HCA Publishes Reasons for Confirming Validity of Holding DOCAs
The High Court recently released the reasons for decision in dismissing the appeal in Mighty River International Ltd v Hughes & Ors [2018] HCA 38. This decision confirms the validity of employing a certain form of deeds of company arrangement (“DOCAs”), known as a “holding DOCA” as a restructuring tool.
The case centers around a company Mesa Minerals Ltd (“Mesa”), which was placed into voluntary administration and the entry into a deed of company arrangement (“the Deed”). At the second meeting of creditors, a majority voted in favour of entering into the Deed which, amongst other things, provided for a moratorium on creditors' claims; required the administrators to conduct further investigations and report to creditors concerning possible variations to the Deed within six months; and provided that no property of Mesa Minerals be made available for distribution to creditors.
One of Mesa’s creditors, Mighty River International Ltd (“Mighty River”), disputed the validity of the Deed and subsequently brought proceedings in the Supreme Court of Western Australia alongside another creditor. Mighty River plead four bases for the Deed being void: (i) the Deed was contrary to the object of Pt 5.3A Corporations Act 2001; (ii) the deed invalidly sought to circumvent or sidestep the requirement in s 439A(6) for a court order extending the short convening period during which a second meeting of creditors must be convened by an administrator; and (iii) the deed did not comply with an alleged requirement in s 444A(4)(b) to distribute some property of Mesa Minerals and (iv) the administrators had failed to form the opinions required by s438A(b) and, at the relevant time as per s439A(4).
These arguments were rejected at first instance by Master Sanderson and on appeal to the Court of Appeal where it was held that the Deed was consistent with the object of Pt 5.3A of the Corporations Act 2001 (Cth); that s 444A(4)(b) did not require some property to be made available to pay creditors' claims; and that the use of a "holding" deed of company arrangement was one "gateway" to extend the period for convening a second creditors' meeting beyond the timeframe set by s 439A(5), the other being a court order under s 439A(6). By grant of special leave, Mighty River appealed to the High Court.
Before the High Court, Mighty River made two submissions: First, the Deed was not a valid deed of company arrangement, principally because it was an agreed extension of time that had not been ordered by a court under s 439A(6) and was contrary to the object of Pt 5.3A; Second, the Deed should have been declared void under s 445G(2) for contravening ss 438A(b) and 439A(4), or s 444A(4)(b), or both.
The Court was split 3:2 with Kiefel CJ and Edelman and Gageler JJ forming the majority. The Majority held that the HDOCA was consistent with Pt 5.3A, was validly executed and conferred genuine rights and duties; did not involve an impermissible side-stepping of s 439A(6) as the side-stepping was merely incidental to the purpose of the HDOCA; was not required to be declared void by s445G(2); and s 444A(4)(b) does not require property to be specified in the Deed.
Naming Wrong Employer Invalidates Fair Work Claim
The recent case of Lili Sinden v HDR Inc. T/A HDR [2018] FWC 5643 provides a reminder that when bringing a claim against employers, any would be applicant must ensure they name the correct entity in their application.
The applicant in this case, Ms Lili Sinden a HR manager, attempted to file a general protections claim under s 365 of the Fair Work Act 2009 against her former employer. Unfortunately for Ms Sinden, she named the US parent company, HDR Inc, as the respondent in her application and not her actual employer HDR Pty Limited. In response the employer raised a jurisdictional objection to Ms Sinden’s claim. Ms Sinden then sought to have the application amended under s 586 of the Act.
Ms Sinden asserted that the Commission could be satisfied that naming HDR Inc was a genuine error as her application correctly identified the trading name, ABN and address of her employer HDR Pty Limited. Ms Sinden further submitted that a number of documents surrounding her employment and termination simply referred to her employer as “HDR” as well as her email signature listing her as an employee of “HDR” and making several references to HDR Inc.
The respondent opposed claiming that this mis-naming was not a simple error, instead contending it was a conscious decision to elicit a strategic benefit in the application. In arguing this point the employer noted several factors including: the applicant’s position as the most senior HR manager for HDR Pty Limited, over 17 years of experience in human resources, frequent contact with the HR Manager for the US, and her regular work included drafting and distributing documents specifying the name HDR Pty Limited.
Having canvassed the evidence, Deputy President Kovacic was not prepared to amend the application to name the correct entity, concluding that it was implausible for Ms Sinden to have made such an error.
New Zealand Set to Reform Insolvency Laws
With the Insolvency Practitioners Bill currently before the New Zealand Parliament, the nation's insolvency laws are set to undergo a significant transformation.
The bill was first introduced to parliament in April 2010, and sought to introduce a ‘negative licensing system’ for insolvency practitioners. In doing so, the initial bill afforded the Registrar of Companies power to ban people from acting as a liquidator or receiver, and endeavoured to strengthen existing provisions relating to the automatic disqualification of insolvency practitioners. However, the bill was put on hold following its second reading in November 2013.
In June, the government revived the Bill, introducing a Supplementary Order Paper and making significant revisions to the original proposal. Submissions on the proposed changes closed on 24 August 2018 and the Bill is now listed before the Economic Development, Science and Innovation Committee of Parliament on 6 September 2018.
If adopted, the reform will:
- Introduce a coregulatory licensing framework whereby insolvency practitioners would need to be licenced by an accredited body under a new stand-alone Insolvency Practitioners Act;
- Extend the circumstances in which an insolvency practitioner will be disqualified from acting by reason of the practitioner’s association with the affected company or entity;
- Impose obligations on insolvency practitioners to provide detailed reports on insolvency engagements;
- Provide that, at a meeting of creditors of a company or an entity in liquidation or administration, the vote of a related creditor will be disregarded unless the court orders otherwise;
- Require insolvency practitioners to provide information and assistance to an insolvency practitioner that replaces them;
- Empower the court to make orders:
- Compensating any person who has suffered loss as a result of an insolvency practitioner’s failure to comply with any relevant enactment, rule of law or court order; and
- Sanctioning insolvency practitioners who fail to comply with any relevant enactment, rule of law or court order.
The reform will see the New Zealand system resemble that of the UK, whose insolvency laws are also under major review. It comes after New Zealand rejected the Australian model, where regulation is governed by ASIC and ASFA, with limited statutory regulation by the industry bodies.
NSWSC: Liquidators Must Not Use Casting Vote to Veto Their Removal
In a recent judgment delivered by the Supreme Court of New South Wales, the court found in favour of a creditor who sought to remove its liquidator, despite previously failing to do so at a meeting convened pursuant to the Insolvency Practice Schedule (Corporations).
Background
The case involved The Owners – Strata Plan 84741 (Strata Plan) who were the body corporate of a block of flats located in Clovelly. Strata Plan commenced proceedings against Iris Diversified Property Pty Ltd (Iris) and the builder of the apartment complex. The builder was subsequently placed in external administration and the proceedings continued against Iris. Before judgement was handed down, Iris sold a substantial property which they claimed was unrelated to Strata Plan’s claim against them. They also asserted that the assets they owned were owned in their capacity as trustee.
Following two 2017 judgements, Strata Plan became a creditor of Iris in the total amount of $1 799 937.91. Iris Group Management (IGM) - an entity associated with Iris Diversified - also claimed debts of $207 000. In October 2017, Iris was placed in liquidation and Henry McKenna appointed as liquidator.
Following this, Strata Plan requested that McKenna convene a meeting with the creditors of Iris Diversified, at which they sought to have him replaced by Liam Bailey and Christopher Palmer.
Prior to the meeting, McKenna was advised by his lawyers that he could exercise his casting vote against the resolution, so that it failed to pass. Strata Plan subsequently initiated proceedings after McKenna acted according to his lawyer’s instruction.
Decision
In deciding the case, the court was required to determine whether McKenna had power to exercise a casting vote against the resolution of his removal and whether resolution for McKenna’s removal should be ‘treated a passed’ and liquidators appointed.
In seeking a declaration that McKenna had no power to exercise a casting vote against his removal and the appointment of Bailey and Palmer as replacement liquidators, Strata Plan relied on r 75-115 (5) of the Insolvency Practice Rules (Corporations).
These rules provide for circumstances in which a resolution is passed at a meeting of creditors after a poll is demanded. The rules specify that the external administrator may exercise a casting vote in favour of the resolution where:
- no result is reached by a majority in number and value of creditors voting in favour or against the resolution; and
- The resolution relates to the removal of an external administrator of a company.
Despite this, they ultimately contended that the rule does not contemplate the external administrator exercising a casting vote against the resolution to remove themselves.
The court held that it was not necessary to determine whether the effect of that rule was to determine whether McKenna had power to exercise a casting vote or if its effect is merely that his vote was to be disregarded.
Ultimately, Black J ordered that Bailey and Palmer be appointed as joint liquidators of Iris, with McKenna ordered to pay costs without recourse to the assets of Iris.
This case signals an important reminder for liquidators tempted to use their casting vote to defeat a resolution calling for their removal. It is also telling for lawyers who are advising clients on how to vote in deadlocked meetings.
CBA Joins World Bank To Deliver World's First Blockchain Bond
The World Bank has endorsed the Commonwealth Bank of Australia as the sole arranger of the world’s first blockchain bond. The development comes in response to strong investor interest in bond-i (blockchain offered new debt instrument) technology, and is expected to launch following consultation with a wider investment group.
Labelled ‘$AUD Kangaroo bond’, the new technology seeks to utilise blockchain technology to create, allocate, transfer ownership and manage live bond deals. By affording an automated process for buying and transferring security ownership, the technology promises to create efficiencies for issuers and investors. In doing so, it simplifies the transaction process by removing the need for reconciliation of data between different IT systems, thus enabling all parties to rely on a synchronised ledger showing ownership in real time.
The World Bank has championed blockchain for streamlining processes among debt capital market intermediaries and agents, declaring that it will enhance regulatory oversight, improve operational efficiencies and simplify raising capital and trading securities. It marks the first time globally that a legally binding bond will be created, allocated, transferred and managed through its life cycle solely using distributed ledger technology.
However, the new bond will not fully embrace blockchain technology. Instead, in order to avoid Australia’s 10% goods and services tax on fiat-currency-linked tokens, payments will be made via the existing SWIFT system.
The transaction is estimated to raise between $50 million and $100 million and is expected to launch from the World Bank’s existing global debt issuance facility in the coming weeks. We are excited to watch as Australia leads the way in implementing this world class technology and are eager to see how global bonds progress following its launch.
FCA: Trustees Entitled to Acquire Assigned Claims
In Rambaldi v Meletsis, in the matter of Karas (Bankrupt) [2018] FCA 791, the court was required to consider whether the trustees of a bankrupt estate had the power to acquire assigned claims.
Background
In 2011, Nick Meletsis replaced his brother-in-law, Tom Karas, as the sole director and shareholder of 70 Nicholson Street Pty Ltd. Following this, the property at 70 Nicholson Street Fitzroy was sold to Establishment 5, and a mortgage which Karas held over the property was subsequently discharged.
Karas become bankrupt on 16 October 2015 and in February 2016, Yeo and Rambaldi were appointed the joint and several trustees of his estate, replacing the initially appointed trustees. Following their appointment, Yeo and Rambaldi commenced investigation of Karas' affairs and subsequently raised questions over the discharge of Karas' mortgage. In doing so, the pair concluded that further investigation was required to confirm that no money was owing to Karas’ estate.
In late 2016, the liquidator provided Yeo and Rambaldi with documents relating to the sale of 70 Nicholson Street, along with a note advising that he intended to finalise the liquidation due to depleted funds. Yeo and Rambaldi subsequently obtained further material from Karas' former lawyers, and enabled by funding from the Deputy Commissioner of Taxation (DCT), conducted further examinations pursuant to s81 of the Bankruptcy Act.
Following this, the pair concluded that 70 Nicholson Street had causes of action against various related parties, and that as a result of property dealings undertaken prior to liquidation, the company owed the bankrupt estate in excess of $1.1 million.
In July 2017, Yeo and Rambaldi offered to acquire the assigned claims for $25 000. Having obtained approval from the creditors of 70 Nicholson Street, the liquidator accepted the offer the following September and a deed of assignment was subsequently executed. Pursuant to the deed, both the liquidator and 70 Nicholson Street assigned their rights, title and interest to the trustees.
Decision
This case ensued after Howard Speer and Establishment 5 Developments (two parties associated with the property transactions) challenged the assignment of claims. In doing so, they sought a summary dismissal of the assigned claims on the basis that they could not be held to be property of the bankrupt estate.
Yeo and Rambaldi subsequently initiated proceedings, seeking confirmation that they had power to acquire the claims from the liquidator of 70 Nicholson Street and that deed of assignment was ‘valid and enforceable’. They also sought judicial advice that they were justified in acquiring the assigned claims.
Moreover, the DCT sought leave to intervene in the hearing of the two interlocutory applications on a limited basis, pursuant to s30 of the Act and r9.12 of the Federal Court Rules.
In deciding the case, the court was required to consider:
- Whether Yeo and Rambaldi as trustees had power to acquire the assigned claims from the liquidator; and
- If the trustees had that power, whether the Court should give the judicial advice sought.
The Court accepted the trustee’s submission that they had power to acquire the assigned claims. In doing so, Davies J held that the powers contained in s134 were of ‘sufficiently broad compass to include the power to acquire property’ and that such a finding was consistent with both the general law and s19 of the Act.
In asserting their claim, the defendants argued that the assigned claims were not after-acquired property of the bankrupt pursuant to s58(1) and s116(1)(a), because the causes of action were acquired by the trustees not the bankrupt. However, the court held that the assigned claims were acquired by the trustees in their capacity as trustees of the bankrupt’s estate and thus the trustees had a right to sue on those claims.
Moreover, the court rejected the defendant’s contention that the assigned claims were not ‘property’ as defined by s5 of the Act. In doing so, Davies J submitted that their argument incorrectly relied upon a restrictive interpretation of the Act that was not warranted by the statutory context.
Ultimately, the court held that it was reasonable and appropriate to give the judicial advice sought and granted the DCT leave to intervene.
This case is among the first to affirm the insolvency reforms introduced last September, and highlights the manner in which insolvency practitioners may approach causes of action.
SCV: Google Not a Publisher of Online Search Results
In the decision of Defteros v Google Inc LLC, the Supreme Court of Victoria found in favour of Google, asserting that an internet search engine is not necessarily a publisher of material produced in a search.
The applicant to the proceedings, George Defteros, is the plaintiff in a defamation proceeding currently before the courts, whilst Google, the respondent, is the defendant to that proceeding. In his amended statement of claim, Defteros contends that in 2016, Google published online material that was of a defamatory nature. Specifically, that material is alleged to consist of;
- A search result returned from the entry of certain search parameters into Google’s search function; and
- An underlying webpage, accessed via a publication that presented as a result of using Google’s search engine.
In its defence, Google denied publishing the web matter. In doing so, it submitted that it is not the publisher of results that are returned to a user of its search engine, that it is not a publisher of any third-party documents hyperlinked to the result of a search using its search engine; and that it is not the publisher of any third-party document to which a user of the search engine may navigate as a result of performing a search using its search engine.
In May, Defteros filed a summons seeking to strike out various paragraphs of Google’s defence pursuant to r 23.02 of the Supreme Court (General Civil Procedure) Rules 2015, to the extent that those paragraphs asserted that Google was not a publisher of the results that were returned to a user of Google, and that it was not a publisher of any third-party documents connected to any such search result. However, that application was later dismissed by Macaulay J.
Defteros subsequently brought this action, seeking leave to appeal. In doing so, he claimed that the primary judge ‘erred in narrowly and therefore wrongly construing r 23.02’ when he concluded that ‘a pleading was only to be struck out under the rule where there is some defect in the pleading’ and that ‘essentially, the power to be exercised under r 23.02 concerned the form of a pleading rather than the legal or factual merit or substance of what is pleaded.’
However, the court held that there was no substance to either of Defteros’ proposed grounds for appeal. In doing so, it contended that the issue of being a publisher is still a question of both law and fact. Moreover, it held that the primary judge was not bound by the decision in Duffy, as at no point did that case articulate any relevant principle of law that required the judge to strike out Google’s plea that it was not a publisher. Lastly it held that there was no rule of law preventing Google from leading fresh evidence in a separate trial, as it intended to do so here.
Ultimately, the court held that the primary judge’s determination that he was not bound by the Full Court’s decision in Duffy to strike out any parts of Google’s defence was correct.
NSWCA: Liquidators Unable to Recover Third Party Payments as Unfair Preferences
In the recent case of Hosking v Extend N Build Pty Limited, the New South Wales Court of Appeal was required to consider whether payments made by a third party to an insolvent company’s creditor could be recovered by the liquidators as unfair preferences.
In 2012, Built NSW Pty Ltd subcontracted work to Evolvebuilt, with the arrangements subsequently formalised in a building contract. Evolvebuilt then engaged secondary subcontractors to undertake the work, however the subcontractors ceased work on 12 March 2013 after Evolvebuilt failed to pay.
On the same day, the Construction, Forestry, Mining and Engineering Union (CFMEU) wrote to Built instructing them to make the outstanding payments. Built also received a letter from Evolvebuilt, who requested that they pay the secondary subcontractors pursuant to cl 28.2 of the sub-contract.
Following this, Built made initial payments and after assessing the outstanding amounts, made further payments on 28 March. Despite this, Kennico, one of the secondary sub-contractors did not receive any such payments, and so Evolvebuilt made payments to Kennico of its own accord.
After Evolvebuilt entered liquidation in 2015, the company’s liquidators initiated proceedings, alleging the payments made by Evolvebuilt to Kennico and by Built to the other secondary sub-contractors on 28 March were voidable. In doing so, the liquidators argued that the payments were unfair preferences pursuant to s 588FA of the Corporations Act 2001 (Cth), entered into at a time when Evolvebuilt was insolvent.
At first instance Bereton J found that although the Kennico payments were unfair preferences, the Built payments were not. However, he found that Kennico was entitled to rely on the good faith defence in s588FG(2), as a reasonable person in their position would not have had an actual fear that Evolvebuilt was insolvent.
Despite this, the case was later heard on appeal where the liquidators contended that the primary judge erred in concluding that the payments made by Built were made in accordance with CFMEU’s request and not in accordance with Evolve’s request. Moreover, they argued that the primary judge was incorrect in finding that the payments were not made from an asset that benefitted Evolve, and that the request from Evolve to pay its secondary subcontractors was part of a ‘chain of causation’ that caused the payments to be made.
On appeal, the court was required to consider:
- If the payments made by Built were ‘unfair preferences’; and
- Whether Kennico was entitled to rely on the defence.
The court rejected the liquidator’s contentions and so the appeal was unanimously dismissed. In doing so, the court held that as s588FA(1)(a) requires that a debtor company and creditor are ‘parties to the transaction’, it was necessary to identify the ‘transaction’ and determine whether Evolvebuilt was a party to it. Despite this, they did not rely upon a ‘chain of causation’ connecting the debtor company to the payments. It was ultimately held that payments to the five sub-contractors were not unfair preferences.
As to the applicability of the good faith defence, the court held that it was not available to Kennico as a reasonable person in their position would have had ‘a positive apprehension or fear’ that Evolvebuilt was be unable to pay its debts. In doing so, the court relied on evidence which indicated that Kennico had notice that Evolvebuilt was 'unable to pay everyone'.
HCA Confirms Validity of Holding DOCAs
In the recent case of Mighty River International Ltd v Hughes, the High Court of Australia considered 2 cases on appeal from Supreme Court of Western Australia. Both involved a contested deed of company agreement (DOCA) entered into between Mesa Minerals Ltd and its creditors.
The case ensued after Mesa Minerals Ltd entered voluntary administration in July 2016. Subsequently, on 20 October the company’s creditors approved a Holding DOCA that ended the voluntary administration but did not introduce a final proposal to restructure the company and avoid liquidation.
Mighty River International Pty Ltd, a minority shareholder in Mesa, disagreed with this decision and thus initiated proceedings. In doing so they asserted that Holding DOCAs were generally not consistent with the wording and intention of the Corporations Act and were consequently invalid.
At trial, Mighty Rivers argued that the DOCA was void and should thus be set aside. In doing so, they relied on section 444A(4)(b) of the Corporations Act, asserting that the DOCA did not specify any property which would be available to satisfy the claims of Mesa’s creditors and did not otherwise make provision for any return to creditors. They also contended that the natural wording of the act suggests some property must be available for distribution, as it fails to include the words “if any” in relation to property. Lastly, they argued that as the court has the power to extend the convening period for meetings of creditors, Parliament must not have intended administrators to be able to extend the period by DOCA.
However, the respondents argued that the relevant provision was not drafted with the intention that administrators would make property available to creditors but rather, to inform creditors of the property available to be distributed. In doing so, they argued that even where there is no property to distribute, the creditors ought to be made aware of this.
Moreover, they asserted that where there is no property to distribute to satisfy creditor claims in a DOCA, creditor claims may be fulfilled through alternate means such as by offering a debt for equity swap; in which creditors forfeit their rights to enforce their debts in exchange for shares in the company.
The High Court of Australia ultimately upheld the previous decision, dismissing both appeals with costs. They are expected to publish their reasons shortly.
Google Loses Online Defamation Case
A recent decision of the High Court of Australia has allowed Milorad "Michael" Trkulja to sue Google for defamation, following a six-year legal battle.
After being shot in the back in a Melbourne restaurant in 2004, Trkulja was falsely linked with Melbourne’s criminal underworld and later featured in a series of online search results and images. Trkulja subsequently initiated proceedings, alleging Google defamed him by publishing photos which wrongly associated him with well-known Australian criminals including Carl Williams, Chopper Reid and Tony Mokbel.
A 2012 decision of the Victorian Supreme Court found in favour of Trkulja, concluding that Google had defamed him by publishing photos and search results linking him to prominent figures of Melbourne’s underworld.
However, the Victorian Court of Appeal later overturned the decision, ruling the case had no prospects of successfully proving defamation. In doing so, the court found in favour of Google on the following grounds:
- Google is not a publisher
- The Google search results were not defamatory
- Google is entitled to immunity for public policy reasons
Despite this, in 2017 the High Court granted Trkulja special leave to appeal the decision. In arguing his case, Trkulja claimed Google searches for “Melbourne criminal underworld” produced results which associated him with notorious criminal figures, thus positioning him as a criminal himself and ultimately amounting to defamation.
Google contended that it would be ‘irrational’ for a reasonable person to assume all results in the search were of criminals, asserting that the relevant searches also returned results of movie posters, photos of actor Marlon Brando and images of crime victims.
Trkulja also claimed defamation on the basis that Google’s autocomplete function returned suggestions such as, ‘criminal’, ‘underworld’ and ‘is a former hit man’, after inputting his name. However, the court accepted Google’s submission that autocomplete is merely an automatic function influenced by previous search results.
Despite this, the High Court ultimately found in favour of Trkulja, supporting his claim that the Google search results were likely to persuade a reasonable person that he was “somehow associated with the Melbourne criminal underworld.”
In doing so, the court unanimously ruled that Google was in fact a publisher, concluding that “it is strongly arguable that Google’s intentional participation in the communication of the allegedly defamatory results to Google search engine users supports a finding that Google published the allegedly defamatory results.” Moreover, the court held that “the search results complained of had the capacity to convey to an ordinary reasonable person viewing the search results that Mr Trkulja was somehow opprobriously associated with the Melbourne Criminal Underworld, and, therefore, that the search results has the capacity to convey one or more of the defamatory imputations alleged.”
The outcome of this case, and the conclusion that search engines are in fact publishers in their own right, is likely to have serious implications for all search engine operators in Australia. However, whilst Mr Trkulja’s win signals significant progress for Australian defamation law, it remains just another step in his lengthy court battle, with Mr Trkulja set to return to the Victorian Supreme Court later next year.
