Administrators allowed to sell company assets despite unusual sale process
In Goyal, in the matter of Cape Technologies Pty Ltd (administrators appointed) [2021] FCA 1654, the Federal Court used its discretion to permit the sale of a business in somewhat unique circumstances. The justification was that the sale maximised the chances of the business continuing in existence and resulted in a better return to creditors than an immediate winding up of the company. Whilst that justification is consistent with the object of voluntary administrations as set out in section 435A of the Corporations Act 2001, the sale process remains unusual.
Background
Cape Technology Pty Ltd (the Company) was established to develop a new financial operating system for businesses. The Company’s assets included tangible assets (comprising of cash) and intangible assets (comprising of work-in-progress associated with the development of the financial operating system).
The directors appointed administrators on 18 October 2021 and these administrators subsequently conducted a valuation of the Company. The evidence was that in the absence of any sources of revenue or funding, the administrators had insufficient funds to meet the ongoing operational costs of the Company. The administrators concluded that unless the business assets were sold, there would be no funds available for distribution to creditors, including employees, on a liquidation of the Company.
Sale of Business
Faced with these difficult circumstances, the administrators began conducting a sale process on a truncated timeline due to the Company’s poor financial situation. They began entering negotiations with two groups of directors and shareholders of the Company. One of these groups, BidCo made an offer that had to be signed before 12 noon on 1 November 2021. The other director had expressed interest, but facing time pressures, the administrators signed a head of agreement with BidCo to meet the deadline.
The first meeting of creditors was held on 4 November 2021 and At this meeting, the administrators informed the creditors inter alia:
- given financial constraints, the administrators were not able to conduct a traditional sale process;
- the directors and shareholders were given the opportunity to purchase the business of the Company;
- a bid had been accepted;
- they were being financially supported by the successful bidder while the sale process was underway;
- a court application would be necessary because of the unique circumstances of the sale.
The administrators gave creditors, shareholders and directors notice of the application and the orders being sought. There was no opposition.
Court’s Consideration
The decision notes that Section 90-15(3)(a) of the Insolvency Practice Schedule confers a broad power on the Court to make “an order determining any question arising in the external administration of the company”. The Court noted that the power in S90-15(3)(a) was “not appropriately exercised where the Court is being asked to do no more than sanction the making and implementation of a business or commercial decision in respect of which no particular legal issue is raised or in respect of which there is no potential to bring into question the propriety or reasonableness of the decision”.
The Court also noted that “courts have been prepared to sanction, by direction (such as now sought), an administrator’s exercise of that power where there is the potential for issues of “propriety or reasonableness” to be raised with respect to the making of the decision”.
The administrators application to the court was made because the administrators were concerned about the sale occurring in circumstances where:
- they had not publicly advertised the assets for sale;
- The period in which the assets had been offered for sale was limited;
- BidCo was a company owned and controlled by two directors of the company;
- The company’s creditors had not had the opportunity to vote on the sale; and
- The sale was not proposed as part of a deed of company arrangement.
The administrators were concerned that the circumstances could raise issues about the reasonableness and proprietary of that sale, particularly when there were some matters in dispute with the other director who also bid for the assets.
In addressing the circumstances of the sale, the administrators submitted that:
- due to the limited financial resources of the Company, there was financial ability for the Company to fund a traditional marketing campaign.
- while they would have preferred to negotiate with arms-length purchasers, they decided it was better to sell to someone who would appreciate and understand the business;
- they relied on section 435A of the Corporations Act which stated that an insolvent company’s affairs should be administered in a way that maximises the chances of the company continuing in existence.
The court agreed that, in the difficult circumstances, the administrators had taken justifiable and reasonable action to maximise the return to creditors and employees. The Court made orders approving the sale of business assets to BidCo; albeit being a related party.
Take outs
This case highlights a number of points, particulars for external administrators and their advisers:
- the Court will not usually provide judicial advice or direction where an administrator is making or implementing a commercial decision;
- the Court may exercise its discretion in appropriate circumstances, particularly where there is the potential for issues of “propriety or reasonableness” to be raised with respect to the making of the decision;
- the onus will be on the administrator to prove that they have taken all reasonable and justified steps in conducting a sale or process in the circumstances.
The Court also made an order restricting access to certain of the material files as commercially confidential until completion of the sale to prevent prejudice.
Bankruptcy Notice set aside due to administrative errors
The recent case of Grant v Green & Associates Pty Ltd [2021] FCA 934, shows the importance of checking bankruptcy notices for errors, particularly ones that could invalidate the notice.
Factual Background
A Bankruptcy Notice was served by Green & Associates (Green) on Ms Nerez Grant (Ms Grant) on 13 May 2021 for $27,802.87 for which she had to pay or make arrangements to pay within 21 days. The Bankruptcy Notice contained three errors.
The first error in the Bankruptcy Notice was that it specified that the address to make payment to was Ms Grant’s personal address, rather than the creditor’s address. The second error was that same address issue was repeated in the Bankruptcy Notice for the address where service of documents was to be sent to. The final error was that the wrong debt amount was specified. The Creditor also did not take into account a garnishee order which had been made by the Local Court for $1,113.29 which should have been deducted from the amount in the Bankruptcy Notice.
As a result, Ms Grant filed an application within the 21-day deadline, seeking an order that the Bankruptcy Notice be set aside. Green did not dispute that the errors were present in the Bankruptcy Notice, but contended that there errors were not substantial enough to justify that the Bankruptcy Notice be aside.
Should the errors cause the notice to be set aside?
Relevantly, two provision of the Bankruptcy Act 1966 (Cth) were applicable. The first was s 41(5) which states that a bankruptcy notice is not invalidated by an incorrect sum that exceeds the amount unless the debtor within time fixed for compliance notifies the creditor. The other provision was s 306, which states that a formal defect will not invalidate a bankruptcy notice unless the Court is of the opinion that substantial injustice has been caused by the defect. The address and the incorrect amount were dealt with separately.
When it came to the incorrect amount on the notice, Green relied on s 41(5). The creditor submitted that Ms Grant did not submit the relevant notice disputing the amount within the “time fixed” as required by the Bankruptcy Act, as she did not serve the affidavit to them within the initial 21 days of the bankruptcy notice. It was submitted that the “time fixed” definition does not encompass any court ordered extensions, like the one that Ms Grant received.
Ms Grant contended that the application was sent to Green within the extended timeframe and also Green acknowledged that the debt on the bankruptcy notice was incorrect.
Wigney J agreed with Ms Grant, stating that time fixed would encompass any extensions given by the Court. He concluded that by the operation of s 41(5), the notice was automatically invalid.
It was therefore not necessary to make a conclusion on the address error. However Widney J did state that the error would be unlikely to cause substantial injustice under s 306. Ms Grant would have noticed that the address to pay on the notice was her personal address and would have been able to easily rectify this error.
However, due to the overstatement of the debt, the notice was set aside. This case highlights the importance of taking into account any other amounts paid including garnishee orders when sending a bankruptcy notice and checking for any administrative errors.
Increase to personal bankruptcy threshold
As part of its response to the Coronavirus pandemic, the Australian Government implemented a number of temporary changes to the bankruptcy and insolvency laws. This insolvency moratorium was the subject of a prior post here, but in summary included:
- an increase of the minimum debt required to issue a bankruptcy notice from $5,000 to $20,000;
- an increase of the minimum debt required to issue a creditor’s statutory demand from $2,000 to $20,000;
- an extension of the timeframe for debtors to take action to resolve a bankruptcy notice or creditor’s statutory demand from 21 days to 6 months;
- the suspension of directors' personal liability for insolvent trading.
Whilst these measures were previously extended from 30 September 2020 to 31 December 2020, there was no further extension and they have now expired.
In late 2020, the Bankruptcy Amendment (Bankruptcy Threshold) Regulations 2020 (Cth) was passed to permanently increase the minimum required debt to issue a bankruptcy notice from $5,000 to $10,000. This change took effect on 1 January 2021.
A copy of the Attorney-General’s Media Release issued on 18 December 2020 can be accessed here.
There has been no corresponding increase to the minimum required debt to issue a creditor’s statutory demand.
Insolvent trading moratorium extended to New Year
This morning the Federal Government announced it will continue to provide regulatory relief for businesses impacted by COVID-19 by extending temporary insolvency and bankruptcy protections until 31 December 2020.
These measures, originally set to expire on September 30, include:
Bankruptcy changes
- Increase in the minimum debt threshold for a creditor-initiated bankruptcy procedure from $5,000 – $20,000;
- The time to respond to a bankruptcy notice increased from 21 days to 6 months;
- An extension of the protection period for individual’s declaring an intention to present a debtor’s petition extended from 21 days to 6 months.
Insolvency Changes
- Increase in minimum amount for a statutory demand from $2,000 – $20,000;
- Increase in time to respond to a statutory demand from 21 days to 6 months;
- Temporary suspension of directors’ personal liability for insolvent trading for six months (egregious cases of dishonesty will still attract criminal liability);
- Insertion of s 588GAAA which provides an additional temporary safe harbour provision during the six-month period.
Treasurer Josh Frydenberg commented that “the extension of the temporary changes to the insolvency and bankruptcy laws will continue to provide businesses with a regulatory shield to help them get across to the other side of the crisis.”
Do Australia’s bankruptcy laws breach its freedom of movement obligations?
In 1972, Australia signed the United Nations International Covenant on Civil and Political Rights (ICCPR), before ratifying the Convention in 1980. In doing so, the nation agreed, among other commitments, to uphold Article 12 which codifies the freedom of movement. However, Australian bankruptcy law continues to provide that limitations may be imposed on a bankrupt’s international travel, with scholars and bankrupts alike asserting that such restrictions are too harsh and constitute a breach of Australia’s obligations under international law.
Australian bankruptcy law provides that a bankrupt’s international travel is at the discretion of the trustee of their bankruptcy. Section 77 of the Bankruptcy Act provides that a bankrupt must surrender their passport to the trustee, whilst section 272 requires that a bankrupt seek their trustee’s approval before leaving the country. The law was not designed as a punitive measure, but rather to facilitate the efficient administration of a bankrupt’s estate. This rationale was predicated on the basis that proper administration of an estate requires the bankrupt to be physically present in Australia, and that by seizing their passport, the bankrupt will be unable to flee.
Relevantly, in Re Tyndall, the court noted that:
“Restrictions upon such travel under the bankruptcy legislation must be seen as being aimed at ensuring the proper administration of the bankruptcy laws and of bankrupt estates under such laws and not as a penalty imposed upon a citizen as a consequence of inability to pay debts leading to the making of a sequestration order.”
In Weiss v Official Trustee in Bankruptcy the court said at 43:
“I am conscious of the fact that the evidence revealed in [the bankrupt's] public examination suggests that [the bankrupt] has committed various offences against the Bankruptcy Act 1966 (Cth) which have characteristics involving nondisclosure and concealment. However, these are matters to be litigated at the proper time. It is a basic principle that a resident of Australia is entitled to expect that he may travel freely notwithstanding the fact that he is a bankrupt provided it will not lead to his staying overseas in order to defeat or delay his creditors and provided it will not interfere with the due administration of his bankrupt estate (see Tyndall's case at 15). It is to secure the proper administration of bankrupt estates that bankrupts are required by the Bankruptcy Act 1966 (Cth) to give their passports to the trustee (par. 77(a)) and to obtain the permission of the trustee before travelling overseas (par. 272(c)). This interference with the travel of bankrupts is not for the purpose of punishing or expressing disapproval of them for offences or alleged offences against the Bankruptcy Act 1966 (Cth).”
The considerations Australian Courts often deliberate, although not exclusive, are:
- Is the proposed visit genuine?
- Is the bankrupt likely to return to Australia as promised?
- Will the visit hamper the administration of the estate?
Meanwhile, Article 12 of the ICCPR provides that everyone shall be free to leave any country, including their own, except where restrictions are necessary to “protect national security, public order, public health or morals or the rights and freedoms of others.”
In Re Tinkler, Nicholas J recognised that “a trustee’s decision to refuse a bankrupt permission to travel overseas is in a special category because it affects the freedom of movement of a person who may not have committed or been charged with any offence.” Further, in Re Hicks, the court noted that a trustee’s power to restrict travel can significantly affect the bankrupt’s freedom.
Accordingly, in its 2015 Report on Traditional Rights and Freedoms – Encroachments by Commonwealth Laws, the Australian Law Reform Commission called for review of section 77, asserting that the requirement ‘may not be a proportionate response to concerns about bankrupt individuals absconding.’ In doing so, it posited that travel restrictions should only be imposed subject to ‘precise criteria and judicial oversight’.
In reaching this conclusion, the ALRC relied on submissions made by Associate Professor Christopher Symes who argued that the requirement for bankrupts to surrender their passport fails to reflect the reality of the modern era. Namely, it is common for people to frequently travel internationally, and enhanced technological affordances make international communication a seamless process, rendering it possible for estates to be effectively administered even where bankrupts are not physically present in Australia.
Despite this, the Australian Government has not taken steps to adopt the ALRC’s recommendation.
On one view, the law appears to need reform but equally, Australia should be permitted to regulate these issues to protect the legal rights of various parties. Finding the right balance is the key. However, the issue is complex as while the existing model fails to accommodate commercial reality, it would also be impractical to require a court to hear an application every time one of Australia’s 15,000+ bankrupts wishes to travel abroad.
Ultimately, while no definitive solution is apparent, it is worth noting that directors of insolvent Australian companies are not subject to the same limitations as personal bankrupts. Further, in no comparable jurisdiction, including the UK, USA, Canada, New Zealand, South Africa, Malaysia, Singapore, India or Ireland, is forfeiture required. As such, there is merit to the argument that bankrupt estates can be effectively administered without unduly restricting travel.
So, should the process be flipped on its head whereby Australian bankrupts are not required to surrender their passports to the trustee and free to travel as they wish? On one view the answer is yes and this could be achieved by reforming the existing practice by transferring the burden onto the bankruptcy trustee to object to travel in any event, rather than requiring the bankrupt to seek permission in the first place.
Any time a bankrupt has sought to rely on the ICCPR in supporting an application for travel, it has been held that Australia’s international agreements have no direct legal effect on domestic law as the provisions have not been incorporated in domestic legislation. Perhaps it is time that Australia updates its bankruptcy laws to not only reflect current times, but to simultaneously uphold its international human rights obligations.
Corporate Law and COVID-19
Treasurer Josh Frydenburg has announced a series of potential temporary economic measures in response to the fluid COVID-19 situation. This temporary package has implications for bankruptcy, insolvency and corporate law.
We have summarised the proposed measures below.
Bankruptcy changes
- Increase in the minimum debt threshold for a creditor-initiated bankruptcy procedure from $5000 - $20,000;
- The time to respond to a bankruptcy notice increased from 21 days to 6 months;
- An extension of the protection period for individual’s declaring an intention to present a debtor’s petition extended from 21 days to 6 months.
Insolvency Changes
- Increase in minimum amount for a statutory demand from $2000 - $20,000;
- Increase in time to respond to a statutory demand from 21 days to 6 months;
- Temporary suspension of directors’ personal liability for insolvent trading for six months (egregious cases of dishonesty will still attract criminal liability);
- Insertion of s 588GAAA which provides an additional temporary safe harbour provision during the six-month period.
According to the Bill, the amendments to times for compliance will only apply to procedures commenced on or after the commencement of the amending Schedule. The temporary increase in the monetary threshold will be repealed at the end of the six-month period which starts on the date of commencement.
In addition to the above relief, the Australian Investment and Securities Commission has announced it has adopted a ‘no-action’ position in regard to company AGM’s including:
- a two-month ‘no-action’ position in regard to entities with a financial year end of 31 December that have not held an AGM by 31 March 2020;
- the holding of virtual AGM’s;
- sending supplementary notices of AGM electronically;
- non-compliance with section 249J of the Corporations Act.
ASIC encourages the use of technology to facilitate virtual AGMs and electronic communication, however the company constitution will determine whether or not this is possible. ASIC cannot amend the constitution to allow this, however irregularities may be addressed via other methods.
No changes to financial reporting obligations have been announced yet, however ASIC is monitoring the situation.
While ASIC is entitled to indicate that it will not exercise its regulatory powers in a certain way, this does not prevent third parties from taking action against a company or a Court ruling that conduct has breached legislation. It is highly advisable to seek legal advice prior to undertaking a course of action.
Court rejects bankrupt’s international travel request
A recent decision of the Federal Circuit Court has refused a bankrupt’s application to travel overseas after the bankrupt demonstrated total disregard for the obligations arising under his bankruptcy status.
On 28 November 2019, Sher Khan made an application under section 27 of the Bankruptcy Act seeking review of a decision by the trustee which prohibited him from travelling overseas. In doing so, Mr Khan gave evidence that he wished to travel abroad and that he had done so previously.
The trustee submitted that Mr Khan’s application was refused because his conduct had been inconsistent with his obligations as a bankrupt. In this respect, Mr Khan had failed to disclose information pertaining to proceedings that were underway in New Zealand in respect of his assets and in which he had claimed $3 million. Further, Mr Khan had treated a charity as if it were his own funds.
In deciding the case, the court was particularly concerned by the fact that in the New Zealand proceedings, Mr Khan had supplied an affidavit in which he claimed that he was not bankrupt. Accordingly, Judge Street concluded that Mr Khan’s false affidavit demonstrated that he had no understanding of his obligations as a bankrupt.
Ultimately, his Honour held that it was not appropriate to permit a grant of leave to the applicant to travel overseas. This was on account of the concerns expressed by the trustee and Mr Khan’s apparent lack of understanding surrounding his bankruptcy status and his subsequent obligations.
AFSA launches online lodgements
In an effort to simplify the process of applying for bankruptcy, the Australian Financial Security Authority have combined the Statement of Affairs and Debtor’s petition forms and moved the service online.
Under the move, which commenced 2 January 2020, an individual seeking to apply for bankruptcy or needing to file their statement of affairs following a sequestration order, will need to do so via the free online portal. In doing so, applicants will need to complete the new Statement of Affairs form which features simplified language and fewer questions than its predecessor.
In unveiling Bankruptcy Online, AFSA has noted that while individuals may continue to have a registered trustee manage their bankruptcy, they cannot have the registered trustee submit an application on their behalf. However, the portal will allow individuals to upload the trustee’s signed consent form to submit with their application. If the application is accepted, AFSA will then appoint the trustee to the administration and notify them in accordance with existing practices.
Despite encouraging the use of Bankruptcy Online and warning that applicants will no longer be able to submit the former Debtor’s Petition and Statement of Affairs forms, AFSA has assured individuals that those without internet access may request that a paper version of the new form be posted to them.
UK case reignites debate on the correct extent of judicial intervention
A recent decision in the United Kingdom has shed light on the topical issue surrounding the proper extent of judicial intervention. The case of Serafin v Malkiewicz & Ors [2019] EWCA Civ 852 ensued after Mr Serafin appealed an earlier decision on a number of grounds, including that the trial judge had exercised unfair judicial treatment against him.
Mr Serafin was a Polish immigrant who relocated to London where he subsequently engaged in a number of small business ventures, including a food business, which he launched in 2008. In 2011, a bankruptcy order was issued in relation to that business, with the Official Receiver finding Mr Serafin had engaged in misconduct by disposing of £123,743 whilst insolvent. As a result, Mr Serafin was made subject to a five-year Bankruptcy Restrictions Undertaking (BRU) in 2012.
In October 2014, Mr Serafin was the subject of an article published in Nowy Czas, a magazine popular among London’s Polish community. The article was entitled ‘Bankruptcy Need Not Be Painful’ and Mr Serafin contended that it contained serious defamatory allegations about him that amounted to a character assassination. He subsequently brought an action against the magazine’s editor and co-publishers, complaining of 14 different defamatory allegations.
The matter was heard over a 7-day period, after which Justice Jay found that many of the allegations were in fact ‘seriously defamatory’. Despite this, his Honour dismissed the claim in its entirety after finding some of the allegations to be untrue. Mr Serafin subsequently appealed the decision on five grounds, including that the trial judge had shown him ‘unfair judicial treatment’.
On appeal, counsel for Mr Serafin asserted that the judge’s interventions were accusatory, with the judge acting as an advocate for the defendant’s case rather than a neutral umpire. Mr Serafin also argued that the judge ought to have considered that there was an inherent risk of unfairness on the basis that he was an unrepresented litigant who was not legally qualified and did not have English as a first language, whilst his opponent was a very experienced silk.
In doing so, Mr Serafin tendered evidence that Justice Jay had formed a prejudicially adverse view of his evidence and character. The evidence included comments made by his Honour that Mr Serafin was “fundamentally untrustworthy” and warning Mr Serafin that “you will lose” and “I will hold things against you.” His Honour also told Mr Serafin “your reputation is already starting to fall apart, because you are a liar and you do treat women in a frankly disgraceful way.”
Furthermore, when counsel for the defendants suggested that the judge ask Mr Serafin which parts of the article he maintained were false, Justice Jay quipped, “I would not even bother, Mr Metzer, I think we have got to assume every point is lies.”.
On appeal, the court held that it was wrong for Justice Jay to “descend into the arena and give the impression of acting as an advocate”. In doing so, it concluded that it was “immediately apparent…that the Judge’s interventions during the Claimant’s evidence were highly unusual and troubling” and that his Honour “used language which was threatening, overbearing, and frankly, bullying”.
In deliberating this ground, the court considered Michel, which notes that not all departures from good practice render a trial unfair. However, having regard to the ‘nature, tenor and frequency of the Judge’s interventions’, the court concluded that an appeal was warranted.
In allowing the appeal, the court declared that Justice Jay “not only seriously transgressed the core principle that a judge remains neutral during the evidence, but he also acted in a manner which was, at times, manifestly unfair and hostile to the Claimant”.
Ultimately, this case reinforces that the role of a judge is to determine the dispute of the parties impartially and that one should not engage in bullying or unnecessary intervention. Although a UK case, it reflects trends in the Australian legal system, with almost two thirds of Victorian barristers reported to have been bullied from the bench. The rising number of instances such as this certainly begs the question of whether Queensland ought to create a Judicial Commission as has been done in New South Wales.
The scope of judicial intervention is a complex topic, which requires an open debate.
FCA: Income protection payments not exempt in bankruptcy
In the matter of Gittens v Field (Trustee) [2018] FCA 976, the Federal Court of Australia has held that income protection payments from personal injury are assessable income under the Bankruptcy Act.
Having owned and operated a dental practice for almost 25 years, John Gittens had retained two income protection policies which sought to protect his livelihood in the event that he suffered total disablement that rendered him unfit to work.
In 2015, Gittens was preparing a barbeque when he cleavered the top of his left index finger, resulting in amputation and thus hindering his ability to continue work as a dentist. Gittens subsequently lodged a claim pursuant to the policies, and it was accepted that he was entitled to receive income protection payments of $270 000 per year.
On the 25 January 2017, after leaving his dentistry business, Gittens entered bankruptcy. On the same day, Malcolm Field, in his capacity as the trustee of the bankrupt estate, issued Gittens with a contribution assessment notice pursuant to s 139W of the Bankruptcy Act. The notice outlined the contribution Gittens was liable to pay, calculated with regard to the income protection payments he had received, or was likely to receive. Relevantly, Field held that these payments were 'income', and as such were to be considered when applying the regime established by the Act.
However Gittens disputed the assessment and subsequently initiated proceedings. In doing so, he contended that the trustee had no entitlement to the benefits as they were property that was not divisible between his creditors by virtue of s 116(2)(g).
Accordingly, the court was required to consider whether the monthly payments arising under the income protection policy were in fact 'income', or whether they were exempt as arising from personal injury.
Ultimately, the court held that income does not vest in the bankruptcy trustee, but rather is payable by way of a statutory formula pursuant to Div 4B, PtVI of the Act.
Moreover, Charlesworth J held that s 116 is not the sole means for identifying divisible property, and that as such, it is not necessary to resort to s 116(2)(g), which specifically excludes monies derived by personal injury.
Relevantly, his Honour noted that, "had Mr Gittens not lost his earning capacity, his income as a dentist would be subject to the income provisions...and...viewed in that way, it is difficult to see how the creditors of the bankrupt in that situation could be unjustly swelled or advantaged by the application of the income contribution scheme to the Benefits."
This case bears an interesting distinction from the decision in Berryman, in which a lump sum TPD payment was held to be protected in bankruptcy, on the basis that it was a one-off payment that had not been quantified by reference to income or earning capacity.
