Insolvency case update

The courts were back in full swing during February 2015.

Here now are five decisions we think are most thought-provoking for this region, dealing with issues like who gets the deposit paid under a land sale contract later disclaimed by a trustee in bankruptcy, whether the right to an offsetting claim against a statutory demand can be contracted out of, whether a “bar” clause in a settlement deed can apply to prevent appeal against a sequestration order and when taking security over a soon-to-be-insolvent company will not be a voidable uncommercial transaction.

Case No. 1: 640 Elizabeth Street Pty Limited (In Liquidation) & Ors v Maxcon Pty Limited [2015] VSC 22 – 20 February 2015

The company 640 Elizabeth Street Pty Limited (640) owned land at 640 Elizabeth Street in Melbourne, and entered into a joint venture with Jabbour 640 Pty Limited to develop the land into a residential apartment complex. Elan Pty Limited was the development manager and nominee of the joint venture, and entered into a building contract with Maxcon Pty Limited to build the apartments.

Construction of the apartment complex was completed by Maxcon and certified in November 2011. In February 2012 Maxcon issued an invoice to Elan for payment of the $51,600 GST amount attributable to the last agreed payment owing to Maxcon under the building contract. In May 2012 Maxcon remained unpaid and Elan also admitted that, among other things, Maxcon’s retention money had been used to discharge an unrelated Westpac mortgage.

In light of Elan’s revelation about the use of Maxcon’s retention money, which Maxcon’s director said was tantamount to theft, Maxcon demanded security for payment of its retention money and the GST amount. In consideration for that security, Maxcon agreed not to sue 640. Under a Deed of Acknowledgment in June 2012 between Maxcon and Elan for and on behalf of 640, Maxcon took a charge for the money owed to it over various properties owned by 640 (with a caveat lodged on the title of each property), and 640 agreed to give Maxcon a mortgage over those properties in registrable form.

Administrators were appointed to 640 in November 2012 and in February 2013, the creditors resolved to wind the company up. The liquidators claimed that the transaction giving security to Maxcon, namely the Deed of Acknowledgment and the mortgage, should be set aside as an uncommercial transaction. Justice Sifris of the Victorian Supreme Court disagreed – he found that 640 had derived a benefit from the transaction in the form of saved legal costs that would otherwise have been incurred in litigation brought by Maxcon for recovery of its retention money.

His Honour said that while Elan was the party against whom Maxcon would initially claim, Elan had a right of indemnity from the joint venturers so that any payment by Elan would ultimately be paid (in part) by 640, and reduce 640’s profit accordingly. In the circumstances, the benefit of the transaction to Maxcon was not so great as to render it uncommercial. Rather, it was perfectly explicable and explained by normal commercial practice.

In our experience, a transaction where a company gives security only months before it goes into liquidation is invariably alleged to be uncommercial. However, this case highlights the importance of carefully and objectively considering all the circumstances giving rise to the transaction before commencing recovery proceedings against the recipient of the benefit.

Case No. 2: Majet & Anor v Goggin & Miller as Trustees of the Bankrupt Estate of Brett-Hall & Anor [2015] QSC 38 – 27 February 2015

In January 2014 Mr and Mrs Majet entered into a contract with Mr Brett-Hall to sell their property in Port Douglas, Queensland. Mr Brett-Hall paid the deposit under the contract but was made bankrupt in March 2014 before the contract completed. The trustees of Mr Brett-Hall’s estate disclaimed the contract under section 133(1A) of the Bankruptcy Act 1966 (Cth) as unprofitable and, in response to that disclaimer, Mr and Mrs Majet terminated the contract for anticipatory breach. The issue before the Court was who was entitled to the $139,000 deposit amount.

Mr and Mrs Majet said they were entitled to keep the deposit under the terms of the contract, namely because the contract was terminated by reason of the buyer’s default. The trustees said the deposit was to be returned to them because any property obtained by Mr and Mrs Majet after the date of Mr Brett-Hall’s act of bankruptcy (being in December 2013) was held on trust only. To determine the issue, the Court had to decide the effect of disclaimer on the contract.

In finding for Mr and Mrs Majet, Justice Henry of the Queensland Supreme Court found that the disclaimer only affected the rights, interests and liabilities of the buyer under the contract, and not those of the seller. Therefore, upon being notified (by his trustees) that Mr Brett-Hall did not intend to complete the contract, Mr and Mrs Majet’s rights around termination were not affected, including their right to keep the amount of deposit already paid. Furthermore, in respect to the deposit, his Honour said that section 133(2) would only operate to release Mr Brett-Hall from liability – that liability having already been met – and the deposit in the hands of the sellers was subject only to rights.

This case confirms that the terms of the contract being disclaimed are key, and those terms are not necessarily displaced by an insolvency event.

Case No. 3: Tran v Pu [2015] FCA 97 – 20 February 2015

In April 2013 Mr Pu obtained judgment against Mr Tran for around $35,000. In October 2013 Mr Pu issued a bankruptcy notice to Mr Tran for the judgment sum. After issue of the bankruptcy notice there were negotiations between Messrs Pu and Tran about the debt, resulting in a Deed of Settlement between them being executed in April 2014.

Relevantly, clause 3 of the Deed provided that the Deed could be pleaded as a full and complete defence to any action taken by any party in relation to the matters referred to in the Deed. Clause 4 provided that if Mr Tran defaulted on his obligations under the Deed, Mr Pu could rely on Mr Tran’s non-compliance with the previously issued bankruptcy notice.

Mr Tran defaulted on the Deed and Mr Pu successfully applied to have a sequestration order made against Mr Tran’s estate. In the first instance, Mr Tran applied for review of the sequestration order. Mr Pu successfully opposed that application, with Justice Whelan confirming that clause 3 of the Deed operated to prevent Mr Tran bringing the application at all. The current proceeding was an appeal by Mr Tran of Justice Whelan’s decision.

In finding for Mr Tran on his appeal, Justice Beach of the Federal Court said that no private contractual “bar” clause could override section 52 of the Bankruptcy Act. Rather, a court was required to satisfy every element of that section, including be satisfied with the proof of the debts allegedly owing by the debtor. His Honour also said that the public purpose and effect of section 52 on the property and creditors of the debtor outweighed any public policy in encouraging settlement of litigation. Ultimately, his Honour referred the matter back to Justice Whelan for rehearing.

This case is a warning that not all legal actions can be barred under the terms of a settlement deed, no matter what the parties may have intended. This may be a good thing if you are in similar shoes to Mr Tran, but not so good if you are like Mr Pu and thought you had a certain course of action available to you.

Case No. 4: Qube Logistics (Vic) Pty Limited v United Equipment Pty Limited [2015] WASC 70 – 26 February 2015

In September 2010 Qube Logistics entered into an agreement with United Equipment to rent two forklifts. At various times over the next three years, defects were identified in the forklifts, culminating in one of them splitting in half in early 2014. Qube Logistics said the forklifts were unsafe and not fit for the purpose they were hired, and stopped paying rent to United Equipment.

United Equipment issued a statutory demand for the unpaid rent amount, which Qube Logistics applied to have set aside on the basis of a greater offsetting claim. United Equipment opposed the application on the basis of clause 7k of the rental agreement that said:

The Renter’s obligations to make payments and otherwise perform its obligations under this Agreement will continue regardless of any defect in, or lack of performance of, the Equipment and the Renter has no right to claim any setoff or withhold any payments.

It was United Equipment’s position that Qube Logistics was liable to pay the full amount of rent regardless of the state of the forklifts, and then separately sue to recover damages.

Master Sanderson of the Western Australian Supreme Court disagreed that clause 7k operated to prevent Qube Logistics from bringing an application under section 459H of the Corporations Act 2001 (Cth). Rather, the Master applied the decision of Bakota Holdings Pty Limited v Bank of Western Australia where Justice Barrett said that an “offsetting claim” within the section 459H(5) definition may exist even thought it could not be pleaded by way of setoff or counterclaim in an action for recovery of the debt the subject of the statutory demand.

The Master confirmed that it is the existence of a genuine claim by way of a counterclaim, setoff or cross-demand that is relevant, not the ability to use it as a defence in an action for recovery of the demanded debt. Furthermore, quoting Justice Barrett, ‘the inclusion of “cross-demand” in the definition of “offsetting claim” shows that the concept extends beyond claims that can be deployed by way of setoff or counterclaim in debt recovery proceedings’. The Master ordered the demand be set aside.

This case confirms the care that must be taken when deciding to issue a creditors’ statutory demand, namely being sure there is no genuine dispute, offsetting claim or other good reason that will give rise to the demand being set aside. If in doubt, ordinary debt recovery proceedings should be used.

Case No. 5: Akron Roads Pty Limited (In Liquidation) v Crewe Sharp & Ors [2015 VSC 34 – 13 February 2015

In April 2013 the liquidators of Akron Roads commenced proceedings for insolvent trading against the directors of Akron and a related company, Crewe Sharp. The claim against Crewe Sharp was on the basis it was a shadow director of Akron and “running the show”. During the course of the proceedings, the liquidators became aware of relevant policies of professional indemnity insurance issued by CGU to Akron director Mr Crewe and Crewe Sharp.

Upon request by Mr Crewe and Crewe Sharp, CGU denied liability under the insurance policies. Furthermore, neither Mr Crewe nor Crewe Sharp applied to join CGU to the proceedings as a third party, which prompted the liquidators’ instead to apply to join CGU.

CGU opposed the liquidators’ application on a number of grounds, including that only an insured party could apply to join its insurer and the liquidators had not properly articulated how Crewe Sharp was a director of Akron.

In finding for the liquidators, Justice Judd of the Victorian Supreme Court held that by virtue of section 562 of the Corporations Act, the liquidators had sufficient interest in the insurance policies, and were entitled to make the joinder application. Furthermore, his Honour did not consider the liquidators’ case against Crewe Sharp ‘hopeless, or bound to fail’, and any pleading deficiencies could be dealt with in the ordinary course of the proceedings.

This case is interesting for two reasons. First, because there may be another source of funds for liquidators to pursue when prosecuting insolvent trading claims and secondly, because there may be a corporate director to pursue as well as individuals.

For more information contact:

Alisa Taylor | Partner
(02) 6279 4444