Insurance and insolvency - when insurers hit hard times

On 18 July 2012, Partners John Morgan and Michael Quinlan presented at an Allens' monthly Corporate Insolvency and Restructuring forum in our Sydney office on the topic Insurance and Insolvency.

The slides used in the presentation are available from the Allens website.

Winding up in insolvency due to tax debt - can the existence of the tax debt be challenged to rebut insolvency?

The Federal Court of Australia has delivered a decision which dealt with a court ordered winding up of a company due to its insolvency as evidenced by debts owed to the Australian Taxation Office. The company conceded that it could not pay the tax debt but argued that there was a 'reasonably arguable case' against the debt and, thus, the court should either reject or adjourn the winding up application so that they could challenge the debt.

Murphy J, in Deputy Commissioner of Taxation v Compumark Pty Ltd [2012] FCA 583, held that regardless of whether or not there was a 'reasonably arguable case' against the tax debt, the company was insolvent and should be wound up.

The main implication of this case is that, regardless of the existence of a 'reasonably arguable case' against a debt, if the company is otherwise presumed insolvent the court will order a winding up.

Interaction between a bank and the receivers - is the bank an interference?

The Victorian Supreme Court has delivered a judgment which considered whether the plaintiff bank had interfered with the conduct of a receivership. In Bank of Western Australia Ltd v Abdul & Anor [2012] VSC 222, Croft J dealt with a plaintiff bank's attempt to enforce guarantees provided in respect of facility agreements against the defendants. One question before the court was whether the plaintiff had directed the exercise of the powers of the receivers and managers appointed by it to the companies in default, or interfered with their conduct in the realisation of the assets of those companies, in a manner that displaced the agency relationship between the receivers and managers and those companies, or otherwise rendered the plaintiff liable for the conduct of the receivers and managers.

The court answered this question in the negative, holding that there was no evidence that the plaintiff had been heavily involved in the performance of the receivers' duties. (As an aside, the court held that it would be unconscionable for the plaintiff bank to seek enforcement of the guarantees or facility agreement against the the wife [the second defendant] who, having signed the guarantees and facility, had not understood the purport and effect of the transactions).

The case emphasises the principles relating to the degree of communication and interaction between a receiver and mortgagee as being dependant on the nature of the secured property and the relative complexity of the receivership task. The decision emphasises that communication between the receiver and a secured creditor is entirely proper and will not lead to displacement of the agency relationship unless it goes beyond mere consultation or the communication of preferences by the secured creditor.

Effect of agreement to grant director/creditor further security upon request

The New South Wales Court of Appeal has considered whether an agreement to grant further security to a creditor upon request created an equitable mortgage or charge, such that a payment to that creditor / director was in respect of a secured debt and therefore not a voidable unfair preference.

Chief Justice Bathurst (Beazley JA and Tobias AJA agreeing), in Roberts v Investwell Pty Ltd (In liq) [2012] NSWCA 134, held that an agreement to create a mortgage or charge in favour of a creditor upon request will only create an equitable mortgage or charge if it confers an immediate equitable interest in particular property, or grants an immediate right of recourse to present or future property.

This case demonstrates that a contractual right to request further security does not generally create an equitable mortgage or equitable charge, and accordingly payments to creditors who have the benefit of such provisions but have not requested the creation of further security may be recovered in insolvency as voidable unfair preferences.

Phoenixing activity expected to cost Australia billions

A report released by accounting firm PricewaterhouseCoopers has highlighted that the sharp rise in 'phoenixing' - the evasion of tax, employee entitlements etc. through deliberate liquidation of related corporate trading entities - is estimated to cost Australia between $1.78 billion and $3.19 billion per annum.

The report was commissioned by the Fair Work Ombudsman.

ASIC insolvency statistics for May 2012 - another bad month for Australian corporations

The news hasn't got much better for Australian corporations, with 1318 insolvency appointments across Australia in May 2012, according to data recently released by ASIC.

This follows on from our blog post on 22 June 2012 which highlighted that April 2012 was the worst April on record in terms of insolvency appointments in Australia.

The May 2012 figure represents an increase of 9 per cent on May 2011 (1207 insolvency appointments).

Is there a presumption against winding up a solvent company?

The Full Court of the Federal Court of Australia has delivered a decision which dealt with an appeal against a winding up order pursuant to s233 of the Corporations Act 2001 (Cth) of Bonyton Metals Group Pty Ltd (BMG) where the trial judge found BMG's conduct to be oppressive and commercially unfair to Ample Source International Limited.

In Hillam v Ample Source International Limited (No 2) [2012] FCAFC 73, BMG, on appeal, asserted that the winding up order was not justified and that there was a general principle which the trial judge failed to observe, that a solvent company should not be wound up by court order except in extreme circumstances.

Emmett, Jacobson and Buchanan JJ held that the appeal was to be dismissed and held that the order of the trial judge to wind up BMG was the appropriate relief in the circumstances. Although their Honours acknowledged that an order to wind up a solvent company is an extreme step, they asserted it is not a principle or assumption that such a winding up is inappropriate. The real question is whether a winding up order is appropriate to deal with and address the grounds for relief and that answer is only found in the facts of a particular case.

Practitioners should be aware there is no presumption against winding up a solvent company.

Validity of administrator's appointment under the Corporations Act

The New South Wales Supreme Court has delivered an important decision which dealt with the validity of the appointment of an administrator where the composition of a club's board was inconsistent with the club's Articles of Association.

Black J, in Dolores Correa and The Spanish Club Limited (subject to Deed of Company Arrangement) v Kenneth Michael Whittingham (No 3) [2012] NSWSC 526, held that although the Board lacked the minimum number of directors required under its Articles, the administrator could rely upon ss 128-129 of the Corporations Act 2001 in relation to the club's actions to appoint him, as the administrator did not suspect or know that the appointment did not comply with the club's articles. The Judge also considered that the appointment was valid from when consent was given by the administrator, even though this was after the date when the instrument of appointment was executed.

The Judge was of the view that given the factors that may have indicated to the administrator that he had not been validly appointed, it may have been prudent for the administrator to undertake further enquiries to determine that the Board was properly constituted and that his appointment was valid. However, those factors and the administrator's failure to undertake further enquiries did not restrict the administrator from relying on ss 128-129 of the Corporations Act. The case is also an example of a court finding that it is acceptable to provide consent to an appointment after the appointment instrument is executed.