InSolvency. Insolvency & Reconstruction Bulletin. August 2014 Issue No 3

Transcription

1 InSolvency Insolvency & Reconstruction Bulletin August 2014 Issue No 3

2 Welcome to the Spring edition of our insolvency and reconstruction team bulletin. Mercifully, the weather is warming up and so are the battles in the world of insolvency between liquidators, creditors and directors of companies. In this edition, we consider a number of court decisions on terminating liquidations, setting aside deed of company arrangements and setting aside personal insolvency agreements. We have been involved in a few such cases recently and have found that a recurring theme in these judgments is the Court s willingness to delve deeper into the transactions involving related entities. This is particularly in circumstances where the presence of the related entity has been instrumental in the decision made as to the future of the company or debtor in question. > Contents Are You Related?...Page 3 Terminating a Winding Up - What Will a Court Consider When Exercising This Discretion?...Page 4 Terminating a DoCA - Commercial Morality Under the Microscope...Page 6 Setting Aside Personal Insolvency Agreements - When being too close matters...page 10 We hope you enjoy this edition.

3 InSolvency Insolvency & Reconstruction Bulletin > Are You Related? > The definition of related entity is commonly used in the insolvency context to describe parties to a transaction. Under the Corporations Act 2001 (Cth), the definition of related entity is very wide. It means any of the following: a promoter of the body; a relative of such a promoter; a relative of a spouse of such a promoter; a director or member of the body or of a related body corporate; a relative of such a director or member; a relative of a spouse of such a director or member; a body corporate that is related to the first-mentioned body; a beneficiary under a trust of which the first-mentioned body is or has at any time been a trustee; a relative of such a beneficiary; a relative of a spouse of such a beneficiary; a body corporate one of whose directors is also a director of the first-mentioned body; a trustee of a trust under which a person is a beneficiary, where the person is a related entity of the first-mentioned body because of any other application or applications of this definition. A relative in relation to a person under the Act means the spouse, parent, or remoter lineal ancestor, child or remoter issue, or brother or sister of the person. Cases have provided comment on the importance of related entities. In the case of McDonald v Hanselmann (1998) 28 ACSR 49, Young J said: Where the purchaser is a related entity in the corporate sense or a relation by blood or by law in the individual sense, then the Court should look at the transaction far more closely and be less inclined to excuse the sale at an undervalue because of some commercial factor. The statement by Young J emphasises the notion that a real purpose of the definition is to enable a Court to lift the corporate veil and consider the commerciality of transactions made, particularly where related entities are involved. Rigby Cooke Lawyers - InSolvency 3

4 > Terminating a Winding Up - What Will a Court Consider When Exercising this Discretion? > Pursuant to section 482 of the Corporations Act 2001 (Cth) (Act), at any time during the winding up of a company, the Court may, on application, make an order staying the winding up either indefinitely or for a limited time or terminate the winding up on a day specified in the order. This application may be made by the liquidator, a creditor or contributory of the company or an administrator of a deed of company arrangement. The jurisdiction to terminate a winding up under section 482 is discretionary. There are no statutory criteria prescribed as to how the discretion should be exercised but in the West Australian case of Re Warbler Pty Ltd (1982) 6 ACLR 526, Master Lee QC provided a list of criteria which is of useful guidance and is as follows: (1) The granting of a stay is a discretionary matter, and there is a clear onus on the applicant to make out a positive case for a stay. (2) There must be service of notice of the application for a stay on all creditors and contributories, and proof of this. (3) The nature and extent of the creditors must be shown, and whether or not all debts have been or will be discharged. (4) The attitude of creditors, contributories and the liquidator. (5) The current trading position and general solvency of the company should be demonstrated. Solvency is of significance when a stay of proceedings in the winding-up is sought. Ideally this evidence should be from the liquidator or an independent accountant. (6) If there has been non-compliance by directors with their statutory duties as to the giving of information or furnishing a statement of affairs, a full explanation of the reasons and circumstances should be given. (7) The general background and circumstances which led to the winding-up order should be explained. (8) The nature of the business carried on by the company should be demonstrated, and whether or not the conduct of the company was in any way contrary to commercial morality or the public interest. While these eight points have provided the Courts with a checklist of matters that may be considered when making a decision as to whether a winding 4 Rigby Cooke Lawyers - InSolvency

5 InSolvency Insolvency & Reconstruction Bulletin > Terminating a Winding Up - What Will a Court Consider When Exercising this Discretion? (continued) > up should be terminated, these factors do not limit the matters a Court may take into account. Two common factors that have been referred to in judgments are: (1) the solvency of the company; and (2) whether the company is in a sufficiently strong financial position to prove that it can continue trading without an appreciable risk of reverting to liquidation. In Re Skay Fashions Pty Ltd (1986) 10 ACLR 743, Tadgell J, in considering the merits of an application for the termination of a winding up, stated that the Court will not act simply on the assent of creditors and will have to consider whether the termination of the winding up will be conducive or detrimental to commercial morality and the interests of the public at large. In this regard, it is clear that if a company is wound up in insolvency, it should remain in liquidation unless solvency can be demonstrated. In Metledge (t/a Metledge and Associates) v Barkit Pty Ltd (in liq) [2005] NSWSC 160, Barrett J stated that where the ground for winding up was insolvency, an indispensable part of the applicant s task is to prove solvency. In Stoljar Joinery (Aust) Pty Ltd v Charterarm Investments Pty Ltd (in liq) [2011] VSC 577, Ferguson J held that: How the company has performed in the past is the best indicator of how it is likely to conduct itself in the future. In my view, if all the evidence is considered then there is no doubt that it would be contrary to public interest and contrary to commercial morality to permit the company to resume trading. The Court will not act simply on the assent of creditors and will have to consider whether the termination of the winding up will be conducive or detrimental to commercial morality and the interests of the public at large. Accordingly, the Court will generally not terminate the winding up (and thereby restore control of the company to its shareholders and directors) unless existing creditors debts have been or will be paid and there is clear evidence that the company will have additional financial strength and stability so as to provide confidence that it can continue without an appreciable risk of reverting to liquidation. In the case of Re Lorie Najjar and Sons Pty Ltd (in liquidation) (2013) 94 ACSR 561, Black J reiterated the position that when exercising its discretion under s 482 of the Act, the Court is required to consider the purposes of the Act and specifically the regime for winding up a company. This discretion is not confined by any implied limitations by a checklist of criteria developed by the case law. In this case, while Black J considered the criteria mentioned in the case of Re Warbler Pty Ltd referred to above, ultimately the decision was determined by his Honour s analysis of the transactions underpinning the liquidator s claim that the company was insolvent. This case demonstrates and reiterates that while there is certainly case law outlining guiding criteria for the Court to consider, the Court has a relatively wide discretion to consider whether a winding up of a company should be terminated and the Court may decide to place certain weight on any number of the matters including those outside the checklist of criteria when making the decision to terminate the winding up. Rigby Cooke Lawyers - InSolvency 5

6 > Terminating a DoCA - Commercial Morality Under the Microscope > In a number of recent cases, the Courts have been asked to consider the question of whether a Deed of Company Arrangement (DoCA) entered into by the creditors of a company ought to be set aside (and the company be put into liquidation) or whether a DoCA should be allowed to remain on foot. In this article, we consider the judgments handed down in Promoseven Pty Ltd v Prime Project Development (Cairns) Pty Ltd (Subject to DOCA) & Ors [2013] QCA 405 and the more recent case of DSG Holdings Australia Pty Ltd v Helenic Pty Ltd [2014] NSCWA 96. Relevant sections of the Corporations Act 2001 (Cth) The relevant sections of the Corporations Act 2001 (Cth) (Act) with respect to the Court s ability to terminate a DoCA are set out below. Under Section 445D of the Act, the Court may make an order terminating a DoCA if satisfied that: 1. Information was given to the administrator of the company or to such creditors: a. about the company s business, property, affairs or financial circumstances that was false or misleading; and b. the information can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the DoCA. 2. The information was contained in a report or statement under subsection 439A(4) that accompanied a notice of the meeting at which the resolution was passed; or 3. There was an omission from such a report or statement and the omission can reasonably be expected to have been material to such creditors in so deciding; or 4. There has been a material contravention of the deed by a person bound by the deed; or 5. Effect cannot be given to the deed without injustice or undue delay; or 6. The deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be: a. oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or b. contrary to the interests of the creditors of the company as a whole; or 7. The deed should be terminated for some other reason. In addition, pursuant to section 600A of the Act, the Court has the power to set aside a resolution passed in circumstances where: 1. It would not have been passed if the votes of the related creditors were disregarded; and 2. The passing of the resolution is contrary to the interests of the creditors as a whole or; 3. The passing of the resolution has prejudiced the interests of those creditors who voted against it to the extent that is unreasonable (having regard to the benefits that resulted to the related creditor and the nature of the relationship between the related creditor and the relevant company. Promoseven Pty Ltd v Prime Project Development (Cairns) Pty Ltd - Commercial Morality In the case of Promoseven Pty Ltd v Prime Project Development (Cairns) Pty Ltd (Subject to DOCA) & Ors in the Queensland Court of Appeal, Promoseven Pty Ltd (Promoseven) appealed the decision of the Supreme Court of Queensland to dismiss Promoseven s application to terminate the DoCA entered into by Prime Project Development (Cairns) Pty Ltd (Prime). The Court of Appeal allowed the appeal and ordered that the DoCA be terminated. 6 Rigby Cooke Lawyers - InSolvency

7 InSolvency Insolvency & Reconstruction Bulletin > Terminating a DoCA - Commercial Morality Under the Microscope (continued) > Promoseven alleged that the purpose or the effect of the DoCA was to remove the possibility of an investigation into a number of questionable transactions entered into by Prime which would warrant a liquidator s scrutiny. Despite the Administrators view that the return in liquidation would be less than a return in administration, the Court held that it would be: detrimental to commercial morality to dispense with the opportunity which the winding up law provides for the investigation of the affairs of Prime. On the question of commercial morality, the Court of Appeal referred to the principles outlined in Emanuele v Australian Securities Commission ((1995) 63 FCR 54) in which the Full Court stated that the powers of the Court are discretionary and are to be exercised having regard to both the interests of the creditors as a whole and the public interest. The public interest element includes the question as to whether the granting of the termination would be detrimental to commercial morality. The relevant factors were as follows: 1. The Administrators had identified a potential Rigby Cooke Lawyers - InSolvency 7

8 > Terminating a DoCA - Commercial Morality Under the Microscope (continued) > voidable unreasonable director-related transaction with a related party company known as Refund Pty Ltd (Refund). Refund was a related company of Prime, within the meaning of the Act, in that their directors and shareholders included both Mr Knell and Mrs Knell (who were husband and wife). Mr Knell executed the relevant agreement (Refund Agreement) on behalf of Prime and Mrs Knell executed on behalf of Refund. 2. There was a lack of commerciality in the in the Refund Agreement transaction which warranted the public examination of the affairs of the company. 3. The Refund Agreement was between companies controlled by Mr Knell and Mrs Knell and there was no evidence from either of them to explain the Refund Agreement from a commercial point of view. 4. Master Developers Association Pty Ltd (MDA), the financial sponsor of the DoCA, was a related company of Prime as it was owned and controlled by Mrs Knell. 5. The two largest creditors (two related party companies) offered to stand aside for dividend purposes (but not voting purposes). All of the creditors, except Promoseven and another creditor, voted to accept the proposed DoCA. The behaviour and actions of related party entities were heavily scrutinised, particularly where the related party entity votes were determinative in passing the resolution to enter into the DoCA. The Court of Appeal also relied on the decision of PD McMurdo J in the case of Public Trustee v Octavier [2009] QSC 202 in which his Honour adopted passages from Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235 which outlined that if the below factors are present, they suggest that it would be detrimental to commercial morality to allow a DoCA to proceed: 1. If a director is attempting to avoid public examination about the affairs of a company by making a payment to creditors; 2. If there are circumstances which suggest that investigation is called for; and 3. It appears there may be prospects of preference or uncommercial transaction or insolvent trading recoveries. DSG Holdings Australia Pty Ltd v Helenic Pty Ltd - Uncertainty of return to creditors In the more recent case of DSG Holdings Australia Pty Ltd v Helenic Pty Ltd [2014] NSWCA 96, two related party creditors appealed the decision of the Supreme Court of New South Wales to terminate a DoCA and wind up Retail Adventures Pty Ltd (Company). The New South Wales Court of Appeal refused leave to proceed with the appeal and held that the Company should remain in liquidation. The facts below assist in explaining the ownership structures of the Company and its related entities: 1. The shares in the Company were owned by Retail Adventures Holdings Pty Ltd (in liquidation) (RAH). 2. All shares in RAH were owned by the Applicant, DSG Holdings Australia Pty Ltd (DSG). 3. The shares in DSG were owned by Bicheno Investments Pty Ltd (Bicheno) 4. The shares in Bicheno were assets of the Jan Cameron Trust. 5. Ms Cameron was at all material times a director of the Company, RAH, DSG and Bicheno. 8 Rigby Cooke Lawyers - InSolvency

9 InSolvency Insolvency & Reconstruction Bulletin > Terminating a DoCA - Commercial Morality Under the Microscope (continued) > When the Company was placed into administration, the Administrators caused its business to be transferred to DSG and the Administrators continued their efforts to sell the business as a going concern or enter into a DoCA. The sale to DSG was completed on 13 March 2013 and in July 2013, DSG wrote to creditors anticipating a proposal for a DoCA. In its circular to creditors, DSG proposed the following: 1. Under the DoCA, the return to creditors would be 6c in the dollar whereas in a liquidation scenario, the return could range from 9.04c in the dollar to 2.57c in the dollar (these figures were much lower than the figures put forward by the Administrators in their report); 2. Non-related creditors would be able to claim against the deed fund; 3. The deed fund would comprise of the Company s and RAH s bank accounts together with a contribution from Bicheno, DSG, Jan Cameron, Penny Moss and Bruce Irvine (Contributing Related Parties) of $5,500,000 (Deed Contribution) to be made by 31 January 2014 or such other date as the Deed Administrators may agree; 4. Importantly, if the Deed Contribution was not made, the Deed would fail and the Deed Administrators would not be entitled to take formal steps to recover the Deed Contribution from the Contributing Related Parties. At the creditors meetings, 606 creditors voted with a total value of $46,052,678 in favour of the resolution while 122 creditors voted with a total value of $36,490,655 against the resolution. Of the votes in favour of the resolution, DSG and Bicheno s votes were valued at $36,986,958. If these related party votes had been disregarded, then the result would have been 604 creditors voting $11,065,720 in its favour. Two creditors of the Company (including Helenic Pty Ltd) commenced proceedings to set aside the resolution that the Company execute a DoCA and ordered that the Company be wound up. In summary, the trial judge found that the possibility that the $5.5 million might not be paid and the possibility of the deferral of the relation back period also prejudiced creditors and this prejudice was unreasonable. DSG sought leave of the Court to appeal the decision of the Supreme Court of New South Wales. The Court of Appeal dismissed DSG s leave application and held that while an examination of prejudice is not necessarily limited to a comparison of the expected returns under the proposed DoCA as opposed to a winding up, there will be cases where the financial disadvantage to the creditors voting against the proposal is so substantial, and certain, that it amounts to prejudice which is unreasonable pursuant to the principles outlined in section 600A(1)(c)(ii) of the Act. Conclusion The cases demonstrate that the Court has a wide discretion when making decisions as to whether a resolution that a company enter into a DoCA should be set aside pursuant to either section 600A or section 445D of the Act. In both these cases, the Courts determined that the resolutions be set aside. However they reached those decisions on different grounds - namely, the commercial morality ground and the proposed return to creditors. The common factor however was that the behaviour and actions of related party entities were heavily scrutinised, particularly where the related party entity votes were determinative in passing the resolution to enter into the DoCA. Rigby Cooke Lawyers - InSolvency 9

10 > Setting Aside Personal Insolvency Agreements - When Being Too Close Matters > We have been involved in a number of matters involving Personal Insolvency Agreements (PIA) recently. These include circumstances where creditors have applied to the Court to set aside the PIA on the basis that the terms of the PIA were unreasonable and not calculated to benefit the debtor s creditors generally. The principles outlined in Osborne v Gangemi [2011] FCA 1252 were applied in the recent case of Levy (as executor of the estate of Rand (deceased)) v Harpur [2014] FCA 688 in which we acted for the PIA trustee. In the case of Osborne v Gangemi, His Honour Justice Bromberg summarised the principles to be taken into account when determining whether a PIA should be set aside pursuant to the Bankruptcy Act 1966 (Cth)(Act). This case also stands for the notion that related party debts will be heavily scrutinised by the Court when determining whether the interests of creditors generally (rather than a select few) are being benefited. Section 222(1) of the Act empowers the Court to set aside a PIA if satisfied that: 1. The terms of the PIA are unreasonable or are not calculated to benefit the creditors generally; or 2. For any other reason, the agreement ought to be set aside. In this matter, the Respondent, Antonio Gangemi (Gangemi) was an active property developer in the business of jointly developing various properties utilising a number of corporate entities and entered into agreements with parties including the Applicant, Richard Osborne (Osborne) in relation to those property development projects. The Court recognised that PIAs provide a useful way in which the personal insolvency of an individual can be dealt with where a genuine accommodation can be made with that individual s creditors to achieve the best result out of a bad situation. The Court takes into consideration the Act s intent that it is imperative that the creditors generally, rather than some but not others, benefit from the PIA. However, the outcome of this case was that the PIA was set aside for the following reasons: 1. The amount available for distribution was trivial or negligible when compared to Gangemi s total debts. In fact, the distribution proposed of $80,000 in relation to total debts of $4 million meant that the dividend payable to creditors would have been about one cent in the dollar after deduction of the trustees likely costs. 2. There were clearly matters that required further investigation. Gangemi claimed that he had no assets and no beneficial interest in any properties with which he was involved as a property developer yet spent substantial legal fees on litigating matters in relation to various property developments in which he was involved. 3. There was evidence that Gangemi had beneficial interests in properties which he failed to disclose to creditors including shares and access to funds. 4. A trustee in bankruptcy would be able to utilise the investigative powers under the Act over the entirety of Gangemi s affairs whereas the terms of the PIA effectively foreclosed the use of the investigative powers conferred on a trustee in bankruptcy. 5. Bankruptcy would make available to the creditors any property which devolved to Gangemi after the commencement of bankruptcy and before its discharge. In the 10 Rigby Cooke Lawyers - InSolvency

11 InSolvency Insolvency & Reconstruction Bulletin > Setting Aside Personal Insolvency Agreements - When Being Too Close Matters (continued) > PIA scenario, any property acquired after the implementation of the PIA would not be made available to meet creditors claims. 6. The vote in favour of the PIA was very close and highly influenced by creditors who were not at arms length from Gangemi. Bloomingdale, one of the creditors (a related party as well as a target of further investigations), accounted for over a third of the votes in favour of the PIA. Other related parties who voted in favour of the PIA were Gangemi s son, friend and lawyers. The Court held that the interests of these creditors did not coincide with the interests of creditors generally. His Honour determined that there was sufficient evidence to suggest that there were practical and not merely hypothetical advantages to the creditors should the PIA be set aside. His Honour s decision makes it clear that the Court takes into consideration the Act s intent that it is imperative that the creditors generally, rather than some but not others, benefit from the PIA. Further, while it has been common for debtors to take advantage of related party debts to assist with getting PIAs over the line, a creditor is likely to succeed in any application to set aside the PIA when the debtor has not provided accurate and complete documents relating to his/her state of affairs and where the debtor has heavily relied upon related party debts to obtain approval for a PIA. Rigby Cooke Lawyers - InSolvency 11

12 Our Team Radhika Kanhai / Partner 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 from our 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