InSolvency. Insolvency & Reconstruction Bulletin. March 2014 Issue No 2

Transcription

1 InSolvency Insolvency & Reconstruction Bulletin March 2014 Issue No 2

2 > Contents Welcome to another edition of the Insolvency and Reconstruction Team s Bulletin. We ve had a busy start to the year, seeing a rise in bankruptcies as well as unfair preference recovery actions by liquidators. Stay tuned for our future editions to find out the outcome of the interesting cases in these areas which we are currently working on. Suspending Payment of Debts - When is it an Act of Bankruptcy?...Page 3 Preference Payments - Third Party Payments and Letters of Credit...Page 4 PPSA Battles Over Fixtures and Fittings...Page 6 In this edition, we cover some tricky insolvency issues arising out of the application of the Personal Property and Securities Act 2009, complex preference payment disputes involving third parties and letters of credit and an analysis of when suspending payment of debts is an act of bankruptcy.

3 InSolvency Insolvency & Reconstruction Bulletin > Suspending Payment of Debts - When is it an Act of Bankruptcy? > Under the Bankruptcy Act 1966 (Act), a creditor may present a creditor s petition where a debtor has committed an act of bankruptcy and at the time when the act of bankruptcy was committed, the debtor: 1. was personally present or ordinarily resident in Australia; 2. had a dwelling-house or place of business in Australia; 3. was carrying on business in Australia, either personally or by means of an agent or manager; or 4. was a member of a firm or partnership carrying on business in Australia by means of a partner or partners or of an agent or manager; Despite the fact that section 40 of the Act contains 21 acts of bankruptcy, the most common act of bankruptcy relied upon by creditors is the expiry of a bankruptcy notice served upon a debtor. However, in order for a creditor to apply to an Official Receiver to issue a bankruptcy notice on the debtor, the creditor must have a final judgment or order for an amount of at least $5,000 or two or more judgments which total $5,000. In recent times, we have seen a rise in creditors relying upon an act of bankruptcy referred to in section 40(1)(h) of the Act. This section states that if the debtor gives notice to any of his or her creditors that he or she has suspended or that he or she is about to suspend payment of his or her debts, this gives rise to an act of bankruptcy. In order to establish that the debtor has committed this act of bankruptcy, the creditor must establish: 1. the debtor has shown that he or she intends to refuse to pay all his or her debts as they become due; and 2. the debtor has communicated that intention to one of the creditors. While these two elements seem to be relatively straight forward, the cases which consider the application of section 40(1)(h) demonstrate that this act of bankruptcy may not be so simple to prove. In the 2001 case of Conn v Hanks, the debtor stated to the creditor Look mate, you know my wife and I have lost a bundle on this business. We have no money to pay anyone, not you or anyone else, and we can t see when we ll have it in the future. We owe money all over the place and if anyone pushes us, they ll get nothing. Phipps FM held that this fulfilled the elements of section 40(1)(h) and satisfied the requirement of this ground of bankruptcy. More recently, in the 2009 case of Lawry v Mitrou, Riley FM considered the principle articulated by Lord Robertson in the old English case of Clough v Samuel. Riley FM considered that a debtor does not form an intention to suspend payment of all of his debts in circumstances where a debtor may put off the evil day and stagger on, leaving the stoppage of his career to be brought about by the action of others. The Court held that because the debtor was silent about his other creditors (in that he did not say whether he intended to meet their debts or not), he did not form an intention to suspend payment of all of his debts. This case suggests that in order to establish that the debtor formed an intention to suspend payment of all debts, there must be a clear communication that the debtor intended not to pay all other creditors (silence is not sufficient). Rigby Cooke Lawyers - InSolvency 3

4 > Preference Payments - Third Party Payments and Letters of Credit > Under the provisions of the Corporations Act 2001 (Act), when a company is placed into liquidation, the liquidators of a company may assess all transactions made by the company in the relation back period (being the period 6 months before the date the company went into liquidation) and deem a payment a voidable transaction. Recently, we acted for a client which supplied goods to a company that subsequently went into liquidation. The liquidators of the company commenced proceedings against our client seeking to claw back a number of payments made by the company to our client during the relation back period. The question at the centre of the proceedings was whether payments that are secured by third party (financial institution) letters of credit can be deemed to be unfair preference payments made by a company to a creditor. Our client had been supplying goods to the company pursuant to a letter of credit arrangement whereby the company provided our client with a purchase order, the company arranged for their bank to provide an irrevocable letter of credit to our client to cover the costs of the goods the subject of the purchase order and upon receipt of the irrevocable letter of credit, our client supplied and shipped the goods to the company. In other words, the payments our client received were not made by the company but were made by a third party, being the bank (subject to the irrevocable letter of credit). The question at the centre of the proceedings was whether payments that are secured by third party (financial institution) letters of credit can be deemed to be unfair preference payments made by a company to a creditor. The concept of whether third party payments are deemed unfair preferences has been considered in a number of cases including Macks and Emanuel (No. 14) Pty Ltd v Blacklaw & Shadforth Pty Ltd (1997) 147 ALR 281, Burness (as liquidator of Denward Lane Pty Ltd)(In Liq) v Supaproducts Pty Ltd [2009] FCA 893 and more recently in Commissioner of Taxation v Kassem and Secatore [2012] FCAFC 124. In Macks and Emanuel (No. 14) Pty Ltd v Blacklaw & Shadforth Pty Ltd, the debtor contracted the creditor to build a road. The lender provided a secured facility to the debtor to finance the construction. Following a stop order, the creditor sought a number of progress claims from the debtor. There was correspondence from the debtor to the lender acknowledging that the lender was not obliged to make payments to the creditor as a result of the stop order. The lender and creditor then executed a deed under which the debtor directed the lender to pay the amount of the first progress claim to the creditor. The full Federal Court held that because the debtor had to authorise a third party payment to discharge the debt, the debtor would always be a party to that discharge and accordingly, this constituted a transaction for the purposes of the Act and therefore caught under the unfair preference regime. However, when payment occurs via a letter of credit arrangement, this arrangement can be distinguished from the Macks and Emanuel (No. 14) Pty Ltd case as payment occurs by the bank without any further act of the debtor as the payment is actually made by the bank to the creditor. In Burness (as liquidator of Denward Lane Pty Ltd)(In Liq) v Supaproducts Pty Ltd, the debtor 4 Rigby Cooke Lawyers - InSolvency

5 InSolvency Insolvency & Reconstruction Bulletin > Preference Payments - Third Party Payments and Letters of Credit (continued) > and creditor had a business relationship for the purpose of purchasing building materials. A director of the debtor told the creditor that his father (who was also a director of the debtor) would be retiring and asked that the debtor s existing account be transferred to another company of which he was also a director. The creditor transferred the account to the new company (which paid the debtor s outstanding debt). Justice Gordon stated that the third party payment should be set aside as an unfair preference as it was sufficient on the facts that the debtor had authorised the payment despite the absence of any proof that the third party payment had been funded by the debtor or had resulted in diminution of the debtor s assets. The Court however accepted that the creditor had proved the good faith defence on the basis that a reasonable person in those circumstances would have had no grounds to suspect insolvency and that it had no reason to suspect the debtor was insolvent. In the recent case of Commissioner of Taxation v Kassem and Secatore, the Federal Court considered whether payments made by a third party, Antqip Pty Ltd (Antqip) on behalf of Mortlake Hire Pty Ltd (in liquidation) (Mortlake) could be deemed preference payments. Antqip was a related company to Mortlake as both companies had the same sole director and shareholder. The Federal Court held that based on the evidence, the payment by Antqip to the Commissioner of Taxation was made to the Commissioner on Mortlake s direction and the payments gave the Commissioner a preference over other creditors because he obtained full payment of the debt whereas other unsecured creditors were left to prove in the winding up. The payments were therefore a transaction for the purposes of the unfair preference regime under the Act. The above cases demonstrate that even if there does not appear to be a debtor/creditor relationship between the parties by virtue of a letter of credit arrangement, if the payments require the authorisation of the company, this satisfies the requirement that the company and the creditor are parties to the transaction. However, when a creditor does not have a direct relationship with the company but rather has the direct relationship with the bank, it would be difficult for a liquidator to rebut the creditor s good faith defence. The argument being that in those circumstances, a reasonable person would not have suspected that the company was insolvent and that he/she could not have reasonably suspected as such. Rigby Cooke Lawyers - InSolvency 5

6 > PPSA Battles Over Fixtures and Fittings > In the recent case of Re Cancer Care Institute of Australia Pty Ltd (Administrator Appointed) [2013] NSWSC 37, Black J held that the granting of a security interest in personal property pursuant to the Personal Property Securities Act 2009 (Cth) (PPSA) is a factor which supports the classification of the goods as personal property rather than a fixture. The granting of a security interest in personal property provides evidence that a person bringing an item onto the land objectively intended that it remain personal property (and not become a fixture). Brief summary of the facts The company in administration, Cancer Care Institute of Australia Pty Ltd (administrator appointed) (CCIA), purchased medical equipment from a supplier, Varian Medical Systems Australasia Pty Ltd (Varian), subject to a registered purchase by CCIA to Varian in respect of the equipment. The equipment was installed by Varian in premises leased by Cortez Enterprises Pty Ltd (Cortez) to CCIA. Cortez and CCIA had common directors. Cortez argued that the expensive equipment had become part of the land (owned by Cortez). Did the equipment become a fixture? Whether the equipment was a fixture or personal property depended on the objective intention of CCIA in bringing the equipment onto the land. The court determined this intention by reference to: 1. the degree of affixation of the equipment to the land; and 2. the purpose of that affixation. More likely to be a fixture (part of the land) If the equipment is actually fixed to the land then it is a fixture unless proved to the contrary. Degree of affixation The building on the land would need to be demolished to remove the equipment, or the equipment could be ruined if it was removed. Purpose of affixation The owner of the land and the equipment are the same, so an intention to improve the land is easier to discern. The equipment is installed on the land for the better enjoyment of the land (e.g. to promote the use of the land for brick manufacturing). More likely to be personal property (separate to the land) If the equipment is kept in position by its own weight, then it is not a fixture unless proved to the contrary. Degree of affixation The equipment could be removed without substantial damage to the building and any damage could be repaired without substantial expense. Purpose of affixation The owner of the land and the equipment are different, and a tenant is unlikely to intend to make a present of the item to the landlord. The equipment is installed for the better use of the equipment (e.g. to hold it steady whilst the equipment is in operation). 6 Rigby Cooke Lawyers - InSolvency

7 InSolvency Insolvency & Reconstruction Bulletin > PPSA Battles Over Fixtures and Fittings (continued) > The Decision Black J found that the complex medical equipment was distinct from the base frame upon which it rested because they had separate and independent viability. The base frame was recessed and cemented into the concrete slab of the premises, was separately installed and was often left in place when the medical equipment was moved from place to place. On the other hand, Black J found that the medical equipment was not a fixture for the following reasons: CCIA would have known that this expensive equipment was capable of being moved from place to place; CCIA was a tenant at will and it was unlikely that CCIA objectively intended that the equipment costing approximately $9 million would become the property of Cortez; the removal costs were not substantial; and CCIA had purchased the equipment on credit and granted a security interest in it. This case provides some practical guidance to insolvency practitioners seeking to determine the status of the goods left on premises when a tenant goes into external administration and consequently, which goods will vest in the external administrator, the landlord or the party with a registered interest under the PPSA. Rigby Cooke Lawyers - InSolvency 7

8 Our Team Radhika Kanhai / Special Counsel T rkanhai@rigbycooke.com.au Ben Wyatt / Partner T bwyatt@rigbycooke.com.au Nicola Chow / Lawyer T nchow@rigbycooke.com.au Level 11, 360 Elizabeth Street Melbourne Victoria 3000 T F To unsubscribe from this publication If you do not wish to receive publications of this type from us in the future, please notify us by sending an to: marketing@rigbycooke.com.au Your request to remove you as a subscriber should include the word unsubscribe and your full address to allow us to correctly identify your removal fromour lists. Reprinting articles Articles in this publication may be reproduced in whole or in part, provided that appropriate recognition is given to the author and the firm, and prior approval is obtained. To obtain approval, please contact Rigby Cooke on or marketing@rigbycooke.com.au. Rigby Cooke Lawyers 2014