MV’s Top 5 Insolvency Cases Nov 2014

Each month numerous insolvency-related cases are decided by various courts around the country.

For November 2014, we have picked five of the most thought-provoking decisions dealing with issues like whether the “slip rule” can be used to extend the time to determine a winding up application, the importance of a liquidator having incontestable evidence when trying to claw back transactions, the need to properly swear an affidavit in support of a statutory demand and when a liquidator can sell trust assets.

Case No. 1: Highup Pty Limited (In Liquidation) v Vesna Gubas [2014] FCA 1170 – 5 November 2014

Before being placed into liquidation in April 2013, Highup operated a restaurant and kiosk. Over time, Highup’s director established other companies to meet Highup’s employment liabilities, including Catering Staff Services Pty Limited. CSS went into liquidation in November 2011.

In April 2012, CSS’s liquidator attempted to settle a claim against Mrs Gubas for insolvent trading. Mrs Gubas was the sole director of CSS and the mother of Highup’s director. CSS’s liquidator prepared a settlement deed where, among other things, the Recitals set out the debt claimed by the liquidator against Mrs Gubas and the amount he was prepared to accept in satisfaction of that debt. Mrs Gubas was not a party to the draft settlement deed – her son and Highup’s director was.

The settlement deed was never executed. Highup subsequently paid amounts to CSS’s liquidator but not for the exact amount nor on the actual dates specified in the draft deed. Nontheless, Highup’s liquidator alleged the payments by Highup to CSS were only in satisfaction of Mrs Gubas’ debt to that company, of no commercial utility to Highup, and were therefore recoverable from Mrs Gubas as a “related entity benefit” under section 588FH of the Corporations Act 2001 (Cth).

Mrs Gubas adduced little to no evidence in response to the Highup’s liquidator’s claims, which ultimately did not disadvantage her. While Justice Buchanan agreed that Highup was insolvent at the time it made payments to CSS’s liquidator, he did not agree the evidence proved there was no commercial utility in Highup making the payments at issue. For one thing, his Honour was unimpressed that he was asked to infer that a Recital to a draft and unexecuted settlement deed, to which Mrs Gubas was not a party, was proof of Mrs Gubas’ indebtedness at all to CSS. His Honour said:

I am not prepared to conclude that…the terms of the proposed, unexecuted deed should be regarded as legally effective, much less that they should be regarded as explanatory of the conduct of Highup, which was not proposed to be a party to it.

This decision serves as a stark reminder of the need to have properly prepared evidence before embarking on litigation, and that courts are not inclined to “join the dots” on incomplete evidence where there are other possible explanations for a transaction.

Case No. 2: McLay as Liquidator of Ross Holdings (WA) Pty Limited (In Liquidation); in the matter of Ross Holdings (WA) Pty Limited (In Liquidation) [2014] FCA 1208 – 1 November 2014

Mr McLay, as liquidator of Ross Holdings, filed an application under section 480 of the Corporations Act seeking orders that he be released as liquidator and the company be deregistered. In preparing his application and supporting affidavits, Mr McLay adhered to the requirements in rule 7.5 of the Federal Court (Corporations) Rules 2000 (Cth), save for serving the Australian Securities and Investments Commission with the application.

In the first instance, Mr McLay’s application was adjourned so he could properly serve ASIC and ascertain whether ASIC objected to the orders being sought. In ultimately granting Mr McLay’s application, Justice Siopis confirmed that:

An application for release under s 480(d) of the Corporations Act is an important application because it has the effect of wiping the slate clean for a liquidator. Therefore, it is important that ASIC be notified of any such application and have an opportunity insofar as it may wish to be heard in opposition to that order.

This decision confirms that while an application for release occurs at the very end of the liquidation when money is scarce and it is largely procedural, it is an important application so no less time and care should be spent on preparing evidence for the court than for any other piece of litigation.

Case No. 3: Deliver Western Australia Pty Limited v Truckworld (WA) Pty Limited [2014] WASC 411 – 7 November 2014

On 2 September 2014 DWA served a statutory demand on Truckworld. On 22 September 2014 Truckworld applied to have the demand set aside on that basis that the affidavit supporting the demand was not sworn in accordance with the requirements of the Oaths, Affidavits and Statutory Declarations Act 2005 (WA). Specifically, the affidavit did not state that it had been witnessed by an authorised witness and the person who did witness the affidavit was not as permitted by the OASDA.

Before the application was heard, DWA filed an affidavit by the person who had in fact witnessed the affidavit supporting the statutory demand, and that person deposed she was an authorised witness and of a type permitted by the OASDA.

In his decision, Master Gething considered whether a breach of the OASDA merely made the demand defective or a nullity, whether the defective demand should be set aside because substantial injustice would be caused to DWA or whether the defective demand should be set aside “for some other reason”.

His Honour agreed that because the original supporting affidavit had not identified it had been sworn in front of an authorised person, it was not an “affidavit” within the meaning of the OASDA and prima facie the demand could be set aside. However, the 11th hour second affidavit filed by DWA – where the witness identified herself and her status – cured the defect in the supporting affidavit such that his Honour did not consider Truckworld would suffer substantial injustice if the demand was not set aside.

This decision confirms that issuing a creditors’ statutory demand is more than just an exercise in form-filling, and care should be taken to comply with all the rules relating to all the documents.

Case No. 4: In the matter of Stansfield DIY Wealth Pty Limited (In Liquidation) [2014] NSWSC 1484 – 13 November 2014

Stansfield DIY was ordered into liquidation in February 2013. At that time, its only function was acting as trustee of the Elliott Stansfield Super Fund. The issue in this case was whether the liquidator of Stansfield DIY could sell or otherwise deal with the property of the Super Fund, including to pay the liquidator’s fees and costs.

In a clear and comprehensive decision, Justice Brereton has helpfully analysed the various (and at times conflicting) authorities concerning a trustee’s rights as against trust assets and how those rights translate to a trustee’s liquidator.

His Honour concluded that if the insolvent company remains trustee of a trust, a liquidator will have power to administer the trust assets, pay creditors, wind up the trust and recover remuneration and expenses from the trust assets (if the company’s only function is to act as trustee).

However, if the insolvent company resigns as trustee then the liquidator will have no power of sale as section 477(2) of the Corporations Act does not empower a liquidator to sell assets held by the company on trust. In such situations, his Honour recommended a liquidator seek orders to be appointed as receiver of the trust assets and realise those assets to discharge the company’s liabilities.

Case No. 5: Soil and Contracting Pty Limited v Boban Pty Limited [2014] WASC 402 – 30 October 2014

We slipped in this case because it was nearly decided in November and it raises interesting issues we thought worth sharing.

This case considered whether the six-month rule contained in section 459R(1) of the Corporations Act could be extended by using the “slip rule”. Section 459R(1) requires a winding up application to be determined within six months after it is made and the slip rule gives a court power to correct a mistake or error arising from an accidental slip or omission.

On 12 February 2014 Soil and Contracting filed a winding up application in the Supreme Court of Western Australia against Boban for failure to comply with a statutory demand. A directions hearing was held on 5 August 2014 and, on that date, the application was set down for hearing on 27 October 2014. The six months under section 459R expired on 12 August 2014, but no party applied to extend that time limit until Soil and Contracting did on 24 October 2014.

In granting Soil and Contracting an extension of time for its winding up application, the Court analysed whether the language of section 459R excludes use of the slip rule for an application made outside time, whether the slip rule could be used to exercise the discretion contained in the section and, ultimately, whether that discretion should be exercised.

While this decision confirms that the slip rule can be used to “correct” the timeframe in which a winding up application can be determined, Soil and Contracting had to demonstrate that its facts warranted the discretion to extend time being exercised. The point here is that it is better to meet the statutory timeframes than incur additional costs applying for further time.

For more information contact:

Alisa Taylor | Partner
(02) 6279 4444