The Personal Property Securities Act 2009 (Cth)

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1 Mills Oakley Christmas Insolvency Review 2016

2 Dear Friends and Colleagues, It s almost time to down tools, pop the champagne and enjoy the break with family and friends. But before you do, here are our reflections on the year that was 2016 including who has been naughty or nice to insolvency practitioners and our thoughts on what 2017 holds for the industry. The Personal Property Securities Act 2009 (Cth) The Personal Property Securities Act 2009 (Cth) (more affectionately known to many as the PPSA ) is almost five years old. Like an ill-raised child of a similar age, it continues to taunt and trip up practitioners and creditors alike (well, mostly creditors). The biggest issue we continue to see is a failure by secured parties to register on time, or not at all, thereby engaging the vesting rules in either s 267 of the PPSA or s 588FL of the Corporations Act 2001 (Cth) ( Corporations Act ). The major PPSA decision to be handed down this year focused on the effect of these rules. In Re Carpenter International Pty Ltd [2016] VSC 118, her Honour Justice Cameron examined the effect of both of these sections. In relation to s 588FL of the Corporations Act, her Honour considered when a security agreement giving rise to a security interest came into force. The issue is key because, if there is no registration within 20 business days of this time, a security interest will vest upon the appointment of a liquidator or administrator. On the facts of the case, her Honour found that the security agreement came into force at the time it was executed, and not at some later time (such as when the relevant security attaches). In relation to s 267 of the PPSA, her Honour noted that the vesting rule comes into play immediately before the appointment of an administrator or a liquidator and not the day before. So a sneaky creditor who quickly registers a security interest on the same day as an appointment (but before the appointment) is not affected by s 267. When assessing the validity of creditors security interests, these rules are a useful place to start. Notwithstanding the passage of time, the importance of registering on time still eludes many secured creditors. You should also consider the effect that a late registration has on a secured party s priority, if the security interest has not otherwise vested.

3 The Great Trust Debate Probably the most topical and troubling issue for practitioners in 2016 is how to administer and wind-up corporate trustees. The trouble started brewing in 2014 when Justice Brereton of the New South Wales Supreme Court held in Re Stansfield DIY Wealth Pty Ltd (in liq) (2014) 291 FLR 17 that the powers of sale in the Corporations Act (such as section 437A(1)(c) and 477(2)(c)) did not apply to trust property as it was not property of the company within the meaning of section 9 of the Corporations Act. The decision flew in the face of numerous decisions in other state and federal courts. It is clearly undesirable and impracticable for there to be divergent views on the applicability of the Corporations Act in different jurisdictions. This year, Brereton J added more fuel to the debate. In Re Independent Contractors (No 2) (2016) 305 FLR 222, his Honour held that section 556 similarly did not apply to the distribution of trust property, leaving a further question mark over whether Chapter 5 of the Corporations Act has any application to the property of insolvent corporate trustees. The decision causes a great deal of consternation for all, not least priority creditors, such as employees and the Commonwealth Department of Employment (where the Commonwealth enjoys rights of subrogation, having paid employees under FEGS). This year, we acted for the liquidator of Pharmore Pty Ltd (in liq) in a proceeding (unreported) in which the Supreme Court of Victoria considered itself bound by the Victorian decisions, such that s 556 did apply to the distribution of trust property. The issue was also a key one before the Court in the Amerind case in which we acted for the Receivers and Managers (see below). In that case, the Commonwealth Department of Employment argued strongly for the position that sections 433 and 556 of the Corporations Act do apply to the distribution of trust property. Watch this space.

4 Practitioner Remuneration This year, Brereton J continued to promulgate the ad valorem approach to practitioner remuneration. This approach seeks to levy remuneration on a proportionate basis against realised assets when an administrator or liquidator approaches the Court for remuneration approval orders. According to his Honour, the approach incentivises the creation of value proportionate to the size of the relevant appointment. We are not aware of any recent decisions in Victoria which have adopted or promoted the ad valorem approach to remuneration. Indeed, the TVM decision in which we acted (see below) affirmed the Victorian Supreme Court s view that assessment of remuneration on a time basis was appropriate in the circumstances, finding that from a sample size of entries, the tasks performed, time taken and person undertaking the tasks were reasonable. Brereton J s approach thankfully has not been followed by other NSWSC judges, including Robb and Black JJ. Robb J has noted that the selection of a percentage, divorced from all other relevant circumstances is not necessarily appropriate. Black J has similarly noted that the size of the pool of assets in a liquidation does not necessarily reflect the work which must be undertaken. We don t see the ad valorem approach as being a particularly popular one amongst practitioners and, for the reasons discussed by Robb J and Black J, we hope it does not catch on in In our view there are better ways for creditors and the Courts to review and scrutinise practitioner remuneration.

5 The State of Insolvency Law If you re feeling a little unsure as to the state of the law you re not the only one. Currently, laws have been passed (but are waiting to come into effect) and there are further proposed reforms and rules on the way. This is the current state of play. The Insolvency Law Reform Act 2016 (Cth) ( ILRA ) is due to take effect on 1 March Key changes include: enabling creditors to remove a practitioner and appoint a replacement through an ordinary resolution; introducing statutory default remuneration of $5,000 for corporate insolvencies (without the need for creditors meetings); and reducing the current bankruptcy period from 3 years to 1 year. Interestingly, whilst the proposals paper released by the Federal Government in April 2016 recommended other changes, including the introduction of a safe harbour rule for directors and nullifying ipso facto clauses, no Bill has yet to be introduced in respect of them. Prior to the election, there was a great deal of talk around these reforms. We hope they will be back on the agenda for further debate in Elsewhere, the Insolvency Practice Rules have been released in draft form, which are rules made under the ILRA. The Government has recently sought the industry s views on the proposed Rules, but they are yet to be finalised. In terms of content, they provide for a range of amendments including the registration and discipline of external administrators. Look out for the new rules when they are finalised in 2017.

6 What we ve been up to... Finally, this is a small snapshot of what s been keeping us busy in 2016, and what we re looking forward to in In the matter of Amerind Pty Ltd (in liq) (recs and mgrs apptd) we acted for the Receivers and Managers of Amerind Pty Ltd (in liq) (recs and mgrs apptd) in an application to determine various contentious questions, including whether ss 433 and 556 of the Corporations Act apply to trust property, as well as the appropriate apportionment of the receivers remuneration and disbursements against circulating and non-circulating asset pools. The decision is reserved. In the matter of Pharmore Pty Ltd (in liq) we acted for the Liquidators of Pharmore Pty Ltd (in liq) and successfully obtained orders that s 556 of the Act did apply to the distribution of the company s trust property. In the matter of Mowbray College (in liq) we acted for the Liquidator of Mowbray College, a private school in Melbourne s west, which collapsed in Following high-profile public examinations, the Liquidator commenced an insolvent trading claim against some of its directors, involving various complex matters of fact and law. The proceeding recently successfully settled at mediation. In the matter of Re Traditional Values Management Ltd (in liq) we acted for the liquidators of TVM in a proceeding where the Court approved their remuneration and expenses on a time cost basis without deduction. In the matter of Timbercorp Finance Pty Ltd (in liq) we have continued to act for the liquidators of Timbercorp Finance Pty Ltd in over 1,800 proceedings for the recovery of monies owing by investors entered into between 1992 and 2009 to fund investments in Timbercorp managed investment schemes. In 2016, we were involved in several landmark cases in the Supreme Court, Court of Appeal and High Court. These cases have concerned the rights of investors to raise issues in the proceedings brought against them in relation to their investments and loans that they did not raise or seek to raise in an earlier unsuccessful class action; whether loans funds can be advanced by adjustments to intra-group intercompany loan accounts; and the proper construction of managed investment scheme constitutions and related agreements.

7 Masters Home Improvement we acted on behalf of Great American Inc and GA Australia Pty Ltd in negotiating its appointment by Woolworths Limited as agent to sell off $600 million of inventory held by 68 Masters Home Improvement stores Australia-wide. Pumpkin Patch Pty Ltd (recs and mgrs apptd) we acted on behalf of Great American Inc and GA Australia Pty Ltd as part of their appointment by the receivers and managers to Pumpkin Patch to realise in-store and online inventory valued in excess of $60 million across 130 stores. Man to Man Pty Ltd (in liq) we acted for the liquidator of Man to Man Pty Ltd, which operated 26 retail stores across Australia. The winding-up involved the sale of the company s business and assets to a large competitor, and resolving claims of secured parties, including in relation to inventory supplied pre-appointment. In the matter of BBY Limited (in liq) we act for a defendant appointed to represent the interests of a class of BBY clients, in relation to the collapse of this high-profile stockbroking and financial advisory firm. The proceeding concerns the distribution of funds held by BBY in client segregated accounts ( CSAs ), in circumstances where there are significant shortfalls in some CSAs but not others. The proceeding is listed for a four day trial in the NSW Supreme Court in January And finally... On behalf of Mills Oakley, we wish you and your loved ones a joyous Holiday Season and a prosperous 2017.

8 Stuart Lewin T: E: Andrew Brown T: E: Joanne Hardwick T: E: Ariel Borland T: E: Roger Jepson T: E: Darren James T: E: Mark Wenn T: E: Nirupa Manoharan Special Counsel T: E: Ken Lin Senior Associate T: E: Ivana Griggs Senior Associate T: E: Jennifer O Farrell Associate T: E: jofarrell@millsoakley.com.au Hannah Carne Associate T: E: hcarne@millsoakley.com.au Melissa Jeremiah Associate T: E: mjeremiah@millsoakley.com.au Dean Brayley Lawyer T: E: dbrayley@millsoakley.com.au Melbourne Sydney Brisbane Canberra Perth