09 August 2016

Round-up of recent insolvency decisions

Liquidator’s remuneration trends in the New South Wales Supreme Court – In the matter of Independent Contractor Services (Aust) Pty Ltd (in liquidation) (no 2) [2016] NSWSC 106

The applicant was appointed administrator of Independent Contractor Services (“ICS”) on 4 October 2012.  Just over one month later, the applicant became ICS’s liquidator.

During the administration, just over $150,000.00 was collected from debtors.  After the payment of the petitioning creditor’s costs and other expenses including the administrator’s remuneration and costs of almost $30,000.00, there was balance of just over $114,000.00.

During the course of the liquidation, further amounts were received which increased the nett balance to $211,799.00.

The applicant incurred just over $80,000.00 in costs during the course of the liquidation.  After this expenditure, $130,980.00 was available for distribution and the applicant had accrued in excess of $115,000.00 in WIP.

There were a number of creditors including the ATO which had lodged a proof of debt in excess of $11.5M.

The applicant made an application for, relevantly, the following:

  1. a determination that the applicant was entitled to remuneration in the amount of $49,510.50 (despite accruing over $115,000.00 in WIP) pursuant to s 473 of the Corporations Act; and
  2. a declaration that the applicant was entitled to be indemnified for $12,152.00 costs incurred during the voluntary administration and liquidation.

Of the $49,510.00 remuneration claimed, $40,965.00 related to the first and unsuccessful application, $2,600.00 related to the identification of trust assets, $3,070.00 related to the recovery of trust assets, $2,289.00 related to correspondence with the beneficiaries, and $585.00 related to updating trust records.  Neither the liquidator nor legal advisors sought any remuneration for work performed since the determination of the first application.

In this application, the primary issue that was raised was in relation to the approval of the liquidator’s remuneration and expenses.  The court held that:

  1. the applicant was entitled to be indemnified in relation to the costs incurred; and
  2. the applicant’s remuneration was approved in the sum of $30,000.00 plus GST.

In relation costs incurred, the court noted that:

  1. All of the disbursements were reasonably incurred as they all assisted in the winding up process; and
  2. The amounts claimed for expenses were also reasonable, keeping in mind the small size of the estate.

As to liquidator’s remuneration, Justice Brereton observed that:

  1. Liquidators are entitled to ‘reasonable remuneration’ for their services in winding up a company, and the court has a very wide discretion in allowing and fixing the level and basis of remuneration;
  2. The liquidator bears the onus of establishing that the remuneration claimed is fair and reasonable, including that the work was properly performed in the due course of the liquidation and that the amount claimed is fair and reasonable reward for it;
  3. Liquidators will not necessarily be allowed remuneration at their firm’s standard hourly rates for the time spent. Particularly in smaller liquidations (as was the case here), questions of proportionality, value and risk are relevant;
  4. Liquidators cannot be expected to be rewarded for their time in smaller liquidations at the same rate as larger liquidations where more property is available for distribution;
  5. In this case, much of the risk and burden had been transferred to and rested on the applicant’s solicitors and counsel, as opposed to the applicant as liquidator. A lot of the work in respect of the liquidation had also been undertaken during the administration process which had resulted in separate remuneration having been paid to the now liquidator; and
  6. The first application was unsuccessful and unnecessary which considerably reduced the value of the liquidator’s work. Having said that, the current application was necessary and no claim for remuneration had been made in respect of it.

Balancing all of the above factors, the Court ordered that:

  1. the applicant was entitled to 2% on realisations (being $4,236.00), reflecting the very limited work done by the applicant in respect of realisations;
  2. the applicant was entitled to 15% on distributions (being $16,647.00), which was higher than usual and reflected the complicating features that required directions hearings; but
  3. having regard to the size of the fund, the totality of work completed and time expended, the applicant was entitled to remuneration of $30,000.00, which equated to approximately 14% of gross realisations.

In increasing the remuneration from just over $20,000.00 to $30,000.00, the court indicated that it did not want to discourage liquidators from undertaking small but difficult liquidations.

Justice Brereton adopted similar reasoning in the decision of Sakr Nominees Pty Ltd [2016] NSWSC 709.

In this matter, creditors were paid in full, there were no company debts and the only remaining asset was valued at $517,830.00.

The liquidator sought approval of an amount of just over $102,000.00 which included legal fees payable to the liquidator’s solicitor of $66,939.87.  Despite criticising the amount that had been charged by the solicitor, Justice Brereton was content that the liquidator had scrutinised the invoice and gave evidence that he considered the fees were reasonable.  For that reason, they were approved.

With respect to the liquidator’s remuneration, the liquidator had received creditor approval for a total of $197,000.00 which had been drawn on in full.  He was seeking approval for the balance of $63,577.80.  It was necessary to bring this application for approval because all of the creditor’s had been paid in full so there was no way to convene a creditor’s meeting.

Justice Brereton again cited that liquidators are entitled to ‘reasonable remuneration’ and that the ‘liquidator bears the onus of establishing that the work was properly performed in the due course of the administration’ and that the amount claimed is ‘fair and reasonable reward for that work’.

He scrutinised the affairs of the liquidation and in doing so, noted that:

  1. the liquidation was described as being ‘a small family company’;
  2. the only significant asset was real property realised for $3.72M;
  3. agents and solicitors were engaged to negotiate and act on that sale. In doing so, it represented a significant transfer of risk and responsibility in that transaction;
  4. the liquidator had paid secured creditors approx $2M and unsecured creditors approx $904,000.00; and
  5. proofs of debt were disputed, the liquidator received no cooperation from the directors or company accountants and the liquidator had been required to go through the process of settling a list of contributories.

Once again, His Honour imposed his own notions of “proportionality” and made references and considerations including:

  1. 5% on realisations;
  2. 3% on distributions; and
  3. 10% on the first $100,000.00 of realisations, and 5% thereafter.

Having regard to those calculations and the facts involved in this liquidation, he concluded that it was appropriate that remuneration be fixed in the sum of $200,000.00, but for two factors.

One was that notice of the application had been given to the contributories and there had been no objection (although this did not mean that the application should proceed by default).  The other was that there had been some additional work required which was not anticipated by the previous creditors’ approval.

Taking these matters into account, he was prepared to allow some remuneration over and above the $197,000.00 previously approved, but not the whole amount claimed.  This resulted in an extra $20,000.00 of remuneration as opposed to the $63,000.00 being claimed.

The liquidator has appealed the decision and the issues will now be scrutinised by the Court of Appeal.

PPSA update – Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed) v General Electric International Inc [2016] NSWSC 52

In March 2013 Forge Group Power Pty Ltd (“Forge”) entered into a contract for the rental of power generation equipment and the supply of associated services with General Electric International Inc (“GE”).  Under this contract, GE agreed to rent the turbines to Forge for a fixed term and provide Forge with certain services including installation, commissioning and demobilisation of the turbines.  No financing statement was registered on the Personal Property Securities Register (“PPSR”) in respect of this lease.

In February 2014, Forge appointed voluntary administrators and five weeks later went into liquidation. Forge applied to the New South Wales Supreme Court for directions that the interest of GE vested in Forge immediately before the appointment of the administrators.

GE argued that the Personal Property Securities Act (“PPSA”) did not apply to the lease because:

  1. GE was not regularly engaged in the business of leasing goods and therefore the lease was not a PPS lease (or a security interest) for the purposes of the PPSA; and
  2. the turbines were fixtures and therefore the PPSA did not apply to the lease.

On the issue of whether GE was engaged in the business of leasing goods, the Court concluded that:

  1. the test of whether a person is or is not regularly engaged in the business of leasing goods is to be determined having regard to that person’s activity wherever it occurs, that is, it is not limited to their activity in Australia;
  2. this test applies at the time that the lease is entered into; and
  3. when the lease was entered into and at all material times afterwards, GE was regularly engaged in the business of leasing goods in Australia.

As to whether the turbines became fixtures, section 10 of the PPSA defines fixtures as “goods, other than crops, that are affixed to the land”.

GE contended that this definition of being “affixed to the land” is “a non trivial attachment”.  Forge argued that the common law test of what is, or is not, a fixture applies under the PPSA.  The common law test focuses on the intention of the person affixing the goods to the land.

After considering these arguments the court held that:

  1. the words “affixed to the land” in section 10 means affixed according to common law concepts; and
  2. the turbines did not become fixtures.

In reaching the conclusion that the turbines were not fixtures, the court considered the following factors:

  1. the turbines were designed to be demobilised and moved to another site easily and within a short period of time and in fact remained mounted on wheeled trailers while leased;
  2. the turbines were only intended to be in a position on the temporary power station for a rental term of two years, subject to some limited rights of extension;
  3. Forge was contractually obliged to return the turbines at the end of the rental term;
  4. anchoring equipment intended to prevent damage to the turbines during cyclonic weather conditions was designed to be easily removed for demobilisation and reuse at a new site;
  5. the attachment of the turbines to the land through the use of anchoring equipment was for the better enjoinment of the turbines and not for the better enjoinment of the land;
  6. removal of the turbines would cause no damage to the land;
  7. removal of the turbines from the site would not destroy or damage the turbines;
  8. the cost of removal of the turbines from the site was modest in comparison to the failure of the turbines;
  9. the head contract included an express term that the property in the turbines would not pass to the owner of the land;
  10. the lease included a term that the turbines would remain at all times personal property, notwithstanding that they may be affixed or attached to any other real or personal property;
  11. Forge was not the owner of the site and it plainly did not intend to make a gift of the turbines to the owner of the land; and
  12. GE prescribed that the mechanism for attachment of the turbines at the site and plainly did not intend them to become property of the owner of the land.

ATO Set Offs – Commissioner of Taxation v 4 Doonan Street Collinsville Pty Ltd (in liq) [2016] NSWCA 69

A lender appointed receivers and managers to 4 Doonan Stree Collinsville Pty Ltd (“the company”) in August 2010 and shortly thereafter administrators were appointed.  In March 2011, one of the administrators was appointed liquidator of the company.

The receivers sold the company’s property and business assets and lodged a tax return recording a net capital gain of just over $1.4M, which gave rise to a tax liability of just over $717,000.00.  This was paid in full.

In November 2012, the company’s tax agent applied to amend its income tax return lodged by the receivers.  The agent applied to reduce the company’s net capital gain to zero because, as trustee, the company was not liable for any capital gains tax.

The Commissioner accepted the application, determined that the company’s taxable income was just over $142,000.00 and, consequently, the company we entitled to a refund of $651,340.85.  However, only $398,472.44 was returned to the company.  This was because the Commissioner made 5 deductions from the refund, pursuant to the Taxation Administration Act 1953 (Cth), based on sums owed by the company in respect of other tax liabilities.  The deductions were made under Part IIB of the Taxation Administration Act, which deals with Running Balance Accounts.   

The company argued that it was not lawful for the Commissioner to deduct tax debts owed by the company before the Commissioner  made the full refund.  The company’s grounds for this argument were:

  1. the Commissioner did not have the power to make the deductions because the deductions amounted to an attachment, sequestration, distress or execution put into force against the company (which was in liquidation) as per section 500 of the Corporations Act, and were void as a result; and
  2. even though the deductions did not fall within the set off provisions in section 533C of the Corporations Act, the situation was almost identical and, as a result, the Commissioner’s knowledge of the company’s insolvency prohibited the deduction.

The court held that the Commissioner is obligated to deduct the tax debts owed by the company before making repayment.  In other words, the company had no right to recover any money until the Commissioner had completed the process as prescribed by the Taxation Administration Act 1953. The court further held that the provisions of the Taxation Administration Act 1953 applied notwithstanding the insolvency of the company.

This decision was upheld by the Court of Appeal, but it is important to note that the case proceeded on the basis that both sides agreed that all material tax debts were part of a single running account.  The Court of Appeal cautioned: “the artificial basis upon which the parties conducted the proceedings has affected the significance of the reasoning in the judgment for other cases”.

Voluntary administration as an abuse of process – ASIC v Planet Platinum Limited and Anor [2016] VSC120

On 21 April 2015 ASIC filed an application to wind up Planet Platinum Limited and Anor (“Planet Platinum”) and to appoint a provisional liquidator.  The application was based on alleged misconduct on behalf of the directors and mismanagement of the company.

On 4 May 2015, the directors appointed a voluntary administrator of the company, Mr Rathner.  In accepting the appointment as administrator, Mr Rathner made very few enquiries as to the solvency of the company.

In the first creditors meeting (at which Mr Rathner was present), on 12 May 2015, the directors made a statement outlining, relevantly, that “… the company is still solvent and the administration is only necessary due to compliance issues and not due to the fact that we can’t pay our bills.  Our goal from the administration process is to privatise the company, removing it from the ASX and addressing the issues raised by ASIC.”

There was also evidence of conversations between the directors themselves and the directors and Mr Rathner, to the effect that Mr Rathner was appointed to thwart the winding up application made by ASIC.

ASIC commenced proceedings on the grounds that the appointment of Mr Rathner as administrator was invalid and for an improper purpose because pursuant to section 436A of the Corporations Act, a company may only appoint an administrator where the board has formed the opinion that the company is insolvent, or is likely to become insolvent in the future.  The issue was whether Planet Platinum had complied with s 436A of the Corporations Act in appointing Mr Rathner as administrator.

The court held that section 436A of the Corporations Act had not been complied with and, pursuant to s 447A, the court ordered that the appointment of Mr Rathner was invalid, void and of no effect.

In coming to this decision, the court made two findings:

  1. Firstly, that the directors of Planet Platinum did not comply with s 436A as they were not of the bona fide opinion that the company was insolvent, or likely to become insolvent. This was primarily due to the statements made in the creditors meeting to the effect that the company was still solvent and the administration was only necessary due to compliance issues.  Also relevant was the fact that the provisional liquidator’s report stated that Planet Platinum was able to pay its debts as and when they fell due. Another relevant factor was that the directors did not have a great deal of financial information available to them at the time they resolved to appoint an administrator, and therefore could not have formed an opinion as to the solvency of the company.
  2. Secondly, that the directors appointed Mr Rathner as administrator for an improper purpose. The court held that the true purpose in appointing the administrator was not because of solvency issues of the company, but instead to assist in privatising the company and to prevent ASIC’s application to wind the company up.  This finding was based on a number of factors, including:

2.1.  the fact that the administrator was appointed shortly after ASIC made the application to wind the company up; and

2.2. the statement made at the creditors meeting that the company was appointing an administrator only due to compliance issues and that the company was in fact solvent.

For further information please do not hesitate to contact Tim McGrath or Melanie Husband on 4036 9700.

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