MV’s Top 5 insolvency Cases Dec 2014

December 2014 was a busy month, with many insolvency-related cases decided by various courts around the country.

For December 2014, we have picked what we think are the five most thought-provoking decisions for our region, dealing with issues like whether a supplier retains a security interest under a retention of title arrangement in goods moved between related entities, whether a bankrupt’s right to receive income under a testamentary trust vests in the trustee in bankruptcy, how much reliance can be placed on Australia Post’s express-post service to determine the date of service and what constitutes a retrenchment payment for the purposes of a priority distribution in a liquidation.

Case No. 1: Warehouse Sales Pty Limited (In Liquidation) & Ors v LG Electronics Australia Pty Limited & Ors [2014] VSC 644 – 17 December 2014

In addition to LG, a number of other well-known companies supplied white goods to Warehouse Sales (WHS) under retention of title arrangements. WHS on-sold or transferred those goods to retail customers as well as to its subsidiary, WHS 2, for retail sale. The suppliers registered their security interest in the goods on the Personal Property Securities Register against WHS. There was no contractual relationship between the suppliers and WHS 2.

Liquidators were appointed to both WHS and WHS 2 and they sought the Court’s answer to a number of questions about, among other things, whether the suppliers had a security interest in any of the goods in WHS 2’s possession or, instead, whether that entity had taken the goods free of any security interest under sections 32 and 46 of the Personal Property Securities Act 2009 (Cth).

Ultimately, the Court found that under the terms of each supplier’s contract with WHS, no supplier had a security interest in goods sold by WHS to retail customers, only Panasonic had a security interest in goods held by WHS 2 and all suppliers had a security interest in goods held by WHS and WHS 2 still under a lay-by arrangement.

In deciding the questions posed by the liquidators, Justice Sifris noted that the PPSA is not a code, and it only provides for a priority regime and not a title regime. The point here was that the question of whether or not there had been a “sale” of the goods under the PPSA, and whether that sale was in the “ordinary course of business” as required under each supply agreement, it was acceptable (and indeed necessary) to refer to the local statute, the Goods Act 1958 (Vic), and related authority.

Case No. 2: Combis, the Trustee of the Property of Landers, a Bankrupt v Harding, Billington and Regan as Executors of the Deceased Estate of Billington [2014] FCA 1391 – 18 December 2014

After the appointment of a Trustee in bankruptcy to his estate, Mr Landers’ mother died and bequeathed to him a regular income derived from the sale of her house. The Trustee argued that the income was payable to him and not Mr Landers because Mr Landers’ right to receive the money was after-acquired property pursuant to section 58 of the Bankruptcy Act 1966 (Cth).

In the first instance, the Federal Circuit Court held that the money received by Mr Landers constituted “income” within the meaning of section 139L(1)(a) of the Bankruptcy Act and was not property within the meaning of section 116(1)(a). The Federal Court agreed.

In deciding to dismiss the Trustee’s appeal, Justice Siopis placed great weight on the analysis undertaken by Justice French (as he was then) in Re Gillies [1993] FCA 289 of the history of a bankrupt’s right to retain income derived during the bankruptcy, and the fact a bankrupt is only required to contribute a specified amount of income to the bankruptcy rather than deliver up to the trustee all income above the statutory threshold. Justice Siopis found there was nothing in the Bankruptcy Act to suggest there should be a difference in the treatment of income from a pre versus post-bankruptcy source.

This decision can of course be contrasted with that of Di Cioccio v Official Trustee in Bankruptcy [2014] FCA 782 where the Federal Court recently held that shares purchased by a bankrupt from money he had saved during the bankruptcy did vest in his trustee in bankruptcy as after-acquired property.

Case No. 3: In the matter of Future Developments Pty Limited [2014] NSWSC 1712 – 5 December 2014

In mid-September 2014 a creditor’s statutory demand was served on Future Developments by Hoi Constructions. Hoi Constructions express-posted the demand to Future Development’s registered office as disclosed on an ASIC-search and in compliance with section 109X of the Corporations Act 2001 (Cth).

Future Developments applied to the NSW Supreme Court to have the demand set aside on the basis there was a genuine dispute about the debt. Hoi Constructions argued the application was filed out of time.

The issue before the Court was whether the statutory demand was served on 17 September 2014 as disclosed by Australia Post’s express post tracking system. If so, the application to set aside would be incompetent under section 459G of the Corporations Act as it was filed later than 21 days after service. Future Developments argued that service was on 19 September 2014, when someone at the registered office actually retrieved the mail and opened the letter containing the demand.

In finding that the demand was served on 17 September as per Australia Post’s tracking system, Justice Robb considered Australia Post’s “General Terms & Conditions” as relate to the express-post service as well as other, relevant statutes dealing with postal service. His Honour agreed with the proposition that if a company maintains a registered office, and the registered office has a mailbox in its vicinity, then delivery of a letter occurs when the letter is deposited in the letterbox.

Like many before it, this case confirms that the date of service is critical in the context of a statutory demand, and an issuing creditor should pay attention to and record in detail the steps to serve the demand. Equally, a recipient of a demand should pay attention to the statutory timeframe in which any application to set aside the demand must be filed.

Case No. 4: Schmitt v Carter [2014] FCA 1370

The plaintiff, Mr Schmitt, was at various times a director, the Chief Financial Officer and Secretary of CMA Corporation Limited (Subject to Deed of Company Arrangement). At the end of 2012, while he was a director, Mr Schmitt’s employment at CMA was summarily terminated.

At the beginning of 2013 Mr Schmitt commenced proceedings against CMA for wrongful dismissal, but administrators were appointed to that company in August 2013 and the proceedings were stayed. Mr Schmitt lodged a proof of debt in CMA’s administration claiming, among other things, unpaid salary arising from his allegedly unlawful termination of employment.

Under the DOCA executed by CMA at the end of 2013, creditors would be paid in accordance with the “priority waterfall” set out in the DOCA. Mr Schmitt argued he should be a “Class B Creditor” – defined in the DOCA as ‘Employees to the extent that they have a Claim in respect of Employee Entitlements’ – for the unpaid salary but the deed administrators disagreed and determined Mr Schmitt to be an ordinary unsecured creditor.

A key issue before the Court was whether Mr Schmitt’s unpaid salary claim was a “retrenchment payment” within the meaning of section 556(1)(h) of the Corporations Act.

In finding against Mr Schmitt, Justice Gleeson said that Mr Schmitt’s claim was one ‘for the loss of bargain resulting from CMA’s repudiation of the contract [of employment] and the plaintiff’s acceptance of that repudiation’. His Honour further held that the claim was attributable to termination of the employment contract and not to any particular day of service. Accordingly, the unpaid salary claim was not a debt payable by CMA referable to days of service, and therefore not a retrenchment payment.

Case No. 5: Fletcher & anor as liquidators of Octaviar Administration Pty Limited v Anderson [2014] NSWCA 450

In one of a number of proceedings in the liquidation of the failed Octaviar property finance group, here the NSW Court of Appeal upheld the decision of Justice Young that liquidators must notify all interested parties before seeking an extension of the time in which to commence recovery proceedings for preference payments.

Previously, Octaviar’s liquidators had applied for and been granted a “shelf order” under section 588FF of the Corporations Act for an extension of time in which to bring any preference claim, including against the Federal Commissioner of Taxation. The flow-on effect of a preference claim against the Commissioner is that the directors of the company may be liable to indemnify the Commissioner under section 588FGA for the amount of the claim.

Justices Beazley, McColl and Barrett agreed with Justice Young that directors of a company are persons directly affected by any proposed preference-recovery proceeding against the Commissioner and, therefore, the directors must be notified of any application for a shelf order so they may be heard on the issue. Here, the directors had been afforded no such notice by the liquidators before the shelf order was applied for and granted.

Their Honours also found that the statutory indemnity in section 588FGA was not akin to a guarantee given to a lender for a borrower, namely because the indemnity is ‘in no way referable to anything done or not done by the Commissioner or the directors themselves’. Rather, the bringing of a section 588FF proceeding immediately makes the director liable for a contingent liability and the director may well want to defend the liquidator’s claim.

This case confirms that an application for a shelf order should be approached with caution and, ideally, liquidators should commence recovery proceedings as soon as possible and within the statutory time period.

For more information contact:

William Ward | Special Counsel
(02) 6279 4444