MV’s Top 5 Insolvency Cases Sept 2014

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

For September 2014, we have picked five of the most thought-provoking decisions dealing with issues like the PPSA implications of goods held on bailment by receivers, who is actually permitted to act as a receiver and when are proceedings commenced by a liquidator against a director an abuse of process.

Case No. 1: Re Arcabi Pty Ltd (Receivers & Managers Appointed) (In Liquidation) [2014] WASC 310 – 4 September 2014

Receivers were appointed by Westpac to Arcabi, which operated a business of storing and selling rare coins and notes for its customers. Much of the property on Arcabi’s premises was not owned by it — it was stored for safekeeping or was onsite for sale on consignment.

After much investigation, the Receivers formed the view that that storage and consignment arrangements were not security interests under the Personal Property Securities Act 2009 (Cth) such that the property was available to be realised for Westpac. The Receivers sought directions from the Court on the issues of whether:

  1. the storage and consignment arrangements were bailments and consignments that required registration under the PPSA; and
  2. the Receivers were entitled to claim an indemnity from and lien over the property that was not the subject of Westpac’s security.

This decision provides some clarification to provisions in the PPSA concerning “bailments”, “PPS leases” and “commercial consignments”, and highlights the complexity of applying the PPSA in practice. It also provides a good example of receivers seeking directions from a court to clarify issues under the PPSA, and what Receivers may do with unclaimed property.

Case No. 2: Pozzebon v Australian Gaming and Entertainment Ltd (In Liquidation) [2014] FCA 1034 – 24 September 2014

The Pozzebons, as trustees of their self-managed superannuation fund, loaned AGEL $250,000. The loan was documented and secured against AGEL’s personal property, and there was no dispute that the agreement gave rise to a “security interest” that had “attached” to the collateral of AGEL’s personal property and was “enforceable” against third parties within the meaning of the Personal Property Securities Act 2009 (Cth). The issue was perfection.

The funds were advanced on 24 December 2013, the security interest was registered on the Personal Property Securities Register on 19 May 2014, AGEL went into administration on 26 May 2014 and liquidators were appointed on 6 June 2014. Too late did the registration occur and the liquidators said the Pozzebons’ security interest has vested in AGEL under section 588FL of the Corporations Act 2001 (Cth).

Justice Collier confirmed that attachment and enforceability are mandatory prerequisites to perfection under section 21 of the PPSA. Furthermore, the PPSA lists the limited ways in which a security interest may be perfected: by registration; possession or control (1). The Pozzebons had only perfected by registration, and well after the 20 day requirement, which meant they were unprotected when AEGL suffered an insolvency event within six months of the registration.

This decision, while perhaps obvious, is a reminder that attachment plus enforcement plus one of the methods of perfection within the statutory timeframe is necessary to protect a security interest, otherwise the interest vests in the insolvency practitioner.

Case No. 3: In the matter of Petrolink Pty Ltd; Smith v Bonè [2014] FCA 1024 – 22 September 2014

In 2011 the Commissioner of Taxation had Mr Smith appointed as liquidator to Petrolink, a company run by Mr Bonè. Shortly after his appointment, Mr Smith applied for and obtained the Court’s leave to be appointed administrator of Petrolink and the business traded on.

The relationship between Messrs Smith and Bonè soured during the administration. The situation worsened when, in March 2012, Petrolink went back into liquidation and Mr Smith commenced proceedings against Mr Bonè and an entity related to him, Valvelink, for insolvent trading and unfair preference payments respectively.

During 2013 Mr Bonè filed an application first challenging Mr Smith’s remuneration and then, later, seeking to have Mr Smith removed as liquidator of Petrolink. The issue before Justice Wigney was whether Mr Bonè’s application was an abuse of process, designed to intimidate Mr Smith into discontinuing his claims against Mr Bonè and his related entity.

In reaching the conclusion that Mr Bonè was genuinely aggrieved by issues arising in the liquidation, and the predominant purpose of his application was not to intimidate Mr Smith, Justice Wigney closely examined the history of dealings between Messrs Smith and Bonè. That examination revisited the contents of correspondence that had passed between the two men and their legal advisers and, in short, neither side was covered in glory – correspondence for Mr Bonè had, at times, been ‘unhelpful, if not inappropriate or even improper’, while there were very real question marks over Mr Smith’s remuneration and his action against Valvelink.

This decision is a reminder to insolvency practitioners of the benefits of keeping directors and shareholders apprised of steps in the external administration with a view to managing expectations of what will be achieved. It is also yet another example of the need to be transparent as to remuneration and disbursements estimated and actually incurred.

Case No. 4: Yarrawonga Earthmoving & Garden Supplies Pty Ltd (Receiver Appointed) v Clem Court Pty Ltd [2014] VSC 439 – 11 September 2014

Clem Court was a secured creditor of Yarrawonga under a Deed of Charge executed in 2007. Pursuant to that Charge, and upon default by Yarrawonga, Clem Court appointed Mr Sutherland on 7 April 2014 as receiver and manager over the charged property of Yarrawonga. On 27 June 2014 Clem Court appointed Mr Walker as “controller” over the charged property. Mr Walker was Yarrawonga’s accountant and financial adviser since 2003, as well as the director of Clem Court.

On 10 July 2014 Mr Sutherland resigned as receiver and manager. On 15 August 2014 Mr Walker ceased acting as controller and was replaced by Mr Viney. Mr Viney proposed to auction Yarrawonga’s earth moving equipment – the heart of that business – a week after his appointment and apply the proceeds of sale to a debt allegedly owed to Clem Court and disputed by Yarrawonga.

Yarrawonga sought an injunction to prevent the auction going ahead and objected to Mr Viney’s appointment on the basis he was not a registered liquidator but was acting as a receiver contrary to section 418 of the Corporations Act 2001 (Cth). Clem Court argued that Mr Viney was not acting as a receiver but only a controller, and so did not need to be registered.

In deciding that Mr Viney was actually acting as a receiver and not a controller, and therefore was required to be a registered liquidator, Chief Justice Warren took a “substance over form” approach. First her Honour looked at the terms of the Charge, which referred extensively to the appointment of a receiver and conferred powers akin to those under section 420 of the Corporations Act. Next, her Honour noted that Mr Viney was in possession of most of Yarrawonga’s property, which was consistent with the appointment of a receiver. In light of these findings, Clem Court was restrained from exercising its security under the Charge.

This decision confirms that ticking a particular box on a form lodged with the Australian Securities and Investments Commission does not make the thing necessarily so. In this case, ticking the “controller” box did not make Mr Viney a controller – the instrument of appointment and the substance of the appointment prevailed.

Case No. 5: In the matter of Amy Holdings Pty Ltd; In the matter of Land Enviro Corp Pty Ltd [2014] NSWSC 1176 – 27 August 2014

Although this case was decided before September, we thought it useful to include because it deals with an issue we see much of – an application to set aside a creditor’s statutory demand.

In April 2012 judgment was given in the Supreme Court of NSW in favour of a number of parties in proceedings commenced in 2001. Thereafter began a series of applications by the unsuccessful parties to appeal various aspects of the judgment in respect of various parties. While the facts of the initial proceeding and subsequent appeals are complex, this case dealt with two applications made on a number of grounds to set aside a statutory demand issued for the judgment debt to Amy Holdings and Land Enviro Corp each.

In working through the relevant authorities, in this case Justice Brereton confirmed that:

  • a judgment debt indisputably exists unless and until it is set aside, which means there can be no genuine dispute about the judgment debt while it stands;
  • the pendency of an appeal of the judgment debt does not constitute “some other reason” to set aside the demand unless and until enforcement of the judgment debt is stayed or security is given for it;
  • an offsetting claim to a debt must be between two identical parties and if they are the parties to the litigation, then that offset is foreclosed by the judgment which is final; and
  • it is not an abuse of process for a creditor to issue a demand in respect of a debt under a judgment that has not been stayed, notwithstanding an appeal from the judgment is pending and where the debtor is admittedly insolvent.

For more information contact:

Alisa Taylor | Partner
(02) 6279 4444