ARITA Quarterly Round-up - September 2022

CASE REPORTS

4 Objecting to the decision to discharge of Salim Mehajer Administrative review

Weston and Inspector-General in Bankruptcy [2022] AATA 1252

PERSONAL INSOLVENCY

7 When an objection is objectionable

Michaela Manicaros v Commercial Images (Aust) Pty Ltd [2022] QSC 83

INSOLVENCY REMUNERATION

9 Public examinations liquidators’ right to commercially sensitive information and documents Pearce, in the matter of Bandiera Holdings Pty Ltd (Receiver Appointed) (in liquidation) v Bandiera Holdings Pty Ltd [2022] FCA 876

INSOLVENCY

OBJECTION TO DISCHARGE PUBLIC EXAMINATIONS

11 Reasonable to pursue an unreasonable director-related transaction in a solvent liquidation Aviation 3030 Pty Ltd (in liquidation) v Lao, in the matter of Aviation 3030 Pty Ltd (in liquidation) [2022] FCA 458

INSOLVENCY RECOVERY PROCEEDINGS

13 SOPA and insolvency intersect again

Nicolas Criniti Pty Ltd (in liquidation) [2022] NSWSC 1149

INSOLVENCY

OF DEBT

LEGISLATION

14 Claim under D&O policy defeated where director’s company benefited from director’s breach

Hakea Holdings Pty Ltd v McGrath (No.2) [2022] FCA 995

CASE REPORTS

Objecting to the decision to discharge of Salim Mehajer

Administrative review

Weston and Inspector-General in Bankruptcy [2022] AATA 1252

PERSONAL INSOLVENCY OBJECTION TO DISCHARGE

The Administrative Appeals Tribunal recently conducted a review of a decision by the Inspector-General in Bankruptcy (Inspector-General) to confirm an objection under s 149N of the Bankruptcy Act 1966 (Cth) (the Act) to the discharge of Mr Salim Mehajer’s bankruptcy. The objection was lodged by Mr Mehajer’s trustee in bankruptcy. The objection was based on grounds relating to Mr Mehajer’s failure to pay the trustee amounts he was liable to pay and also a failure to provide written information about the bankrupt’s property, income or expected income when requested in writing by the trustee: Weston and Inspector-General in Bankruptcy [2022] AATA 1252.

KEY TAKEAWAYS

• Under s 149N(1A) of the Act, an objection must not be cancelled under subsection 149N(1) if the objection specifies at least one special ground; there is sufficient evidence to support the existence of at least one special ground specified in the objection; and the bankrupt fails to establish that the bankrupt had a reasonable excuse for the conduct or failure that constituted the special ground.

• When considering the operation of s 149N of the Act, the proper and preferred approach is to proceed directly to consideration of subsection 149N(1A) rather

than first considering s 149N(1). This adopts the approach in Stolyar and Inspector General in Bankruptcy [2021] AATA 3398 and Jones and Inspector‑General in Bankruptcy [2018] AATA 3260

• The only decisions the Inspector‑General is able to make under the Act are to cancel or confirm an applicant’s decision to lodge a notice of objection. There is no separate decision in respect of a ground of objection. Consequently, the AAT can only make a decision pursuant to s 43 of the Administrative Appeals Tribunal Act (1975) (Cth) to affirm, vary, set aside and substitute or remit for reconsideration with directions or recommendations, the Respondent’s decision under subsection 149N(3) of the Act to confirm or cancel a decision to file an objection.

BACKGROUND

Sydney businessman and former Auburn deputy mayor Salim Mehajer became bankrupt pursuant to a Sequestration Order made by the Federal Circuit Court on 18 March 2018. The period of bankruptcy was due to end on 5 May 2021. The case concerned whether the period of bankruptcy of Mr Mehajer should be extended.

The Applicant, the trustee in

bankruptcy, lodged a written notice of objection to discharge from bankruptcy on 11 November 2020 pursuant to s 149B of the Act under the grounds specified in paragraphs 149D(1)(f) and 149D(1)(d) of the Act (Objection).

The ground in paragraph 149D(1)(f) was that the bankrupt failed to pay to the trustee an amount that the bankrupt was liable to pay under s 139ZG of the Act. The ground in paragraph 149D(1)(d) was that the bankrupt, when requested in writing by the trustee to provide written information about the bankrupt’s property, income or expected income, failed to comply with the request.

On 13 November 2020, Mr Mehajer applied to the Respondent, the Inspector General, pursuant to s 149K of the Act requesting a review of the Objection on all grounds.

On 12 January 2021, a delegate of the Respondent decided to confirm the ground of objection contained in paragraph 149D(1)(f) (the Confirmed Ground) and to cancel the ground of objection in paragraph 149D(1)(d) (the Cancelled Ground) (the Reviewable Decision). As stated in the Reviewable Decision, the effect of the decision pursuant to subsection 149A(2) of the Act was that Mr Mehajer would remain bankrupt until 4 May 2026.

The Applicant applied to the Administrative Appeals Tribunal ( AAT) for a review of the Reviewable

TURNER

Partner,

Rose Fulbright

DAINTON

Lawyer, Norton Rose Fulbright

Decision pursuant to s 149Q of the Act, specifically in respect of the Cancelled Ground, being that Mr Mehajer failed to provide information to the trustee when requested in writing to do so. Mr Mehajer applied to be made a party to the proceedings and also sought review of the Confirmed Ground. As such, the AAT considered both the Confirmed Ground and the Cancelled Ground.

DECISION

Under subsection 149N(1A) of the Act, the Objection was not cancelled under subsection 149N(1) because:

1. the Objection specified two “special grounds”;

2. there was sufficient evidence to support the existence of both special grounds; and, 3. in respect of both special grounds, the bankrupt, Mr Mehajer, had failed to establish that he had a reasonable excuse for the conduct or failure that constituted the special ground.

Therefore, the Respondent’s decision to confirm the trustee’s decision to file the notice of objection was affirmed.

Matters raised at the beginning of the hearing

Before consideration of the primary issues, there was an issue in dispute as to the AAT’s jurisdiction. Mr Hutchins for the Respondent submitted that under the Act, the Respondent could only determine whether or not to cancel or confirm the trustee’s decision to lodge a notice of objection. There was no separate decision in respect of a ground of objection. Consequently, the AAT could only make a decision pursuant to s 43 of the Administrative Appeals Tribunal Act (1975) (Cth) to affirm, vary, set aside and substitute or remit for reconsideration with directions or recommendations, the Respondent’s decision under subsection 149N(3) of the Act to confirm the Applicant’s decision to file the Objection.

Ultimately, both the Applicant and Respondent were asking the AAT to affirm the Reviewable Decision.

Mr Mehajer was seeking to have the Reviewable Decision set aside and the decision substituted that the trustee’s Objection be cancelled.

Mr Hutchins stated near the beginning of the hearing that in accordance with the Respondent’s duty, the Respondent had a better understanding of the issue in respect of the Cancelled Ground, intended to work with the AAT, and, certain material having come to light, it may not have had reasons for cancelling that ground.

The proper approach to applying s 149N of the Act in this case

The relevant law in this case is s 149N of the Act. The Court undertook analysis of this section by considering three cases. The Court considered whether, as the Applicant contended, the proper approach as set out in Rimanic and Inspector‑General in Bankruptcy [2010] AATA 875 was first to apply the criteria in subsection 149N(1) to the facts of the case and, then if applicable, apply the criteria in subsection 149N(1A). The AAT preferred to adopt the approach in Stolyar and Jones which meant proceeding directly to consideration of subsection 149N(1A).

In any case, the AAT made observations about s 149N(1) and concluded that only s 149N(1)(b) might apply on these facts. In this case both the Confirmed Ground and the Cancelled Ground are “special grounds” pursuant to subsection 149N(1A). The appropriate course is to consider the sufficiency of the evidence in respect of each ground separately as required by paragraph 149N(1A)(b), and if there is sufficient evidence, whether Mr Mehajer had a reasonable excuse pursuant to paragraph 149N(1A)(c). Mr Mehajer was required to succeed on both grounds to achieve the outcome he sought. If he was

unsuccessful, the Objection must not be cancelled. If he was successful, it would be necessary to consider the application of paragraph 149N(1)(b).

The issues to be determined

By reference to s 149N(1A), the issues were:

1. Is there sufficient evidence to support the existence of at least one special ground specified in the Objection?

2. If the answer to (a) is yes, has Mr Mehajer failed to establish that he had a reasonable excuse for the conduct or failure that constituted the special ground?

3. If Mr Mehajer has established a reasonable excuse for the conduct or failure that constituted the special ground, paragraph 149N(1)(b) must be considered.

Consideration of the Confirmed Ground

There was no dispute that Mr Mehajer had not paid the contributions. Therefore, there was sufficient evidence to support the existence of a failure to pay income contributions.

The AAT then considered whether Mr Mehajer had established a reasonable excuse for the non‑payment. Mr Mehajer maintained that he had never been advised that he was liable to pay and had never received the relevant notice. The AAT considered various claims of Mr Mehajer including that a member of the Respondent’s staff had told him that he did not have to pay while the review was underway. There was no corroborative evidence. The AAT did not accept that this occurred.

The AAT also considered claims that Mr Mehajer suffered depressive downfalls that last several weeks that make him feel worthless and unable to physically move. However, Mr Mehajer did not claim that this condition led to his belief that he did not have to pay the contribution while the Respondent was reviewing the assessment.

Dr Henderson, consultant forensic psychiatrist, had previously provided an opinion in relation to the impact of the diagnosed condition on Mr Mehajer’s behaviour in respect to previous charges that had been laid. The doctor did not address the issues before the AAT or Mr Mehajer’s behaviour relating to either of the grounds, including his claimed belief in respect of this ground. The AAT was not satisfied that the evidence established that he had a reasonable excuse for failing to pay the contributions. At its highest, Mr Mehajer’s claim was that he had a genuine belief that he did not have to pay the contribution while the review was before the Inspector General. There was no basis for that belief because he had received a copy of the notice of 28 July 2020 which set out the amount owing and a schedule for payments, and warned that non‑payment was a ground of objection and that a request for review did not affect his liability to pay the contribution. He had applied for review to the Inspector General as the notice had specified.

Pursuant to subsection 149N(1A) the objection was not cancelled under subsection 149N(1). The Reviewable Decision was affirmed. That finding was sufficient to dispose of the matter. However, the parties were of the view that the AAT should address both grounds of objection.

Consideration of the Cancelled Ground

In relation to the Cancelled Ground, Mr Mehajer claimed that he had cooperated and done all he could to provide the documents the Applicant requested and to maintain communication with the Applicant because the finalisation of his bankruptcy was in his best interest. Mr Mehajer referred to searches carried out by the Applicant pursuant to warrants of Mr Mehajer’s residential property, the offices of his solicitor and accountant, and the offices of work

colleagues and family members. The Applicant confiscated all books and records including data from electronic devices. After that, Mr Mehajer claimed that he strongly believed the Applicant had possession of all his books and records. Mr Mehajer also claimed that he was unreasonably denied an extension of time within which to provide information that he had already provided because he was ill. This position led to a similar consideration of whether there was sufficient evidence to support the claim that Mr Mehajer failed to comply with a request and whether Mr Mehajer had established a reasonable excuse for the conduct or failure that constituted the Cancelled Ground.

The AAT considered correspondence between Mr Mehajer and the Applicant in relation to the production of documents. This correspondence included a request for two extensions by Mr Mehajer, which were granted. When a further extension was sought, the Applicant refused the request and advised that no further extensions of time would be given, noting that a period of 6 weeks was “more than adequate”. The Objection was filed the following day. Mr Mehajer adduced evidence in relation to sickness including evidence from a neuro surgeon and spinal surgeon that “I understand that he has court requirements, but in his current state, his attendance will need to be postponed until approximately 2 weeks post surgery.”

In relation to whether there was sufficient evidence to support the existence of the Cancelled Ground, the AAT stated:

“[Mr Mehajer’s] claims are two fold and contradictory. He maintains that he has provided, directly or by way of search warrants, all documentation and information he has. He claims that he would have to use subpoenas to obtain other material. At the same time, he stated that he was going to provide more material, sought extensions of time within which to

do so, and eventually did provide material which he maintained had already been provided. Doing the best

I can, I understood [Mr Mehajer’s] position was that he provided previously provided information to demonstrate that he was doing his best to co‑operate with the Applicant.

The only issue between the Applicant and Respondent was whether [Mr Mehajer] had a reasonable excuse for his non compliance.”

The AAT was also not satisfied that Mr Mehajer had a reasonable excuse for failing to provide the requested information. In making this decision, the AAT referred to the long period of time in which Mr Mehajer had to provide information. He was granted two extensions by the Applicant, the last a week longer than requested. The AAT stated:

“He was made aware sufficiently of the consequences of not providing the information requested. He initiated two court proceedings not long after receiving the 22 September 2020, was involved in another court proceeding, and was concerning himself with his real property interests in the period given to comply with the request. That [Mr Mehajer] spent time on those other matters in October 2020 demonstrates that he was not prioritising complying with the Applicant’s request.”

The AAT also considered an argument from the Applicant and Respondent that no correspondence from Mr Mehajer after 11 November 2020 may be taken into account pursuant to subsection 149N(1B). The AAT agreed with this argument but in any case, it made no difference to the outcome.

Accordingly, the AAT determined that pursuant to subsection 149N(1A) of the Act, the Objection was not be cancelled under subsection 149N(1) of the Act. As such, the Reviewable Decision must be affirmed.

Read the decision

When an objection is objectionable

Manicaros

Commercial

CORPORATE INSOLVENCY REMUNERATION

In a decision handed down by Brown J on 20 May 2022, the Queensland Supreme Court provided useful guidance on when a liquidator may recover their legal costs of a remuneration application from a creditor objecting to the application (Objector): Michaela Manicaros v Commercial Images (Aust) Pty Ltd [2022] QSC 83

KEY TAKEAWAYS

• Generally, costs are not awarded against Objectors because they serve an important role in assisting the Court when scrutinising an appointees’ costs. However, this rule can be displaced in exceptional circumstances.

• When costs orders are made against an Objector in the exceptional circumstances noted above, they can be on a standard or indemnity basis.

• An Objector making serious allegations against an appointee, and being aware that the appointee will have to spend significant resources responding to the claims is not, by itself, sufficient to justify a costs order against an Objector.

BACKGROUND

Mr Verschoyle was the director of Commercial Images (Aust) Pty Ltd (Company), which was placed into

provisional liquidation on 31 October 2017. On 15 February 2018, the Company was wound up by court order and the provisional liquidator was appointed as the liquidator of the Company (Liquidator).

On 23 July 2018, the Liquidator filed an application for approval of his remuneration by the Court, which was objected to by Mr Verschoyle, one of the Company’s creditors (GEDG), an employee of the Company and PA Khoury Lawyers (Mr Verschoyle’s solicitors) (PAKL).

On 21 November 2018, Mr Verschoyle and PAKL filed a Joint Statement of Facts, Issues and Contentions (JSFIC) in the remuneration application that contained allegations that the Liquidator: 1. breached his fiduciary duties; 2. failed to act in good faith and for a proper purpose; and 3. breached sections 180 and 182 of the Corporations Act 2001 (Cth).

Subsequently, on 19 December 2018, the Liquidator, on behalf of the Company, commenced proceedings against Mr Verschoyle to recover a loan that had been made to him by the Company (Loan Proceeding).

In his defence to the Loan Proceeding, Mr Verschoyle claimed that if he successfully opposed the

Liquidator’s remuneration application, he would not have to repay the director loan. As later noted by the Court in its judgment, there was no basis for Mr Verschoyle to raise this defence.

By the time the remuneration application was heard, PAKL was in receivership, and so on 3 December 2021, Mr Verschoyle advised the Liquidator that he no longer opposed the application and withdrew his misconduct claims. This meant that the Liquidator’s remuneration was approved by the Court on 15 December 2021 after a significant delay and after significant costs has been incurred defending Mr Verschoyle’s accusations.

Subsequently, the Liquidator made an application to have his costs of the remuneration application paid by Mr Verschoyle on either a standard or indemnity basis. The grounds for the Liquidator’s application were that Mr Verschoyle:

1. went beyond being a mere objector and became an adversary (Ground 1);

2. had a predominant ulterior motive for alleging misconduct (Ground 2); and

3. engaged in conduct that constituted harassment (Ground 3).

Her Honour Justice Brown of the Queensland Supreme Court considered each of these grounds.

CASE

DECISION

Ground 1

The Court found that exceptional circumstances existed in the present case for Mr Verschoyle to pay the Liquidator’s costs on a standard basis. This was because Mr Verschoyle conducted himself as an adversary, rather than as a mere objector in the application.

The allegations were unsubstantiated with no evidence provided by Mr Verschoyle to justify his claims. By making unproven claims, and using them as the basis for his defence in the Loan Proceeding, Mr Verschoyle was found to go beyond acting as an objector with legitimate interests.

In particular, her Honour justified imposing a costs order on Mr Verschoyle because he abandoned his opposition to the remuneration application (and his allegations against the Liquidator) well after the matter had been set down for hearing.

Ground 2

As mentioned above, the Court found that one of Mr Verschoyle’s aims in objecting to the Liquidator’s remuneration was to advance his own interests in the Loan Proceeding. However, it determined that there was insufficient evidence to infer that this was Mr Verschoyle’s predominant motivation. Her Honour’s reasoning was that Mr Verschoyle had objected to the Liquidator’s remuneration, and filed the JSFIC, prior to the commencement of the Loan Proceeding. She concluded that it was unlikely he would have made the objection in order to land a “pre‑emptive strike” in anticipation of the Loan Proceeding.

In addition, the Court found that the director of GEDG had an ulterior purpose in pursuing the objection, as a result of personal grievances he had against the Liquidator for rejecting GEDG’s proof of debt. However, this ulterior purpose could not be attributed to Mr Verschoyle.

While the Liquidator failed on Ground 2, the fact that an ulterior motive existed at all influenced the Court’s finding that Mr Verschoyle acted as an adversary in Ground 1.

Ground 3

The Court accepted that Mr Verschoyle was well aware that the Liquidator would have to spend considerable time and money responding to the allegations he sought to make. However, her Honour found that this was an insufficient basis to infer that the allegations were intended to cause, serious and unjustifiable trouble and harassment.

CONCLUSION

Since the Court did not find that Grounds 2 and 3 were made out, the Liquidator’s costs were not ordered to be paid on an indemnity basis.

In her judgment, her Honour said that Courts should be hesitant to make costs orders against Objectors, as this might discourage them from legitimately raising concerns in remuneration applications. However, this case serves as a reminder that, while it is not common, Objectors are not immune from having legal costs ordered against them where their conduct goes beyond merely objecting to a liquidator’s claim for remuneration.

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Public examinations

liquidators’ right to commercially sensitive information and documents

in the matter of Bandiera Holdings Pty Ltd (Receiver Appointed) (in liquidation) v Bandiera Holdings Pty Ltd

CORPORATE INSOLVENCY PUBLIC EXAMINATIONS

In Pearce, in the matter of Bandiera Holdings Pty Ltd (Receiver Appointed) (in liquidation) v Bandiera Holdings Pty Ltd [2022] FCA 876, an accounting firm applied to discharge a summons for public examination that required production of their commercially sensitive professional indemnity insurance policy.

KEY TAKEAWAYS

• A company’s “examinable affairs”, under the Corporations Act 2001 (Cth) (Act) includes its property, which extends to the existence and value of any potential causes of action against third parties.

• Satisfying a Court that a proposed examinee can likely give information about the company’s “examinable affairs” (which s 596B of the Act requires before a summons can be issued) is a relatively low bar.

• Mere assertions that there is no claim against the person summonsed and/or that the person’s interaction with the relevant company was limited are insufficient to challenge a summons, particularly if the liquidator adduces some contrary evidence (which can include material produced in answer to a summons).

• An undertaking from liquidators to keep documents produced by an examinee confidential may tip the balance in favour of issuing a summons where those documents are confidential or commercially sensitive.

BACKGROUND

Mr Reynolds owned and controlled Bandiera Holdings Pty Ltd (Company).

In late 2018, negotiations took place between the Company and another entity (Seller) for the purchase of a financial planning business, including its client book (Business).

On 21 December 2018, the Company entered a deed to purchase the Business (Deed). Following completion, a dispute arose between the Company and the Seller including with respect to the Company’s payment of only part of the purchase price.

Liquidators were subsequently appointed to the Company and obtained orders for a summons to be issued to an accounting firm (Accountants) under s 596B of the Act who had previously advised the Company. The summons required production of, among other documents, the Accountants’ professional indemnity insurance

policy (Policy). The Accountants produced most of the material required, but resisted production of the Policy, and sought a discharge of that aspect of the summons. In so doing, the accountants contended:

• seeking the Policy was not a proper purpose for issuing a summons, but amounted to a fishing exercise;

• any potential claims against the Accountants were weak, such that the Court should not require production of the Policy given its confidential/sensitive nature;

• via an affidavit from one of their partners, that the Accountants were unaware of any existing or potential claim the Company may have against them; and

• the services the Accountants provided were limited, occurred over a short period, and were provided well after the Company entered into the Deed.

DECISION

The Court noted that an application seeking to discharge a summons in effect sought a review of the Registrar’s order for the summons to be issued. Accordingly, the application was by way of a hearing de novo, where fresh evidence was permitted.

Although the Accountants suggested their relationship with the Company was limited, the liquidators’ evidence (which included documents the Accountants produced in compliance with the Summons) indicated otherwise. The evidence included:

• an engagement letter issued to Mr Reynolds in relation to advice concerning the Business acquisition;

• emails Mr Reynolds sent the Accountants requesting advice; and

• emails Mr Reynolds sent to the Seller that was copied to the Accountants, which indicated that the Accountants had been advising him in relation to the purchase of the Business.

In relation to the Company’s “examinable affairs”, the Court noted that:

• the concept was broad, and included the Company’s transactions, dealings, and property – the latter of which encompassed the existence and worth of any causes of action the Company may have;

• satisfying a Court that a person is likely to be able to give information about the Company’s examinable affairs is a fairly low threshold;

it requires proof of a reasonable hypothesis or scenario justifying that a potential examinee has information to provide; and

• where the potential examinee is summonsed because there may be a claim against them, it is not necessary to establish the existence of a plausible claim –rather, it is enough to show that a possible claim or cause of action might exist: Pittman v Park; in the matter of BAM Recycling Pty Ltd (in liquidation) [2020] FCA 887.

The Court concluded that there was “a sufficiently close connection between the alleged misconduct of Mr Reynolds and the advice provided by [the Accountants] to justify an investigation into whether [the Accountants were] involved in the identified breaches of the Act”. Accordingly, the Court held that there was sufficient justification for issuing a summons to the Accountants and requiring production of the Policy.

Discretionary refusal to order production

The Accountants submitted the Court had a broad discretionary power to refuse issuance of a summons under s 596B of the Act, and that in exercising that discretion, the Court must balance:

• ensuring a liquidator can obtain all necessary information to conduct his or her public responsibility; and • an interest in affording justice to the examinee.

Although the Court did not disagree with the Accountants’ contention, and accepted the Policy was confidential and commercially sensitive, this did not automatically outweigh the interests of the liquidators and the Company’s creditors.

Ultimately, the liquidators proffered an undertaking to restrict disclosure of the Policy to themselves, their professional and administrative staff, their lawyers, any litigation funder and the funder’s lawyers (provided such persons gave a separate undertaking) and Court staff. This was sufficient to overcome any argument from the Accountants that they should not be ordered to produce the policy until further evidence more definitively establishing an actual or potential claim was provided.

Conclusion

The Court dismissed the application based on the liquidators’ undertaking and ordered the Accountants to pay the liquidators’ costs.

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Reasonable

solvent liquidation

CORPORATE INSOLVENCY RECOVERY PROCEEDINGS

director-related transaction

A recent decision of the Federal Court of Australia has confirmed that a liquidator of a solvent company can pursue unreasonable director related transaction claims under s 588FDA of the Corporations Act 2001 (Cth) (Act) for the benefit of the company’s shareholders.

KEY TAKEAWAYS

• The term ‘creditor’ in the context of an order made under s 588FF(4) of the Act, which enables recovery of the lost benefit of an unreasonable director related transaction “for the benefit of the creditors of a company”, extends to shareholders in the case of a solvent company in liquidation.

• The Court’s power to grant relief pursuant to a claim under s 588FDA is not conditioned by any requirement that a company be insolvent. A remedy under s 588FF(4) is enlivened when a transaction meets the definition of an unreasonable director related transaction within the meaning of s 588FDA, irrespective of the solvency of the company.

BACKGROUND

In 2011, Aviation 3030 Pty Ltd ( Aviation 3030) entered into a contract to purchase land for $7.8 million. Seven years later, in October 2018, Aviation 3030 contracted to sell the land for $135 million, with settlement to occur some 54 months later in April 2023.

Between 2011 and 2015, Aviation 3030 undertook capital raising to fund the acquisition and development of the property, with those investors referred to as the ‘Early Investors’ in the reasons for decision.

The transaction at the centre of the unreasonable director related transaction claim was the 2016 issue of 152 million shares in Aviation 3030 at a price of $0.001 per share to interests associated with the two founding shareholders of the company (Founding Shareholder Interests).

In separate earlier proceedings, ASIC sought to wind up Aviation 3030, and a related managed investment scheme, on the just and equitable ground pursuant to s 461(1)(k) of the Act on the basis that the orders were necessary for the public interest, to ensure investor protection and enforce

compliance with the law. ASIC pointed to the 2016 share issue to the Founding Shareholder Interests being at a gross undervalue, as well as a number of other matters including fabrication of documents, misleading investors, related party loans and unauthorised and exorbitant expenditures, as demonstrating a strong case that the public interest is relevantly affected.

ASIC succeeded in its application and the Court made orders winding up Aviation 3030 on 20 March 2019. Importantly, Aviation 3030 was solvent.

In the present case, the liquidators of Aviation 3030 sought relief pursuant s 588FF of the Act, in respect of the 2016 share issue to the Founding Shareholder Interests on the basis that it was an unreasonable director‑related transaction pursuant to s 588FDA.

Among other things, the key issues before the Court were:

• whether relief under s 588FF(4) of the Act is available to a liquidator of a solvent company; and

• whether the term “creditor” includes shareholder for the purposes of s 588FF(4), which provides as follows:

4. If the transaction is a voidable transaction solely because it is an unreasonable director‑related transaction, the court may make orders under subsection (1) only for the purpose of recovering for the benefit of the creditors of the company the difference between: a) the total value of the benefits provided by the company under the transaction; and b) the value (if any) that it may be expected that a reasonable person in the company’s circumstances would have provided having regarding to the matters referred to in paragraph 588FDA(1)(c).

DECISION

The liquidators submitted the term ‘creditors’ imposes no constraint on the relief sought in this case and contended that insolvency at the time of the relevant transaction is not an element to be considered in the case of an unreasonable director related transaction. The liquidators relied on the Explanatory Memorandum and second reading speech of Corporations Amendments (Repayment of Directors’ Bonuses) Act 2003 (Cth), which stated that: “In certain limited circumstances, liquidators can attack payments made while a company is still solvent. This bill adds to those circumstances, by explicitly extending them to include unreasonable payments made to directors of companies…To be caught, the transaction must have been unreasonable, and entered into

during the four years leading up to a company’s liquidation, regardless of its solvency at the time the transaction occurred.”

Further, the liquidators submitted that the meaning of ‘creditors’, used in the context of s 588FF(4) should be understood to include company shareholders, having regard to the ordinary and natural meaning of the word, relying on the decision of her Honour Justice Davies in Re BM2008 Pty Ltd (in liquidation) [2010] VSC 337; 244 FLR 17 where her Honour found (at [15] [16]) that a shareholder is a ‘creditor’ in the sense that they are entitled to distribution of the surplus remaining at the conclusion of the solvent winding up, as the ordinary meaning of the term constructs a creditor to be “someone to whom money is due”.

The Defendants (being the Founding Shareholder Interests) argued that s 588FF(4) could not apply in relation to a solvent company, contending that there needs to be an element of insolvency in the circumstances, and that the orders sought were not “for the benefit of the creditors” of Aviation 3030 because the company was a solvent company.

However, the Court accepted the liquidators’ submission that that creditor claims do not arise exclusively out of the insolvency of a company. Despite Aviation 3030 being very much a solvent company, the Court noted that there were a number of creditor claims which remained outstanding and, in relation to the interpretation of the term ‘creditor’ in s 588FF(4), found as follows:

“The creditor may be a person entitled to payment of a debt, or to the recovery of damages awarded by a judgment of a court of competent jurisdiction…

A shareholder is one class of creditor of the company, entitled to payment of a sum in accordance with the terms which govern the obligation.”

The Court held that, although there are various context in which it is relevant to distinguish between to two, both external creditors and shareholders are exposed to equal risk of harm by an unreasonable director related transaction and so there should be no reason to distinguish between the two classes for the purpose of recovery. Shareholders remain entitled to a pari passu distribution of any surplus after payment of external creditors, with respect to their claims for the return of the paid up share capital and a distribution of any surplus.

The Court also found that the fact that s 588FDA is not conditioned by any requirement that the company be insolvent is implicit recognition that unreasonable director related transactions may arise irrespective of the solvency of the company.

Ultimately, the Court was satisfied that the requirements of s 588FF(4) had been made out and made orders including a declaration that the 2016 share issue was an unreasonable director related transaction and ordered that Lao Holdings Pty Ltd, the third defendant and one of the Founding Shareholder Interests, pay the sum of $9,044,000 pursuant to s 588FF(4).

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SOPA and insolvency intersect again

Nicolas Criniti Pty Ltd (in liquidation)

CORPORATE INSOLVENCY PROOFS OF DEBT

PAYMENT SECURITY LEGISLATION

The New South Wales Supreme Court has recently considered the adjudication of a proof of debt in the context of a SOPA adjudication application on foot as at the relation back date.

In an industry facing pressure, this case provides useful clarity on the intersection between the Corporations Act 2001 and state security of payment legislation, and serves as a further incentive for builders to act promptly in issuing payment claims and activating the adjudication process.

KEY TAKEAWAYS

• The Court restated the requirements for a debt to be provable in a liquidation. In adjudicating the proof of debt, the liquidator is required to: identify the substantive obligation which the debt or claim represents; and determine whether the circumstances reveal sufficient evidence of the basal fact necessary to bring the substantive obligation into being.

• The Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA) provides a mechanism for the determination and payment of enforceable debts. The payment mechanisms are not enlivened until the debt is

– ARITA Vic/Tas Division

enforceable under the SOPA. This requires certain preconditions to be satisfied. Where an adjudication application has been made, the determination of that application is a precondition.

• Accordingly, where an adjudication application has been made under the SOPA, the associated debt does not constitute a ‘statutory debt’ until a determination has been made.

BACKGROUND

The SOPA entitles builders to claim progress payments in the course of performing work under a construction contract. Where the parties to a construction contract disagree as to the amount payable under payment claims (and the statutory requirements and timeframes are met), the builder can make an application under the SOPA to have an adjudicator determine the quantum of the debt.

It is now settled law that an external administrator cannot rely upon the SOPA in seeking to recover debts owing to the Company. In the recent matter of Nicolas Criniti Pty Ltd (in liquidation) [2022] NSWSC 1149 the Court considered the intersection between the SOPA and insolvency provisions in the Corporations Act from the reverse position: where a creditor was seeking to rely on a SOPA adjudication process on foot as at the date of the administrators’ appointment.

Nicolas Criniti Pty Ltd (the Company) retained a builder to construct an apartment block in Sydney. Two years into the project the Company rejected a progress payment claim by the builder and issued a nil payment schedule. In response, the builder filed an adjudication application under the SOPA. Before the adjudicator could hand down a determination, the Company appointed administrators and was subsequently wound up. Whilst the Company was under administration, the adjudicator found in favour of the builder and determined that the adjudicated debt was $927,727.80.

The builder subsequently sought to prove for the debt in the liquidation as a statutory debt based on the determination. The liquidator rejected the builder’s application on the grounds that adjudication did not create a ‘statutory debt’ admissible for proof under s 553(1) of the Corporations Act.

DECISION

Given that appeals of a proof of debt adjudication are hearings de novo, the Court was able to consider at trial reasons and factors that had not been raised by the liquidator in his original rejection of the proof of debt.

One of the primary issues considered by the Court was whether the adjudication application was

sufficiently progressed to give rise to a statutory debt under the SOPA. In assessing this point, his Honour Justice Hammerschlag noted that the case clarifies a legal principle of significant public interest.

His Honour found that the SOPA creates a statutory scheme whereby entitlements to payments arise as distinct statutory debts because of the determination made by an adjudicator. The source of the debt is not the existence of the conditions that allow for an application under the SOPA, or that a SOPA adjudication is on foot, it is the determination itself which gives rise to the statutory debt.

To be provable in a winding up, debts must have crystallised into a substantive obligation as at the date that the administrators were appointed. As the determination had not been made at the date of the administrators’ appointment, no statutory debt was yet in existence.

His Honour rejected the builder’s submission that the genesis of the enforceable debt was the entry into the construction contract, with the adjudicators decision merely quantifying and confirming what was already the builder entitlement.

The Court took comfort from the fact that the statutory right

is independent of the parties’ contractual rights, which can still be used to prove for debts in a winding up. In this regard, the builder was entitled to lodge a proof of debt and substantiate its claim under contract. Presumably, the substantiation documentation was available to them as it had been submitted in the SOPA adjudication process. This is a logical decision that aligns with existing legal principles and with practical considerations in the assessment of proofs of debt in a liquidation.

the decision

Hakea Holdings Pty Ltd v McGrath (No.2) [2022] FCA 995

DIRECTOR’S DUTIES

TOM LANGDON, Barrister, Francis Burt Chambers

A recent decision from the Federal Court is a useful example of how exclusion clauses in a directors and officers liability insurance policy will apply in practice when bringing a claim against a director for breaches of duty. The case considered the scope of a ‘known circumstances’ exclusion and a ‘personal advantage’ exclusion: Hakea Holdings Pty Ltd v McGrath (No.2) [2022] FCA 995

KEY TAKEAWAYS

• When pursuing claims against a director in the expectation that the claim will be paid by an insurer under a D&O policy, it is essential to consider all of the exclusions applicable under the policy.

• Courts construe insurance policies liberally, and will be reluctant to interpret exclusions in a way that will give them such a broad application that they would defeat the operation of the policy.

• While the interpretation of an insurance policy depends primarily

on the precise terms of the policy, in many cases, a ‘known circumstances’ exclusion will be read down to only exclude liability if the insured was aware that a legal liability might flow from the ‘circumstances’.

• Where a D&O policy excludes liability for claims based on conduct that gave the director an ‘advantage’ or benefit, this will include indirect benefits and advantages, such as benefits to companies controlled by the director.

Claim under D&O policy defeated where director’s company benefited from director’s breach

• The Court is not bound by the manner in which a plaintiff seeks to confine its claim: for example, if the director has engaged in deliberate conduct, the court will be prepared to make a finding that the conduct was deliberate or intentional even if the plaintiff does not allege that it was the case. This means a plaintiff may be unable to ‘tailor’ the elements of their claim for the purpose of seeking to avoid the operation of particular exclusions (such as fraud or intentional conduct exclusions) in an insurance policy by confining the claim to one of negligence.

BACKGROUND

The Defendant, Mr McGrath, was a director of Hakea Holdings Pty Ltd (Hakea). He was also the sole director and shareholder of Denham Constructions Pty Ltd (Denham). Hakea engaged Denham under a design and construct contract for an aged care facility to be owned and run by Hakea.

In late 2014 and throughout 2015, Denham experienced severe financial difficulties, including an inability to pay tax, and failed to comply with multiple payment plans. Work on the project fell behind schedule because subcontractors ceased work, being unpaid by Denham.

Mr McGrath’s explanations for the delays to the board of Hakea did not disclose Denham’s financial difficulties. The Court found that Mr McGrath breached his duties as a director of Hakea, because he should have disclosed that Denham was experiencing severe financial difficulties and that it was unable to complete the project in the foreseeable future.

Mr McGrath had the benefit of a directors and officers insurance policy (the Policy). Hakea sought to bring a claim against the insurer under the Policy for Mr McGrath. The insurer argued that Mr McGrath’s liability to Hakea was excluded from the Policy on the basis that:

• the claim arose out of circumstances that were known to Mr McGrath before the Policy was taken out (in February 2016); and

• Mr McGrath gained a ‘personal profit or advantage’ from the conduct that was the subject of the claim.

DECISION

On the ‘known circumstances’ exclusion, Yates J held that neither Mr McGrath nor Hakea knew of the ‘circumstances’ or ‘Claim’ before the commencement of the Policy. This was despite:

• the judge’s finding that Mr McGrath knew that Denham was experiencing severe financial difficulties by May 2015; and

• the judge’s finding that Hakea knew of Denham’s financial difficulties by November 2015.

Hakea had made an attempt to confine its case to not include any element of deliberate or knowing misrepresentation by Mr McGrath, arguing that Mr McGrath believed that Denham was not having financial difficulties. However, Yates J found that he was not bound by that confined case. On the evidence, his Honour was satisfied that Mr McGrath knew of Denham’s financial difficulties, and deliberately concealed them.

However, Yates J concluded that this was not enough to bring the claim within the ‘knowledge’ exclusion under

the Policy. His Honour’s view was that the exclusion required more than ‘simply, facts known to the director, prior to the inception of the policy, that might subsequently provide the factual substratum for a Claim. To read [the exclusion] in that way would drastically and unrealistically, limit the availability of the indemnity that is to be provided under the policy, and thus fail to give the policy a commercial construction’.

His Honour concluded that the exception would only be enlivened if the director knows that the ‘circumstance’ would ‘expose him or her to a legal liability to a third party’. That is, even though the exclusion in question was drafted in very broad terms, his Honour found that the claim would only be excluded if the director had some awareness of the legal consequences of the ‘circumstance’.

However, his Honour did find that the ‘profit or advantage’ exclusion applied, because Mr McGrath benefited from the continuation of Denham’s contract with Hakea. Hakea unsuccessfully sought to avoid the exclusion on the basis that Mr McGrath and Denham were distinct legal entities, and it was Denham, not Mr McGrath, who benefited from the contract.

As Denham’s sole director and shareholder, Mr McGrath had control of all of Denham’s finances, and treated Denham’s money as if it was his own. As a result, Mr Denham obtained an ‘advantage’ from his conduct, and as a result his liability was excluded under the Policy.

Therefore, Yates J held that the Policy did not respond to Mr McGrath’s liability, and Hakea’s claim against the insurer was dismissed.

Read the full decision

PRACTICE ALERTS

WA New Building Security of Payment Act

PAYMENT SECURITY LEGISLATION

5/07/2022

STATE LEGISLATION

The Building and Construction Industry (Security of Payment) Act 2021 (the Act) provides important payment protections for all participants in the Western Australian building and construction industry (some exclusions apply). It applies to construction contracts entered into on or after 1 August 2022.

Building and Energy WA has produced a range of educational materials to help participants in the WA building and construction industry understand when and how the Act will apply to construction contracts.

The Construction (Former Provisions) Contracts Act 2004 will continue to apply to contracts entered into prior to this date.

Access information on the Building and Construction Industry (Security of Payment Act)

Access the Construction (Former Provisions) Contracts Act

Personal insolvency indexed amounts update (March 2022)

PERSONAL INSOLVENCY

7/07/2022

INDEXED AMOUNTS

AFSA has updated some Indexed amounts based on the Australian Bureau of Statistics Consumer Price Index (CPI) for the March quarter 2022.

See the current list of indexed amounts on the AFSA website

Director ID requirements for companies in external administration

CORPORATE INSOLVENCY

20/07/2022

DIRECTOR ID

ARITA has received a number of queries from members regarding the obligation of directors of companies in external administration to obtain Director IDs.

If a person was a director in the past, but not since director ID was introduced (4 April 2021), they do not need to apply for a director ID.

It is recommended that those who were directors at 4 April 2021 (the date the director ID requirement took effect) apply even though they may not be a director at the conclusion of the transitional period (30 November 2022).

If a company is deregistered or the director ceased before 4 April 2021 (assuming the person is not a director of any other companies), then no application is required.

If a company is deregistered or the director ceased after 4 April 2021, then the directors should apply.

Personal insolvency indexed amounts update (June 2022)

PERSONAL INSOLVENCY

29/07/2022

INDEXED AMOUNTS

AFSA has updated some Indexed amounts based on the Australian Bureau of Statistics Consumer Price Index (CPI) for the June quarter 2022.

See the current list of indexed amounts on the AFSA website

ROCAP Version 2

CORPORATE

ASIC FORMS

1/08/2022

The newly released ROCAP Version 2 has replaced the previous version of the ROCAP on the ASIC website and, from 1 August 2022, external administrators are requested to issue the ROCAP Version 2 for the director/ officer to complete.

As noted in the ASIC communication issued to all registered liquidators today, the ROCAP Version 2 was developed based on feedback from:

• registered liquidators (RLs) and their staff

• small group consultation sessions with RLs and software providers

• director testing.

ASIC considered all feedback received and incorporated that feedback into Version 2, where possible.

*Note: Please ensure you do

The ROCAP Version 2 comprises:

• Part A (Form 507), including Form 507A and Part A appendix tables

• Part A instructions

• Part B, including Part B appendix tables*

• Part B instructions.

ASIC requests that external administrators make every effort to transition to the ROCAP Version 2 now. It has engaged with the software providers (CORE and Insol6 (formerly MYOB)) to help the profession be ready for this.

Any inquiries or feedback regarding the ROCAP Version 2 should be sent to RLQueries@asic.gov.au

Download the ROCAP Version 2

ATO finalising position on CGT for Trustees

PERSONAL INSOLVENCY TAX

Members will be aware that ARITA have been pursuing the issue of CGT in bankruptcies for over a year.

Following a final meeting last week with the ATO, we are aware that the ATO will publish its final determination within the next few weeks.

Unfortunately, its position essentially remains that s 254 applies to bankruptcy trustees. This obviously has significant and problematic impacts on the administration of

estates and the personal liability of trustees.

ARITA is already considering what appeal options exist, but this will certainly include seeking ministerial intervention and law reform to address the consequences.

The ATO has agreed to speak at a webinar event to explain to trustees and others that work in the bankruptcy space how it sees the guidance applying. More information regarding the webinar, which will be free to members and subscribers, will be provided once a date is confirmed.

Personal insolvency exemplar behaviour case studies

PERSONAL INSOLVENCY

29/08/2022

AFSA

In June 2022, AFSA released case studies highlighting exemplar behaviour by practitioners on its website with the intention that it recognises publicly the good work they do.

AFSA wants to hear from Trustees about further case studies where practitioners have demonstrated best practice in culture, integrity, and moral compass. The aim is to promote excellence and good behaviour and share stories with the profession.

Case studies can be submitted to PractitionerSupervision@afsa.gov.au with the subject line ‘Exemplar behaviour case study’.

The inclusion and final wording of any case studies on the AFSA website is at the discretion of AFSA. AFSA continues to refine the release of the case studies, including their ease of access on the AFSA website.

More about the publication of benchmarks for the profession can be found in AFSA’s December 2021 PIR Newsletter article

Legal status of directors who do not hold Director ID

DIRECTOR ID

13/09/2022

After an enquiry by a member, ARITA asked the Modernising Business Registers Business Advisory Group (MBR BAG) about the legal status of a director (and their actions) if they do not have a Director ID by the end of November, which is the date that a Director ID is required by.

The following response has been provided to ARITA noting that the response is provided for information only and is general information. It is not legal advice and does not take into account a director’s individual circumstances. Independent legal advice should be sought on the application of this information to a director’s individual circumstances.

QUESTIONS AND SHORT ANSWERS

1. If a director does not have a director ID: a) Will the director lawfully remain a director?

Yes – provided that they were lawfully appointed. b) Will their actions/decisions be valid? Yes – provided that their actions/decisions are lawful.

c) Will a director appointment made after 30 November 2022 be valid?

Yes – provided that the appointment is lawful.

2. However, a director must also comply with their director ID obligations under the Corporations Act 2001. This response provides an overview of those obligations and the potential consequences for failing to meet those obligations.

DETAILED EXPLANATION

1. a) A lawfully appointed director will remain a director, irrespective of: whether or not that director has applied for or has a director ID; when the director was appointed.

b) Actions/decisions taken by a person, who does not have a director ID, in their capacity as a lawfully appointed director are not affected by their failure to have director ID.

c) Failure to have a director ID does not invalidate a director’s lawful appointment or lawful actions/ decisions taken in their capacity as a director.

d) Failure to have a director ID does not prevent a person from being lawfully appointed as a director.

2. However, a director of an Australian registered company is required to have a director ID.

Explanation:

Under the director ID provisions of the Corporations Act 2001 1 a director of an Australian registered company2 is an “eligible officer”.3 The Registrar may determine that a particular person or a class of persons are not “eligible officers”. 4

An eligible officer (i.e. a director) must have a director ID 5 unless they have a director ID application pending or the person became a director without their knowledge.6

The date by which a person must apply for a director ID depends upon when the person was appointed as a director.7

The Registrar may, on the application of a director, extend the director ID application period.8 The Registrar may also allow a class of persons a longer period of time in which to apply for a director ID.9

Civil and/or criminal penalties may apply for failure to have a director ID.10 Civil penalties may also be applied to a person (such as a tax agent) who is “involved” 11 in a contravention of the director ID requirement.12

The Registrar can direct a director to apply for a director ID.13 Civil and/or criminal penalties may be applied for failure to comply with such a direction.14 Civil penalties may also be applied to a person (such as a tax agent) who is “involved” in a failure to comply with such a direction.15

It is an offence to intentionally misrepresent a director ID which is not the director ID of a person or is a number held by someone else. The offence may attract civil and/or criminal penalties.16

Information about who needs to apply for a director ID, how they can apply and when they need to apply can be found at https://www.abrs.gov.au/directoridentification number

An act done by a director is effective even if the director’s appointment, or the continuance of their appointment is invalid because the company or director failed to comply with the company’s constitution or any provision of the Corporations Act.17

Material taken into account 1. The following material was considered in this response: • the Corporations Act 2001 (Cth).

1 Part 9.1A of the Corporations Act 2001 (CA). 2 Being a company registered under the CA – see s 9 definition of “company” and Division 1 of Part 5B.2 of the CA. 3 “Eligible officer” is defined in sub section 1272B(1) of the CA. 4 Under subsections 1272B(2) and (3) of the CA. As at the date of this response, no such determinations have been made. 5 Under subsection 1272C(1) of the CA. 6 See subsections 1272C(2) and (3) of the CA. 7 See https://www.abrs.gov.au/director-identification-number/who-needs-apply-and-when. Under subsection 120(1) of the CA, A person becomes a director of a company on registration of the company if the person is specified in the application with their consent as a proposed director of the company. 8 Under section 1272E of the CA. 9 See subsection 1272E(2) of the CA. 10 Under subsections 1272C(4) and (5) of the CA. ABRS refers potential civil/criminal breaches to ASIC for potential prosecution. As at the date of this response, the maximum civil penalty for an individual is $1,100,000 and the maximum criminal penalty for an individual is $13,200. 11 Under s 79 of the CA, a person is “involved” in a contravention if, and only if, the person: has aided, abetted, counselled or procured the contravention; or has induced, whether by threats or promises or otherwise, the contravention; or has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or has conspired with others to effect the contravention. 12 Under subsection 1272C(5) of the CA. 13 Under subsection 1272A(2) of the CA. 14 Under s 1272D of the CA. ABRS refers potential civil/criminal breaches to ASIC for potential prosecution.As at the date of this response, the maximum civil penalty for an individual is $1,100,000 and the maximum criminal penalty for an individual is $13,200. 15 Under subsection 1272D(4) of the CA. 16 Under s 1272H of the CA. 17 Under subsection 201M(1) of the CA.

AFSA guidance for Queen’s memorial public holiday

AFSAPERSONAL INSOLVENCY

14/09/2022

Following on from our Practice Alert on 12 September, AFSA have provided guidance for personal insolvency appointments around the effect of the Queen’s memorial public holiday.

AFSA considers a practical approach should be taken and supports the following approach:

1. Where meetings have been scheduled to occur on the public holiday they should be reconvened.

2. Where notices for meetings issued before the proclamation of the public holiday, and therefore at that time they issued, satisfied the business day requirement trustees should take a practical approach and proceed with the scheduled meetings.

3. Where notices issue after the proclamation of the public holiday, the public holiday should be observed and will not count as a business day.

This position is supported by the definition of the term “business day” in the Acts Interpretation Act 1901 –“business day” means a day that is not a Saturday, a Sunday or a public holiday in the place concerned.

At the time the notices that issued before the proclamation of the holiday, it was not a holiday in the place concerned.

ASIC guidance for Queen’s memorial public holiday

ASICCORPORATE INSOLVENCY

20/09/2022

Following on from our Practice Alert on 12 September, ASIC have provided guidance for corporate insolvency appointments around the effect of the Queen’s memorial public holiday.

This information applies to creditors meetings and proposals without a meeting where the relevant period includes 22 September 2022.

ASIC considers that where 22 September 2022 has been included as a business day, this no longer applies in light of the memorial public holiday for Queen Elizabeth II. Accordingly, registered liquidators should for:

• meetings already convened, issue new notices reconvening the meeting to the next business day; and

• proposals already issued, contact creditors and advise

that the proposal date has been changed to the next business day.

Any questions please contact RLqueries@ASIC.gov.au

ARITA Comment

ARITA notes that rework may be required as a result of the guidance issued by ASIC. If rework is required as a result of notices sent prior to the declaration of the public holiday, this work would be considered necessary and proper for the purposes of remuneration claims. If the rework is required as a result of notices sent after the declaration of the public holiday, this work would not be considered necessary and proper for the purposes of remuneration claims and should be written off.

Amendments to Victorian Environmental Protection Act

EPA STATE LEGISLATION

21/09/2022

Victorian members, or those members accepting appointments in Victoria, need to be aware that recent amendments to the Victorian Environmental Protection Act 2017 (EP Act) may impact appointments.

The amendments to the EP Act attempt to secure a “super priority” for the State against an occupier in relation to the costs incurred by the Environmental Protection Agency (EPA ) under the EP Act. This has been done by amending s 297 of the EP Act to override Chapter 5 of the Corporations Act 2001 (the Act) and by declaring s 297 as a Corporations legislation displacement provision for the purposes of s 5G of the Corporations Act applies (s 297A EP Act).

Section 5G of the Corporations Act provides that if a State law declares a provision of a State law to be a Corporations

legislation displacement provision for the purposes of that section, any provision of the Corporations legislation with which the State provision would otherwise be inconsistent does not operate to the extent necessary to avoid the inconsistency.

However, the operation of s5G is complex and contentious as can be seen from previous judicial consideration, such as that in the Linc Energy appeal decision, which has previously been summarised on the ARITA website.

ARITA has written to the Victorian EPA asking to meet to discuss the Agency’s intentions with regards to the implementation of the amended legislation in external administrations. We will keep members advised.

Personal insolvency indexed amounts update (20 September 2022)

INDEXED AMOUNTS PERSONAL INSOLVENCY

26/09/2022

AFSA has updated some Indexed amounts following the Department of Social Services’ release of basic rates of pension for 20 September 2022.

See the current list of indexed amounts on the AFSA website

ATO releases guidance on CGT in bankruptcy

PERSONAL INSOLVENCY TAX

The ATO have issued guidance on how it will interpret the application of s 254 of the Income Tax Assessment Act 1936 (ITAA 1936) to capital gains made by a bankruptcy trustee during the administration of a bankrupt estate.

Members will recall that the ATO published an article in AFSA’s PIR newsletter in June 2021 stating that s 254 of the ITAA 1936 applied to trustees in bankruptcy in the same way as it applied to liquidators. This meant that trustees in bankruptcy had a liability for tax on capital gains made on the sale of assets in bankrupt estates. This was a marked change to the position as understood by trustees.

ARITA obtained its own expert advice and made numerous submissions to the ATO on why the position taken was plainly wrong. However, the ATO has maintained that its interpretation of the law is correct. We have been able to get the ATO to address some of the practical issues with the implementation of its interpretation, and the ATO has issued guidance and updated its website materials.

ARITA is deeply dissatisfied with the ATO’s position, but the issue is now at a stage where we cannot take it any further with the ATO. An option is for a trustee in bankruptcy

to challenge the ATO’s interpretation. ATO funding of a test case may be available, and an application would have to be made.

The other option is to escalate the issue and seek legislative change to clarify how s 254 of the ITAA 1936 should equitably apply to capital gains in insolvency administrations, both personal and corporate. ARITA has written to the Treasurer and the Attorney General setting out our concerns and proposing a solution to ensure a fair outcome for all stakeholders.

Neither of these solutions will change the position in the short term, so it is important that trustees are aware of the issue and make decisions on the administration of their bankrupt estates accordingly – particularly around the commerciality of realising properties that have vested in the estate when potential tax liabilities are taken into account. We understand that AFSA is developing guidance to assist trustees.

Read the ATO guidance paper

Read the ATO website information Read ARITA’s letter to the Treasurer and Attorney-General