ATO Commences Examinations to Identify Phoenix Activity
The Australia Taxation Office recently commenced public examinations in the Federal Court, in relation to a group of entities connected to pre-insolvency advisor Philip Whiteman. The examinations will review the suspected promotion and facilitation of phoenix activities and tax schemes.
ATO Deputy Commissioner Will Day has revealed that the examination will investigate over 45 service providers, clients and employees of these advisors and alleged ‘dummy directors’ of phoenix companies. In doing so, it has appointed Pitcher Partners as liquidators, who will investigate the affairs and conduct of the entities before further legal action is pursued.
The ATO has taken a strong stance on illegal phoenix activity in recent times, asserting that it “deprives employees of their hard-earned wages and superannuation entitlements, unfairly disadvantages honest businesses by undercutting prices and leaves suppliers with unpaid debts.”
The activity is estimated to cost businesses, employees and the government $5.13 billion per year, and so the ATO is committed to “detecting those who promote and facilitate illegal phoenix behaviour, and disrupting those who willingly engage in phoenixing.”
ASIC to revise RATA with launch of ROCAP
Next month, ASIC is expected to launch it's Report on Company Activities and Property (ROCAP) which will have the effect of revising the existing RATA form. It has been designed in response to law reform and industry consultation, and serves to enable insolvency practitioners to obtain better information about events leading up to an external administration, including information about asset recoveries and reporting to ASIC.
Relevantly, the revised form seeks to minimise costs by:
- reducing the time spent dealing with large quantities of paperwork, by simplifying the process in which information is collected from directors about an external administration;
- providing directors with a form that they are able to complete themselves, thus reducing time spent following up information that was excluded in the first instance; and
- reducing requests from liquidators under ASIC's Liquidator Assistance Program.
Ahead of ROCAP's launch, ASIC has recommended that insolvency practitioners review their internal processes, such as changes to internal systems, precedents and checklists, to ensure they are equipped for its introduction this November.
Postal Evidence Rule Extended to 7 Days
Last month, the Senate passed the Civil Law and Justice Legislation Amendment Bill 2018, which serves to improve the operation and clarity of civil justice legislation administered by the Attorney-General.
Schedule 5 of the Bill introduces amendments to the Evidence Act 1995, by extending the postal evidence rule to accord with changes to Australia Post delivery times.
Currently, s 160 (1) of the Evidence Act states that “it is presumed … that a postal article sent by prepaid post addressed to a person… was received at that address on the fourth working day after having been posted.”
However, under the amendments, post will now be deemed to have been received on the ‘7th working day.’
The change will come into effect on the day which the Bill is given Royal Assent, which is likely to be in early October.
However, it is important to note that this change will not affect Commonwealth deeming rules, which, pursuant to The Acts Interpretation Act 1901, deem that service is “to have been effected at the time at which the letter would be delivered in the ordinary course of post."
Banking Royal Commission Reveals Culture of 'Greed and Dishonesty'
On the 28th of September, Kenneth Hayne, Head of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, published an interim report following months of investigations. The report reflects on the first four rounds of public hearings, which considered consumer lending, financial advice and small to medium enterprise loans.
Commissioner Hayne’s findings reveal that misconduct in the banking sector has been driven by greed, with financial institutions prioritising profits over people, and upholding shareholder interests over those of their customers.
Among the illegal and unethical practices exposed by the inquiry are findings of fees for no service, irresponsible and negligent lending practices, and failure by the banks to comply with policy requirements in the event of a breach.
Moreover, the investigation has revealed instances of charging fees to deceased persons, advice that cost one consumer almost $500 000 and the issuing of a credit card that would take the holder 138 years to pay off.
Whilst no recommendations will be provided until the final report is published next February, the interim report poses 693 questions about the banking, financial services and superannuation industry. These include;
- Whether existing law should be administered differently;
- Whether bank employees should continue to be rewarded for selling products; and
- Whether the current Household Expenditure Measures used by banks to assess suitability for 75 per cent of all loans is still viable, and if not, what should replace it.
As highlighted on the commission’s website, “the Commission cannot resolve individual disputes. It cannot fix or award compensation or make an order requiring a party to a dispute to take or not to take any action.” Instead, the Royal Commission simply investigates and provides recommendations to the government, who will decide which recommendations they wish to adopt by reforming the law.
Therefore, whilst individual consumers cannot expect financial wins to come directly from the Commission, they are still likely to see positive outcomes. This is because the recommendations handed down in the final report will likely prove a catalyst for legislative change, ultimately resulting in greater transparency for banking consumers.
The Commission is currently seeking submissions in response to the interim report, with the final report due on 1 February 2019.
Supreme Court of Queensland Issues Costs Guidelines
Practice Direction 22 of 2018
The Supreme Court of Queensland has for the first time issued guidance as to the appropriate percentage uplift to professional fees to be allowed pursuant to Item 1 of the Scale of Costs (the Scale) contained in Schedule 1 to the Uniform Civil Procedure Rules 1999 (UCPR).
Background
On 24 August 2018, the scales of costs in the UCPR were updated and as a part of those updates, the scales of costs for work undertaken in the Supreme Court of Queensland and in the District Court of Queensland (which had previously existed as Schedules 1 and 2 to the UCPR, respectively) were amalgamated.
Item 1 of the Scale (which had existed in substantially the same form in both Schedules 1 and 2 prior to their amalgamation) provides for an additional allowance to be made over and above the allowances otherwise provided for professional fees in the Scale for ‘General care and conduct’.
Item 1 then sets out a list of factors which must be considered when arriving at an appropriate allowance for general care and conduct.
Historically, allowances for general care and conduct have in practice been calculated by reference to a specified percentage of the professional costs that had otherwise been claimed/allowed by reference to other items in the Scale. Allowances ranged anywhere between 15% to 35% of professional costs otherwise allowed, most commonly falling between around 20% to 30%.
In its current form, Item 1 of the Scale now also provides for the issue of guidelines for the calculation of the general care and conduct allowance in practice directions by the Chief Justice.
Practice Direction 22 of 2018
Practice Direction 22 of 2018 was issued on 10 September 2018 and is entitled “Costs Guidelines”.
The practice direction provides guidelines for the application of Item 1 of the Scale, with its centrepiece being a comprehensive table providing an appropriate range of percentage allowances depending upon the quantum and complexity of each matter.
By way of example, in the Supreme Court:
- A ‘straight forward’ claim where the amount involved does not exceed $2M would attract an uplift between 15%-20%;
- A ‘straight forward’ claim where the amount involved exceeds $2M would attract an uplift of between 20%-25%;
- A ‘complex’ claim where the amount involved does not exceed $2M would attract an uplift between 20%-30%; and
- A ‘complex’ claim where the amount involved exceeds $2M would attract an uplift of 25%-35%.
The table also provides for many other circumstances, including those in the District Court, where the allowances are lower across the board.
The practice direction also provides that characterisation of a matter as straight-forward or complex is to be made on a case-by-case basis, with the intention being that about half of the work in each court will fall into each category.
No doubt over time judicial authority will begin to emerge which will assist in identifying where the line between a ‘straight forward’ and ‘complex’ matter lies.
For those wishing to view it, a copy of Practice Direction 22 of 2018 may be accessed here.
High Court of Australia rules that ‘Holding DOCAs’ are permissible in certain circumstances
Background
Mesa Minerals Limited (Mesa) is a listed mining company which owned a 50% joint venture interest in two manganese projects. It was placed into Voluntary Administration on 13 July 2016.
Voluntary Administrations are governed by Part 5.3A of the Corporations Act 2001 (CA). The object of Part 5.3A is set out in section 435A: being to administer the business, property and affairs of an insolvent company in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence or if that is not possible, results in a better return to creditors and members than an immediate winding up.
The regime provided in Part 5.3A is that the administrator is to investigate the circumstances of the company, form an opinion in respect of certain matters and call a meeting of creditors within 5 days before or after the end of the ‘convening period’, in most cases being 20 business days after the beginning of the administration. The Court may extend the convening period upon application and at the time of the events in question, the convening period could not be extended for more than 45 business days. At the meeting, the creditors may decide either that the company execute a Deed of Company Arrangement (DOCA), that the administration should end or that the company be wound up.
During the period of Voluntary Administration under Part 5.3A, a statutory moratorium is also applied to the claims of creditors against the company in administration.
At the adjourned second meeting of creditors of Mesa on 20 October 2016, the creditors voted in favour of entry into a DOCA, which was executed on 3 November 2016. The DOCA provided that the Administrators were to continue to investigate the property and affairs of the Company to explore the possibility of a restructure or recapitalisation of the Company and report within 6 months with the results of their investigations.
The Deed, in effect, is what is known colloquially as a ‘holding DOCA’.
Proceedings at first instance and below
Mighty River International Limited (Mighty River) owned 13.5% of Mesa and commenced proceedings in the Supreme Court of Western Australia seeking orders, relevantly, declaring that the DOCA was of no force and effect and terminating or setting aside the DOCA. Another shareholder of Mesa, Mineral Resources Limited (Mineral Resources) cross-applied for orders to the effect that the DOCA was not void or alternatively, that it was valid.
Master Sanderson dismissed Mighty River’s application at first instance.
On appeal to the Court of Appeal of the Supreme Court of Western Australia, Mighty River argued that the DOCA was invalid on two basis of note, namely that:
- Section 444A(4)(b) of the CA required that a DOCA specify some property of a company available to pay creditors, which the present DOCA did not do; and
- the DOCA had the effect of impermissibly extending the moratorium upon creditors’ claims and the time for investigation and reporting upon a restructuring proposal beyond the convening period without obtaining an order of the Court to do so. The essential argument was that such an extension was not consistent with the object of Part 5.3A as expressed in section 435A of the CA because it provided for “essentially an extension of the Administration Period”.
The Court of Appeal of Western Australia held the DOCA valid in separate judgments and dismissed the appeal.
The decision in the High Court
By a 3:2 majority, the High Court also held that the DOCA was valid and dismissed the appeal.
The plurality (comprising Kiefel CJ and Edelman J, with whom Gaegler J agreed in a separate judgment) held that:
- the DOCA did not contravene the object of Part 5.3A or impermissibly extend the time for investigation and reporting without an order of the Court pursuant to s439A(6) of the CA because:
- “the operation of the Deed aims to fulfil the object of the Part by maximising the chance of Mesa Minerals' survival or otherwise providing a better return to creditors than would result from its immediate winding up”. Reliance was placed upon evidence that the value of the listed shell of Mesa was between $400,000 and $900,000 and that as a result, sale of the assets of Mesa would be a better outcome for creditors than winding up if the administrators’ investigations determined that the business could not be successfully restructured and continue to operate; and
- the object of Part 5.3A was “not compromised if creditors choose, in a deed of company arrangement, to extend a moratorium beyond the period that they would otherwise have had outside an administration”; and
- in light of its context and purpose, section 444A(4)(b) of the CA did not require that a DOCA must specify some property of a company available to pay creditors’ claims; rather, it required that a DOCA specify any property of a company available to pay creditors’ claims. As a result, the DOCA in question did not contravene section 444A(4)(b).
Gageler J, whilst agreeing with the reasons of Kiefel CJ and Edelman J, delivered a separate judgment further explaining his Honour’s rejection of the argument that the DOCA did not comply with the procedural requirements of Part 5.3A of the CA.
Conclusion
The decision is of significance because it confirms that a ‘holding DOCA’ (although note the questioning of the use of that term on the basis that it has no legislative recognition) is not invalid merely because it has the effect of extending the moratorium upon claims of creditors beyond the convening period in Part 5.3A without leave of the Court. Instead, a DOCA extending the moratorium beyond the end of the convening period will not be invalidated for that reason alone so long as the purpose of the extension is consistent with the object of Part 5.3A; namely, to achieve a better outcome for creditors and/or members than an immediate winding up of the company if the moratorium were not extended.
Further, the decision is also of practical assistance because it confirms that a DOCA need only identify property available to pay creditors’ claims where there is in fact such property available to do so.
HCA Publishes Reasons for Confirming Validity of Holding DOCAs
The High Court recently released the reasons for decision in dismissing the appeal in Mighty River International Ltd v Hughes & Ors [2018] HCA 38. This decision confirms the validity of employing a certain form of deeds of company arrangement (“DOCAs”), known as a “holding DOCA” as a restructuring tool.
The case centers around a company Mesa Minerals Ltd (“Mesa”), which was placed into voluntary administration and the entry into a deed of company arrangement (“the Deed”). At the second meeting of creditors, a majority voted in favour of entering into the Deed which, amongst other things, provided for a moratorium on creditors' claims; required the administrators to conduct further investigations and report to creditors concerning possible variations to the Deed within six months; and provided that no property of Mesa Minerals be made available for distribution to creditors.
One of Mesa’s creditors, Mighty River International Ltd (“Mighty River”), disputed the validity of the Deed and subsequently brought proceedings in the Supreme Court of Western Australia alongside another creditor. Mighty River plead four bases for the Deed being void: (i) the Deed was contrary to the object of Pt 5.3A Corporations Act 2001; (ii) the deed invalidly sought to circumvent or sidestep the requirement in s 439A(6) for a court order extending the short convening period during which a second meeting of creditors must be convened by an administrator; and (iii) the deed did not comply with an alleged requirement in s 444A(4)(b) to distribute some property of Mesa Minerals and (iv) the administrators had failed to form the opinions required by s438A(b) and, at the relevant time as per s439A(4).
These arguments were rejected at first instance by Master Sanderson and on appeal to the Court of Appeal where it was held that the Deed was consistent with the object of Pt 5.3A of the Corporations Act 2001 (Cth); that s 444A(4)(b) did not require some property to be made available to pay creditors' claims; and that the use of a "holding" deed of company arrangement was one "gateway" to extend the period for convening a second creditors' meeting beyond the timeframe set by s 439A(5), the other being a court order under s 439A(6). By grant of special leave, Mighty River appealed to the High Court.
Before the High Court, Mighty River made two submissions: First, the Deed was not a valid deed of company arrangement, principally because it was an agreed extension of time that had not been ordered by a court under s 439A(6) and was contrary to the object of Pt 5.3A; Second, the Deed should have been declared void under s 445G(2) for contravening ss 438A(b) and 439A(4), or s 444A(4)(b), or both.
The Court was split 3:2 with Kiefel CJ and Edelman and Gageler JJ forming the majority. The Majority held that the HDOCA was consistent with Pt 5.3A, was validly executed and conferred genuine rights and duties; did not involve an impermissible side-stepping of s 439A(6) as the side-stepping was merely incidental to the purpose of the HDOCA; was not required to be declared void by s445G(2); and s 444A(4)(b) does not require property to be specified in the Deed.
Naming Wrong Employer Invalidates Fair Work Claim
The recent case of Lili Sinden v HDR Inc. T/A HDR [2018] FWC 5643 provides a reminder that when bringing a claim against employers, any would be applicant must ensure they name the correct entity in their application.
The applicant in this case, Ms Lili Sinden a HR manager, attempted to file a general protections claim under s 365 of the Fair Work Act 2009 against her former employer. Unfortunately for Ms Sinden, she named the US parent company, HDR Inc, as the respondent in her application and not her actual employer HDR Pty Limited. In response the employer raised a jurisdictional objection to Ms Sinden’s claim. Ms Sinden then sought to have the application amended under s 586 of the Act.
Ms Sinden asserted that the Commission could be satisfied that naming HDR Inc was a genuine error as her application correctly identified the trading name, ABN and address of her employer HDR Pty Limited. Ms Sinden further submitted that a number of documents surrounding her employment and termination simply referred to her employer as “HDR” as well as her email signature listing her as an employee of “HDR” and making several references to HDR Inc.
The respondent opposed claiming that this mis-naming was not a simple error, instead contending it was a conscious decision to elicit a strategic benefit in the application. In arguing this point the employer noted several factors including: the applicant’s position as the most senior HR manager for HDR Pty Limited, over 17 years of experience in human resources, frequent contact with the HR Manager for the US, and her regular work included drafting and distributing documents specifying the name HDR Pty Limited.
Having canvassed the evidence, Deputy President Kovacic was not prepared to amend the application to name the correct entity, concluding that it was implausible for Ms Sinden to have made such an error.
New Zealand Set to Reform Insolvency Laws
With the Insolvency Practitioners Bill currently before the New Zealand Parliament, the nation's insolvency laws are set to undergo a significant transformation.
The bill was first introduced to parliament in April 2010, and sought to introduce a ‘negative licensing system’ for insolvency practitioners. In doing so, the initial bill afforded the Registrar of Companies power to ban people from acting as a liquidator or receiver, and endeavoured to strengthen existing provisions relating to the automatic disqualification of insolvency practitioners. However, the bill was put on hold following its second reading in November 2013.
In June, the government revived the Bill, introducing a Supplementary Order Paper and making significant revisions to the original proposal. Submissions on the proposed changes closed on 24 August 2018 and the Bill is now listed before the Economic Development, Science and Innovation Committee of Parliament on 6 September 2018.
If adopted, the reform will:
- Introduce a coregulatory licensing framework whereby insolvency practitioners would need to be licenced by an accredited body under a new stand-alone Insolvency Practitioners Act;
- Extend the circumstances in which an insolvency practitioner will be disqualified from acting by reason of the practitioner’s association with the affected company or entity;
- Impose obligations on insolvency practitioners to provide detailed reports on insolvency engagements;
- Provide that, at a meeting of creditors of a company or an entity in liquidation or administration, the vote of a related creditor will be disregarded unless the court orders otherwise;
- Require insolvency practitioners to provide information and assistance to an insolvency practitioner that replaces them;
- Empower the court to make orders:
- Compensating any person who has suffered loss as a result of an insolvency practitioner’s failure to comply with any relevant enactment, rule of law or court order; and
- Sanctioning insolvency practitioners who fail to comply with any relevant enactment, rule of law or court order.
The reform will see the New Zealand system resemble that of the UK, whose insolvency laws are also under major review. It comes after New Zealand rejected the Australian model, where regulation is governed by ASIC and ASFA, with limited statutory regulation by the industry bodies.
NSWSC: Liquidators Must Not Use Casting Vote to Veto Their Removal
In a recent judgment delivered by the Supreme Court of New South Wales, the court found in favour of a creditor who sought to remove its liquidator, despite previously failing to do so at a meeting convened pursuant to the Insolvency Practice Schedule (Corporations).
Background
The case involved The Owners – Strata Plan 84741 (Strata Plan) who were the body corporate of a block of flats located in Clovelly. Strata Plan commenced proceedings against Iris Diversified Property Pty Ltd (Iris) and the builder of the apartment complex. The builder was subsequently placed in external administration and the proceedings continued against Iris. Before judgement was handed down, Iris sold a substantial property which they claimed was unrelated to Strata Plan’s claim against them. They also asserted that the assets they owned were owned in their capacity as trustee.
Following two 2017 judgements, Strata Plan became a creditor of Iris in the total amount of $1 799 937.91. Iris Group Management (IGM) - an entity associated with Iris Diversified - also claimed debts of $207 000. In October 2017, Iris was placed in liquidation and Henry McKenna appointed as liquidator.
Following this, Strata Plan requested that McKenna convene a meeting with the creditors of Iris Diversified, at which they sought to have him replaced by Liam Bailey and Christopher Palmer.
Prior to the meeting, McKenna was advised by his lawyers that he could exercise his casting vote against the resolution, so that it failed to pass. Strata Plan subsequently initiated proceedings after McKenna acted according to his lawyer’s instruction.
Decision
In deciding the case, the court was required to determine whether McKenna had power to exercise a casting vote against the resolution of his removal and whether resolution for McKenna’s removal should be ‘treated a passed’ and liquidators appointed.
In seeking a declaration that McKenna had no power to exercise a casting vote against his removal and the appointment of Bailey and Palmer as replacement liquidators, Strata Plan relied on r 75-115 (5) of the Insolvency Practice Rules (Corporations).
These rules provide for circumstances in which a resolution is passed at a meeting of creditors after a poll is demanded. The rules specify that the external administrator may exercise a casting vote in favour of the resolution where:
- no result is reached by a majority in number and value of creditors voting in favour or against the resolution; and
- The resolution relates to the removal of an external administrator of a company.
Despite this, they ultimately contended that the rule does not contemplate the external administrator exercising a casting vote against the resolution to remove themselves.
The court held that it was not necessary to determine whether the effect of that rule was to determine whether McKenna had power to exercise a casting vote or if its effect is merely that his vote was to be disregarded.
Ultimately, Black J ordered that Bailey and Palmer be appointed as joint liquidators of Iris, with McKenna ordered to pay costs without recourse to the assets of Iris.
This case signals an important reminder for liquidators tempted to use their casting vote to defeat a resolution calling for their removal. It is also telling for lawyers who are advising clients on how to vote in deadlocked meetings.
