MV’s top 5 insolvency cases — May 2015

Our top five thought-provoking cases for May 2015.

This month deals with issues including recovery of company property distributed by a director for family law reasons, retention of title arrangements entered into before commencement of the PPSA, the enforceability of an unsigned guarantee, the effect of a DOCA on a secured creditor’s claim under a guarantee, and who owns the residual funds at the end of a personal insolvency agreement.

Case No. 1: Kijurina (as liquidator of ET Family Pty Limited) v Taouk [2015] FCA 424 – 8 May 2015

Mr Taouk was the sole director and shareholder of ET Family Pty Limited and MEA Group Pty Limited. In 2010 ET Family acquired a number of properties in Bankstown, New South Wales. In 2012 MEA Group acquired a property in Cowra, New South Wales.

At the beginning of September 2013 Mr Taouk entered into a binding financial agreement (BFA) with his wife pursuant to section 90C of the Family Law Act 1975 (Cth). Later that same month, Mr Taouk arranged for the transfer of the Bankstown and Cowra properties to Mrs Taouk, which was said to be in accordance with the BFA between them. At this time, the Taouks were still married although separated.

In October 2013, at an Extraordinary General Meeting of ET Family and MEA Group, Mr Taouk resolved to appoint Mr Kijurina joint liquidator of those companies. A report as to the affairs of each company was tabled at the meeting, and each report disclosed a debt owed to the Australian Taxation Office. The transfer of the properties left each company with insufficient assets to pay its debts.

The liquidators of ET Family and MEA Group applied to recover the Bankstown and Cowra properties from Mrs Taouk as unreasonable director-related transactions. In finding for the liquidators, Justice Edmonds of the Federal Court applied the test as discussed by Justice Mansfield in Michael Edward Slaven v Clinton John Menegazzo [2009] ACTSC 94 saying:

…a reasonable person in the position of the company at the time of the transaction, would not have agreed to dispose of the property upon the terms upon which the company did so.

Justice Edmonds held that Mr Taouk had used company property to discharge a personal obligation and enter into a property settlement with Mrs Taouk under their BFA – there had been no benefit to either company. His Honour went on to find that this conduct breached Mr Taouk’s fiduciary and statutory duties owed as a director to ET Family and MEA Group, with significant statutory and equitable damages awarded against Mr Taouk.

This case highlights the danger of sole director shareholders failing to remember their company is a separate legal entity and, instead, treating the company’s assets as their own.

Case No. 2: Central Cleaning Supplies (Aust) Pty Limited v Elkerton (in his capacity as joint and several liquidator of Swan Services Pty Limited (in liquidation)) [2015] VSCA 92 – 12 May 2015

From September 2009 to May 2013, Central supplied cleaning equipment to Swan. The supply was in accordance with a credit application submitted by Swan to Central in September 2009 which, among other things, stated that each supply would be subject to Central’s standard terms. The credit application did not set out those standard terms.

For each supply of equipment, Central invoiced Swan. Each invoice included, among other things, a retention-of-title (ROT) clause whereby the goods the subject of the sale remained the property of Central until the purchase price had been paid by Swan in full.

After commencement of the Personal Property Securities Act 2009 (Cth) on 30 January 2012 Central never registered its security interest in the ROT clauses against Swan.

Swan went into liquidation in May 2013. At that time, there were unpaid invoices for equipment supplied by Central between November 2012 and May 2013. Central sought to enforce the ROT clause in each unpaid invoice and recover the equipment, which Swan’s liquidator resisted.

The key issue before the Court was whether Swan’s credit application ‘provided for’ the granting of a security interest in the future, in which case it would be covered by the PPSA transitional provisions and Central could enforce its ROT clauses to recover the equipment.

In a unanimous decision, the Victorian Supreme Court of Appeal overturned the decision of the trial judge and held that Central’s interests were transitional security interests and benefited from temporary perfection.

In finding for Central, Justices Maxwell, Tate and Beach held that the credit application was not an agreement – it was merely an offer by Swan that was accepted by Central making and invoicing its first supply to Swan. Interestingly, both Central and Swan’s liquidator had submitted the credit application was the agreement at issue.

Their Honours said the agreement was actually formed with Central’s first invoice, at which time the ROT clause was made known to Swan and incorporated into the agreement, and provided for future security interests each time a supply was made. The first invoice was in September 2009 — well before commencement of the PPSA — and therefore was a transitional security agreement.

This case serves as yet another reminder of the importance of registering security interests within time on the Personal Property Securities Register – in this case Central was only protected by the transitional provisions. For insolvency practitioners, the type of arrangement as existed between Central and Swan is commonplace, and care will still need to be taken when assessing whether pre-PPSA arrangements are covered by the transitional provisions.

Case No. 3: CoreStaff Group Holdings Pty Limited & Anor v Remote Contracting Services Pty Limited & Anor [2015] NTSC 29 – 22 May 2015

Western Desert Resources Limited and Remote Contracting Services Pty Limited were companies involved in the mining industry and shared a common director. CoreStaff Group Holdings Pty Limited was a member of the CoreStaff group of companies, who provided labour hire services.

In October 2012 CoreStaff and Western Desert reached agreement about CoreStaff providing employees for the purposes of Western Desert’s business. In November 2012 CoreStaff sent a credit application form to Western Desert to complete that included, among other things, a director guarantee at clause 17. The place for signing the credit application was immediately below clause 17 and in the following terms:

Signed Sealed and Delivered by: Director — as Guarantor in the presence of

The directors of Western Desert signed the application without inserting the name of Western Desert as the ‘Applicant’ at the top of the form or crossing out the words ‘As Guarantor’. However, overtyped at the top of the application were the words:

Director Guarantees are declined as guarantees are not offered on behalf of publically listed entities.

In early 2013 CoreStaff and Remote Contracting reached agreement about CoreStaff providing employees for Remote Contracting’s business. In May 2013 CoreStaff sent a credit application to Remote Contracting, which contained the same director guarantee clause 17 and signature block.

Similar to Western Desert’s form, the sole director of Remote Contracting (being the common director with Western Desert) signed the application form under clause 17 and without inserting Remote Contracting as the ‘Applicant’ at the top of the form. Unlike Western Desert’s form, however, there was no further notation about the director guarantee.

In early 2014 both Western Desert and Remote Contracting ceased paying CoreStaff for its services. Western Desert subsequently entered voluntary administration, and CoreStaff commenced proceedings against the directors of both companies to enforce the purported guarantee in each credit application. The directors resisted the claim on the basis neither guarantee was signed as such.

The question before the Court was whether either guarantee was enforceable by CoreStaff.

Justice Kelly of the Supreme Court of the Northern Territory started by looking at the credit application itself. Her Honour found the credit application to be an offer by “the Applicant” which was accepted by CoreStaff’s conduct in supplying labour to that Applicant. Furthermore, clause 17 was an integral part of the offer.

On this basis, by virtue of the words overtyped at the top of its credit application form, Western Desert’s application made it plain that no director guarantee was being offered. CoreStaff was not obliged to accept Western Desert’s offer as put, but it did and the clause 17 director guarantee was not enforceable against Western Desert’s directors.

The position in relation to Remote Contracting, however, was held to be different. Given the lack of notation about a direction guarantee being refused, clause 17 of Remote Contracting’s application was held to be enforceable against the sole director.

This case is a reminder that if a director does not want to give a personal guarantee for their company’s obligations, then that must be made patently clear on any form signed for the company. The lack of specific signature as guarantor may not be enough to avoid liability.

Case No. 4: Australian Gypsum Industries Pty Limited v Dalesun Holdings Pty Limited [2015] WASCA 95 – 13 May 2015

Australian Gypsum Industries was part of the BGC group of companies that supplied building products and services on credit under various agreements to Newglen Nominees Pty Limited. The obligations and liabilities of Newglen owed to the BGC group were secured by deeds of guarantee and indemnity executed by Dalesun, supported by an equitable charge over Dalesun’s land.

Administrators were appointed to Dalesun in December 2010 and a DOCA was executed in April 2011. Among other things, the Dalesun DOCA purported to extinguish all claims against Dalesun except those claims specifically preserved in the DOCA. The BGC group did not vote in favour of the Dalesun DOCA.

The Dalesun DOCA was terminated in June 2011 because it had achieved its purpose, and Dalesun continued to operate after that. The BGC group supplied goods and services to Newglen after the Dalesun DOCA was terminated under the original supply agreements.

Administrators were appointed to Newglen in February 2012 and a DOCA was executed in March 2012. The Newglen DOCA was terminated that same month because it had achieved its purpose. While the BGC group received some payment from Newglen, it was left short and so looked to Dalesun to pay the shortfall under the previously executed deeds of guarantee and indemnity.

The question before the Court was whether the Dalesun DOCA had the effect of discharging Dalesun from any obligations it owed to the BGC group under the deeds of guarantee and indemnity.

The majority of the Western Australian Supreme Court of Appeal upheld the decision of the trial judge, finding that the Dalesun DOCA had indeed extinguished any claim by the BGC group against Dalesun for Newglen’s unpaid debts.

In finding for Dalesun, Justices Newnes and Murphy had regard to the purpose of Part 5.3A of the Corporations Act 2001 (Cth): relevantly, of giving the insolvent company a ‘fresh start’ in executing (and completing) a DOCA. Their Honours agreed with the trial judge that section 444D does not permit a secured party to preserve its rights so as to allow it to enforce debts that arose after execution of a DOCA.

The Court held that a secured creditor who has not voted in favour of a DOCA is permitted to do no more than realise or otherwise deal with its security, in this case being the charge over Dalesun’s land. The Court further held that BGC group’s (contingent) claims were not ‘deemed’ to be preserved for the purposes of the group continuing to exercise security rights after termination of the Dalesun DOCA because those rights had not been exercisable before then.

This case highlights the need for secured creditors to take positive action and enforce their security interest, or get involved in the DOCA process to preserve their claims, or re-document business arrangements if the principal debtor or guarantor executes a DOCA. Taking no action carries the risk of a security interest proving worthless.

Case No. 5: Warner v Mayfair Limited, in the matter of the Personal Insolvency Agreement of Gore [2015] FCA 441 – 11 May 2015

This case concerned an application by Mr Warner for directions and advice about money that came to be held by him as trustee of the personal insolvency agreement (PIA) of Mr Gore.

Insofar as is relevant, Mr Gore’s PIA provided that the funds available to his trustee would include funds of Mr Gore’s (clause 3.2) as well as funds from anticipated consultancy work with various third parties (clause 3.4). Clause 13.1 provided that creditors would be paid from the funds referred to in clause 3.2. There was no express provision dealing with distribution of the funds referred to in clause 3.4.

Mr Gore’s PIA was terminated by his creditors under section 222B of the Bankruptcy Act 1966 (Cth) in February 2012. In April 2012 Mr Gore became bankrupt upon his presentation of a debtor’s petition to the Official Trustee. At the time of Mr Gore’s bankruptcy, Mr Warner still held funds contributed by third parties under clause 3.4 of the former PIA and there were competing claims for those funds, including by Mr Warner for his remuneration.

The question before the Court was who is entitled to moneys held by the trustee of a PIA upon its termination when creditors have not been fully paid.

Justice Farrell of the Federal Court acknowledged that the issue is not clearly addressed in the Bankruptcy Act. Her Honour said the answer must be determined having regard to the source of the funds and, where funds have been contributed by third parties, the terms of the PIA and the extent to which they incorporate relevant provisions of the Bankruptcy Act.

Working through the provisions of Mr Gore’s PIA, which her Honour noted was ‘not a model of the draftsman’s art’, Justice Farrell held that the residual funds held by Mr Warner at the end of the PIA constituted property of Mr Gore’s and therefore, by virtue of section 58 of the Bankruptcy Act, vested in the Official Trustee in April 2012. Accordingly, the third parties who had contributed to the PIA were left to prove in Mr Gore’s bankruptcy as unsecured creditors.

This case is a reminder of the need for good and clear drafting when a particular outcome is desired. Here, the third-party contributors were disadvantaged because the terms of the PIA were simply not sufficiently clear about the status of their funds, namely who they belonged to in the event the PIA failed.

For more information contact:

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

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