Application to set aside statutory demand

In Newsnet Pty Limited v Patching [2011] NSWSC 690, the NSW Supreme Court considered an application to summarily dismiss a plaintiff's application under section 459G of the Corporations Act to set aside a statutory demand.

The court dismissed the defendant's application, holding that there was a real question to be tried that the plaintiff's application was served within the prescribed period and that the supporting affidavit raised a genuine dispute regarding the statutory demand.

The significance of this case is two-fold.

First, the decision highlights that, in interlocutory proceedings, courts will be reluctant to uphold an application to summarily dismiss an application to set aside a statutory demand in circumstances where, on its face, there is a 'real question to be tried' about whether there is a genuine dispute. Second, the decision re-iterates established case law holding that service of an application to set aside a statutory demand may be effected at the address for service stated in the statutory demand, and, depending on the circumstances, service by facsimile may be effective.

Consideration of the expediency of litigation funding required

In Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89, the Federal Court dealt with an application by a non-party for leave to appeal the decision to approve a liquidator's entry into a litigation funding agreement.

The court held that the orders made by the primary judge should be set aside and the proceedings should be remitted for further consideration of whether the entry into, and performance of, the obligations under the litigation funding agreement is necessary for winding up the affairs of the funding party, within the meaning of section 477(2)(m) of the Corporations Act.

This case serves as a reminder that s 477(2)(m) would not support the provision of litigation funding by a liquidator, solely on the prospect of obtaining a return that might be generated by the funding agreement. In order for the agreement to be deemed necessary within the meaning of s 477(2)(m), the agreement must enable the liquidator to do anything expedient in the beneficial pursuit of winding up the affairs of the company and the distribution of its property.

'Good faith' and 'running account' defences

The Supreme Court of South Australia has recently considered the 'good faith' and 'running account' defences contained in the Corporations Act.

In Clifton (as liquidator of Adelaide Fibrous Plasterboard Linings Pty Ltd (in liq)) & Anor v CSR Building Products Pty Ltd [2011] SASC 103, the court held that the defendant had failed to establish the 'good faith' defence. However, the 'running account' defence was established in respect of two of the five payments that the liquidator had sought to impugn as unfair preferences.

The case illustrates that the 'good faith' defence is difficult to prove where any indicators of insolvency exist. However, knowledge or even actual suspicion of insolvency, though it be such to negate the 'good faith' defence, does not of itself preclude reliance upon the 'running account' defence for a payment received. The point at which a running account ceases to exist is when the mutual purpose of inducing further supply is subordinated to a predominant purpose of recovering past indebtedness.

Setting aside statutory demand for 'some other reason' under Corporations Act

The court in Sebastian Builders and Developers Pty Ltd v Floruit Holdings Pty Ltd & Currency Corp Pty Ltd [2011] NSWSC 655 is useful for its references to recent judicial commentary on key issues relating to s459J(1)(b) such as when the court may choose to exercise its discretion to set aside a statutory demand for 'some other reason' and the factors relevant to establishing an abuse of process.
The court referred to the following:

• For an application under s459J(1)(b) to succeed, the court must be convinced there is 'some other reason' to set the statutory demand aside.
• When considering whether to set aside a statutory demand for 'some other reason' the court should be "satisfied that there is an appeal based on reasonable and arguable grounds which, if successful, would result in the existence of an offsetting claim": Eumina Investments Pty Ltd v Westpac Banking Corporation (1998) 84 FCR 454.
• When faced with a challenge to a statutory demand on the basis of an alleged abuse of process, attention should be paid to the objectives properly pursued by service of a statutory demand. A creditor serving a statutory demand aims, first and foremost, to obtain payment of the creditor's debt. The creditor may have a second or subsidiary purpose, which is to obtain the benefit of a presumption of insolvency if the primary purpose of eliciting payment is not achieved and no successful application to have the demand set aside is made. But the principal purpose is to obtain payment. See TS Recoveries Pty Ltd v Sea-Slip Marinas Australia) Pty Ltd [2007] NSWSC 1074.

 

Liquidator's power to sell chose in action: non-assignability clause

A recent NSW Court of Appeal case, Owners of Strata Plan 5290 v CGS & Co Pty Ltd [2011] NSWCA 168, dealt with whether a liquidator can sell a chose in action arising out of a contract containing an express restriction on assignment.

The court held that s477(2)(c) of the Corporations Act does not empower a liquidator to assign a chose in action that arose under a contract containing a non-assignability clause.

This case illustrates that although s477(2)(c) empowers a liquidator to sell 'the property of the company', which includes 'a thing in action', the words of the Act do not override an express agreement to the effect that a property is not assignable.

Arbitrability of insolvency-related claims denied

The Court of Appeal of Singapore recently upheld a High Court decision that insolvency-related avoidance claims are not arbitrable, as they relate to a type of dispute that only the courts can resolve.

Regarding the arbitrability of claims by, or against, an insolvent company, the court drew a distinction between:

• claims that arise only upon the onset of insolvency, due to the operation of the insolvency regime; and
• those that stem from a company's pre-insolvency rights and obligations.

The court considered that insolvency/bankruptcy law is an area replete with public policy considerations that are too important to be settled by parties privately through arbitration. Accordingly, it held that courts should treat disputes arising from the operation of the insolvency regime as non-arbitrable, even if the parties have expressly included them in the scope of the arbitration agreement.

Similarly, a liquidator will not be bound by an arbitration agreement where that agreement affects the rights of other creditors. However, a company in liquidation is able to resolve a dispute by way of arbitration where that dispute arose before the liquidation, and relates to a private dispute between the company and another party.

To read more about this case, go to the Allens website. 

Liquidators can't sell company property subject to non-assignment clause

The NSW Court of Appeal has held that a liquidator's power to sell company property does not extend to the sale or assignment of contractual rights that are subject to a non-assignment clause. This limitation also applies to receivers and voluntary administrators. Partner Michael Quinlan and Law Graduate Stephen Lloyd report.

The importance of exclusion clauses in guarantees

A recent decision of the New South Wales Court of Appeal has reiterated the importance of including a clear and unequivocal exclusion clause in a guarantee that prevents the guarantor discharging its liabilities based on a breach of the creditor's obligations under the guarantee.

Brighton v Australia and New Zealand Banking Group Ltd [2011] NSWCA 152 dealt with the enforceability of a guarantee following the disclosure of confidential information by the creditor in breach of clause 22 of the Code of Banking Practice, which applied to the guarantee.

The court held that the breach of the duty of confidentiality under the Code did not constitute a discharge of the guarantors' liabilities under their respective guarantees to the creditor. While the court affirmed that a strict interpretation of clauses in favour of the guarantor is necessary when construing a guarantee, it was found that an exclusion clause in the guarantee was clear enough to deny the guarantor the right to terminate the guarantee based on the breach by the creditor.

This case serves as a reminder to creditors that:

• special rules of construction apply to guarantees and, specifically, an obligation in the guarantee bearing an ambiguous contractual status will be construed as a condition in favour of the guarantor;
• in light of this rule, the creditor may be required to strictly perform that obligation or the guarantor may be entitled to terminate the guarante; and
• it is therefore important for creditors to ensure that guarantees include a clear and unequivocal exclusion clause that prevents the guarantor discharging its liabilities based on a breach of the creditor's obligations under the guarantee.