13 July 2017

Recent insolvency case law developments

In the Matter of Linc Energy Limited (In Liquidation) [2017] QSC 53

Justice Jackson of the Supreme Court of Queensland delivered his judgment in the matter of Linc Energy on 13 April 2017.

It was an application filed by the liquidators pursuant to section 511 of the Corporations Act seeking directions that Linc was justified in not complying with environmental protection orders which were issued by the Department of Environment and Heritage Protection.   Not surprisingly, the Department opposed the directions.

By way of background, Linc owned and operated an underground coal gasification project at Chinchilla.  It was the owner of a large parcel of land, held a mineral development licence in respect of the land and a petroleum facility licence for its production operations.  In association with the two licences, the company also held environmental protection authorities.

On 15 April 2016 the applicants were appointed administrators to the company.  Less than one month later, the respondent issued an environmental protection order to the company in administration.  The order essentially required Linc to continue to conduct groundwater testing as well as maintain certain monitoring and land rehabilitation equipment.  Ten days following the receipt of the order, the company’s creditors resolved that the company be wound up and the applicants were appointed liquidators.

Five weeks later the applicants vacated the site and gave notice disclaiming the land, the mineral development licence, the petroleum facility licence and the environmental authorities pursuant to section 568(1) of the Corporations Act.  Soon thereafter the respondent went into possession of the land and facilities and contended that, notwithstanding the disclaimer, the company was obliged to comply with the environmental protection order.  The respondent also submitted that the liquidators were obliged, under section 493 of the Environmental Protection Act, to ensure that the company complied with the order where there were funds available in the winding up to do so.

As a result the liquidators applied to the court for directions as to their obligations.

Central to the litigation was the question as to whether the disclaimer of the land, licences and the environmental protection authorities had the effect of discharging the company from future compliance with any obligations under the environmental protection order. To determine this, it was necessary to examine whether the items purported to be disclaimed in the notice were in fact property.

The court looked at section 9 of the Corporations Act and the definition of property contained therein, and noted that the land, as well as the mineral development and petroleum fuel licences, were property that came within the scope of section 568 of the Corporations Act.  The question that remained was whether the environmental protection authorities were property.

The liquidators submitted that the authorities were property because a holder who satisfies certain conditions is entitled to carry out relevant mining activities, it is transferrable, it has value because it affects the value of the associated mining authority and because the Chief Executive is entitled to charge substantial fees for the authority.

The respondent submitted that the authorities were not property because they do not confer any property rights.  Instead, they confer a freedom from liability for carrying out an otherwise prohibited activity.  In any event, the respondent submitted that the company’s liabilities under the environmental protection orders were not liabilities in respect of any disclaimer of property because the environmental protection orders were issued under section 358 of the Environmental Protection Act to secure compliance with the company’s general environmental duties under that Act.  His Honour observed that if that submission was accepted it may not be necessary to resolve the dispute as to whether the environmental protection authorities were property at all.

Justice Jackson looked at the terms of the environmental protection orders which provided that the company must not, without the respondent’s prior written approval “materially alter, or dispose of any infrastructure on the site that is necessary to ensure compliance with the requirements of the EPO and that may be required for the ongoing management of environmental risks and/or site rehabilitation”.  In addition it provided that “all infrastructure that is necessary to ensure compliance with the requirements of the EPO and that may be required for the ongoing management of environmental risks and/or site rehabilitation must be maintained in a functional and operable manner”.

The trial judge also looked at the notice of disclaimer which was issued by the liquidators which provided that they disclaimed the land, the mineral development licence, the petroleum fuel licence and the environmental protection authorities.  It also provided that they disclaimed a number of other items including various tanks, compressors, pumps, computers, electrical installations, water quality tester, water sampler, consumables, a low pressure flare, a shipping container of electrical distributions for the plant and a trailer.  Although the evidence did not confirm, the trial judge inferred that some of the site infrastructure consisted of the fixtures and other items of property in the notice of the disclaimer.   It followed, in his view, that the environmental protection order purported to prohibit any disposal of, and to oblige the company to continue to maintain property which the liquidators had attempted to disclaim in the notice.

Given the terms of the environmental protection orders the trial judge found that sections 358 and 361 of the Environmental Protection Act impaired the liquidators’ right to disclaim the site infrastructure under the Corporations Act.  As a result, the trial judge concluded that it was not necessary to answer the question as to whether the environmental protection authorities were property in order to give a direction that the liquidators were not justified in failing to cause the company to comply with the environmental protection orders.

After concluding that the company remained liable to comply with the environmental protection orders, the trial judge went on to consider whether the liquidators were personally liable to see that it did so under section 493 of the Environmental Protection Act.   This section provides that the executive officers of a corporation must ensure that the corporation complies with the Act.

Not surprisingly, the liquidators submitted that section 493 did not apply to them on the basis that they were not members of the governing body of the company because the governing body was the board of directors.  Additionally, they submitted that they were not concerned with, and did not take part in the company’s management.  Instead, their powers are derived from their office for the purposes of winding up the affairs of the company.

His Honour noted that the purpose of section 493 is to secure compliance with the corporation’s liabilities/obligations under the Environmental Protection Act.  He considered that by definition, the company appointed the applicants as liquidators “for the purposes of winding up the affairs and distributing the property of the company”.  The liquidators’ powers in this case include “to carry on the business of the company so far as, in the opinion of the liquidators, required for the beneficial disposal and winding up of that business” and the particular powers to do the many things set out in section 477(2) of the Corporations Act.  His Honour noted some restrictions in subsection 477(6), being “subject to this part, the liquidator must use his or her own discretion in the management of the affairs and property of the company and the distribution of its property”.

His Honour rejected the submission by the liquidators that they were not executive officers.  He found that to limit the exercise of the liquidators’ power to the purpose of winding up the affairs and distributing the property of a company does not relieve the company from its obligations.  Further, the extension by statute of an obligation of a corporation to an executive officer does not, per se, differentiate between obligations incurred before the commencement of the winding up, and post commencement obligations.  Additionally, it does not differentiate between an obligation that is beneficial to the winding up process and one that might not assist in that process.

His Honour found that to limit the operation of section 493 by construing the definition of executive officer to exclude a liquidator would be unwarranted.  There is no support for it in the text, or in the context of the rest of the Environmental Protection Act or any other relevant materials that may be taken into account in interpreting section 493.

In making orders, Justice Jackson was careful to confine his findings to the specific set of facts and the disclaimer of property in the site infrastructure discussed above.  He did not find it necessary to decide whether the environmental protection authorities were disclaimer property and he did not extend his conclusions to any environmental protection orders which might be issued in the future.

It is also important to note that this decision deals with the pre CoRA amendments to the Environmental Protection Act which widened the scope of persons who can receive an environmental protection order.  It is also important to note that this decision is, on its facts, limited to a situation where there are funds available in the liquidation to comply with the order.

Although limited in its scope, this decision has significant implications for insolvency practitioners because it is a serious offence to contravene an environmental protection order.  Executive officers, and by this decision, the company’s liquidators, must also ensure the company complies and where the company commits an offence under the Act, each executive officer is also deemed to have committed an offence.

Not surprisingly, this decision is currently under appeal.

Re Amerind Pty Ltd (in liq) [2017] VSC 127

Amerind Pty Ltd carried on business as trustee of the Panel Veneer Processes Trading Trust, manufacturing and distributing decorative and architectural finishes.  Its sole activity was to act as trading trustee.  It had no assets of its own and the liabilities were incurred by it in its capacity as trustee only.

Amerind had a number of secured debenture facilities with Bendigo and Adelaide bank.  On 6 March 2014, the bank sent a letter to Amerind demanding repayment of and terminating its existing facilities.  Five days later the sole director appointed administrators pursuant to section 436A of the Corporations Act.  On that same day the bank appointed receivers and managers.  Two days later, creditors resolved to have the company wound up and the administrators were appointed liquidators.

Receivers traded on for about one month after their appointment and after ceasing operations, realised the assets.   The bank was paid out some $20M.   After making allowance for the receivers’ remuneration there was a surplus of just over $1.6M available for distribution.

The receivers applied to the Supreme Court for directions after the Commonwealth sought to recover priority payment of the former employee wages and entitlements pursuant to sections 433, 556 and 560 of the Corporations Act.

The receivers and liquidators supported the priority payment to the Commonwealth however a secured creditor rejected it.  One of the issues therefore was whether property which is held on trust by a corporate trustee is ‘property of the company’ for the purposes of the Corporations Act.  If so, then it may be subject to the priorities regime.  If not, the assets will be distributed according to the usual trust principles.

Justice Robson followed the decision of Justice Brereton in Re Independent Contractors over the decision of Re Enhill and Re Sugo Gold and determined that where a company acts solely as trustee and has no assets of its own, the trustee’s right of indemnity does not constitute property of a company for the purposes of section 556 and 433 of the Corporations Act.

In doing so, he reasoned that to be property of the company, it cannot simply be property in the name of the company that belongs to another person.  To do so would be to overturn centuries of law recognising the distinction between legal and beneficial ownership of assets.

His honour felt bound by the decision of Justice Brereton as opposed to the earlier Full Court decisions on the basis that the earlier decisions were handed down based on the Victorian and South Australian Companies Acts as opposed to the Corporations Act.  He was keen to see a uniformity across the states in the interpretation of Commonwealth legislation.

Although His Honour concluded that the right of indemnity was not property of the company, he still went on to examine whether the right of indemnity is a circulating asset for the purposes of section 433(3) of the Corporations Act.  His Honour determined that the trustee’s indemnity or lien:

  1. is not an ‘account’, and therefore not a circulating asset under section 340(5) of the Personal Property Securities Act; and
  2. is not a floating charge under section 51C of the Corporations Act because:
    • there is no chargor or chargee which is necessary for the creation of a charge. It is simply a case of a trustee incurring debts on behalf of a trust; and
    • a floating charge only fixes on some event of crystallisation whereas the trustee’s right of indemnity is fixed. It attaches on the incurring of the debt to all trust assets and does not require any act of crystallisation, as is required with a floating charge.

It is important to note that Justice Robson emphasised the fact these findings were made on the basis that the company acted solely as trustee and did not have any assets of its own.   He also emphasises that his examination was confined to the present circumstances, where the trustee’s right is that of exoneration and not recoupment.

This decision is also under appeal.

Killarnee Civil and Concrete ContractorsPty Ltd (in liquidation)

This matter currently playing out in Western Australia is of very similar facts to Re Amerind.

It involves an application filed by the liquidators of Killarnee Civil and Concrete Contractors Pty Ltd which acted as a trading trust.  Similar to Amerind, it has no assets of its own and its liabilities were incurred in its capacity as trustee only.  The liquidators have applied for orders that the company be permitted to sell the assets of the trust and pay the secured creditor in priority to the extent of the employee entitlements which have been paid.

This matter was originally mentioned before a single judge of the Federal Court but following the decision of Re Amerind, the judge has ordered that the matter be heard by the Full Federal Court.  Put simply, there is a very strong view that the decisions of Independent Contractors and Re Amerind are wrong and that there is a need for a Full Federal Court to make a decision to put some certainty in place for matters where the company in liquidation has simply acted as trustee.

For more information, please contact Senior Associate, Melanie Husband on 4036 9700.

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