Distribution of assets of unregistered managed investment schemes

The Federal Court of Australia has recently considered the method of distribution of the assets of 21 unregistered managed investment schemes (most of the which were joint venture property projects associated with Mr Mark Ronald Letten).

In Australian Securities and Investments Commission v Letten (No 7) [2010] FCA 1231, the receivers and managers appointed to the property of the schemes sought directions from the Court to the effect that the scheme property ought to be distributed proportionately to the claims, as assessed by the receivers, given that it was near impossible to determine entitlements with respect to the individual schemes following a complicated collapse.

The circumstances of this case were that:

• it was estimated that 916 investors had invested over $100 million in the schemes as consideration to acquire rights to benefits produced by the acquisition of a particular identified asset or assets;
• the funds were mixed for at least 12 years during which there were in excess of 110,000 transactions through the relevant bank accounts; and
• the receivers concluded that to attempt to reconstruct the accounts and trace individual investor contributions to a particular scheme and into particular assets would cost approximately $18 million.

The Court held that the receivers of the schemes were justified in dealing with the assets by allowing claimants to prove their claims to particular assets and then pooling any surplus into a common fund for rateable distribution between investors.

In the exceptional circumstances of this case, the Court accounted for commercial realities and took a pragmatic approach rather than strictly following the general principle that there should be no distribution of surplus assets of a managed investment scheme other than to the members of that scheme.

Removal of lenders' caveat lodged in respect of guarantor's property

The Supreme Court of New South Wales has recently considered a guarantor's application under s74MA of the Real Property Act 1900 (NSW) seeking the removal of caveats placed by the lender on properties owned by the guarantor.

In Manttan v Equititrust Limited [2010] NSWSC 931, the guarantor submitted that the caveat had no proper purpose and was imposed in order to put illegitimate pressure on the guarantor. One of the issues before the court was whether the lender (as equitable mortgagee pursuant to an unregistered second mortgage) had a legitimate interest in refusing to remove the caveat so as to prevent the sale, at below market value, of two properties owned by the guarantor.

The court held that the lender's caveats should be maintained, as the removal of the caveats without any alternate security would prejudice the lender's position.

This case confirms that a caveat will not be removed where the registered proprietor does not offer alternate security, particularly in circumstances that would result in the lender losing priority or place the lender at risk of receiving a lesser amount on realisation of the secured assets.

Administrator's requirement to operate separate accounts for liquidations

A recent decision of the Federal Court of Australia demonstrates that administrators must operate separate accounts for the liquidation of each company to which they are appointed, however, where administrators fail to do so, the court may make orders to enable the completion of the liquidations and to protect the administrators from liability if they have acted practically and in good faith.

Worrell, in the matter of Regulation 5.6.06 of the Corporations Regulations 2001 (No. 2) [2010] FCA 1257 dealt with the effect of Regulation 5.6.06 of the Corporations Regulations on liquidators.

The court held that the conduct of the administrators, in operating a single compound account for liquidations, contravened Regulation 5.6.06, which requires that administrators operate separate accounts for each liquidation. However, the court made orders under Regulation 5.6.09 of the Corporations Regulations and s1322(4) of the Corporations Act allowing the applicants to continue using the single compound account to complete the existing liquidations and to relieve them from liability.

Whether irrevocable power of attorney unjust or contrary to public policy

The Supreme Court of New South Wales has recently considered whether an irrevocable power of attorney was unjust of contrary to public policy and whether a donee of an irrevocable power of attorney is under any fiduciary obligation to act in the interests of the donor of that power.

Quest Rose Hill Pty Ltd v White [2010] NSWSC 939 dealt with the proper construction of a clause in a lease that purported to give the lessee an irrevocable power of attorney in respect of the lessor's rights to vote at meetings of the owners corporation. The lessors challenged the grant of power, arguing that if it was irrevocable, it was unjust and/or contrary to public policy.

The court held that the power of attorney met both the statutory and common law tests of irrevocability. Ordinarily, an irrevocable power of attorney would allow the lessee to act independently and without reference to the lessors' interests because the usual fiduciary duties of an agent to a principal do not apply. However, in the circumstances of this case, there were provisions in the lease which qualified the scope of the power. Consequently, the court found that the irrevocable power of attorney was not unjust or contrary to public policy because the lessee was contractually obliged to exercise its power in a particular manner and in good faith.

Insolvency practitioners are often confronted with contracts that include an irrevocable power of attorney in favour of the company to which they have been appointed. This decision reinforces the line of authority which holds that a donee of an irrevocable power of attorney is under no fiduciary obligation to the donor and therefore is free to act as it sees fit, even if this is contrary to the donor's interests.

Remuneration of liquidator where remuneration fixing mechanism breaks down

A recent decision of the Supreme Court of New South Wales demonstrates the process undertaken by the court in determining the remuneration of a special purpose liquidator under s511 of the Act.

Onefone Australia Pty Ltd v One.Tel Ltd [2010] NSWSC 1120 dealt with an application from the special purpose liquidator of One.Tel Limited concerning his remuneration. The court held that the resolution of the committee of inspection was invalid due to a failure to comply with requirements under s499(3) of the Act and that it could not be validated by s1322(2) of the Act. The court therefore held that it was for the court to determine the special purpose liquidator's remuneration under s511 of the Act, and ordered the liquidators to re-present their evidence to demonstrate more clearly the link between the work carried out and their role as liquidators.

This case demonstrates that:

• where a remuneration fixing mechanism established under s499(3) of the Act breaks down, the court will assume responsibility for quantifying the remuneration under s511 of the Act; and
• the onus rests on the liquidator to establish their entitlement to the specified remuneration. Where the liquidator fails to present sufficiently clear and detailed evidence about the activities undertaken in their role, they may be ordered to re-formulate and re-present their claim.

Validity of appointment of administrators by invalidly appointed director

The New South Wales Court of Appeal has recently decided a case which dealt with the validity of the replacement of company directors of single member companies, and the effect of an invalid directorship on the subsequent appointment of administrators.

In Sheahan v Londish [2010] NSWCA 270, the court held that the removal and replacement of the company director by the sole shareholder of the companies was invalid due to a failure to comply with requirements under s249B of the Corporations Act 2001 (Cth). The subsequent appointment of administrators was therefore invalid, and could not be validated by s201M of the Act. However, the court validated the appointment of the administrators through its remedial power under s1322(4) of the Act.

This case demonstrates that courts will maintain the statutory formalities regarding the making of resolutions by single member companies. It also indicates that the court's ability to make orders under s1322(4) is not confined to those decisions of a procedural nature, and that the Court will make orders validating decisions of a substantive nature where it is just and equitable to do so.

Centre of main interests for the purposes of Model Law

In Ackers (as joint representative) v Saad Investments Company Limited (in official liquidation) (a company registered in the Cayman Islands) [2010] FCA 1221, the Federal Court of Australia recognised proceedings in the Cayman Islands as foreign main proceedings and foreign appointed liquidators as foreign representatives for the purposes of the Model Law on Cross-Border Insolvency.

The main implications of this case are that:

• the courts will favour expediency in resolving the issue of a company's centre of main interests (COMI), as the purposes of the presumption in Article 16(3) of the Model Law are to avoid unnecessary delays to the court, prevent prejudice to creditors and uphold the objectives of the Model Law;
• in cases concerning the determination of a company's COMI, Australian courts may have recourse to the available body of international common law; and
• the Article 16(3) presumption amounts to prima facie evidence of a company's COMI.

In this case, the court held that:

• the presumption under Article 16(3) of the Model Law was not displaced and the registered office of Saad Investments Company Limited in the Cayman Islands was the company's COMI;
• the liquidation proceedings in the Cayman Islands should be recognised as foreign main proceedings for the purposes of the Model Law; and 
• the applicant liquidators were to be recognised as the foreign representatives under the Model Law.

Winding up on just and equitable ground is a remedy of last resort

The Supreme Court of New South Wales has recently confirmed that that winding up a solvent company on the 'just and equitable' ground is a remedy of last resort, even where a company has committed serious contraventions of the Corporations Act 2001 (Cth).

ASIC v Great Northern Developments [2010] NSWSC 1087 concerned an application by ASIC to wind up Great Northern Developments Pty Ltd (GND) on the 'just and equitable' ground for making offers of securities without a disclosure document.

The court rejected ASIC's application to have GND wound up on the 'just and equitable' ground for the following reasons:

• GND was not alleged to be insolvent, and an application to wind up a solvent company is a remedy of last resort;
• the order might damage the interests of the investors that the Act was meant to protect, by forcing GND to realise its assets in a liquidation sale;
• there was no allegation any investor was misled about any matter;
• GND undertook to the court to remedy its breaches of the Act; and
• the investors in GND opposed the winding-up order.

Court considers meaning of 'the whole or substantially the whole of a company's property'

The Supreme Court of Victoria has recently confirmed that 'the whole, or substantially the whole of a company's property', in the context of section 436C of the Corporations Act 2001 (Cth), means more than just 'a significant part' of the company's property.

Re Australian Property Custodian Holdings Limited (admins apptd) (recs & mgers apptd) [2010] VSC 492 dealt with the validity of appointment of administrators by a secured creditor.

Daytree Pty Ltd, a secured creditor of Australian Property Custodian Holdings Limited (the company), purported to appoint administrators to the company under section 436C of the Corporations Act (which provides that a person who is entitled to enforce a charge over 'the whole, or substantially the whole' of a company's property may appoint administrators to the company.)

The company's balance sheet as at 30 June 2010 disclosed total assets of $15,751,942.63, which included a $5 million deposit held at the National Australia Bank that was excluded from Daytree's charge. On that basis, the charge covered only 68 per cent of the company's property, which the court found was 'a significant part of the Company's assets, but certainly not the whole and...certainly not substantially the whole'.

The court therefore held that the purported appointment of voluntary administrators by Daytree was invalid, as the charge did not extend to 'the whole, or substantially the whole' of the company's assets. Notwithstanding that finding, the court proceeded to make orders under section 447A of the Corporations Act to the effect that Part 5.3A of the Act is to operate in relation to the company as though the administrators had been appointed by resolution of the company's directors.

Lack of default notice not a bar to claim for monies due or possession

A recent decision of the Supreme Court of New South Wales demonstrates that, whilst a default notice under s57(2)(b) of the Real Property Act 1900 must be served prior to exercising a power of sale, the lack of such a notice will not bar a claim for monies due or possession of the mortgaged property.

Suncorp-Metway Limited v Nam Property Holdings Pty Limited [2010] NSWSC 1078 dealt with an application for summary judgment brought by Suncorp following a loan default and the borrower's cross-claims of special disadvantage and unconscionable conduct.

The borrower argued that, prior to exercising the right to accelerate, Suncorp was first required to issue a notice under s57(2)(b) of the Real Property Act with respect to the relevant default. The borrower also filed a cross-claim against Suncorp for relief under s 51AC of the Trade Practices Act 1974 (Cth) and in accordance with the equitable jurisdiction of the court in cases of unconscionability. The borrower alleged that it executed the mortgage without having received any proper explanation of the meaning and effect of the clause relating to Suncorp's right to accelerate. The director of the borrower neither spoke nor read any English so the transaction was completed in Vietnamese via the borrower's broker.

The court held that although Suncorp had not served a default notice under s57(2)(b) of the Real Property Act, it was not barred from claiming monies due or possession of mortgaged property. The court also dismissed the borrower's cross-claims of special disadvantage and unconscionable conduct and entered summary judgment for Suncorp for the monetary amount due and possession of the mortgaged property.

Payment of employee entitlements in receivership

The Federal Court of Australia has recently considered receivers' obligations to pay employee entitlements as a priority debt in Gothard, in the matter of AFG Pty Limited (Receivers and Managers appointed) (in liq) v Davey [2010] FCA 1163. In this case, the receivers appointed to the Allco group of companies applied to the court to determine which entity within the group was the employer for legal purposes.

The court held that the practical effect of the financial and accounting arrangements of the Allco group was that the entity which 'formally' employed the employees was not actually their employer for legal purposes. Rather, that entity was merely a payroll entity for the group and an employer of record for the purpose of reporting to authorities.

Due to the operation of sections 433(3)(c) and 556(1)(e) of the Corporations Act 2001 (which require employee entitlements to be paid out as a priority debt in the event of receivership) this decision impacted the ability of the receivers to repay the debts owed to secured creditors.

This decision demonstrates that receivers cannot rely on the formality of employment contracts to avoid having to account for employee entitlements. Courts will look to the practical arrangements which existed within a corporate group when determining which entity was the employer for legal purposes. Courts may also prefer an interpretation of these arrangements which ensures that employees are granted their entitlements in the event of insolvency.

Guarantor's right to recover damages under section 420A

The New South Wales Supreme Court has recently clarified that section 420A of the Corporations Act 2001 (Cth) does not confer a right on guarantors to recover damages or any other right to a remedy.

Bank of Western Australia Limited v Usalj [2010] NSWSC 991 dealt with whether a particular guarantor had standing to bring a cross claim under s420A of the Corporations Act. The bank commenced proceedings against the guarantor seeking moneys owed to it under the relevant guarantee. The guarantor defended those proceedings and also filed a cross-claim alleging that the bank undersold the secured property in breach of section 420A.

The court held that the guarantor did not have standing to bring a cross claim seeking damages under section 420A of the Act. In doing so, the court noted that there is nothing to indicate that it was the intention of the legislature that section 420A(1) should confer any right or remedy on guarantors or other persons who involve themselves contractually in consequences of the exercise of the power of sale. However, the court granted the guarantor leave to file and serve an amended cross claim on the basis that he was potentially entitled to an equitable set off.

Mortgagees' ability to claim under mortgagor's insurance policy

The Federal Court of Australia has recently handed down a decision which considered the manner in which the court will approach the interpretation of an insurance policy in cases where a mortgagee has only a limited interest in the insured property.

In Secure Funding Pty Ltd v Insurance Australia Limited [2010] FCA 1094, the mortgagee's interest in the insured property was noted in the insurance policy as a credit provider/first mortgagee. One of the insureds deliberately set fire to the insured property and the property was extensively damaged as a result. The mortgagee made a claim under the insurance policy which the insurer rejected, relying on an exclusion clause contained in the policy. The court held that the policy terms clearly excluded liability in circumstances where the insured's deliberate acts caused the damage and accordingly, the policy did not indemnify the mortgagee .

The court also noted that is is possible for a person with a limited interest (such as a mortgagee) to take out their own policy to avoid difficulty with insurance should the mortgagor (or someone with temporary carriage of an asset) be tempted to destroy the property.

This case highlights that, in certain cases, it may be prudent for mortgagees or other persons who possess only a limited interest in an insured property to obtain independent insurance to avoid refusal of a claim under an insurance policy because of the actions of the mortgagor.

Factors indicating insolvency and proximate insolvency

The factors contained in ASIC Information Sheet 42 - Insolvency: a guide for directors have been cited in a recent decision of the Federal Court of Australia as commonsense indicators of insolvency, though they are not to be taken as exhaustive or prescriptive. The court's decision also demonstrates that evidence of capital injections is not capable of proving insolvency, though it can go to proving proximity to insolvency.

Morris v Danoz Directions Pty Ltd (in Liq) (No 2) [2010] FCA 836 dealt with the admissibility of an expert report that utilised certain indicia to demonstrate a company's proximity to insolvency. The court excluded two paragraphs of the report on the basis that they contained inferences for which the expert had insufficient expertise. However, the court admitted the remainder of the report, even where it displayed a focus on some insolvency indicators over others. The court held that availability of shareholder loans, whilst not capable of proving insolvency, may be considered as an indicator of proximate insolvency.

Setting aside statutory demands after expiry of period for compliance

A recent decision of the Victorian Court of Appeal demonstrates that, where a judge is acting on a mistaken assumption as to the effect of his/her orders not to set aside a statutory demand, a debtor may be permitted to proceed with an appeal of that decision even though the (extended) time for compliance with the demand has expired and no application is on foot to extend that period.

VFS Group Pty Ltd v BM2008 Pty Ltd (in liq); Perth Freight Lines Pty Ltd v BM2008 Pty Ltd (in liq) [2010] VSCA 277 considered an appeal by two companies to set aside statutory demands served on them in circumstances where the period for compliance had already expired.

The Court of Appeal found that the judge at first instance had acted within the inherent jurisdiction of the court when he 'corrected' the orders he made earlier dismissing the companies' application to set aside the statutory demands. The effect of this 'correction' was to extend the period for compliance with the demands, thus allowing the companies' substantive appeal of the decision not to set aside the statutory demands to proceed.