MV’s top 5 insolvency cases — April 2015

The courts are back in full swing and there were lots of insolvency cases decided in April 2015 around the country.

Our top five thought-provoking cases this month deal with issues including whether an application to set aside a statutory demand can be made after the demand has been withdrawn and only for the purpose of recovering costs, the Commissioner of Taxation’s power over running balance accounts and allocating tax debits and credits, whether the set-off provisions in section 553C apply to a non-company body in liquidation, whether a personal insolvency agreement can act as a bar to proceedings for breach of director’s duties and a statutory demand being set aside on strict conditions.

Case No. 1: Polytrade Pty Limited v Glass Recovery Services Pty Limited [2015] VSC 164 – 28 April 2015

On 24 January 2015 Glass Recovery Services (GRS) issued a statutory demand to Polytrade seeking payment of an amount in excess of $2.6M. The demand was served on 29 January 2015. On 16 February 2015, by its solicitors’ correspondence, Polytrade called upon GRS to withdraw the demand on the grounds of a genuine dispute about the amount claimed by GRS.

After some to-ing and fro-ing between solicitors, GRS agreed to withdraw the demand on 17 February 2015. After this, however, Polytrade demanded that its costs for dealing with the demand, including instructing solicitors to prepare an application to set the demand aside, be paid by GRS. GRS refused to pay any costs to Polytrade so Polytrade went ahead and filed its application to set aside the demand, albeit the only order it sought was for indemnity costs.

The question before the Court was whether Polytrade’s application was effective given the statutory demand had already been withdrawn and before the application was filed.

In finding against Polytrade, Associate Justice Randall of the Supreme Court of Victoria considered the authorities about when a statutory demand is on-foot and must be complied with, as well as the Court’s power to award costs under the Corporations Act 2001 (Cth) and the Victorian Supreme Court Rules to a party induced to enter into litigation (1). His Honour noted that a withdrawn creditor’s statutory demand is not capable of being complied with, and cannot be the subject of an application to set it aside, but a court does have power to award costs where a matter before it is without jurisdiction.

His Honour found that GRS had withdrawn its demand promptly upon identification of the dispute by Polytrade, and noted that Polytrade appeared to have instructed its solicitors late within the 21-day compliance period to deal with the demand (the inference being that Polytrade’s conduct was responsible for its signifcant legal costs).

His Honour went on to find that GRS’s refusal to pay costs could not be categorised as inducing an application to set aside the (withdrawn) demand, and nor could it be categorised as inducing Polytrade to believe it had a reasonable cause of action for costs. To add insult to injury (or perhaps just desserts for playing hardball), Polytrade was ordered to pay GRS’s costs of the failed application.

The moral of this story is do not wait until the last minute to deal with a statutory demand, and think twice before embarking on belligerent litigation.

Case No. 2: In the matter of 4 Doonan Street Collinsville Pty Limited (In Liquidation) [2015] NSWSC 437 – 17 April 2015

The liquidator of 4 Doonan Street Collinsville Pty Limited (Company) sought to recover payments from the Commissioner of Taxation under section 500 of the Corporations Act, which makes void any attachment, sequestration, distress or execution put in force against property of a company after the resolution has been put to wind the company up.

In August 2010 receivers were appointed to the Company. In March 2011 the Company entered voluntary winding up. Shortly after, the Commissioner lodged a proof of debt in the amount of $50,464.52 relating to a deficit in the running balance account (RBA) for the Company’s business activity statements. At the time of the liquidator’s appointment, the Company had outstanding business activity statements for July and August 2010 and income tax returns for the years ended 30 June 2010 and 2011.

The receivers lodged and paid the 2011 income tax return for the Company. In November 2012 the liquidator lodged an amended 2011 income tax return that reduced the tax liability by $651,340.85 (the Credit Amount). The Commissioner credited the Credit Amount to the Company’s income tax RBA. Thereafter, the liquidator lodged the Company’s outstanding 2010 business activity statements and 2010 income tax return. The tax liability arising from each of these returns was debited against the Credit Amount in the Company’s various accounts held by the Commissioner.

The Commissioner refunded to the Company the balance of the Credit Amount after the various tax liabilities had been debited against it, the refund being $398,457.44. The liquidator commenced proceedings against the Commissioner to recover the debit amounts of $287,606.80, with the effect that the liquidator sought to recover the full Credit Amount.

The question before the Court was whether the Commissioner’s powers in Part IIB Division 3 of the Taxation Administration Act 1953 (Cth) were available after the liquidator was appointed to the Company. Broadly, the relevant provisions within that Part permit the Commissioner to apply tax debits and credits across a taxpayer’s RBAs as he so determines to pay tax debts.

Justice Black of the Supreme Court of New South Wales held that the Commissioner’s powers under Part IIB Division 3 did remain after appointment of a liquidator, and those powers were not at odds with section 260-45 of Schedule 1 of the Taxation Administration Act dealing with the collection and recovery of tax liabilities from liquidators. In that regard, his Honour noted that the debits would not have been in issue if the Company had lodged its tax returns and business activity statements in a timely manner:

It does not seem to me that any of the relevant provisions of the TAA 1953 reflect any wider public policy, not reflected in their terms, that a liquidator or a company’s creditors should be able to take advantage of a company’s delay in lodgement of tax returns, or in an extreme case, a decision to defer the lodgement of tax returns in anticipation of a winding up.

As to section 500 of the Corporations Act, Justice Black held that the Credit Amount was not “property of the company” until the Commissioner had made the allocations or applications required under section 8AAZL of the Taxation Administration Act, and then the property of the Company would be the balance remaining after those allocations or applications. All the Company had was a right to require the Commissioner to properly perform his duties under Part IIB of the Taxation Administration Act to determine the amount payable to the Company.

As it turned out, the liquidator was not wholly unsuccessful in the litigation as the Commissioner conceded some of the amounts debited against the Credit Amount were not done strictly in accordance with the methods required under section 8AAZL. The amount of $113,914.45 was ordered to be paid to the Company.

Case No. 3: In the matter of Anglican Development Fund Diocese of Bathurst (Receivers & Managers Appointed) [2015] NSWSC 440 – 20 April 2015

In February 2015 we wrote about this receivership, which you can find here: This present case is another application by the receivers for the Court’s assistance to resolve issues arising in the course of their work.

The receivership is unique in that the Anglican Development Fund Diocese of Bathurst (ADF) voluntarily wished to cease trading and wind up, but it was not a “Part 5.7 Body” under the Corporations Act capable of having a liquidator appointed. Upon application by the Commonwealth Bank of Australia, a lender to ADF, receivers were appointed in October 2013 and given the powers and functions of a liquidator to wind up ADF. One of those powers was to call for and adjudicate on proofs of debt.

In November 2013 the Anglican Property Trust Diocese of Bathurst (APT) lodged a proof of debt in ADF’s winding up for $1,320,470.46. However, APT simultaneously owed an amount of $639,561.99 to ADF, giving a net amount of $680,908.47 owing to APT. APT proposed that its debt to ADF be set-off under section 553C of the Corporations Act against the amount claimed by APT in its proof of debt. However, section 553C only applies to a company in liquidation, and ADF was no such company.

The key question before the Court was what, if any, principles of set-off the receivers should apply in adjudicating proofs of debt lodged in ADF’s winding up. The receivers also sought the Court’s advice as to the timeframe in which proofs must be adjudicated given the winding up was not in accordance with the usual provisions of the Corporations Act and subordinate legislation, including those governing proofs of debt.

In deciding the questions before him, Justice Brereton of the Supreme Court of New South Wales first confirmed that section 553C would not apply to APT’s proof of debt given ADF was not a company as required by the section. His Honour then considered whether the rule in Cherry v Boultbee would instead apply which, broadly, prevents a party proving against a company for a debt until that party has first repaid any debts it owes to the company.

In the situation at hand, the rule in Cherry v Boultbee (2) would mean that ‘as a condition of participating as a creditor of ADF in the fund constituted by ADF’s net assets, APT would first have to contribute the amount of its debt to ADF’. The receivers’ evidence was that there would be a significant difference in the amount of dividend payable to APT if APT first had to repay its debt to ADF and then prove for the full amount of its debt – ie the likely dividend to APT would be significantly less than if the two debt amounts could be set-off against each other.

Analysing the relevant cases derived from Cherry v Boultbee, Justice Brereton concluded that the rule only applies where set-off is not otherwise available. His Honour then looked at whether equitable or statutory set-off was available to APT or ADF. His Honour held that equitable set-off was not available but statutory set-off was. That statutory set-off was in the form of either ADF or APT being able to commence “ordinary action” against the other to recover their respective debt and, under the New South Wales Uniform Civil Procedure Rules, the defendant party being able to plead a set-off or cross-claim in the amount of debt owed to it by the other. In that regard, Justice Brereton noted that the appointment of receivers to ADF did not automatically stay or prevent any proceedings against that entity, unlike the situation when liquidators are appointed.

In summary, while section 553C did not apply to permit APT to set-off its debt owed to ADF, the statutory set-off would practically give the same result and so the receivers were advised to permit APT to lodge a proof of debt for the balancing amount of $680,908.47. The receivers were also advised not to delay adjudicating on APT’s debt.

Case No. 4: Angus Carnegie Gordon in his capacity as liquidator of Lyon Form Pty Limited (In Liquidation) & Anor v Leon Plant Hire Pty Limited (In Liquidation) & Ors [2015] NSWSC 397 – 10 April 2015

This case is another example of a most useful decision by Justice Black of the Supreme Court of New South Wales in terms of its analysis of authorities and statements of principles.

The facts are briefly as follows. In January 2010 Leon Plant Hire, related entity Lyon Formwork Pty Limited and members of the Leon family (some being directors of the two companies) borrowed an amount of $991,250 from an independent third party. The loan was secured by mortgage over two properties, and Lyon Formwork was to make the loan (mortgage) repayments for the borrowers.

Following a winding up application being filed by the Australian Taxation Office, an administrator was appointed to Leon Plant Hire on 11 April 2011. On 11 May 2011 Lyon Formwork was wound up on application by a workers compensation insurer. Related entity Lyon Form was incorporated on 29 March 2011, and the evidence before the Court was that this was done in anticipation of both Leon Plant Hire and Lyon Formwork being wound up.

The crux of the case concerned the fact that after Lyon Formwork was wound up, Lyon Form made the loan payments to the third-party lender as well as other payments directly benefiting Leon Plant Hire and the various directors of the related entities. Lyon Form entered voluntary liquidation on 15 May 2012 and its liquidator brought a number of claims against Leon Plant Hire and certain directors, including seeking to recover the loan and other payments as voidable transactions and seeking compensation from Lyon Form’s director for breach of duties.

In defence to the claim for breach of director’s duties, Lyon Form’s director pleaded inter alia that her personal insolvency agreement (PIA) entered on 23 July 2012 under Part X of the Bankruptcy Act 1966 (Cth) acted as a bar to that claim. Clause 9 of the PIA said that the upon the director’s performance of her obligations under the deed, she would be released and discharged from all the provable debts owed by her to the creditors and from all claims, actions, suits, demands and other proceedings by each of them on account of those debts.

The first consideration for the Court was whether a claim for breach of director’s duties would have been a provable debt in the director’s bankruptcy.

Noting section 82 of the Bankruptcy Act which deals with proofs of debt, Justice Black confirmed that the claim for compensation would be provable debt and extinguished by the PIA if it was either a liquidated claim or an unliquidated claim arising by reason of a contract, promise or breach of trust. Conversely, the claim would not be provable and not extinguished by the PIA if it was for unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust.

The next consideration was whether a breach of director’s duties is a liquidated or unliquidated claim.

In finding for the director (only on this point concerning breach of duties), Justice Black held that the liquidator’s claim for compensation for breach of duties was in substance one for liquidated damages. Specifically, it was akin to an equitable debt where the claim seeks restitution of misappropriated money and does not seek a wider inquiry into loss. (3) Accordingly, the liquidator’s claim would have been a provable debt in the director’s bankruptcy and so was extinguished by the director’s PIA.

While it was not strictly necessary for him to deal with this point, Justice Black proposed that a breach of director’s duties was not analogous to a breach of trust, which meant the director was only saved by the fact this claim against her was framed as one for liquidated damages.

Case No. 5: KEP Management Services Pty Limited v Goldwest Enterprises Pty Limited [2015] WASC 132 – 17 April 2015

This is a case of be careful what you wish for. KEP Management Services (Phillips Engineering) and Goldwest were parties to an agreement whereby Goldwest provided workers to Phillips Engineering to use in the delivery of services by Phillips Engineering to BAE Systems Australia Defence and Downer EDI Engineering Power Pty Limited.

In November 2014 Phillips Engineering ceased using Goldwest’s services on the basis of concerns that some of the workers were not entitled to work in Australia. On the same basis, Phillips Engineering refused to pay certain invoices issued to it by Goldwest.

Goldwest issued a creditor’s statutory demand to Phillips Engineering for the unpaid invoices totalling $524,842.45. Phillips Engineering filed an application to set aside that demand on the basis of a genuine dispute about the debt (ie Goldwest had not provided what it had contracted to) or greater offsetting claim (ie Phillips Engineering’s contracts with BAE and Downer had been terminated due to the questionable status of workers supplied by Goldwest).

During the course of the hearing, Phillips Engineering conceded that not all of the workers the subject of the unpaid invoices were prohibited from working in Australia, which meant that some amount was payable to Goldwest. Furthermore, the quantum of Phillips Engineering’s alleged offsetting claim was not free from doubt, being calculated on ‘a very positive set of assumptions’, with the amount being speculative although plausible. There was also evidence that Philips Engineering was actually in financial difficulty.

In the course of his judgment, Master Gething of the Supreme Court of Western Australia canvassed the relevant authorities concerning what is a genuine dispute and offsetting claim. However, the interesting point in this case is that the Master looked to section 459M of the Corporations Act that permits a creditor’s statutory demand to be set aside with conditions.

Given the facts of the case, the Master ordered the statutory demand be set aside on two strict conditions: that Phillips Engineering commence proceedings against Goldwest within 28 days and pay $100,000 into the Court as security for Goldwest’s costs of that proceeding.

In short, Phillips Engineering was ordered to put its money where its mouth is.

For more information contact:

Alisa Taylor | Partner
(02) 6279 4444