+ Overseas Travel Restrictions for Directors of Insolvent Companies

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  Overseas Travel Restrictions for Directors of Insolvent Companies

Sydney

Wednesday 22 November 2006

Melbourne

Wednesday 29 November 2006

Prepared and presented by Leigh Adams, Principal, Leigh Adams Lawyers

Directors of insolvent companies

Section 486A (1) states that on the application of a liquidator the court may make orders:

(a)   … prohibiting…an officer …of the company from taking…out of …Australia…money or … property of the company ….

(b)                                                              ….

(c)   … requiring …the… officer …to surrender … his … passport…

(d)  … prohibiting an officer of the company … from leaving Australia…

Section   486A (2) states that the court may only make an order under subsection (1) if:

(a) the company is being wound up in insolvency or by the court or an application has been made for the company to be so wound up; and

(b) the court is satisfied that there is at least a prima facie case that the officer… will become liable:

(i) to pay money to the company…; or

(ii) to account for property of the company; and

(c) the court is also satisfied that there is substantial evidence that the officer …

(i) ….; …

(ii) … intends to leave Australia

  in order to avoid that liability …; and

(d) …   .

Section 486A

Where a meeting under s. 439A of the Corporations Act (a meeting of the creditors of a company in administration) resolves under s.439C (c) that the company be wound up, then s. 446A deems such a resolution to be a special resolution under s. 491 -  that is, a resolution that the company be wound up voluntarily, not in insolvency nor by the court. So section 486A technically does not apply in such circumstances.

Section 486A was discussed by his honour Young J in ERS Engines Pty Limited –v- Wilson (1994) 35 NSW LR 193.  

He said that one of the matters to be proved before Section 486A can be exercised is that the director intends to leave Australia in order to avoid liability to repay. The mere fact that the director’s being overseas may make the liquidator’s task more difficult is insufficient.

His Honour also noted s. 486A (5) prohibits the court from requiring as a condition of granting an interim order, an undertaking as to damages. Thus the court he said, will have to weigh up when considering whether to make an interim order under this section, the fact that the directors are not to receive any compensation for frustrated travel arrangements even if on a final hearing, the court considers that no interim order should have been made.

I now turn to Jones re. ACN 110802938 Pty Limited [2006] NSWSC 276.

In that case, the originating process sought as interlocutory relief an order pursuant to s. 486A of the Corporations Act that until further order of the court, the director be prohibited from leaving Australia without the consent of the court.

The plaintiff was concerned about the bona fides of certain transactions regarding the sale of assets by the company to a purchaser in which the director of the company in liquidation seemed to have an interest.

It was clear on the evidence that whilst he had suspicions, the liquidator was not yet in a position to make any fully formulated and supported allegations about breach of duty in connection with the sale transaction.

His Honour noted that the lack of fully formulated and supported allegations meant that the plaintiff had not shown “at least a prima facie case” that the director was liable to pay or account to the company concerned.

His Honour went on to discuss s. 486A (2)(c) which requires that the court be satisfied as to the existence of “substantial evidence” of intention to leave the jurisdiction.

Barrett J in the Jones case made reference to Jordan CJ in Godfrey -v- Henderson (1994) 44 SR (NSW) 447 at 454 where Jordan CJ distinguished “substantial evidence” from a “surmise or a mere scintilla”.

Barrett J in the Jones case then referred to the evidence before him, and stated that it did not constitute substantial evidence that the director intended to leave Australia. He said that suspicion is not sufficient. Hard evidence is required.

In the Jones case, it was also conceded that in any event, s. 486A was unavailable because the company was subjected to the form of winding up that follows on from a voluntary administration under Part 5.3A.

The liquidator sought to deal with this point by making an application for a winding up order under s. 461.

His Honour also went on to state that it may be appropriate for a voluntary winding up to be replaced by a court ordered winding up on the liquidator’s application if some benefit to the body of creditors would thereby be achieved, providing of course that some appropriate ground for the making of a winding up order is shown.

Whether a desire by a liquidator to have access to s. 486A   is a sufficient reason for such a course is something that he left to be considered for a future case.

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