Priority payments for employees in winding-up

The New South Wales Court of Appeal recently considered the application of the section of the Corporations Act (s556) relating to the priority of employee entitlement payments: Sturesteps v HIH Overseas Holdings Ltd (in liquidation) [2011] NSWCA 315

Under that section, an employee's retrenchment payment is prioritised over all other unsecured debts. However, the retrenchment payment is not to include any amount attributable to days where the employee had been a director in the last 12 months before the date of winding-up. The court held that the determination of entitlement to priority payment depended on the proportion of days that the person had been a director or non-director in the last 12 months, not on the position of the person at the time of winding-up.

The relevant employee in this case had been a director during the last 12 months prior to winding-up, then had resigned as director and become an employee. His entitlement to priority payment was therefore apportioned relative to the amount of time he had spent as a non-director in the last 12 months. The fact that the employee was an 'employee' and not a 'director' at the time of winding-up was not determinative.

PPS to commence operation on 30 January 2012

The personal property securities (PPS) system will commence operation in Australia on 30 January 2012.

This week the Attorney-General made a determination setting the 'registration commencement date' and the 'migration date' under the PPS legislation. The registration commencement date (30 January 2012) is the date upon which the PPS system will commence operation. The Attorney-General also determined that 21 November 2011 would be the 'migration date' on which the records of security interests recorded on various existing state and federal registers would begin to be transferred onto the new centralised PPS Register.

Previously there had been concerns that the IT systems necessary to support the operation of the PPS Register would not be ready in time. In response to these concerns, the government introduced a Bill to Parliament, which was also passed this week, which enables the Attorney-General to set a commencement date after 30 January 2012 in the event that further testing of the PPS Register is required.

Liquidators prudent in seeking court approval to enter litigation funding agreement

The Federal Court has recently determined that, in circumstances where a liquidator has received committee of inspection approval to enter into a litigation funding agreement by a slim margin which required the liquidator to exercise a casting vote, it is a 'prudent and proper course of action' to seek court approval for entering the funding agreement.

In Walker and Moloney, in the matter of ZYX Developmental Learning Centres Pty Limited (in liq) (Receivers and Managers Appointed) [2011] FCA 1110, the liquidators of ZYX Developmental Learning Centres applied to the court under section 511 of the Corporations Act 2001 (Cth) for orders that the liquidators were justified in entering into a litigation funding agreement and seeking court approval under s477(2B) for them to enter into the agreement (it being an agreement of more than three months duration).

Although two meetings of the committee of inspection had been held seeking approval to enter into the litigation funding agreement, approval was not obtained at the first meeting and it was only obtained at the second meeting because a liquidator exercised his casting vote as chairman. The liquidators took the view that they should not place reliance on any such approval and instead should seek approval of the court for entry into the funding agreement. The court considered that to be a prudent and proper course of action for the liquidators to take in the circumstances. The liquidators gave evidence about the proposed claim and the terms of the funding agreement. The court gave approval under s477(2B) for the liquidators to enter into the funding agreement and also made a declaration under s511 that they were justified in doing so.

Rubin v Eurofinance appeal set for hearing in May 2012

The Supreme Court of the United Kingdom has set a date for the hearing of the appeal in the cross-border insolvency case Rubin & anor v Eurofinance & Anor. The appeal will be heard over two days on Tuesday 22 and Wednesday 23 May 2012.

As reported in August last year, the British High Court of Justice Court of Appeal held in Rubin and Lan (Joint Receivers and Managers of The Consumers Trust) v Eurofinance SA and others [2010] EWCA Civ 895 that a foreign proceeding to recover money from debtors could be recognised and enforced under the UNCITRAL Model Law on Cross-Border Insolvency. This was despite the fact that the foreign proceeding was technically distinct from the primary, collective insolvency proceedings.

Insolvency appointments on the rise

Data released by ASIC this week shows a strong rise in the number of companies entering external administration during the July-September 2011 quarter.

Overall, the number of insolvency appointments was up 11.5 per cent compared to the previous quarter and increased 18.5 per cent compared to the same quarter last financial year. ASIC's data shows that this increase was primarily due to large numbers of creditor-initiated court liquidations and receivership appointments.

Alleged undocumented transactions held to be a 'contrivance'

A recent Federal Court case concerned the liquidator of Bellpac Pty Ltd contesting the beneficial ownership of convertible bonds issued in relation to a transaction between Bellpac and several other entities. In Warner v Hung, re Bellpac Pty Ltd (Receivers and Managers Appointed) (In Liquidation) [2011] FCA 1123, Ken Hung claimed to be entitled to a beneficial interest in $2 million of convertible bonds by reason of an alleged series of undocumented transactions involving at least five intermediaries.

The court held that Hung did not acquire a beneficial interest in the convertible bonds and, accordingly, granted a declaration that Bellpac was the true owner of the bonds. The court reached its decision due to the defendant's inability to provide the court with any documentary proof evidencing the transactions. The court considered that the alleged transactions were 'no more than a contrivance pieced together in an attempt to justify a transfer of property... after Bellpac had gone into liquidation.'

Varying or setting aside a statutory demand due to unconscionability

The NSW Supreme Court has recently considered an application to set aside or vary a statutory demand on the basis of unconscionability. In re Eastmark Holdings Pty Ltd [2011] NSWSC 1084, the registered owner of 45 lots in a strata scheme development in North Sydney was engaged in an ongoing argument about the payment of outstanding levies to the owners corporation. The owners corporation issued a statutory demand for payment of the outstanding levies.

The court found that there was a genuine dispute between the parties regarding the amount of the debt and ordered that the amount demanded be varied. A genuine dispute arises where the debtor raises a 'plausible contention' which requires further investigation. However, the court was not willing to set aside the statutory demand in this case because the unconscionable conduct pleaded in this case did not directly relate to the statutory demand for outstanding levies - rather it related to proposed special levies being considered by the owners corporation.

This case summarises the court's position on the circumstances in which it will set aside a statutory demand on the basis of unconscionability. Importantly, when the unconscionable conduct does not relate to the matters raised in the demand, it is unlikely that the court will exercise its power to set aside the demand.

Please explain: PPS Bill referred to Senate Committee

The House of Representatives passed the Personal Property Securities (Registration Commencement) Bill 2011 on 2 November 2011.

The Bill was introduced to the Senate on 3 November 2011 where it was referred to the Legal and Constitutional Affairs Committee to ‘identify reasons for delay in the implementation of the register and likely timetable for implementation’. The Committee is due to report its findings to the Senate by 21 November 2011.

As previously reported, in October, the Attorney-General introduced the Bill which would allow the PPS system to commence at a date to be determined by the Attorney-General (which could be after 1 February 2012 if further testing of the PPS Register is required).

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

Economic reality and meaning of 'on behalf of' considered in compensation claim

A recent Queensland Court of Appeal decision has considered a claim for compensation under the National Guarantee Fund in connection with the collapse of Opes Prime. The decision demonstrates that courts will look beyond the terms of an agreement to consider the 'economic reality' of the transaction when determining the nature of a transaction. In addition, in relation to claims under the National Guarantee Fund, a broad meaning will be given to the phrase 'on behalf of' as contained in the Corporations Regulations.

In Securities Exchange Guarantee Corporation Ltd v Samuel Holdings Pty Ltd [2011] QCA 228, a holder of a margin lending account with Opes Prime claimed compensation in respect of money which remained in the account at the time Opes Prime became insolvent. The court held that the account holder was entitled to compensation under the Fund because Opes Prime had received the money in the course of its securities business as demonstrated by the 'economic reality' of the transaction. The court also held that Opes Prime was holding the money 'on behalf of' the account holder at the time of its insolvency. The phrase 'on behalf of' was given a broad meaning such that it would 'extend to all situations in which a dealer receives property from a client which the dealer is not entitled to apply for its own purposes'.

Retrospective validation of defective appointment of administrators

A recent decision of the Victorian Court of Appeal highlights that the court has broad powers under s447A of the Corporations Act to retrospectively validate a defective appointment of administrators, possibly even where such retrospective validation may adversely affect accrued rights of other creditors.

In National Australia Bank Ltd and Anor v Horne and Vrsecky (as administrators of Australian Property Custodian Holdings Ltd) (Administrators Appointed) (Receivers and Managers Appointed) [2011] VSCA 280, the court considered its power to retrospectively validate an invalid appointment of administrators under s447A, which permits the court to make such orders 'as it thinks appropriate about how [Part 5.3A of the Corporations Act] is to operate in relation to a particular company'.

The initial appointment of the administrators to the company had been made on the basis of s 436C, under which a person entitled to enforce a charge may appoint an administrator provided that the charge secures the whole, or substantially the whole, of a company's property. The charge in this case only extended to 68 per cent of the company's assets. This was not 'substantially the whole' of the company's property and the appointment of administrators pursuant to s436C was therefore invalid. The trial judge ordered that the purported appointment of administrators be validated under s447A and this decision was affirmed by the Victorian Court of Appeal, although on a different basis to the trial judge. In reaching its decision, the court intimated that s447A could validate an appointment notwithstanding the fact that accrued rights of other creditors might be adversely affected.

This decision highlights that the court's powers under s447A are broad and will be used flexibly by the courts with a view to achieving the objectives of Part 5.3A.