+ Insolvency Law Update - Autumn 2008

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Are you in breach again?

In what is considered by many to be a substantial change in the litigation landscape, Finkelstein J. recently refused  an application to extend time for filing affidavits - see Black and Decker (Australasia) –v- GMCA Pty Limited [2007] FCA 1623.

He said “A useful rule to adopt is to allow an extension only if the failure to meet the existing timetable is the result of excusable non-compliance. In deciding whether there is excusable non-compliance, the Court should take into account amongst other factors:

a)      The direct and indirect prejudice to the opposing party;

b)      The impact of the delay on the proceedings;

c)      The reasons for the delay;

d)      Good faith or lack of good faith on the part of the party seeking to be excused; and

e)      The effect of putting off a trial both on other litigants and generally on the Court’s ability to efficiently manage its cases.

In stating the above, his Honour was quick to distinguish the  1997 High Court case of  Queensland –v- JL Holdings (1997) 189 CLR 1623. Litigants beware!

Insolvency practitioners who don’t need lawyers

It is often said that insolvency practitioners know more about law than lawyers know about accounting.

Whether that is true or not, it doesn’t help if you, as an insolvency practitioner, have been negotiating a settlement of a potential recovery action and inadvertently lose your entitlement to maintain privilege over confidential documents.

In Commissioner of Taxation –v- Rio Tinto Limited (2006) 151 FCR 341, the Commissioner responded to an allegation by the taxpayer that he could not have been properly satisfied that a transaction was a dividend stripping transaction by stating that the matters he considered in reaching that state of satisfaction were “evidenced” in certain documents, some of which were privileged.

The Court concluded that a mere acknowledgement that a document is relevant to a state of mind is insufficient to constitute issue waiver but in this case however, the Commissioner had taken the further step of stating that the matters he considered were “evidenced” by the documents’ contents.

This made it necessary to examine those documents in order to determine the basis of the Commissioner’s conclusion and accordingly undermining the confidentiality claimed over them.

Statutory demands and debts

Hansmar Investments Pty Limited –v- Perpetual Trustee Company Limited [2007] NSWSC 103 considers the question of whether the amount payable for breach of a contract is a “debt” capable of supporting a statutory demand.   The answer is “yes, but…”.

The company entered into a contract (“the first contract”) to purchase its property from its own mortgagee selling the property under its power of sale. However, the company could not raise the funds and was unable to complete. The mortgagee terminated the contract and the deposit was forfeited to the mortgagee.

Subsequently, the mortgagee sold the property to a third party under a second contract for less than the original contract amount and the proceeds were not enough to fully pay out the liability owing by the company to the mortgagee. The mortgagee issued a statutory demand against the company in an amount being for the short-fall against the original contract less the amount of the forfeited deposit.

The first contract specifically provided that a claim could be made for the short-fall, and the mortgagee relied on the contractual terms.

The mortgagee was the seller of the property under the first contract but after the first contract failed, the mortgage was assigned to a new mortgagee. It was the new mortgagee who sold the property under the second contract and issued the statutory demand.

The Court held that whilst the first mortgagee’s rights under the first mortgage were properly assigned to the new mortgagee, the new mortgagee was not the correct creditor as the first mortgagee’s rights under the first (failed) contract had not been assigned to the new mortgagee. The Court agreed that the debt which was due and payable and capable of supporting a statutory demand, remained with the original mortgagee and not the party that issued the demand.

Application to set aside a voidable transaction

In Kowls Enterprises Pty Limited (in liquidation) –v- Baloglow [2007] NSWCA 191, it was held that a disposition of company funds by agreement between the directors and shareholders of a company, whether or not in breach of the fiduciary duties of one or both of them, remains a transaction of the company and the fact that company was not expressly party to the agreement by which its assets were disposed did not mean that the disposition of the proceeds of sale was not a transaction of the company under s 588FE of the Corporations Act (which deals with voidable transactions).

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