Directors disappointed at no change to Australia's insolvent trading laws

At the beginning of 2010, the Australian Goverment announced a Corporate Insolvency Law Reform Package. The package included options for reform of insolvent trading laws, which had the potential to reduce directors' liability for insolvent trading while directors were trying to restructure financially troubled companies.

The proposals for reform, which would reportedly put Australia on a more equal footing with other countries, included the introduction of a business judgment rule defence to directors' liability for insolvent trading and a moratorium from the duty not to trade while insolvent. The proposals were welcomed by businesses for encouraging directors to save distressed companies, and to provide protections to allow them to do what is best in the interests of shareholders and other stakeholders.

It was recently announced that the Government had abandoned the proposed reforms, for the published reason that insufficient evidence had been provided that law reform would save more companies. It was reported that the Australian Institute of Company Directors and the Insolvency Practitioners Association were among those disappointed at the news.

Some legal commentators assert that there is much evidence to support the view that the risk of liability for insolvent trading forces directors to put companies into premature administration. Business groups are reported to be of the opinion that directors often err on the side of caution and appoint administrators rather than run the risk of serious consequences of continuing with trading.

We will report on any further developments as they may arise.

PPS commencement looks set to be deferred

Today the Attorney-General has introduced a Bill to Parliament amending the Personal Property Securities Act 2009 (Cth) to allow the Personal Property Securities (PPS) system to commence at a date to be determined by the Attorney-General.

Currently, the legislation provides for a default commencement date of 1 February 2012. The PPS system was due to commence in October this year, but as previously reported, a need for further testing of the PPS Register has resulted in delays. If Parliament passes the Bill amending the legislation, it will allow the Attorney-General to set a commencement date after 1 February 2012 if it proves necessary.

The Attorney-General's Department has stated that it remains committed to implementing the PPS system as soon as possible, but that complete functionality of the system needs to be ensured.

We will keep you updated about the passage of this Bill and any other PPS developments.

Defence to unfair preference claims - 'reasonable grounds' to suspect insolvency

A recent decision of the Federal Court of Australia has highlighted that to successfully maintain a defence to an unfair preference claim, a creditor must prove on both a subjective and objective basis that the creditor had no grounds for suspecting the insolvency of the company.

Roufeil v Gliderol International Pty Limited [2011] FCA 847 dealt with whether certain payments made by a company (Austech Garage Door Centre Pty Ltd) to a creditor (Gliderol International Pty Ltd) were voidable transactions within the meaning of section 588FE(2) of the Corporations Act.

The court held that the payments in question were an unfair preference as defined in section s588FA(1) of the Act, as Gliderol received more than it otherwise would have received in the winding-up of the company.

Gliderol sought to establish a defence under section 588FG of the Act and argued that at the time it received the payments, it had no reasonable grounds to suspect Austech's insolvency.

The court held that the basis of the Gliderol's defence was insufficient given that:

(a) subjectively, the basis of the credit manager's conclusions about Gliderol's lack of reasonable grounds to suspect Austech's insolvency (the credit manager's review of the files) was insufficient; and

(b) objectively, the history of Gliderol's dealings with Austech presented grounds which would have led a reasonable person in Gliderol's position to suspect Austech's insolvency (e.g Gliderol ceased its commercial relationship with Austech due to Austech's failure to pay any of its invoices since 30 September 2006 and Austech did not satisfy a statutory demand it had issued to Gliderol).

Setback for Tax Office in issuing demands on foreign companies

This week the Federal Court delivered an interlocutory judgment setting aside leave for substituted service of demands made by the Australian Taxation Office on two companies registered in the Cayman Islands and Luxembourg. The ATO claims that the two companies owe approximately $750 million in taxes and penalties in relation to the 2009 Myer float.

In Australia, Part 5.7 of the Corporations Act provides a special regime where a creditor can issue demands on foreign companies and potentially rely on such a company's failure to satisfy the demand as evidence of insolvency in a later attempt to apply to have a foreign company wound up. This regime is only available if the foreign company is carrying on business in Australia or it is a registered foreign company in Australia so that it satisfies the definition of a 'Part 5.7 body'. The ATO obtained ex parte orders allowing substituted service of such demands as a creditor on the two foreign companies : a Cayman Islands' and a Luxembourg company.

In this week's hearing, the companies successfully applied for the orders to be set aside on the grounds that the ATO has not provided any evidence that the companies were Part 5.7 bodies when it obtained the ex parte orders. The Federal Court's decision highlights that it is necessary for a creditor to provide evidence that the foreign company was in fact carrying on business in Australia or that it was a registered foreign company in Australia if it seeks to obtain orders for substituted service of a demand on a foreign company under s585(a) of the Corporations Act.