Insolvency Legal Update

Transcription

1 Insolvency Legal Update September 2012 Level Carrington Street SYDNEY NSW 2000 DX 262 SYDNEY Tel Fax _1 1

2 OVERVIEW Welcome to Addisons Insolvency Update for September Recent months have brought a myriad of legal developments in the insolvency/restructuring field. We report on some of these below. We hope you enjoy this edition. If you would like further information about anything in this Update please contact one of the Addisons Insolvency Team: Philip Stern, Partner Hayden Martin, Senior Associate Telephone: Telephone: Facsimile : Facsimile: philip.stern@addisonslawyers.com.au hayden.martin@addisonslawyers.com.au Alec Bombell, Graduate Telephone: Facsimile : alec.bombell@addisonslawyers.com.au ADDISONS No part of this document may in any form or by any means be reproduced, stored in a retrieval system or transmitted without prior written consent. This document is for general information only and cannot be relied upon as legal advice. 2

3 GST Trap for Players in Insolvency Author/s: Phil Stern Goods and Services Tax (GST) Groups consist of two or more business entities that are treated as a single entity for GST purposes. One of the main benefits is from the representative member system, where one of the GST Group members is nominated as the representative. The representative member is responsible for paying the group s GST debts, which reduces administrative costs of compliance with GST. However, s of Schedule 1 to the Tax Administration Act 1953 (TAA) makes all members of a GST Group jointly and severally liable for the GST payable by the representative member of the group. It is important that companies within GST Groups have knowledge of the representative GST member. As the liability of the companies are several as well as joint, where there are several debts payable by each of them, each separate GST debt can be treated as if it was a claim against each entity. Unfortunately, a company s records may not readily indicate the existence of a representative (e.g. they may reside with an external tax agent). Insolvency practitioners ought to inquire specifically when appointed as administrators or liquidators of a corporate group if a GST representative has been appointed. This also ought to be asked of the ATO. Case In Application of Solomons & Tayeh [2012] NSWSC 923, Addisons acted for the plaintiffs, who were formerly voluntary administrators of companies which were part of a group of companies known as the Johnson Property Group. The plaintiffs subsequently became trustees of a creditors trust. The applicants sought judicial advice under s.63 Trustee Act 1925 regarding the interpretation of a creditors trust deed. Section 63 allows a trustee to obtain advice from the Court, which gives protection to the trustee. One purpose of s.63 is to allow a trustee to obtain judicial advice about commencing or defending legal proceedings. Judicial advice was only available to the plaintiffs in their capacity as trustees, and not as former administrators. Facts Thirteen companies were members of a GST Group. Their creditors resolved the companies enter into a deed of company arrangement (DOCA) whereby they would be subsequently subject to one creditors trust deed, and the DOCA would then be effectuated. At the time of the administrators appointment, each of the companies was jointly and severally liable for GST, as there existed a representative member. This was unknown to the administrators at the time of the creditors meeting. The ATO had not lodged multiple proofs of debt at that time for unpaid GST, nor alerted the administrators to the representative appointed. The plaintiffs sought advice as to whether they were able to treat multiple proofs lodged by the ATO as being a single liability of the Trust, and pay the multiple claims for the group GST lodged by the ATO as being one debt payable to the ATO. The ATO lodged its multiple claims only after the trust deed was executed. The plaintiffs submitted: _1 3

4 According to the DOCA, if the companies were to be treated as a single entity then claims for the same liability against each of them should be regarded as a single claim; and If the ATO proved only once this would ensure a better and fairer return to creditors under the Trust Deed. Judgment White J held: In the distribution of the trust fund, each claim by creditors against a company was to be treated equally along with claims of other creditors; Having regard to the DOCA, where all Claims against companies are to be pooled, the proper construction is that each separate Claim is to be treated as a claim against the notional single entity; There was nothing in the trust deed or DOCA to suggest that Claims were extinguished or merged into other Claims; A fundamental principle of admission of proofs in administration of insolvent companies is that there cannot be recovery that exceeds the amount of liability. In the circumstances, the full amount of the ATO debt was able to be recovered even through lodgement of multiple proofs. Therefore his Honour found the plaintiffs were not justified in treating multiple proofs lodged by the ATO as being a single liability, and the ATO was entitled to lodge multiple proofs of debt for the same underlying GST debt. 4

5 Security Interests and PPSR Author/s: Phil Stern The Personal Properties Securities Act 2009 (Cth) (PPSA) commenced on 30 January The PPSA makes significant changes to the concept of security interests over personal property. Central to the PPSA is the Personal Properties Securities Register (PPSR). Primacy of the register is a fundamental to the Act. Therefore it is essential that secured creditors are aware of their security interests recorded against a company in the PPSR. This places creditors in a position to respond efficiently to requests as to a claim or for further information about the registration from insolvency plaintiffs appointed to a company, and staves off potential sale of the secured assets. Knowledge of the particulars of the security interests is very important. Currently the general nature of registrations on the PPSR and the number of unregistered transitional security interests makes it difficult for insolvency administrators to rely on the PPSR to identify particular property that is subject to a third party interest. This issue was highlighted in the following case. In Carson, in the matter of Hastie Group Limited (No 3) [2012] FCA 719, the Federal Court found that administrators were justified in selling unclaimed plant and equipment. Administrators were appointed on 28 May 2012 to the Hastie Group of companies. At the time of their appointment the Hastie Group held a large number of individual items of plant and equipment at different locations with an estimated total auction value of $6.4 million. There were 995 registrations on the PPSR: many were very general as to the nature of the security interest claimed. Inadequate record keeping by the company meant that the nature and location of all the plant and equipment could not be determined. The administrators undertook extensive efforts to determine claims upon the equipment, including personal correspondence and advertising in national newspapers. Yates J found that: Three weeks after the initial correspondence, approximately 80% of the secured creditors had failed to respond; The creditors that did respond could not adequately particularise the equipment or the security agreement under which the security interest arose; Despite their best efforts, the administrators continued to face great difficulty identifying the property in which a security interest might be claimed. In addition there were ongoing costs, including significant rental costs of storage of the plant and equipment, being incurred. Yates J found that it was in the best interests of the companies and their creditors to make directions to the administrators to sell the unclaimed plant and equipment. His Honour also made directions that the administrators hold the proceeds of sale in a separate account and apply them: First towards the payment of the administrators costs; 5

6 Then towards any valid claim in relation to the currently unclaimed plant and equipment, and then; After three months, distributing the balance of the sale proceeds in the ordinary course of the administration of the companies. In similar circumstances, it is advisable for administrators to seek equivalent Court directions. This case demonstrates willingness from the Courts to assist administrators. 6

7 Liquidators prospects of success in potential litigation litigation funding proposal Author/s: Phil Stern Liquidators must adequately demonstrate prospects of success in potential litigation in order for the courts to approve an application for entry into a litigation funding agreement. In Jones, Saker, Weaver and Stewart (Liquidators), in the matter of Great Southern Limited (in liq) (Receivers and Managers Appointed) [2012] FCA 807, the liquidators (plaintiffs) of Great Southern Limited and associated entities sought the Court s approval to enter into a funding agreement with a litigation funder. The purpose of the funding was to facilitate investigation of potential claims of breaches of directors duties, which would assist in providing a return to unsecured creditors. Funding had been initially provided by another litigation funder, but had subsequently stopped. The liquidators had been in office for three years and had applied significant funds to their investigations. Siopsis J declined to approve entry into the funding agreement. He relied upon particular relevant factors being: The liquidators prospects of success in the potential litigation; The interests of the creditors; and The level of the funder s premium. The liquidators failed to adduce evidence which sufficiently addressed the factors. His Honour acknowledged the difficulty of the situation. His Honour did not rule out that the liquidators could produce the required evidence at some other stage to satisfy the Court. However, at the time of the judgment, the evidence was insufficient to justify entry into the funding agreement. His Honour required evidence of legal opinions as to the liquidator s prospects of success in the potential litigation. Whilst the courts have power to issue confidentiality orders, and usually do in these types of applications, there are no assurances that a court will always do so, and there is always the potential for argument of a waiver of privilege over the opinions. His Honour also required evidence of the value of the potential claim, in light of the significant funders premium and accruing of professional fees to the liquidators. The particular issue was to ensure the worth of the potential claim demonstrated there would be a benefit for creditors after payment of the funder s premium and fees. The case has potentially significant consequences to liquidators who are obliged to either obtain creditors, committee of inspection or Court approvals for entry into an agreement, including funding agreements, which exceed three months (see section 477 Corporations Act 2001). 7