Court denies the right to sue MF Global Australia

The Federal Court has recognised MF Global's ongoing insolvency proceedings in the United Kingdom. Under international insolvency law, this recognition means that MF Global's clients and others are barred from commencing legal proceedings in Australia against MF Global's Australian arm following the collapse of its parent last year.

MF Global and its Australian counterpart are currently engaged in negotiations over $34 million of funds currently held by the ASX which belongs to MF Global's clients. Both parties claim that this money belongs to their own clients and the ASX is refusing to release it until the matter is determined. In the event that the negotiations fail, MF Global Australia will need approval from the court to sue its parent company. The parties will reconvene in court next month to argue this point.

ASIC data reveals insolvencies on the rise

The number of corporate insolvencies rose significantly during the 2011 calendar year according to data released by ASIC this month. The number of companies entering into external administrations rose 9.2 per cent compared to the previous calendar year. This was the largest yearly increase in companies entering external administration since the height of the global financial crisis in 2008.

Unadjudicated claims not admissable to proof under DOCA

A recent decision of the NSW Court of Appeal considered the circumstances under which a person who has an unadjudicated claim against a company (here, an employee of the company who alleged her employment contract should be varied because it was an 'unfair contract' under the Industrial Relations Act) will be held to be a contingent creditor whose claim is admissible to proof under a Deed of Company Arrangement.

In BE Australia WD Pty Ltd (subject to a Deed of Company Arrangement) v Sutton [2011] NSWCA 414 the court held that:

• a person bringing proceedings against a company which subsequently goes into administration is not a creditor of the company for the purposes of the insolvency provisions of the Corporations Act unless the company owed that person a 'relevant obligation' prior to the appointment of administrators (here, the employee had commenced proceedings against the company but there was no relevant legal obligation on the part of the company towards the employee which had arisen prior to the company going into administration); and
• the court had no power under section 447A of the Corporations Act to order that a person who is not a 'creditor' should be treated as though they are one and so be allowed to prove in a DOCA (noting that the court's power under s447A should only be used to support the purposes of Part 5.3A).

As such, the court held that the deed administrators were correct to reject the employee's proof of debt because she was not a 'creditor' for the purposes of the DOCA. An application seeking special leave to appeal to the High Court has been filed.

Costs orders made after administration will not be caught by a DOCA

Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd [2011] NSWSC 1567 dealt with the question of whether a costs order made after a company entered into administration was caught by a deed of company arrangment (DOCA) so as to bind creditors.

The court held that only the making of a costs order itself can constitute the 'circumstances giving rise to the claim' to bind creditors and therefore the costs award was not caught by the DOCA. He also held that a costs order is not a contingent claim which exists prior to the making of the order itself.

This decision is important because it provides a test of general application for what constitutes the 'circumstances giving rise to the claim' and hence when a claim will be caught by a DOCA or provable in a liquidation. It is also authority for the proposition that a costs order made after a company enters into administration will not be caught by a DOCA or provable in a liquidation.

The importance of getting security and charges right

A recent Queensland Supreme Court decision highlights the importance to both banks and practitioners to prepare loan documentation carefully to ensure that appropriate security is taken. In Bank of Western Australia Limited v National Australia Bank Limited [2011] QSC 379, Bankwest and NAB were contesting the application of funds deposited with NAB by a borrower in circumstances where Bankwest held a fixed and floating charge over the borrower's assets. Bankwest alleged that, upon the borrower giving a guarantee to NAB without Bankwest's consent, Bankwest's charge became a fixed charge over these deposits and that NAB was required to account to Bankwest for the funds.

The court dismissed Bankwest's claim. It was held that Bankwest could not place itself in the position of holding a fixed charge over the term deposits prior to the borrower executing the guarantee to NAB, because the crystallisation of its charge occurred as a result of, and contemporaneously with, the execution of the guarantee.

This case highlights some of the difficulties faced by lenders in obtaining effective security. This is particularly so when the security given by the bank includes a fixed and floating charge, and the borrower also has accounts or lending arrangements with other financiers. It is important for the bank to be aware of what contractual rights other financiers have, and if necessary, enter into appropriate documentation to ensure that the security position of the bank is maintained. This is particularly so in relation to contractual rights of set-off, which will not necessarily be defeated by an earlier charge.

No appointment of provisional liquidator where company assets not under threat

The recent case of In the matter of Nugisi Pty Ltd [2011] NSWSC 1512 involved the rejection of an application for the appointment of a provisional liquidator.

This case demonstrates the court's reluctance to appoint a provisional liquidator where the assets of the relevant company are not in jeopardy such that they would require the protection of such an appointment. The court considered that, although there were potential grounds on which an application for a court ordered winding up of the company could succeed, there was no suggestion that there was any imminent threat to the assets of the company. In these circumstances a provisional liquidator should not be appointed.

Proposed amendments to directors' liability laws

On 27 January 2012 the proposed amendments to directors' liability laws were released. This forms the first part of the Council of Australian Governments' (COAG) Directors' Liability reform project. The project aims to integrate the approach to the imposition of laws concerning personal criminal liability for corporate fault across the Australian jurisdictions.

The Commonwealth has assessed its laws against these principles and the Personal Liability for Corporate Fault Reform Bill 2012 proposes amendments accordingly. The Bill is available on the Treasury's website and submissions may be made until 30 March 2012.