MV’s top 5 insolvency cases for August 2015

This month’s top five thought-provoking cases.

This month deals with issues including the importance of a secured creditor’s support for a DOCA proposal, the meaning of “convening” a meeting in the context of how much a creditor requesting the meeting must pay, whether a liquidator is a ‘person prejudiced by the alienation of property’ under state legislation, the importance of ensuring a valid appointment to a New South Wales registered club and whether a claim in relation to a builder’s statutory warranties is a debt provable in the builder’s bankruptcy.

Case No. 1: Promnitz v Indochine Mining Limited (Subject to a Deed of Company Arrangement); In the matter of Indochine Mining Limited (Subject to a Deed of Company Arrangement) [2015] FCA 857 – 17 August 2015

Mr Promnitz was a creditor of Indochine Mining, which went into administration in March 2015. In May 2015 two DOCA proposals were put by the administrators for consideration by Indochine’s creditors. The key differences between the proposals were:

  1. one proposed a higher return to unsecured creditors, but Indochine’s secured creditor had said it would not support this proposal for lack of evidence it could actually be funded (the SFG DOCA); while
  2. the other proposed a lower return to creditors but Indochine’s secured creditor said it would support this proposal and not appoint a receiver to its security, that security being Indochine’s only income producing asset (the Kandahar DOCA).

Indochine’s administrators recommended and creditors voted in favour of the Kandahar DOCA.

Mr Promnitz applied to the Federal Court for orders that:

  1. the Kandahar DOCA resolution be set aside under section 600A(1) of the Corporations Act 2001 (Cth) on the basis the vote was determined by particular related creditors, and the passing of the resolution was contrary to the interests of Indochine’s creditors as a whole; and
  2. the Kandahar DOCA be terminated under section 445D of the Corporations Act.

In finding against Mr Promnitz, Justice Foster held that while the vote to accept the Kandahar DOCA had carried because of the related creditors, his Honour was not satisfied the resolution should be set aside because the continued support of Indochine’s secured creditor was vital for any DOCA to succeed and there was still doubt about how the SFG DOCA would be funded to give the proposed return to unsecured creditors.

This case demonstrates that the ‘interests of creditors as a whole’ does not necessarily relate to the return to unsecured creditors. Rather, the views of company’s secured creditors are important and a DOCA should seek to address all issues facing the company.

Case No. 2: BH Apartments Pty Limited v Sutherland Nominees Pty Limited (Subject to a Deed of Company Arrangement) & Ors [2015] VSC 381 – 13 August 2015

Sutherland Nominees was operating under a DOCA when BH Apartments exercised its right under section 445F(1)(b) of the Corporations Act as a high value creditor and asked the deed administrators to convene a meeting of creditors to consider changes to the DOCA. The deed administrators gave notice of the meeting, which was subsequently held.

Regulation 5.6.15(1)(b) of the Corporations Regulations 2001 (Cth) requires a creditor who asks for a meeting to be held to pay for the costs of ‘convening’ that meeting. BH Apartments paid the deed administrators $5,000 before the meeting as security for the costs of convening the meeting. After the meeting, the administrators required BH Apartments to pay a further sum of $42,725.48 for the costs of holding meeting, which BH Apartments refused.

The question before the Court was whether the expression ‘convening the meeting’ in regulation 5.6.15 means only calling the meeting as submitted by BH Apartments or, instead, both calling and holding the meeting as submitted by the deed administrators.

In finding for the deed administrators, Justice Bell of the Supreme Court of Victoria undertook a comprehensive exercise in statutory interpretation and had regard to the antecedent provisions of the Corporations Act, namely sections 479(2) and 445F. His Honour held that the word ‘convene’ and its cognates in sections 445F and 479(2) of the Corporations Act encompass the whole process of calling and holding a meeting. Accordingly, the word ‘convening’ in regulation 5.6.15 of the Corporations Regulations must be interpreted in the same way unless the contrary intention appears.

Arguably the issues BH Apartments wanted addressed at a special creditors meeting should or could have been addressed at the ordinary meeting where the DOCA proposal was considered and voted upon. In any event, this case confirms that a meeting request by a creditor can be an expensive exercise, and the company’s external controller can seek reimbursement of all the meeting costs from the requesting creditor.

Case No. 3: Sutherlad & Anor v Jot Property Solutions Pty Limited & Ors [2015] QSC 249 – 25 August 2015

The plaintiffs, Messrs Sutherland and Kukulovski, were the liquidators of Bluechip Property Services Pty Limited (In Liquidation). The liquidators commenced proceedings in their name seeking to declare void and reverse the consequences of the sale and transfer of three former businesses of Blue Chip to Jot Property Solutions.

Blue Chip entered into contracts for sale of the businesses on 1 December 2008. The purchaser, Jot Property Solutions, had been established at the instigation of Blue Chip’s director, and the liquidators alleged that at least one sale contract was under value. On 12 August 2010 Blue Chip entered into voluntary administration and on 27 August 2010 the Federal Court ordered Blue Chip be wound up.

The liquidators claimed the sale of the three businesses by Blue Chip constituted an alienation of property for the purposes of section 228 of the Property Law Act 1974 (Qld) and there had been an intent by Blue Chip to defraud its creditors. Jot Property Solutions claimed the liquidators had no standing to bring the claim.

The question before the Court was whether the liquidators were persons prejudiced by Blue Chip’s alienation of property in December 2008.

In finding for Jot Property Solutions, Justice Henry of the Supreme Court of Queensland noted that the liquidators had brought the claim in their names only and not in the name of the company in liquidation, Blue Chip, or any of its creditors. Blue Chip was also not joined as a co-plaintiff. The liquidators were not owed any debt by Blue Chip either in December 2008 or at the time of the hearing. Instead, the alienation complained of occurred long before the liquidators assumed any connection at all with Blue Chip or its creditors, and there was no causative link now with the earlier alienation of property.

This case is a reminder that while liquidators have power under the Corporations Act to bring proceedings in their own name, care must be taken to think through the elements of each cause of action and exactly who has the right to ask for relief from a court.

Case No. 4: In the matter of Coffs Harbour Catholic Recreation & Sporting Club Limited [2015] NSWSC 1088 – 6 August 2015

In April 2015 the board of directors of the Coffs Harbour Catholic Recreation & Sporting Club unanimously resolved to place the Club into administration. Contrary to section 41 of the Registered Clubs Act 1976 (NSW) the directors did not first seek approval from the New South Wales Casino, Liquor and Gaming Control Authority, which meant the administrators’ appointment was invalid. The administrators stopped work as soon as it became evident that prior approval of the Authority had not been sought.

The board of directors still desired for the (invalidly appointed) administrators to be the (properly appointed) administrators of the Club, and the administrators consented in that regard. The Authority, however, was of the view that once invalidly appointed, the administrators could not now be approved as administrators of the Club.

Justice Robb of the Supreme Court of New South Wales disagreed with the Authority’s view and made orders appointing the administrators to the Club. However, the administrators’ appointment was only effective from the date of the Court’s order and not the board’s resolution, which adversely impacted on the amount of remuneration they could recover.

This case confirms that when being asked to take an appointment over a registered club in New South Wales, insolvency practitioners must ensure there has been approval by the Authority of the proposed appointment or risk either reduced remuneration or increased exposure to personal liabilities.

Case No. 5: The Owners – Strata Plan 80647 v WFI Insurance Limited t/as Lumley Insurance [2015] NSWSC 1161 – 18 August 2015

In May 2006 a builder, Mr Crestani, entered into a building contract with a developer to build apartments on the developer’s property in Silverwater. By section 18B of the Home Building Act 1989 (NSW) statutory warranties were implied into the building contract. Upon registration of the units plan (strata plan 80647), the Owners Corporation became a successor in title to the common property from the developer.

There were defects in the common property, which meant Mr Crestani had breached the statutory warranties, but he became bankrupt in June 2009 before any claim against him had been brought by the Owners Corporation. Mr Crestani was discharged from bankruptcy in June 2012, again before any claim against him had been brought.

The Owners Corporation commenced proceedings against Mr Crestani for breach of the statutory warranties after he was discharged from bankruptcy (which was practically against his home warranty insurer, Lumley). Clause 2(1) of the relevant insurance policy provided that Lumley would meet any claim for loss or damage arising from a breach of a statutory warranty where recovery against the builder could not be made ‘because of the insolvency’ of the builder.

There were two questions before the Court:

  1. whether the Owners Corporation’s claim against Mr Crestani in relation to the statutory warranties was a debt or liability provable in Mr Crestaini’s bankruptcy such that it was released upon his discharge from bankruptcy; and
  2. if the Owners Corporation’s claim was so released, whether Lumley was entitled to deny liability for Mr Crestani’s breach under clause 2(1) of the insurance policy because he was not insolvent at the time the claim was actually brought.

In finding for the Owners Corporation, Justice Darke of the Supreme Court of New South Wales held that the Owners Corporation’s claim against Mr Crestani was based upon statute, and that statute entitled the Owners Corporation to assert against Mr Crestani rights identical with those that the developer could have asserted against Mr Crestani as a matter of contractual entitlement. Accordingly, the claim was a statutory variant of a claim to enforce a contract, which was provable in Mr Crestani’s bankruptcy under section 82(1) of the Bankruptcy Act 1966 (Cth) and released upon his discharge.

On the second question, his Honour held that the insolvency in the clause was not expressed to be limited to an existing state of affairs. Instead, the focus was on the reason why redress against Mr Crestani was not obtainable, and that was because of his insolvency into bankruptcy having the effect of discharging the claimed debt.

While this case is good news for Owners Corporations with access to home warranty insurance, it is not such good news where the builder was not required to have such insurance and has been discharged from bankruptcy. An appeal may follow this decision.

For more information contact:

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