+ Insolvency Law Update-Spring 2008

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Caldebank offers

Don’t make them. Make a Pt 42 Rules offer instead! Because: (i) An offer made under the rules will generally have the same flexibility as a Caldebank offer; (ii) It will have virtual automatic favourable costs consequences for your client; (iii) It will ensure you will not bear the onus in showing that the Court should make a favourable costs order; and (iv) The burden is on the offeree to establish “exceptional circumstances” to found an entitlement to a different order.

Mortgagee sales and GST

S105-5(1) of the A New Tax System (Goods and Services Tax) Act 1999 (the GST Act) provides that you make a taxable supply if

a)          you supply property of another entity (the debtor) to a third party in or towards the satisfaction of a debt that the debtor owes to you; and

b)          had the debtor made the supply, the supply would have been a taxable supply.

One of the interesting effects of the GST Act is that it gives the Commissioner of Taxation a de facto priority for any GST liability on the sale of mortgaged property over both secured and unsecured creditors of the defaulting mortgagor. This is because Div 105 operates to place the GST liability on the mortgagee personally rather than on the mortgagor. This means that the interests of the first mortgagee (and presumably the second mortgagee where the first mortgagee is fully paid) have been placed behind those of the Commissioner.

However, where there is no mortgagee sale (and there is a sale by the mortgagor instead), then the first (and subsequent) mortgagees rank in priority to the Commissioner. Accordingly, a mortgagee may be better off leaving the mortgagor to undertake the sale and account to the mortgagee from the sale proceeds.

Provable debts and Costs Orders

For bankruptcy, s82 of the Bankruptcy Act provides that debts “incurred” before the date of the bankruptcy are provable. In Foots -v- Southern Cross Mine Management P/L [2007] HCA 56, the question of costs orders was considered.

At the time of the bankruptcy, judgment had been handed down, but no costs order had been granted. The High Court said that the costs order must have been granted before the date of the bankruptcy for the costs to be provable. That is logical.

However, under s553(1) of the Corporation Act, a provable debt in the liquidation of a company means a debt the “….circumstances giving rise to which occurred before the relevant date…”.

In Environmental and Earth Sciences P/L -v- Fouris [2006] 152 FCR 510, a costs order had not been made before the relevant date but was based on a judgment which was given before the liquidation commenced. The Court found that the costs order was a provable debt because the basis for granting the order (being the judgment) had been granted before the relevant date and so the circumstances giving rise to the costs order occurred before the relevant date.

It seems that our lawmakers go out of their way to make life difficult for the community’s legal advisers.

Special Purpose Liquidators

Special purpose liquidators have been around since 1887! See Re Midland Land & Investment Corporation [1887] WN(Eng) 58   by way of example. In that case, the company was subject to a court ordered winding up.  The  Corporations Act now enshrines the subsequent body of case law under s473(8). But there is no similar provision for a voluntary winding up - whether a creditor’s voluntary winding up or a member’s voluntary winding up.

However, Justice Barrett in Lo -v- Neilsen & Moller (Autogalss) (NSW) Pty Ltd [[2008] NSWSC 407 has changed all that. In May 2008, using the powers under s511 of the CA, he appointed two registered liquidators as the additional liquidators of the company. There was no application before him to have the existing liquidator replaced (which you can only do in any event on the basis of there being an actual or potential conflict of interest).

Ms Lo contended that there had been a scheme to transfer the assets of the company (“the first company”) to a second company owned and controlled by the first company’s director Mr Rankine. Steps in the scheme included placing the first company into administration, appointing the liquidator Mr Wykes, having his fees paid by an unidentified third party and then placing the first company into a creditors voluntary winding up under the control of Mr Wykes with no further funds available to enable any proper investigation of the company’s affairs.   

Ms Lo’s submission was that Mr Wykes, having been selected for appointment in the first place by Mr Rankine, continued in office only because of the support of Mr Rankine, and she believed his conduct required scrutiny by an independently minded liquidator.

Because of this lack of confidence in Mr Wykes, Ms Lo has requested that he resign but he did not.

The court was influenced by the fact that Ms Lo indicated that she was willing to finance investigations by a liquidator only if that liquidator was not Mr Wykes.

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