MV insolvency news — January 2015

January 2015 was a quiet month for the courts deciding insolvency-related cases.

Here are five decisions we think are most thought-provoking decisions for our region, dealing with issues like when a trustee in liquidation may commence proceedings, whether an adjudication decision can be enforced by a company in liquidation and when a bankrupt can travel overseas.

Case No. 1: Hamersley Iron Pty Limited v James [2015] WASC 10 * – 16 January 2015

Hamersley Iron contracted with Forge Group Construction Pty Limited to construct fuel hubs in the Pilbara. In February 2014, mid-contract, Forge went into voluntary administration and then into liquidation. Typical of many insolvencies in the construction industry, a dispute broke out between Hamersley and Forge about who owed how much under the contract between them for work already done and work to complete.

In March 2014 Forge served on Hamersley an adjudication application under Western Australia’s Construction Contracts Act 2004 (similar to the ACT’s Security of Payment legislation), and it was decided by the adjudicator that Hamersley owed Forge around $641K for work done. Hamersley did not pay on the basis it had an offsetting claim against Forge under section 553C of the Corporations Act 2001 (Cth) in the order of $7.4M. Ordinarily, a counter claim under a construction contract does not affect an adjudication decision.

Forge sought an order from the Court that it could enforce the adjudication decision against Hamersley, and Hamersley sought an order that the decision be set aside given the quantum of its counterclaim against Forge. The practical question before the Court was whether the Corporations Act trumped the Construction Contracts Act.

In finding for Hamersley, Justice Beech said that the object and purpose of section 553C would be defeated if Forge was entitled to recover 100 cents in the dollar from Hamersley under the adjudication decision but Hamersley was left to prove its debt in Forge’s liquidation and potentially receive less than its claim. His Honour was satisfied that there was a serious case to be tried about Hamersley’s counterclaim, and noted that the purpose of section 553C is ‘to do substantial justice between the parties where a debt is really due from the bankrupt to the debtor’.

The Court did not, however, set aside Forge’s adjudication decision – the application to enforce was suspended pending resolution of Hamersley’s claim in the liquidation. Practically, Justice Beech left Hamersley’s claim for Forge’s liquidators to deal with in the first instance.

The case is important in that it confirms the status of section 553C of the Corporations Act, which will make insolvency practitioners think twice before incurring time and costs obtaining an adjudication decision when the proposed creditor has flagged an offsetting claim arising from the debtor’s insolvency.

* Related case is Hamersley HMS Pty Limited v Davis [2015] WASC 14

Case No. 2: KordaMentha Pty Limited & Anor v L M Investment Management Limited (In Liquidation) & Anor; Park & Ors v KordaMentha Pty Limited & Anor [2015] QSC 4 – 23 January 2015

In 2013 KordaMentha and Calibre Capital replaced LM Investment Management as the trustee of the LM Managed Performance Fund (LMPF). An unrelated company, Trust Company (PTAL) Limited, was the legal owner under a Custody Agreement of certain assets of LMIM as trustee for the LMPF. KordaMentha and Calibre Capital sought orders from the Queensland Supreme Court that they could commence proceedings, as trustees, against LMIM and PTAL for recovery of assets.

The application was brought under section 96 of the Queensland Trusts Act 1973. The ACT equivalent is section 63 of the Trustee Act 1925. Both sections deal with a trustee approaching a court for advice or direction about management or administration of trust property, or interpretation of the trust instrument. Importantly, a trustee who follows a court’s advice or direction is deemed to have properly discharged their duties as trustee (except if there has been fraud or misrepresentation in obtaining the advice).

Justice Martin found that the question turned on whether retention of funds to enable the litigation proposed was in the best interests of all the beneficiaries of the trust, and that involved consideration of the prospects of success of the litigation, the potential for substantial depletion of trust assets for costs, what might be gained if the litigation is successful and, overall, whether it is practical and fair for trust assets to be used for the proposed purpose.

This case is important because it confirms that while the court will not investigate the trustee’s evidence and make a finding as to whether the litigation will be successful, an application for court approval to litigate with trust funds is a serious affair and will require careful consideration of the trustee’s position.

Case No. 3: Miao v Michell [2015] FCA 22 – 27 January 2015

Ms Miao sought judicial review of the decision of her trustee in bankruptcy who did not consent under section 272 of the Bankruptcy Act 1966 (Cth) to Ms Miao travelling overseas.

At the time of wanting to travel overseas, Ms Miao had not provided her trustee with information about her estate. In particular, Ms Miao had not provided her trustee with a Statement of Affairs or any other information about assets, liabilities, income or expenditure, nor had Ms Miao provided details of her residential address. Ms Miao told the trustee she was required to travel her sick mother and that the trip was being funded with (previously undisclosed) rental income. Perhaps unsurprisingly, the trustee refused consent for Ms Miao’s travel.

In considering whether the trustee’s decision should be set aside, Justice Beach confirmed that the object of restrictions on a bankrupt’s travel is to ensure the proper administration of the Bankruptcy Act ‘and not as a penalty imposed upon a citizen as a consequence of an inability to pay debts’. Furthermore, a trustee is permitted to consider whether the proposed overseas travel is genuine, whether the bankrupt will return to Australia and whether the travel will hamper administration of the estate.

Ultimately, his Honour gave Ms Miao a short period of time in which to provide her trustee with information about her estate before agreeing to set aside the trustee’s decision and permit the overseas travel. The interesting part about this case is that Ms Miao’s own application forced her cooperation with her trustee.

Case No. 4: Condon (Trustee), in the matter of Rayhill (Bankrupt) v Truthful Endeavour Pty Limited [2015] FCA 7 – 23 January 2015

This case concerned whether the bankrupt was a creditor of a particular trust – that trust being one the bankrupt was formerly the trustee of – in which case the trustee in bankruptcy was entitled to recover surplus proceeds from the sale of property by the trust back into the bankrupt’s estate. The new trustee of the trust said otherwise.

In finding for the trustee in bankruptcy, Justice Jagot dealt with a raft of issues including whether the bankrupt was a creditor of another trust (without funds) and whether certain payments made by other entities were in fact payments made by the bankrupt because they were made from funds belonging to her and at her direction. Her Honour also confirmed a trustee’s right of indemnity against trust assets to pay debts and liability incurred by the trust.

The Court held that the bankrupt’s property vested in the trustee in bankruptcy, and that included the bankrupt’s right of indemnity and associated charge over the assets of the trust. Importantly, it also included the bankrupt’s right of subrogation to the trustee’s indemnity against the trust assets. All of these rights were found to trump the beneficiaries of the trust.

Case No. 5: In the matter of Anglican Development Fund Diocese of Bathurst Board (Recs and Mgrs Apptd) [2015] NSWSC 6 – 22 January 2015

In October 2013 the Commonwealth Bank had receivers appointed to the Anglican Development Fund Diocese of Bathurst Board (ADF) for ADF’s inability to pay the Bank’s secured debt. Shortly after the appointment, the NSW Supreme Court ordered judgement for the Bank in the amount of around $36M with ADF’s consent. The Court also ordered that the receivership of ADF continue and the receivers seek Court approval before making any distribution to creditors.

The present application was brought by the receivers seeking approval to make an interim distribution to creditors, including to the Bank. The application was opposed by the Anglican Property Trust Diocese of Bathurst (APT), who was also a creditor. Among other things, APT alleged that the consent judgment previously ordered by the Court in favour of the Bank should be set aside, and the receivers and their solicitors (who were also the Bank’s solicitors) were not sufficiently impartial to consider any claim ADF may have against the Bank.

In finding for the receivers, Justice Black looked at the residual powers of the board of directors when the receivers were appointed, and held that those powers extended to consenting to judgment in the Bank’s favour. This was particularly so where ADF was being advised by solicitors and senior counsel at the time of giving the consent.

His Honour then looked at the position of the receivers vis a vis the Bank and said that any inquiry into the receivers’ conduct should be raised under section 423 of the Corporations Act. Where no such application had been made, his Honour did not feel it appropriate he express a view. The receivers were granted approval to make the proposed interim distribution to ADF’s creditors.

For more information contact:

Greg Brackenreg — Partner — Dispute Resolution Team
(02) 6279 4409
greg.brackenreg@meyervandenberg.com.au

Bernice Ellis — Senior Associate — Dispute Resolution Team
(02) 6279 4385
bernice.ellis@meyervandenberg.com.au