Insolvency

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that an inquiry should be held into the liquidator’s conduct, pursuant to s536(1)(b) of the Corporations Act (now repealed).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.

by James Conomos Lawyers

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.

by James Conomos Lawyers

High Court of Australia rules that ‘Holding DOCAs’ are permissible in certain circumstances

Mighty River International Limited v Hughes; Mighty River International Limited v Mineral Resources Limited [2018] HCA 38.

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:

1. 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
2. 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:

1. 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

2. 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.

by James Conomos Lawyers

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.

by James Conomos Lawyers

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.

by James Conomos Lawyers

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:

1. If the payments made by Built were ‘unfair preferences’; and
2. 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'.

by James Conomos Lawyers

Court Awards Liquidators Unfair Preference Payments

In the matter of Trenfield v HAG Import Corporation (Australia) Pty Ltd the court was required to consider whether the liquidators of Lineville Pty Ltd were entitled to recover a number of payments as preferences pursuant to s588FA of the Corporations Act 2001 Cth. The payments in question were made by Lineville to HAG Import Corporation, with HAG disputing the liquidator’s entitlement to the payments on the basis that they were not made in respect of an unsecured debt. In doing so, HAG argued that the payments were amounts paid for goods which had been supplied to the company on terms granting HAG a security over the goods or the proceeds of sale of those goods, and that the value of HAG's security was in excess of the amount paid.

In reaching a conclusion, the court was required to consider:

• Whether the security interest had been perfected;
• Whether the creditor was a secured creditor, and if so, at what point in time; and
• How any security was to be valued

Had the Security Interest Been Perfected?
The court applied s267 of the PPSA which provides that correct registration of a security interest prevents the security from vesting in a liquidator or administrator if the company goes into external administration. Here, the registration was not valid for the purposes of the PPSA and thus upon appointment of the administrators, any security interest held by HAG vested in Lineville. In delivering its verdict, the court held that the security interest had not been perfected as it had incorrectly been identified as ‘transitional’.

Despite this, the court ultimately contended that the unperfected security interest was still effective between the parties. In doing so, it held that the PPSA does not make an unregistered security interest completely void.

When Did the Creditor Become Secure?
The court held that the relevant time for determining whether the debt was unsecured is pursuant to the time of each payment. In doing so, it applied s588FA (2) of the Corporations Act, contending that the security has to be valued at the date of each particular payment, in order to perform the calculation required by subsection (2).

How Any Security Was To Be Valued?
After much consideration as to how the value of the security was to be determined, the court held that it was to be assessed as the value of the security to the creditor. Relevantly, it held that in circumstances where there was no expert evidence as to the appropriate basis to value the goods, the matter must be resolved as a matter of common sense. Accordingly, the court held that the appropriate way to value the stock held by the company is at the wholesale price.

Concluding Judgement
Ultimately, judgement was handed down in favour of Lineville, with HAG ordered to pay its liquidators $473,291 plus interest pursuant to s58 of the Civil Proceedings Act 2011.  However, in determining the period for which interest will accrue, the court contended that HAG must be allowed a reasonable time after the demand was made by the liquidators before interest begins to run. According to the statement of claim admitted by the HAG, the first letter of demand was sent on 7 August 2014, and further letters of demand were sent on 3 December 2014, 18 February, 30 April, 17 July and 28 September 2015. It was thus held that interest was payable from 7 August 2015, 12 months after the first letter of demand.

by James Conomos Lawyers