MV’s top 5 insolvency cases — March 2015

Welcome to our quick-pick of insolvency cases decided during March 2015.

This month, our top five thought-provoking cases deal with issues including shelf orders, effective service of director penalty notices, approval of liquidator remuneration and setting aside a creditors statutory demand for genuine dispute or offsetting claim.

Cases No. 1: Grant Samuel Corporate Finance Pty Limited v Fletcher & Ors: JPMorgan Chase Bank, National Association v Fletcher & Ors [2015] HCA 8 and Fortress Credit Corporation (Australia) II Pty Limited v Fletcher & Ors [2015] HCA 10 – 11 March 2015

In these two decisions – arising in the long-running liquidation of the failed property finance group, Octaviar – the High Court dealt with different aspects of section 588FF(3) of the Corporations Act 2001 (Cth).

Broadly, section 588FF(1) allows a court to make various orders in respect of voidable transactions entered into by the company in liquidation. Section 588FF(3) sets out the time limit in which a liquidator must commence voidable-transaction proceedings, namely:

  • 588FF(3)(a) – within the later of three years after the date the liquidation is deemed to have started or one year after the liquidator is appointed for the winding up; or
  • 588FF(3)(b) – within such longer period as the court orders on an application by the liquidator made during the 588FF(3)(a) time limits.

The first case of Grant Samuel Corporate Finance considered whether, on an application made outside the 588FF(3)(a) times but within a previously ordered 588FF(3)(b) time, the time could be further extended but under the NSW Uniform Civil Procedure Rules for the liquidators to commence their voidable transaction proceedings. In finding against the liquidators, the High Court said that the only power given to a court to vary the time limits in section 588FF(3)(a) is that given by section 588FF(3)(b) – local court rules do not supplant or supplement this power in the Corporations Act.

The second case of Fortress Credit Corporation considered whether an extension order given under section 588FF(3)(b) could only be made in relation to a particular transaction(s) identified in the application for the order, or whether it could be made generally and cover transactions not identified in the application or perhaps even known of at the time of making the application (a shelf order). In finding for the liquidators, the High Court said that the only express condition upon a court’s power to give an extension order is the time limits set out in section 588F(3) – the order can apply generally and does not need to be in respect of specifically named transactions.

The first case confirms the significance for liquidators of adhering to the time limits set out in section 588FF(3). The second case grants some reprieve for liquidators in that, at the time of applying for an extension order, they are not required to identify each and every transaction they may wish to challenge in voidable-transaction proceedings.

Case No. 2: Healy v Deputy Commissioner of Taxation [2015] WASCA 44 – 6 March 2015

Mr Healy was a director of World Class Service Pty Limited, which failed to comply with its obligations to remit to the Australian Taxation Office amounts withheld from employees’ salaries. As a result of WCS’ conduct, the ATO issued a director penalty notice to Mr Healy.

An officer of the ATO deposed that he mailed the notice on 23 August 2006 to Mr Healy’s last-known residential addressed as disclosed on the records held by the Australian Securities and Investments Commission. On 12 September 2006 an administrator was appointed to WCS. The question before the Court of Appeal was when the notice was served on Mr Healy, namely:

  • whether it was served before 29 August 2006, in which case the appointment of the administrator was more than 14 days after service and too late to protect Mr Healy from being personally liable for the penalty; or
  • whether it was served on or after 29 August, specifically on 1 September 2006 when Mr Healy claimed he became aware of the notice, in which case the appointment of the administrator was within time and the penalty would be remitted.

In finding for the Commissioner, the Court unanimously said that the evidence before the primary judge proved, on the balance of probabilities, that the notice was delivered in the ordinary course of business on or before the third working day after being posted on 23 August. Having regard to section 29(1) of the Acts Interpretation Act 1901 and section 160 of the Evidence Act 1995 (Cth), the notice was served on or before 28 August 2006, and the appointment of the administrator was too late.

In reaching this finding, the Court held that the notice was not required to be actually received by the person to whom it was sent. Rather, the relevant provisions of the Income Tax Assessment Act 1936 (Cth) focused on the notice being sent to or left at a person’s address. The Commissioner adduced sufficient evidence to show the notice had indeed been sent, and to a proper address, which rendered the notice served regardless of Mr Healy’s actual knowledge of it.

Case No. 3: Re Gunns Plantations Limited (In Liquidation) (Receivers & Managers Appointed) [2015] VSC 102 – 20 March 2015

At the end of last year, we wrote about liquidators’ remuneration coming under close scrutiny and criticism: www.meyervandenberg.com.au/property-construction/case-update-%E2%80%93-liquidators-cop-caning-remuneration-and-disbursements In particular, courts were looking at the proportionality of liquidators’ remuneration as compared to their recovery of funds for distribution to creditors.

In the first quarter of this year, liquidators have regained some ground. First up, in the case of Re Gunns Plantations, the liquidators sought approval of their remuneration in the order of $8M. It was the third application made by the liquidators in the winding up for approval of their remuneration. The application was opposed on the grounds of being excessive by a grower in the Gunns plantation.

In finding for the liquidators, the Court accepted that to the lay person, the hourly rates charged by the liquidators seemed ‘extraordinary’. However, the rates were acceptable given the market rate charged by liquidators generally and, in any event, the Gunns liquidation was ‘a most complex insolvency administration certainly well above the run of the mill administration or liquidation’.

In a second case – PNP Pacific Pty Limited; ex parte Strickland & Hurt as Liquidators of PNP Pacific Pty Limited [2015] WASC 49 – the Court noted that an application for approval of remuneration typically involved two steps, namely a liquidator swearing an affidavit and attaching evidence of the claimed remuneration and then a court reviewing that evidence to decide whether the charges are reasonable.

In approving the liquidators’ remuneration, the Court said that ‘all a liquidator can ever do is set out in broad detail what was done in the course of the liquidation and the hourly rate charged.’ As to that step, the Court went on and declared it a ‘waste of time’ as a court could not, without any detailed assertion to the contrary, assess whether or not a charge is reasonable.

In the final case – In the matter of Hunter Rural Division of General Practice Limited (In Liquidation) [2015] NSWSC 279 – the Court did look at the proportionality of the liquidators’ remuneration as compared to the funds they had recovered for creditors. This was a good job for the liquidators – they had realised $2.2M, creditors had been paid 100 cents in the dollar, there was a surplus of around $1M and the liquidators wanted only wanted remuneration of around $100,000. The remuneration was approved in a single-page decision.

Case No. 4: Wollongong Coal Limited v Gujarat NRE India Pty Limited [2015] FCA 221 – 16 March 2015

In March 2014 Gujurat NRE India issued a creditor’s statutory demand to Wollongong Coal for an amount in the order of $6.5M. Wollongong Coal applied to the Federal Court for orders to have the demand set aside, and thereafter ensued convoluted litigation about the debt claimed by Gujurat NRE India and the dealings between the companies.

One of the grounds on which Wollongong Coal applied to have the statutory demand set aside was that the affidavit sworn in support of the demand pre-dated the demand itself. The Court agreed and said that while that ground was a ‘highly technical point’, it was a good one and ‘an affidavit that pre-dates a demand cannot verify the demand because of the possibility that the debt has been repaid in the intervening period’ even if the intervening period was only 13 hours.

As with anything concerning a creditor’s statutory demand, and an application to set it aside, attention to detail is everything.

Case No. 5: In the matter of Douglas Aerospace Pty Limited [2015] NSWSC 167 – 9 March 2015

This case concerns another application to set aside a creditor’s statutory demand, this time on the grounds of the debt being disputed or there being a greater offsetting claim.

Douglas Aerospace contracted with Indistri Engineering Albury Pty Limited (IEA) to build two hangers at Wagga Wagga’s Forest Hill airport. In January 2014 IEA sent Douglas a payment claim under the Building and Construction Industry Security of Payment Act 1999 (NSW) and in June 2014 IEA issued a statutory demand to Douglas for the adjudicated claim amount (which had been registered in the NSW District Court).

Douglas applied to have the statutory demand set aside on the grounds that there was a genuine dispute about the existence and / or quantum of the debt and, in any case, Douglas had a greater offsetting claim for IEA’s failure to properly complete the building works.

In a comprehensive and most useful decision, Justice Brereton of the NSW Supreme Court examined and summarised the relevant authorities and found that:

While a “true” offsetting claim – for example, a cross-claim for damages for negligence or breach of contract, or the recovery by way of restitution of amounts already allegedly overpaid – may be relied on to set aside a statutory demand for a judgment debt founded on an adjudication certificate, the existence or pendency of an arguable claim that an adjudication does not reflect the true legal rights of the parties – involving no cross-claim for damages, and where there has been no payment and thus no complete claim for restitution – cannot be an offsetting claim for the purposes of section 459H(1)(b).

In finding against Douglas, his Honour upheld the decision of the Western Australian Court of Appeal in Diploma Construction (WA) Pty Limited v KPA Architects Pty Limited [2014] WASCA 91 with the effect that if an adjudication decision is allowed to stand unchallenged or otherwise unlitigated, no argument about its validity or accuracy can be used to defeat a creditor’s statutory demand.

For more information contact:

Greg Brackenreg — Partner — Dispute Resolution Team
(02) 6279 4409
greg.brackenreg@mvlawyers.com.au

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