Termination of court-ordered winding up dependent on company's ability to service foreseen indebtedness

A recent decision of the Supreme Court of New South Wales illustrates that, in determining whether to grant an order terminating the winding up of a company under s482(1) of the Corporations Act, the capacity to operate in a financially sound and responsible way and to service foreseen indebtedness is key. The case also highlights the importance of ensuring that any order terminating a winding up takes effect on a particular date or upon the occurrence of a future event that is certain.

Re Pine Forests of Australia (Canberra) Pty Ltd [2010] NSWSC 1127 dealt with an application for an order terminating the winding up of Pine Forests of Australia (Canberra) Pty Ltd (PFC).

The court held that it was not appropriate to order the termination of the winding up of PFC on the grounds that certain creditors' statutory entitlement to interest would remain unsatisfied and accordingly, on the evidence before the court, PFC would be unable to service foreseen indebtedness.

The order sought under s482(1) was to take effect upon certain creditors being paid statutory interest entitlements under s563B of the Corporations Act and upon a new director being elected at a general meeting of members. The court noted that it was not open to the court to order that the winding up be terminated on the day on which any new director is elected given that the occurrence of this event was not certain and therefore could not be a 'day specified in the order' for the purposes of s482(1).

Winding-up a trustee company

The New South Wales Supreme Court has recently considered an application for summary dismissal of a winding-up application against a trustee company.

In Application of Valad Commercial Management Limited & Ors [2010] NSWSC 646, the court held that the bringing of a winding-up application against a trustee cannot be characterised as a step taken to terminate or vest the trust, or a step taken to procure the distribution of the capital or assets of the trust.

Valad Commercial Management Limited, a shareholder of the trustee company and a unitholder of the relevant trust, contended that the winding-up proceedings against the trustee company were in breach of the Unitholders Agreement. A clause in this agreement barred a unitholder, prior to the completion of the project or the sale of their interest in the project, from taking any steps to terminate the trust or to procure the distribution of the assets of the trust. The court held that applying for a winding-up of the trustee is not the taking of a step to terminate or vest the trust or to procure the distribution of the assets of the trust. Rather, the winding-up application is merely a step preparatory to the unitholder's seeking to persuade the trustee to distribute the assets of the trust or otherwise to terminate the trust.

This decision highlights the difficulties in drafting a trust instrument to protect a trustee company from a winding-up application brought by the unitholders. A clause preventing all unitholders from taking steps to terminate the trust or procure the assets of the trust is not, in itself, sufficient to prevent a unitholder from commencing winding-up proceedings against the trustee.

Resolutions capping administrator's remuneration not a bar to seeking statutory review of remuneration

The New South Wales Court of Appeal recently decided that, despite a resolution approved by creditors capping an administrator's remuneration, the administrator was not precluded from seeking statutory review of his remuneration under section 449E(2) of the Corporations Act.

Paul's Retail Pty Ltd v Morgan [2010] NSWCA 217 concerned the administration of Paul's Retail Pty Ltd (Pauls), which became subject to a deed of company arrangement. At the second creditors' meeting, resolutions were passed relating to the remuneration of the administrator including that:

• from the date of the second creditors' meeting up to the date of execution of the deed of company arrangement, the administrator's remuneration would be calculated on a time basis and charged at an hourly rate; and
• the administrator was authorised to make periodical payments on account of accruing such remuneration at his discretion up to a cap of $90,000.

In subsequent meetings, the administrator attempted to significantly increase the cap. The motions were not seconded and were defeated. Pauls and Pauls' sole director and shareholder commenced proceedings against the administrator claiming that he was estopped from access to the remuneration review process provided by s 449E(2) of the Act as a result of representations allegedly made by the administrator that he would not seek remuneration beyond the caps approved by the creditors' resolutions. 

The court held that despite the administrator's remuneration having been approved and capped by resolutions passed at the second meeting of creditors, the administrator was not precluded from seeking a review of it. Furthermore, the administrator had adequately demonstrated a need to inquire into the original determination regarding the quantum of remuneration. 

This case serves as a salient warning to administrators: to avoid being estopped from invoking s449E(2), administrators must be wary of not making any clear statements or representations to creditors that they would not seek to invoke the statutory jurisdiction to increase their remuneration above the agreed cap.

Welcome back, John

Sydney Corporate Insolvency & Restructuring Partner John Warde returned to the office on Tuesday, 5 October 2010 after a three-month sabbatical in Europe. We are very pleased to have John back on deck (particularly as we continue to be extremely busy!). Welcome back, John.

Sons of Gwalia Bill update

On 30 September, the Senate referred the Corporations Amendment (Sons of Gwalia) Bill 2010 to the Legal and Constitutional Affairs Legislation Committee for inquiry and report by 18 November 2010. For more information on the Bill, please see our earlier blog entry.

Company voluntary arrangement revoked by court on the grounds of unfair prejudice

A recent decision of the England and Wales High Court considered whether a company voluntary arrangement (CVA) depriving creditor landlords of the benefit of a third party guarantee of the tenant debtor's liabilities under disclaimed leases should be revoked because it unfairly prejudiced those landlords' interests.

In Mourant & Co Trustees Ltd v Sixty UK Ltd (in admin) [2010] EWHC 1890 (Ch), the CVA proposed by the administrators of a company preserved the rights of a majority of creditors to the substantial detriment of the rights of a few (ie the landlords), who were left in a worse position than they would have been in that company's insolvent liquidation. The court held that there was no justification for that significant impairment to the rights of one group of creditors and accordingly allowed the landlords' application under s 6(1) of the Insolvency Act 1986 (UK) to revoke the decision (taken at a creditors' meeting convened by the administrators) to enter into the CVA.

The position in the UK with respect to CVAs differs from that in Australia in respect of deeds of company arrangements (DOCAs). Under UK law, a CVA can provide that a creditor who is the beneficiary of an obligation owed by a third party (such as a guarantor) shall give up the right to enforce performance of that obligation (that is, a CVA might be employed to 'strip' guarantees of a debtor company's liabilities). That cannot be achieved by a DOCA under Australian law - see the High Court's decision in Lehman Brothers Holdings Inc v City of Swan, summarised in our Focus article.)

However, in practice, the position under UK and Australian law may not be that different given that, as Mourant's case demonstrates, a CVA which purports to effectively extinguish third party guarantees may be liable to challenge on the grounds of 'unfair prejudice' and may be revoked by the Court on that basis.

Changes to the ATO Director Penalty Notice regime

The Tax Laws Amendment (Transfer of Provisions) Act 2010 introduced changes to the tax laws concerning the Director Penalty Notice (DPN) regime.
A DPN is issued by the Commissioner of Taxation (or his delegate) to a company director, and requires the recipient director to take certain steps in relation to the PAYG tax debts of the company of which he or she is a director, in order to avoid personal liability for those debts. The steps which a recipient director can take in order to comply with a DPN and avoid personal liability for corporate tax debts are:

• to cause the company to pay its tax debts;
• to appoint a voluntary administrator to the company; or
• to cause the company to be wound up. 

By way of example, Ms A is a director of a company, X Pty Ltd, which owes PAYG tax instalments to the ATO. If the Commissioner serves a DPN on Ms A, and Ms A does not take one of the three steps set out above within the time stipulated in the notice, the Commissioner can pursue Ms A personally for X Pty Ltd's PAYG tax debts, recovering an amount equal to those debts as a penalty.
Some of the changes to the DPN regime introduced by the Tax Laws Amendment (Transfer of Provisions) Act 2010 include:

• the DPN provisions have been moved from the Income Tax Assessment Act 1936 to Division 269 of Schedule 1 of the Taxation Administration Act 1953;
• the time for compliance with a DPN has been extended from 14 days to 21 days.
• the entry by the company into a payment arrangement in relation to its tax debts will no longer relieve a director from personal liability if a DPN has been issued (although, the Commissioner may not seek to recover a director penalty while a payment arrangement relating to the relevant tax debts is in force, and is being complied with);
• the existing defences to director penalties have been clarified. A defence is available to directors if they can establish that, because of illness or some other good reason, they did not take part in the management of the company at the time it incurred tax debts which are the subject of a DPN and that it was unreasonable to expect the director to take part in the management of the company at the time. This change has been introduced to address concerns that the previous wording of the defence provisions might allow directors to be excused from liability for minor illnesses which did not impact on their ability to serve as a director; and
• finally, the legislation now states expressly that section 1318 of the Corporations Act 2001 (which permits a Court to grant relief from liability in civil proceedings, if it is satisfied that the defendant has acted honestly and should, in all of the circumstances, be so relieved) is not available to directors as a defence to a director penalty. 

These changes took effect from 1 July 2010.

Corporations Amendment (Sons of Gwalia) Bill 2010 reintroduced into Parliament

The Corporations Amendment (Sons of Gwalia) Bill 2010, which is intended to give effect to the Government's decision to reverse the effect of the High Court’s decision in Sons of Gwalia Ltd v Margaretic, was reintroduced into Parliament yesterday.

The Bill amends the rights of persons bringing claims for damages in relation to shareholdings under the Corporations Act 2001 (Cth). The Bill also makes other amendments to streamline external administrations.

The Sons of Gwalia decision determined that, in a corporate insolvency, certain shareholder claims against a company ranked equally with the claims of other unsecured creditors. This decision went against the commonly understood order of claims in a corporate winding-up. The Bill returns the order of claims to that which existed prior to the Sons of Gwalia judgment.

The Bill contains three key measures: 

• It provides that all claims in relation to the buying, selling, holding or otherwise dealing with shares are to be ranked equally and after all other creditors’ claims.
• It removes the right of persons bringing claims regarding shareholdings to vote as creditors in a voluntary administration or a winding up unless they receive permission from the Court. They will also not be entitled to receive reports to creditors unless they make a request in writing to the external administrator.
• It eliminates any restriction on the capacity of a shareholder to recover damages against a company based on how they acquired the shares or whether they still hold the shares.

We will keep you posted on the Bill's progress through Parliament and if and when it is passed.