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.
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.
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.
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.
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.
