Wednesday, September 29, 2010

Personal liability for rent and other amounts payable under an agreement

Personal liability is an issue which all receivers and administrators and mortgagees in possession pay great attention to. Section 443B(2) (for administrators) and section 419A(2) (for receivers and mortgagees in possession) imposes personal liability for 'rent or other amounts payable under [an] agreement' where the company continues to use, occupy or be in possession of property.

Since the decision of Justice Campbell in Re Nardell Coal Corporation (In Liq) v Hunter Valley Coal Processing [2003] NSWSC 642, practitioners and mortgagees have been quite relaxed about the scope of the 'other amounts payable under [an] agreement' for which they might be personally liable. In Re Nardell, Justice Campbell stated that the words 'other amounts' referred only to liabilities under a property contract akin to 'rent' and in doing so he greatly limited a controller's liability under s419A(2).

In Rapid Metal Developments (Aust) Pty Ltd v Rildean Pty Ltd (No 3) [2010] NSWSC 7 Justice Hulme has changed that. In this case Justice Hulme held that the words 'rent or other amounts payable' should be 'understood by their ordinary meaning in the context in which they appear'. As a result, insolvency practitioners may now be liable under s443B(2) and s419A(2) for a much wider range of costs under a lease or other property contract and not just those similar to rent.

Justice Hulme considered the liability of agents for a mortgagee in possession, the Agents, under s419A(2) of the Corporations Act 2001 (Cth) for three amounts owed by the mortgagor under a contract with the owner: those amounts were unpaid hire charges for scaffolding, interest on those charges and the value of the unreturned scaffolding. His Honour held that the Agents were liable to the owner for all three amounts.

In this case, Justice Hulme rejected the Nardell Coal narrow interpretation of the s419A(2) phrase 'rent or other amounts payable'. If this case is followed a controller's liability under s419A(2) of the Corporations Act may be interpreted broadly: in particular, this case shows that a company to which a controller is appointed will not necessarily need to be in possession of a third party's property for the court to find that a company has continued 'to use' that property under s419A(2). In such circumstances, a controller may still be liable under that section for 'rent or other amounts payable' arising under a property contract.

Tuesday, September 28, 2010

Federal Court of Australia issues new Practice Note CORP 3 - Schemes of Arrangement

The Federal Court has issued new Practice Note CORP 3 - Schemes of Arrangement, effective immediately, which requires that orders for the convening of a meeting of members/creditors under s 411(1) of the Corporations Act 2001 (Cth) contain a statement to the following effect:

IMPORTANT NOTICE ASSOCIATED WITH COURT ORDER UNDER SUBSECTION 411(1) OF CORPORATIONS ACT 2001 (Cth)

The fact that under subsection 411(1) of the Corporations Act 2001 (Cth) the Court has ordered that a meeting be convened and has approved the explanatory statement required to accompany the notices of the meeting does not mean that the Court:

(a) has formed any view as to the merits of the proposed scheme or as to how members/creditors should vote (on this matter members/creditors must reach their own decision); or

(b) has prepared, or is responsible for the content of, the explanatory statement.


The new Practice Note has been issued in response to a recommendation by the Council of Chief Justices' Harmonised Corporations Rules Monitoring Committee. It was considered by that Committee to be necessary to address any concern that the court's orders for the convening of a meeting of members/creditors under s 411(1) may give the impression of endorsement by the court of the scheme of arrangement proposed.

Friday, September 24, 2010

Pursuing an appeal in the Administrative Appeals Tribunal

The Federal Court recently handed down its decision in HFGC Nominees (No 2) Pty Ltd v Hancock as Liquidator of 246 Arabella Investments Pty Ltd (in Liquidation) [2010] FCA 1005, which dealt with whether leave should be granted to a shareholder under section 511 of the Corporations Act 2001 (Cth) to pursue an appeal in the Administrative Appeals Tribunal on behalf of a taxpayer in liquidation.

The taxpayer lodged an objection to an assessment of the Commissioner that disallowed certain deductions and imposed penalties and interest. The liquidator of the taxpayer declined to pursue an appeal from that decision to the Tribunal. A shareholder of the taxpayer (Mr Higgins) therefore applied to the court under s511 for an order that he be entitled to bring that appeal in the name of the taxpayer. Mr Higgins held his shares on trust for two family trusts (of which HFGC Nominees (No 2) Pty Ltd was the trustee).

Section 511 relevantly provides that any liquidator, creditor or (relevantly here) contributory may apply to the court:

(a) to determine any question arising in the winding up of a company; or
(b) to exercise all or any of the powers that the court might exercise if the company were being wound up by the court,

and that if the court is satisfied that the determination of the question or the exercise of the power will be just and beneficial, the court may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the application as it thinks just.

Section 511 is usually used by liquidators seeking directions so this case is quite an unusual use of the power. The court noted that s511 is consistent with the court's inherent jurisdiction to permit a contributory (shareholder) to pursue an appeal in the name of a taxpayer who is in liquidation. Consequently, the court held that s511 can be utilized to authorise a contributory to undertake an appeal of this nature. However, when a taxpayer is in liquidation, a beneficiary of a trust will be unable to pursue a claim under s511 unless there is evidence that the trustee has refused to use his or her status as a contributory to apply to pursue an appeal in the taxpayers' name.

This case also highlights the fact that section 511 can be exercised retrospectively.

Thursday, September 23, 2010

New MoU between Supreme Courts of NSW and Singapore on references of questions of law

The Supreme Courts of NSW and Singapore have entered into a Memorandum of Understanding (MoU), effective from 14 September 2010.

The MoU provides that each court will give consideration, in accordance with its Rules and procedures, to directing parties in proceedings to take steps to have any contested issue of law determined by the courts of the jurisdiction of the relevant governing law (ie Singapore or NSW). This process is aimed at overcoming the difficulties and costs involved in traditional processes for determining questions of law by the judges of one of these jurisdictions with respect to the law applicable in the other jurisdiction.

Wednesday, September 22, 2010

A fatal defect?

In Ron Medich Properties Pty Limited v McGurk [2010] NSWSC 552, Justice Palmer of the NSW Supreme Court considered whether a defect in the terms of a particular caveat was fatal.

The caveat in question was held by Ron Medich Properties Pty Limited (the plaintiff) over land owned by Mrs McGurk (the defendant). The caveat described the plaintiff's estate or interest in the land as follows:

the interest in the land is 'equitable interest pursuant to a constructive trust'; and
that facts said to give rise to the interest are 'use of the caveator's funds to acquire an interest in the property'.

The above description indicates that the plaintiff's interest in the land was as the beneficiary of a constructive trust. However, the interest the plaintiff sought to protect by the caveat was actually not that interest but an interest as the mortgagee by virtue of the doctrine of subrogation. His Honour stated that that interest as the mortgagee is very different from the interest as the beneficiary of a constructive trust.

In addition, the court held that the defect in the terms of the caveat, relating to the nature of the interest covered, was fatal and could not be cured by amendment.

This all may sound very technical but the significance of this case is that it clarifies the way the court will approach the interpretation of the terms of a caveat. In particular, the case highlights the fact that a defect in the terms of a caveat, relating to the interest protected, is fatal and cannot be cured by amendment.

The case emphasises the need for clients to ensure that the 'prescribed particulars' of their interest in the land are explicitly set out in the caveat and that the legal foundation for the interest provided in the caveat is correct.

Thursday, September 16, 2010

Senate Economics References Committee releases its report on the insolvency profession

On 14 September 2010, the Senate Economics References Committee released its report on the insolvency profession. The report concludes that ASIC has been ineffective in its oversight of the insolvency regime and proposes that this responsibility be transferred to the Insolvency Trustee Service Australia (ITSA) to form the Australian Insolvency Practitioners Authority (AIPA).

In addition, the report recommends that the AIPA establish a new licensing system for insolvency practitioner and outlines several requirements for holding a licence, including the passing of a written test, as well as circumstances in which AIPA may suspend or cancel a licence. Finally, the Report makes numerous recommendations intended to provide stricter supervision of insolvency practitioners, greater competition for such roles, and more severe penalties for a practitioner's misconduct.

While the report's recommendations could have a significant effect on insolvency practitioners, it is unclear how many of these recommendations the Federal Government will implement. The Insolvency law at Allens blog will continue to report on the progress of the Committee's recommendations and a more detailed analysis of the report will be the subject of an Allens Focus in the coming days.

Wednesday, September 15, 2010

A bare trustee's right of indemnity for expenses

In Commissioner of Taxation v Bruton Holdings Pty Limited (in liquidation) [2010] FCA 978, Justice Graham of the Federal Court considered a bare trustee's right of indemnity for expenses incurred from litigation the trustee brought against the Commissioner of Taxation.

Bruton Holdings Pty Limited (the Company) was trustee of the Bruton Educational Trust (the Trust). On 28 February 2007, administrators were appointed to the Company. On 30 April 2007, its creditors resolved that it be wound up. Pursuant to the terms of the Trust Deed, the Company ceased to be the trustee of the Trust upon the appointment of the administrators. From that time, the Company was a bare trustee - that is, a trustee who holds title to the trust property for a beneficiary without any express duties or powers. Ultimately, because of the Company's status as a bare trustee, Justice Graham held that the Company was not entitled to indemnification by exoneration or recoupment out of the Trust property for expenses incurred in proceedings challenging the validity of a notice served on the Company's solicitor under s 260-5 of Schedule 1 of the Taxation Administration Act 1953 (Cth).

This case demonstrates the need for a receiver, administrator or liquidator appointed to a trustee company to check the Trust Deed, ideally before appointment, to ensure that the Trust Deed does not cause an immediate termination of the Company's position as Trustee - if it does, the Trust assets may not be available to meet any of the expenses of the administrator or the liquidator in dealing with the trust assets. Where a trust company's position is terminated, but it retains title to the trust assets, the Company will normally become a bare trustee (as occurred in this case when the Company entered administration). Due to a bare trustee's very narrow duties, its right to be indemnified out of Trust assets for expenses incurred in the administration of the trust is far more limited than that of regular trustees. Consequently, receivers and administrators may find themselves personally liable for debts incurred by the Company during their appointment (sections 419/443A of the Corporations Act) without the ability to access Trust assets to recover those debts.

Trust creditors will also face difficulties in recovering money owed to them by a bare trustee. As the right of creditors to access Trust assets is dependent on a trustee's right of indemnity, creditors will often be unable to access those assets when seeking to recover a debt owed to to them by a bare trustee.

Monday, September 13, 2010

Duties owed by a mortgagee to guarantors of the mortgage debt

In Permanent Custodians Ltd v AGB Developments Pty Ltd [2010] NSWSC 540, Justice Davies of the NSW Supreme Court considered the duties owed by a mortgagee to guarantors of the mortgage debt.

His Honour held that the Guarantors were liable to pay the full amount under the guarantee. In doing so, his Honour concluded that s420A of the Corporations Act 2000 (Cth) does not protect guarantors in the circumstances and that the Agreement contained no implied terms imposing a duty to obtain the best price for the Property.

This case confirms that s420A does not protect guarantors of a mortgage debt owed by a corporation when a mortgagee sells the property securing that debt. Consequently, where a guarantor is dissatisfied with the sale price, it will need to rely on any equitable rights and remedies it may have for redress. However, guarantors should remember that the exercise of such rights will be subject to the terms of the guarantee and any other contract between the guarantor and the creditor.

Removal of receivers

In Victor Seeto & Ors v Bank of Western Australia Limited [2010] NSWSC 922, Justice Nicholas of the NSW Supreme Court heard an application for an interlocutory mandatory injunction for the removal of receivers on the ground that their appointment was a violation of clause 2.2 of the Code of Banking Practice.

His Honour held that the interlocutory application must be refused as the plaintiffs had failed to demonstrate that it was reasonably arguable that clause 2.2 of the Code operated to require notice to be given of the appointment of a receiver even though the express terms of the mortgage empowered appointment without notice.

The Code of Banking Practice imposes standards of behaviour to be observed in the performance of contractual rights and obligations. Adherence to the Code requires a bank to have regard to the interests of both parties in the course of its performance of the terms of the relevant contract. However, it does not operate to qualify or vary rights or powers.

Friday, September 10, 2010

Recovery from trust assets

Recently, in Trio Capital Limited (Admin App) v ACT Superannuation Management Pty Ltd & Ors [2010] NSWSC 941, Justice Palmer of the NSW Supreme Court heard an administrators' application for a costs indemnity from trust assets under administration. The trustee was trustee of multiple trusts, some of which were insolvent. The trustee's corporate assets alone were not sufficient to cover the administrators' costs.

His Honour held that to the extent that the trustee's corporate assets were insufficient to meet the administrators' costs, the administrator did not have a discretion to apportion costs between different trusts. While the court may direct that costs incurred in the administration of a particular trust could be recouped from that trust's assets, the court could not allow the interests of one group of beneficiaries to be preferred over the interests of another. The result was that the administrators would be out of pocket for costs incurred in the administration of the insolvent trusts.

This decision highlights the difficulty insolvency practitioners may face in recovering costs where a corporate trustee is trustee of numerous trusts. Even if a court is willing to allow recovery from trust assets, this decision suggests that it will not allow costs to be shared across solvent and insolvent trusts.

Domestic application of foreign law article

Allens Arthur Robinson Partner Michael Quinlan and Law Graduate Hugh Boylan have co-authored an article for the INSOL International Technical Series on the domestic application of foreign law under the UNCITRAL Model Law on cross-border insolvency.

The article is in Issue No.14 and is available to INSOL members at the INSOL website.

Tuesday, September 7, 2010

Portsmouth City Football Club CVA

As Senior Associate Angela Martin is a keen follower of English football and previously worked on the administration of Wimbledon Football Club (now MK Dons), she was interested to report on a recent case involving the Portsmouth City Football Club.

The UK High Court has recently looked at whether HM Revenue & Customs (HMRC) in the UK had suffered unfair prejudice as a result of a Company Voluntary Arrangement (CVA) of Portsmouth City Football Club which provided for football creditors to be paid in full in priority to other ordinary creditors.

In HMRC v Portsmouth City Football Club Ltd & Ors 2010] EWHC 2013 (Ch), Justice Mann held that the application to set aside the CVA on the grounds of material irregularity and unfair prejudice and the appeal from the chairman's decision on the amount of the HMRC debt to be allowed for voting purposes at the CVA meeting should be dismissed. In the absence of a separate successful challenge to the validity of the relevant football rules of the Premier League and Football League, football creditors had to be paid in full as a condition of Portsmouth City Football Club being able to carry on playing in the football league or at least playing without a significant points penalty. There was no apparent unfair prejudice because the CVA did not deprive HMRC (or other non-footballing creditors) of money which would otherwise be made available to them.

Monday, September 6, 2010

Lehman Brothers - Pooling and distributing client funds following insolvency

The UK High Court of Justice Court of Appeal has recently considered the interpretation of a statutory trust under European investment law and the resulting impact on distribution of clients' funds from a collapsed investment firm.

In Lehman Brothers International (Europe)(in administration) v CRC Credit Fund Limited & Ors [2010] EWCA Civ 917, the court held that the relevant legislation was to be interpreted so as to maximise protection of investors. This resulted in a statutory trust being imposed immediately upon receipt of money from clients, such that all money became part of a single pool upon insolvency, and that all clients were entitled to the money they had contributed, irrespective of whether that money was allocated to the investment firm's house accounts or to designated client accounts.

This decision highlights the concern of courts to interpret international financial laws in a manner which gives investors maximum protection. The court was particularly concerned to treat investors equally, so as to give force to the maxim of equity that 'equality is equity'. The decision also indicates that courts will prefer an interpretation which improves the simplicity and efficiency of distribution of funds following insolvency.

Friday, September 3, 2010

Arbitrability of insolvency-related claims

In a recent case concerning an application for a stay in favour of arbitration, Petroprod Ltd (in official liquidation in the Cayman Islands and in compulsory liquidation in Singapore) v Larson Oil and Gas Pte Ltd [2010] SGHC 186, the High Court of Singapore has decided that insolvency-related avoidance claims are not arbitrable as they relate to a type of dispute that can only be resolved by the courts.

Please see our Asia Focus for more detail.

Thursday, September 2, 2010

Octaviar in the High Court

The High Court has unanimously rejected the appeal from the decision of the Queensland Court of Appeal and thus quashed the first instance decision in Octaviar, which had thrown long-accepted practices into doubt. At first instance, Justice McMurdo held the designation of additional documents as Transaction Documents for the purpose of a charge constituted a 'variation in the terms of the charge' which had to be registered, even though the charge instrument was not amended.

Please see our Client Update for more detail.