VSC orders review of liquidator's conduct and fees
In the recent decision of Westpoint Corporation Pty Ltd (in liq) v Yeo [2018] VSC 705, Westpoint Corporation (WPC) have been successful in having the Victorian Supreme Court inquire into the remuneration of the liquidators of Westpoint Finance (WPF). WPC is the major unsecured creditor of WPF.
The case ensued after WPC alleged that WPF's liquidators ‘failed to properly perform their duties' in incurring legal costs of approximately $600 000 and accruing remuneration in excess of $455 000, after pursuing three legal claims for commission in respect of the sale of real estate in circumstances where WPF did not hold the requisite licence and where there were statutory provisions prohibiting the recovery or retention for reward.
Consequently, in February 2017, WPC filed a complaint with the Supreme Court of Victoria seeking that the court conduct an inquiry into the conduct of the liquidators of WPF, pursuant to s536 of the Corporations Act.
WPC also sought a review of the liquidators remuneration pursuant to s504, contending that by pursuing the three legal claims, the amount available for distribution to the creditors of WPF was diminished by approximately $1 million. In doing so, WPC contended that the remuneration approved and paid to the liquidators to date, totalling over $1.4 million, was disproportionate to the $3.8 million recovered by the liquidators in the winding up.
Ultimately the court found in favour of WPC, concluding that an inquiry should be held into the liquidator’s conduct, pursuant to s536(1)(b) of the Corporations Act (now repealed). Despite this, Sloss J held that the review should be confined to their conduct in pursuing PRD Realty Qld; one of the three real estate agents originally targeted by WPF's liquidators.
In relation to WPC’s request for a review of remuneration, the court held that the monies generated by the liquidators between March 26 2006 and October 2 2011 ought to be reviewed pursuant to s504(1).
Whilst inquiries into the conduct of insolvency practitioners is not a common occurrence, they can occur and this case presents a useful example of what the court might consider in determining whether to order an inquiry. The case is useful both to insolvency practitioners and creditors.
Limitation period for costs assessment application runs from date of delivery of lump sum bill
In the matter of QLD Law Group – A New Direction Pty Ltd v Crisp [2018] QCA 245, the Queensland Court of Appeal held that the limitation period for an application for costs assessment by a client runs from the date of delivery of a lump sum bill of costs and not a later itemised bill.
Background and the proceeding below
The respondent, Ms Crisp, had been a plaintiff in a personal injuries proceeding, represented by the appellant in that proceeding.
After the conclusion of that proceeding, the appellant issued a lump sum bill to the respondent on 28 April 2015.
Almost 11 months later in March 2016, the respondent requested that the appellant provide an itemised bill pursuant to section 322 of the Legal Profession Act 2007 (Qld) (the LPA).
The itemised bill was provided by the appellant on 19 May 2016 and almost a year after that (i.e. almost 2 years after the initial lump sum bill was delivered in April 2015), the respondent applied to have the appellant’s costs assessed pursuant to section 335 of the LPA.
Section 335(5) of the LPA provides that a client may make a costs application within 12 months after
- the bill was given, or the request for payment was made, to the client or third party payer; or
- the costs were paid if neither a bill was given nor a request was made.
The central issue of contention was whether the 12-month period commenced from the delivery of the lump sum bill on 28 April 2015 (and therefore expired in April 2016) or from the delivery of the itemised bill on 19 May 2016 (and therefore not expiring until May 2017).
At first instance, the Magistrate applied the former interpretation and found that the respondent’s costs application had been made out of time. The Magistrate also dismissed the respondent’s application to extend time to bring the costs application and accordingly, dismissed the costs application.
On appeal to the District Court of Queensland, Judge Kent QC preferred the latter interpretation and granted the appeal, overturning the decision of the Magistrate.
The appellant then applied to the Queensland Court of Appeal for leave to appeal the decision.
The appeal
Sofronoff P (with whom Morrison and Philippides JA agreed) analysed the wording of the relevant provisions in Part 3.4 of the LPA and noted that section 335 provided for the assessment of costs, not the assessment of a bill (or bills) of costs. His Honour stated:
The statute does not make the delivery of an itemised bill, or indeed the delivery of any kind of bill, a condition precedent to the right to make a costs application. This is consistent with the absence of an idea that it is a bill that is to be assessed. Section 335 does not refer to an assessment of a bill but to “an assessment of the whole or any part of legal costs”. The legal costs may be those referred to in a lump sum bill or an itemised bill. But they may also be the legal costs that have been the subject of the “request” or the payment that are also referred to in s 335(5). It is not only the delivery of a bill that triggers the beginning of the limitation period; it is triggered by a solicitor’s request for payment or by a client’s payment of costs. It can therefore be concluded that there is nothing in s 335 that, for the purposes of an application for an assessment of legal costs, promotes the importance of an itemised bill over a lump sum bill or even that distinguishes between them.
His Honour also noted that section 332 of the LPA distinguished between the effect of delivery of a lump sum bill and delivery of an itemised bill in respect of a law practice’s ability to commence legal proceedings to recover legal costs, stating further that:
These express provisions that distinguish between the legal effects of the delivery of one kind of bill from the legal effects of the delivery of another kind of bill suggest strongly that the absence of any similar distinction in s 335 means that, for the purposes of s 335(5), there is no distinction.
As a result, his Honour determined that the 12-month period within which a client may apply for costs assessment under section 335(5) of the LPA commenced from the delivery of a lump sum bill and did not restart upon the provision of a later itemised bill at the request of a client.
Accordingly, the application for leave to appeal was granted and the appeal was allowed. The proceeding was remitted back to the District Court for the respondent’s appeal against the decision of the Magistrate to refuse to extend the time within which the application for costs assessment could be brought to be determined (determination of this issue was not previously required given that Judge Kent QC had found that the application for costs assessment was made within time).
Conclusion
The decision is of interest to practitioners because it clarifies just when the 12-month limitation period for an application for costs assessment by a client commences and confirms that the later delivery of an itemised bill after the delivery of an initial lump-sum bill does not restart the limitation period afresh.
The decision also has application near nationwide given that the terms of section 335 of the LPA have similar counterparts in most other states, including in New South Wales and Victoria where similar wording to that contained in section 335(5) is to be found in section 198(3) of the Legal Profession Uniform Law, the successor in those jurisdictions to the legislation arising from the Legal Profession Model Bill formulated by the Standing Committee of Attorneys-General and implemented in most Australian states in the mid-2000s upon which the Queensland LPA is based.
FCA clarifies aspects of compensable loss
A recent decision of the Federal Court has given guidance on how damages for loss arising from a wrongly-granted injunction are calculated. The case of Sigma Pharmaceuticals (Australia) Pty Ltd v Wyeth [2018] FCA 1556 belongs to a long running pharmaceutical patent litigation regarding a patent for an extended-release formulation of the medicine venlafaxine. The judgement is important not just in the area of patents, but for any case involving an injunction leading to economic loss such as restraints of trade.
This litigation began in 2009 when the Court granted interlocutory injunctions restraining three generic drug companies from (among other things) supplying their generic brands of venlafaxine in Australia. This decision was confirmed in 2010 by Jagot J who granted final injunctions against the generic manufacturers. This was overturned a year later in 2011 by the Full Federal Court with the High Court refusing any further appeal.
Following the Full Court’s decision, the three manufacturing companies, as well as their upstream suppliers and the Commonwealth of Australia, began proceedings against Wyeth who had sought the injunction in 2009. The claim of the manufacturers and suppliers were based upon economic loss suffered by the manufacturers during the injunction period. The Commonwealth’s claim was based on monopolisation by Wyeth causing the cost of subsidising venlafaxine to rise, however this claim was settled before the judgement was delivered.
In the published reasons for judgement, Jagot J provided an extensive overview of the manner in which damages are to be calculated. In summary there are three key questions to be answered:
- What is the loss?
- Did the loss flow directly from the order?
- Was the loss foreseeable at the time of the order?
In assessing the claims from the remaining parties Jagot J made several important findings:
First, that this principle does not protect a party from the ordinary consequences of litigation, it only protects from those losses arising “from the operation of an order made by a court before the rights of the parties are able to be fully determined” ([128] - [140]). Similarly, anticipatory steps in regard to a pending interlocutory application cannot engage the principle for similar reasons.
Second, simply because an applicant was successful in obtaining an order at first instance does not mean an injunction was not wrongly granted, an assessment of whether an injunction was wrongly granted must be made in reference to the final appeal decision ([234] to [237]).
Third, the discharge of the interlocutory injunctions marked the end of the relevant period for the claimant’s loss, loss suffered as a result of a final injunction does not flow directly from an interlocutory injunction ([238] – [272]).
Fourth, interlocutory injunctions can have a foreseeable and direct adverse effect on a person who is neither a party, nor bound by the injunction ([219]).
FCA rejects Westpac's responsible lending settlement
In the recent matter of Australian Securities & Investments Commission v Westpac Banking Corporation [2018] FCA 1733, Perram J of the Federal Court dismissed an application by ASIC and Westpac Bank for judicial approval of a penalty settlement. ASIC tends to favour reaching settlements rather than litigation for the purpose of applying penalties due its relative efficiency. A settlement can be preferential to litigation in terms of time expended and cost, especially in investment cases with large plaintiff classes or numerous issues.
This case is particularly unique as Perram J made amicus curiae appointments — the appointment of an independent third party to assist the Court in certain ways — to argue against the application in the place of Westpac.
The penalty was concerned with the methods employed by Westpac regarding home loan suitability assessments in a period between 12 December 2011 and March 2015. The specific method in question was a rule of Westpac’s Automated Decision System which gave a 'Final Net Monthly Surplus/Shortfall' calculation. The issue was that the calculation was not based on financial information provided by the customer, but rather a benchmark known as the HEM Benchmark based on data gathered by the ABS.
Westpac and ASIC had agreed that use of the HEM Benchmark was a contravention of s 128 of the National Consumer Credit Protection Act 2009 (Cth) (‘the Act’). Perram J strongly disagreed with this outlining that s 128 is focused on entering into a credit contract before making an assessment. In his Honours own words “… using the HEM Benchmark does not conceivably contravene s 128”. His Honour then went on to critique the substance of the agreement, noting that other than stating Westpac breached s 128, it did not outline what conduct or facts resulted in the breach.
Even after a thorough examination of the relevant facts and submissions by counsel for both parties, Perram J was not convinced that the draft orders presented to him were sufficient to fulfil the obligations of the Court under s 166 of the Act. Section 166 requires a court making a declaration for the purposes of a civil penalty provision to specify the conduct constituting the contravention. His Honour was quite blunt in expressing that he felt the conduct specified was conduct that could breach s 128 stating “I simply do not accept that the conduct specified in the declaration is conduct which could possibly be a contravention of s 128. I will not declare conduct which is not unlawful to be unlawful. The contraventions of s 128, that is the entry into credit contracts, must be specified. The declaration tells one next to nothing.”
On this basis, the joint application was refused with a case management hearing set for November 27. In making this refusal Perram J state “… I accept the need for the Court to encourage settlements in this area but the desirability of doing so does not permit the Court to become a rubber stamp”.
QCA: Consideration must be given to the time taken to assess costs when determining security payments
In the recent matter of Monto Coal 2 Pty Ltd & Ors v Sanrus Pty Ltd & Ors [2018] QCA 309, the Queensland Court of Appeal provided a reminder that the time required to assess costs may be taken into account when determining whether a respondent is able to realise assets to pay security.
Background and the proceeding below
The proceeding related to a dispute over a joint venture to mine coal at Monto entered into in 2002. The proceeding had a long history, having been commenced in October 2007. The plaintiffs consented to provide security for the defendants’ costs of $250,000 in December 2007 and at the time of writing, the proceeding is listed for trial for 16 weeks in 2019.
In December 2017, the defendants applied to the Court to increase the security from $250,000 to $4,000,000.
At first instance, Crow J dismissed the application on the basis that the defendants failed to meet the essential threshold requirement in r671(a) of the Uniform Civil Procedure Rules 1999 that there is reason to believe that the plaintiff will not be able to pay the defendants’ costs if ordered to do so.
His Honour based his decision upon evidence provided on behalf of the plaintiffs that their interest in the joint venture (the evidence indicated that the total value of the joint venture was $100,000,000) significantly exceeded the estimate of the defendants’ likely costs of the proceeding ($4,000,000) and that the plaintiffs may sell that interest in order to satisfy any costs liability to the defendant should their action fail.
The defendants appealed his Honour’s decision on the basis that, relevantly, his Honour had failed to apply the correct threshold test under r671(a) and had erred in failing to find that there was “reason to believe” that the plaintiffs will not be able to pay the defendants’ costs if ordered to pay them.
The defendants needed to succeed on each of those points in order for the appeal to succeed.
The decision on appeal
Gotterson JA (with whom McMurdo JA and Boddice J agreed) held that the primary judge had applied too strict a threshold test under r671(a). The primary judge had approached the test on the basis that the defendants were required to satisfy the Court that the plaintiff “will not” be able to pay the defendants’ costs if ordered to do so, whereas the defendants were merely required to satisfy the Court that there was “reason to believe” that the plaintiffs would not be able to pay costs if ordered to do so.
In reaching his decision with respect to whether the primary judge should have in fact found that there was reason to believe that the plaintiffs will not be able to pay the defendants’ costs if ordered to pay them, Gotterson JA preferred the view was that it was for an applicant for security to adduce evidence from which the Court may form a reason to believe that a plaintiff will not be able to pay the defendants’ costs if ordered to pay them.
His Honour then turned to consider the time period within which a plaintiff must pay a defendant’s costs, observing that:
The expression itself does not stipulate when, or by what means, the plaintiff company is to be able to pay the costs order. It does not require, for example, that in order to be able to pay a costs order, a company must have available liquid funds sufficient to meet the costs order on the date that the order is made. To put it another way, it does not state or imply that a company will be unable to pay unless it has on hand such liquid funds at that date.
His Honour then cited an observation of von Doussa J in Beach Petroleum v Johnson and stated that:
These observations imply, correctly in my view, that the period of time likely to be required for determination, by assessment or otherwise, and allowing for resolution of any disputes that arise in the determination process, is to be taken into account. So also is the opportunity that the plaintiff corporation will have within that period to realise non-liquid assets in order to pay the quantum of the ordered costs as and when they are ultimately determined.
The appellants had contended that the Court should find that there was reason to believe that the plaintiffs would not be able to pay the defendants’ costs if ordered to pay them due to uncertainty surrounding when the plaintiff may be able to realise its interest in the joint-venture.
Gotterson JA ultimately found that on the evidence available, there was no reason to infer that the realisation of the plaintiffs’ interest in the joint venture in order to satisfy any costs order would take longer than the process of determining the costs payable. His Honour also noted that the process of costs assessment may take a considerable time given that the proceeding had commenced some 11 years earlier in 2007 and was listed for 16 weeks’ trial.
In light of that, his Honour held that the threshold requirement that there be reason to believe that the plaintiffs would not be able to pay the defendants’ costs if ordered to do so had not been met and accordingly, dismissed the appeal.
Conclusion
The decision is a timely reminder to practitioners that:
- the threshold contained in r671(a) necessary for security for costs to be awarded requires only a “reason to believe” that the relevant party cannot pay costs if ordered to do so, rather than a concluded opinion that the relevant party cannot pay costs if ordered to do so; and
- the relevant time at which the threshold is to be analysed is not at the time that the order for costs is made; but rather, at the time when the costs must be paid at the conclusion of the costs assessment process. This allows non-liquid assets to be taken into consideration as available to satisfy a costs order if a plaintiff can show that those assets could be sold prior to the conclusion of the costs assessment process. Practically, this may be of assistance in resisting an application for security for costs noting the significant length of time that the costs assessment process can take.
WASCA clarifies the law of set-off in insolvency
In the recent matter of Hammersley Iron Pty Ltd v Forge Group Power Pty Ltd (in liq) (receivers and managers appointed) [2018] WASCA 163 the Court of Appeal of the Supreme Court of Western Australia held that the attachment of a security interest under the Personal Property Securities Act 2009 does not preclude set-off in insolvency pursuant to section 553C of the Corporations Act 2001 or at general law.
Background
In 2012, Hammersley Iron Pty Ltd (Hammersley) engaged Forge Group Power Pty Ltd (Forge) to undertake building works with respect to the construction of power stations at West Angelas and Cape Lambert in Western Australia.
In 2013, Forge obtained finance from a bank and in exchange, granted the bank security over its personal property. Accordingly, the bank registered the security on the Personal Property Security Register (PPSR) in July 2013 pursuant to the Personal Property Securities Act 2009 (PPSA).
The bank appointed receivers and managers to Forge in 2014 and Forge subsequently went into liquidation.
Proceeding below
Relying upon contractual rights, equitable set-off and set-off in insolvency pursuant to s553C of the Corporations Act 2001 (CA), Hammersley argued that its claims against Forge exceeded those that Forge had against it, and that it was entitled to rely upon the set-off described above and to prove for the balance in the liquidation of Forge.
In response, the receivers of Forge contended that:
- section 553C of the CA provided a code governing set-off in insolvency;
- set-off under section 553C did not apply because there was no mutuality as a result of the equitable interest in Forge’s claims against Hammersley subsisting in the bank because of the operation of the PPSA; namely, that the attachment of the security interest in the collateral pursuant to section 19 of the PPSA conferred on the bank a proprietary interest in the collateral at the time of attachment
- the ‘Securities Claims’ of Forge against Hammersley were not ‘accounts’ within the meaning of section 10 of the PPSA because they were not “claims for identifiable monetary sums due by ascertainable dates arising from disposing of property or the granting of rights in the ordinary course of business”. The primary judge upheld that contention, finding that the Securities Claims “were ‘claims that arose after the receivers were appointed by reason of the alleged wrongful draw down by Hammersley of securities provided by Forge’”; and
- as a result, Hammersley was required to pay what it was due to pay to Forge (for the benefit of the bank) and was left to prove in the winding up of Forge for its own claims pari passu with other creditors.
Tottle J upheld contentions of Forge (by its receivers) in the proceeding below.
The decision on appeal
On appeal, the Court of Appeal of the Supreme Court of Western Australia upheld Hammersley’s appeal.
In a lengthy judgment which incorporated a detailed analysis of the relevant principles and their background, the Court of Appeal delivered a single judgment, finding that:
1. Even assuming that the effect of the attachment of the security interest in the collateral pursuant to section 19 of the PPSA conferred on a secured creditor a proprietary interest in the collateral at the time of attachment, that did not of itself operate to destroy the mutuality required for a set-off to apply.
Rather, an analysis of the terms of the relevant security instrument, together with the relevant terms of the PPSA, is required in order to determine whether mutuality is destroyed on a case-by-case basis.
Here, an analysis of the relevant General Security Agreement, when read with the PPSA, indicated that at the relevant date, Forge retained the right to apply payments received from Hammersley for its own benefit by paying down its indebtedness to the bank and to trade creditors and was not available to the bank. Accordingly, there were mutual dealings between Hammersley and Forge within the meaning of s553C of the CA sufficient to enliven the operation of the set-off pursuant to that section.
2. Section 553C of the Act was not a code governing all applicable circumstances of set-off in insolvency. Rather, the Court held that “there is nothing in s553C or its purpose or policy which would relieve the chargee of any equities which would otherwise apply to the charged debt.”
As a result, if statutory set-off pursuant to section 553C is not available, then the result is not that the chargee takes its interest in the claims of Forge free of any equities otherwise available under the general law or imposed by other statutory provisions, such as s80(1) of the PPSA. Rather, any rights taken by a chargee such as the Bank are taken subject to the terms of the contracts between Hammersley and Forge “and any equity, defence, remedy or claim arising in relation to” those contracts. The foregoing may include the right of set-off.
3. Forge’s ‘Securities Claims’, namely, claims that Hammersley had wrongfully drawn down against securities provided by Forge after the appointment of receivers, were ‘accounts’ within the meaning of section 10 of the PPSA. That was significant because if the Securities Claims were not accounts (the finding by the primary judge), then they were not capable of set-off because they would not be taken to have existed at the time of the appointment of the receivers. The Court determined that the Securities Claims were ‘accounts’ because they arose from the maintenance of bank guarantees which Forge provided to Hammersley pursuant to terms of the relevant contracts which was an aspect of Forge’s usual business of providing building services.
Conclusion
The decision is of significance because it confirms that attachment of collateral in a security interest in a secured creditor pursuant to section 19 of the PPSA does not, of itself, act to destroy mutuality sufficient to permit set-off to occur in insolvency.
Also significant is the finding that section 553C of the CA is not a code that applies in respect of set-off in insolvency to the exclusion of general law principles.
ATO Commences Examinations to Identify Phoenix Activity
The Australia Taxation Office recently commenced public examinations in the Federal Court, in relation to a group of entities connected to pre-insolvency advisor Philip Whiteman. The examinations will review the suspected promotion and facilitation of phoenix activities and tax schemes.
ATO Deputy Commissioner Will Day has revealed that the examination will investigate over 45 service providers, clients and employees of these advisors and alleged ‘dummy directors’ of phoenix companies. In doing so, it has appointed Pitcher Partners as liquidators, who will investigate the affairs and conduct of the entities before further legal action is pursued.
The ATO has taken a strong stance on illegal phoenix activity in recent times, asserting that it “deprives employees of their hard-earned wages and superannuation entitlements, unfairly disadvantages honest businesses by undercutting prices and leaves suppliers with unpaid debts.”
The activity is estimated to cost businesses, employees and the government $5.13 billion per year, and so the ATO is committed to “detecting those who promote and facilitate illegal phoenix behaviour, and disrupting those who willingly engage in phoenixing.”
ASIC to revise RATA with launch of ROCAP
Next month, ASIC is expected to launch it's Report on Company Activities and Property (ROCAP) which will have the effect of revising the existing RATA form. It has been designed in response to law reform and industry consultation, and serves to enable insolvency practitioners to obtain better information about events leading up to an external administration, including information about asset recoveries and reporting to ASIC.
Relevantly, the revised form seeks to minimise costs by:
- reducing the time spent dealing with large quantities of paperwork, by simplifying the process in which information is collected from directors about an external administration;
- providing directors with a form that they are able to complete themselves, thus reducing time spent following up information that was excluded in the first instance; and
- reducing requests from liquidators under ASIC's Liquidator Assistance Program.
Ahead of ROCAP's launch, ASIC has recommended that insolvency practitioners review their internal processes, such as changes to internal systems, precedents and checklists, to ensure they are equipped for its introduction this November.
Supreme Court of Queensland Issues Costs Guidelines
Practice Direction 22 of 2018
The Supreme Court of Queensland has for the first time issued guidance as to the appropriate percentage uplift to professional fees to be allowed pursuant to Item 1 of the Scale of Costs (the Scale) contained in Schedule 1 to the Uniform Civil Procedure Rules 1999 (UCPR).
Background
On 24 August 2018, the scales of costs in the UCPR were updated and as a part of those updates, the scales of costs for work undertaken in the Supreme Court of Queensland and in the District Court of Queensland (which had previously existed as Schedules 1 and 2 to the UCPR, respectively) were amalgamated.
Item 1 of the Scale (which had existed in substantially the same form in both Schedules 1 and 2 prior to their amalgamation) provides for an additional allowance to be made over and above the allowances otherwise provided for professional fees in the Scale for ‘General care and conduct’.
Item 1 then sets out a list of factors which must be considered when arriving at an appropriate allowance for general care and conduct.
Historically, allowances for general care and conduct have in practice been calculated by reference to a specified percentage of the professional costs that had otherwise been claimed/allowed by reference to other items in the Scale. Allowances ranged anywhere between 15% to 35% of professional costs otherwise allowed, most commonly falling between around 20% to 30%.
In its current form, Item 1 of the Scale now also provides for the issue of guidelines for the calculation of the general care and conduct allowance in practice directions by the Chief Justice.
Practice Direction 22 of 2018
Practice Direction 22 of 2018 was issued on 10 September 2018 and is entitled “Costs Guidelines”.
The practice direction provides guidelines for the application of Item 1 of the Scale, with its centrepiece being a comprehensive table providing an appropriate range of percentage allowances depending upon the quantum and complexity of each matter.
By way of example, in the Supreme Court:
- A ‘straight forward’ claim where the amount involved does not exceed $2M would attract an uplift between 15%-20%;
- A ‘straight forward’ claim where the amount involved exceeds $2M would attract an uplift of between 20%-25%;
- A ‘complex’ claim where the amount involved does not exceed $2M would attract an uplift between 20%-30%; and
- A ‘complex’ claim where the amount involved exceeds $2M would attract an uplift of 25%-35%.
The table also provides for many other circumstances, including those in the District Court, where the allowances are lower across the board.
The practice direction also provides that characterisation of a matter as straight-forward or complex is to be made on a case-by-case basis, with the intention being that about half of the work in each court will fall into each category.
No doubt over time judicial authority will begin to emerge which will assist in identifying where the line between a ‘straight forward’ and ‘complex’ matter lies.
For those wishing to view it, a copy of Practice Direction 22 of 2018 may be accessed here.
High Court of Australia rules that ‘Holding DOCAs’ are permissible in certain circumstances
Background
Mesa Minerals Limited (Mesa) is a listed mining company which owned a 50% joint venture interest in two manganese projects. It was placed into Voluntary Administration on 13 July 2016.
Voluntary Administrations are governed by Part 5.3A of the Corporations Act 2001 (CA). The object of Part 5.3A is set out in section 435A: being to administer the business, property and affairs of an insolvent company in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence or if that is not possible, results in a better return to creditors and members than an immediate winding up.
The regime provided in Part 5.3A is that the administrator is to investigate the circumstances of the company, form an opinion in respect of certain matters and call a meeting of creditors within 5 days before or after the end of the ‘convening period’, in most cases being 20 business days after the beginning of the administration. The Court may extend the convening period upon application and at the time of the events in question, the convening period could not be extended for more than 45 business days. At the meeting, the creditors may decide either that the company execute a Deed of Company Arrangement (DOCA), that the administration should end or that the company be wound up.
During the period of Voluntary Administration under Part 5.3A, a statutory moratorium is also applied to the claims of creditors against the company in administration.
At the adjourned second meeting of creditors of Mesa on 20 October 2016, the creditors voted in favour of entry into a DOCA, which was executed on 3 November 2016. The DOCA provided that the Administrators were to continue to investigate the property and affairs of the Company to explore the possibility of a restructure or recapitalisation of the Company and report within 6 months with the results of their investigations.
The Deed, in effect, is what is known colloquially as a ‘holding DOCA’.
Proceedings at first instance and below
Mighty River International Limited (Mighty River) owned 13.5% of Mesa and commenced proceedings in the Supreme Court of Western Australia seeking orders, relevantly, declaring that the DOCA was of no force and effect and terminating or setting aside the DOCA. Another shareholder of Mesa, Mineral Resources Limited (Mineral Resources) cross-applied for orders to the effect that the DOCA was not void or alternatively, that it was valid.
Master Sanderson dismissed Mighty River’s application at first instance.
On appeal to the Court of Appeal of the Supreme Court of Western Australia, Mighty River argued that the DOCA was invalid on two basis of note, namely that:
- Section 444A(4)(b) of the CA required that a DOCA specify some property of a company available to pay creditors, which the present DOCA did not do; and
- the DOCA had the effect of impermissibly extending the moratorium upon creditors’ claims and the time for investigation and reporting upon a restructuring proposal beyond the convening period without obtaining an order of the Court to do so. The essential argument was that such an extension was not consistent with the object of Part 5.3A as expressed in section 435A of the CA because it provided for “essentially an extension of the Administration Period”.
The Court of Appeal of Western Australia held the DOCA valid in separate judgments and dismissed the appeal.
The decision in the High Court
By a 3:2 majority, the High Court also held that the DOCA was valid and dismissed the appeal.
The plurality (comprising Kiefel CJ and Edelman J, with whom Gaegler J agreed in a separate judgment) held that:
- the DOCA did not contravene the object of Part 5.3A or impermissibly extend the time for investigation and reporting without an order of the Court pursuant to s439A(6) of the CA because:
- “the operation of the Deed aims to fulfil the object of the Part by maximising the chance of Mesa Minerals' survival or otherwise providing a better return to creditors than would result from its immediate winding up”. Reliance was placed upon evidence that the value of the listed shell of Mesa was between $400,000 and $900,000 and that as a result, sale of the assets of Mesa would be a better outcome for creditors than winding up if the administrators’ investigations determined that the business could not be successfully restructured and continue to operate; and
- the object of Part 5.3A was “not compromised if creditors choose, in a deed of company arrangement, to extend a moratorium beyond the period that they would otherwise have had outside an administration”; and
- in light of its context and purpose, section 444A(4)(b) of the CA did not require that a DOCA must specify some property of a company available to pay creditors’ claims; rather, it required that a DOCA specify any property of a company available to pay creditors’ claims. As a result, the DOCA in question did not contravene section 444A(4)(b).
Gageler J, whilst agreeing with the reasons of Kiefel CJ and Edelman J, delivered a separate judgment further explaining his Honour’s rejection of the argument that the DOCA did not comply with the procedural requirements of Part 5.3A of the CA.
Conclusion
The decision is of significance because it confirms that a ‘holding DOCA’ (although note the questioning of the use of that term on the basis that it has no legislative recognition) is not invalid merely because it has the effect of extending the moratorium upon claims of creditors beyond the convening period in Part 5.3A without leave of the Court. Instead, a DOCA extending the moratorium beyond the end of the convening period will not be invalidated for that reason alone so long as the purpose of the extension is consistent with the object of Part 5.3A; namely, to achieve a better outcome for creditors and/or members than an immediate winding up of the company if the moratorium were not extended.
Further, the decision is also of practical assistance because it confirms that a DOCA need only identify property available to pay creditors’ claims where there is in fact such property available to do so.
