Extent of bare trustee's right to protect trust assets

In the case of Bruton Holdings Pty Limited (in liq) v Commissioner of Taxation [2011] FCAFC 79, the Federal Court considered a bare trustee's right to indemnification for expenses incurred in litigation commenced to protect trust property.

The court found that challenging the validity of a notice issued by the Commissioner of Taxation was a proper function for Bruton Holdings Pty Limited as a bare trustee: its duties extended to protecting and vindicating the rights attaching to trust property. As such, it was entitled to indemnification from the assets of the trust for costs incurred in pursuing that course.

This decision suggests that a bare trustee has the right of indemnity for its costs of instituting and pursuing litigation, which are essentially defensive in nature, to protect trust assets.

Failure to satisfy condition precedent of extension of loan facility

In ING Bank (Australia) Ltd v Leagrove Pty Ltd & Anor; ING Bank (Australia) Ltd v Stafford & Ors [2011] QCA 131, the Queensland Court of Appeal considered the effect of ING's failure to obtain the securities listed in an agreement to extend a loan facility. The principal issue was whether this failure constituted either non-compliance with a condition precedent and/or breach of an implied term with the result being that the guarantees either did not come into effect at all, or that there were no secured moneys under the mortgages.

The court held that, on the proper construction of the relevant transaction documents and taking into account the parties' intentions, there was no condition precedent or implied term vitiating the efficacy of the mortgages and guarantees. Rather the mortgages and guarantees were held to be validly secured and immediately enforceable by ING.

This decision highlights that the courts will consider and construe relevant loan agreements and guarantees by their terms and the objective intention of the parties, according to normal contractual principles. The case also indicates that a company acting in its capacity as a trustee can validly act as guarantor for the company's own indebtedness, at least whilst acting within the terms of the trust and consistently with its fiduciary duties.

Effect of appointment of receivers and administrators on lessees

The Federal Court's recent decision in Lindholm, in the matter of Munday Group Pty Limited (Receivers and Managers Appointed) (In Liquidation) v Tsourlinis Distributors Pty Ltd [2011] FCA 195 considered the effect of the appointment of receivers and administrators on a commercial lease in circumstances where the landlord sought to terminate the lease relying on the appointment as a ground of termination. The court considered whether relief against forfeiture can be granted in circumstances where the lessee is in default under the terms of the lease following the appointment of receivers and administrators.

The court found that for relief against forfeiture to be granted, the lessee must show, in the face of the lessor's right to terminate the lease, that it is necessary for the court to intervene to avoid the effects of unconscionable or conscientiousness conduct by the landlord in setting up the termination. If the breach can be remedied or made good by the payment of compensation, as it was in this case, relief against forfeiture is appropriate.

This case highlights that the appointment of receivers and administrators to a lessee will not always amount to a breach of lease which cannot be remedied. Lessors should exercise care when seeking to terminate a lease following appointments of external administrators to a lessee. Careful consideration should be given as to whether the payment of damages would be sufficient compensation in each set of circumstances.

Court approves a creditors' trust

The NSW Supreme Court has recently considered whether administrators would be justified in recommending that creditors approve a Deed of Company Arrangement (DOCA) and associated creditors' trust in the case of Re Bevillesta Pty Ltd (in voluntary administration) [2011] NSWSC 417.

The company, Bevillesta Pty Ltd, was the registered proprietor of the land where the Top Ryde Shopping Centre is located. The administrators sought directions from the court in relation to the DOCA and creditors' trust, which proposed to pay out unsecured creditors at or close to 100 cents in the dollar in satisfaction of their claims.

The court held that, despite the proposal of the DOCA and creditors' trust being risky for the creditors (as the creditors would relinquish all rights against the company), and despite ASIC's published objections to the use of such mechanisms by administrators, the fact that the creditors were fully informed by the administrators of the risks involved, and the fact that the creditors stood to receive a substantial return if the proposal was implemented meant that there were sound reasons for presenting the proposal to a meeting of creditors.

This decision highlights that administrators are able to present unusual and potentially risky proposals to creditors, including proposals which provide for a creditors' trust, if the creditors are fully informed of the risks involved in the proposal and the situation is one where the creditors stand little to no chance of otherwise receiving any return in the event of liquidation.

The creditors subsequently voted in favour of the DOCA and creditors' trust at the second creditors' meeting which was held on 8 July. For further information see our Focuson this case.

No adjournment of winding-up application to consider alternative proposal

In the recent case of Look Property Group Pty Ltd v Gateway Developments (Vic) Pty Ltd [2011] VSC 237, the Victorian Supreme Court refused to adjourn a creditor's winding-up application at the request of an administrator. The administrator sought the adjournment to enable creditors to consider a proposed deed of company arrangement (DOCA) but the court considered the terms of the proposal to be so derisory that the DOCA had no prospect of being approved at a meeting of creditors.

The administrators claimed that the DOCA, under which creditors would obtain a return of approximately four cents in the dollar, represented a better outcome for creditors than would occur in a liquidation. Two of the largest creditors submitted to the court that, if the proposal were put to a meeting of creditors, they would use their combined vote to defeat the resolution.

Accordingly, the court found that there was no basis for finding that the adjournment of the winding-up application would result in an acceptable proposal emerging. The court was particularly reluctant to use its discretion to adjourn the application because the proposal did not seek to return the insolvent company to a financially-viable position as a trading entity.

Costs orders against receivers not secured creditors

In the recent case of Owston Nominees No 2 Pty Ltd v Clambake Pty Ltd [2011] WASCA 76, the court considered the situation where a receiver was appointed to the appellant by a secured creditor and the respondents sought an order that the receiver and secured creditor (despite not being parties to the appeal) be made jointly and severally liable for costs.

The court referred to its powers to make costs orders against non-parties and it was held that a costs order would be made against the receiver as the receiver had conduct of the appeal on behalf of the appellant. The court was satisfied that this would fully protect the interests of justice and did not extend the costs order to include the secured creditor. The court noted that this approach was consistent with section 419 of the Corporations Act which holds a receiver (not the secured creditor) liable for debts incurred in the court of the receivership.

No setting aside of statutory demand despite defect in form

The Queensland Court of Appeal in McElligott v Boyce [2011] QCA 117 illustrates that the mere absence of the prescribed warning statement outlining the consequences of non-compliance with a statutory demand is not sufficient reason for the purposes of s459J(2) of the Corporations Act 2001 (Cth) to have that statutory demand set aside.

In this case, it was not disputed that the statutory demand did not contain the warning statement outlining the consequences of non-compliance which is prescribed by the statutory form. The court referred to s459J(2) of the Corporations Act which states that a statutory demand must not be set aside owing merely to a defect in its form, unless that defect will cause substantial injustice. In this case, no substantial injustice was caused.

Buzzle to remain good law

The case of Buzzle v Apple was good news for lenders, indicating that they do not become shadow directors merely by virtue of placing conditions on their continued support of debtors in financial strife.

The judgement struck a commercially sensible balance between the interests of borrowers and lenders. That balance allows lenders to protect their financial interests when dealing with financially insecure debtors without then being forced to assume general liability for the acts of the debtor company.

The period for applying for special leave to appeal the decision to the High Court has now lapsed and no application has been made. The result is that the case remains good law in NSW courts and that it is likely to be followed in other courts.

For more information on this important case, see the article by Partner Michael Quinlan and Lawyer Amy Spira in this month's Law Society Journal or see our Focus article.

High Court confirms strength of statutory presumption of insolvency

A recent decision of the High Court of Australia confirms that where a company is subject to a statutory presumption of insolvency for the purposes of a winding up application, the company is required to prove to the contrary of the presumption - the fact that the debtor company disputes the amount of a debt will be unlikely to be sufficient to support a stay or dismissal of the winding up proceedings.

Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (Receivers and Managers Appointed) [2011] HCA 18 dealt with an appeal by ASIC against a decision of the Full Court of the Federal Court staying winding-up proceedings until potential proceedings to determine the amount of a debt owed by a debtor company had been determined.

The High Court allowed the appeal and held that the current statutory scheme provides no basis for an assumption in favour of a dismissal or stay of winding-up proceedings where a debtor company disputes the existence or amount of a debt.

The presumption in this case arose under section 459C(2)(c) of the Corporations Act, which provides that the court must presume that a company is insolvent if, within the three months before the application, a receiver and manager was appointed to property of the company under a power contained in an instrument relating to a floating charge on the property. In similar circumstances, if the appointment of receivers is founded upon a disputed debt, it would seem prudent for the debtor company to challenge the appointment before winding-up proceedings are commenced.

ASIC reports: Corporate insolvencies on the rise

Official figures released by ASIC today show that corporate insolvencies have risen 4.4 per cent across Australia in the 2010-2011 financial year.

ASIC says the figures show that, Australia-wide, the number of court liquidations and director initiated creditors voluntary liquidations have risen, but that the number of receivership and voluntary administration appointments have fallen.

ASIC's press release, which also provides a breakdown of the figures by state and by appointment type is available on its website.

De facto directors - power to appoint administrators?

Are de facto directors able to pass a resolution under section 436A of the Corporations Act appointing an administrator? According to a recent Victorian Supreme Court decision, the answer is no.

In Xie v Crisp & Ors [2011] VSC 154, the court found that although de facto directors fall within the definition of 'director' under s9 of the Act, the power to appoint administrators to a company under s436A of the Act may only be exercised by formally appointed directors. Nevertheless, the court in this case exercised its discretion under s447A of the Act to validate the administrator's appointment.

This case serves as a reminder to insolvency practitioners that they should not only consult the ASIC register, but also conduct reasonable additional inquiries to confirm that a company's directors have the requisite authority prior to accepting an appointment.

The existence of a genuine dispute - setting aside a statutory demand

The New South Wales Court of Appeal recently dealt with an application for leave to appeal from a decision to set aside a statutory demand under section 459H of the Corporations Act on the ground that the primary judge had not sufficiently enquired into whether there was a genuine dispute as to the existence of the debt: Jamal Charara v Integrex Pty Ltd [2011] NSWCA 113.

The court confirmed that in determining whether there is a genuine dispute as to the existence of a debt claimed in a statutory demand the court will not embark on an extensive enquiry into the relevant facts and will not attempt to weigh the merits of the dispute.

The Centro decision

This week's Federal Court decision in relation to ASIC's case against Centro's directors demonstrates how demanding a director's duties in approving financial statements are. In order to meet those demands, Boards may seek to change the ways in which financial information is presented to them and how they review it.

Read more on the Centro decision in our Focus publication on the case.