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If I can’t do it here, can I do it there?

2017-07-12T09:30:00.000+10:00

The High Court considers whether a judgment holder can apply to enforce a judgment against an Australian bankrupt in a foreign jurisdiction.

The Talacko and Bennett families are involved in seemingly endless litigation stretching from Europe to Australia. The breadth of the matters in dispute is as wide as the distance between the two continents. The latest stoush resulted in the Victorian Court of Appeal (VCA) delivering a decision in the last fortnight on the tort of unlawful means of conspiracy.

That followed the recent High Court of Australia (HCA) decision in Talacko v Bennett [2017] HCA 15 which considered whether a judgment creditor of a bankrupt was prevented from obtaining a certificate under section 15(1) of the Foreign Judgments Act 1991 (Cth) (Foreign Judgments Act) to facilitate enforcement of the judgment in a foreign jurisdiction.

A family torn apart by war
The factual circumstances of this case trace back to post World War II Czechoslovakia and East Germany, when a number of Talacko family properties were seized and subsequently vested in the state. Following the end of Communist rule in Czechoslovakia, the three Talacko children allegedly agreed to reclaim, restore and sell their deceased parents' properties and share equally in any profit that followed.

By 1992 the properties had vested with one son, Jan Emil, who had since migrated to Australia. A dispute arose when Jan Emil’s sister and the children of a now deceased brother commenced proceedings against Jan Emil on the basis that he had reneged on the alleged agreement to split the profits.

In 2009, the Victorian Supreme Court held that Jan Emil had reneged on an agreement with the others to share the proceeds and costs of the restoration, and ordered him to pay €10,073,818 in equitable compensation.¹ On 4 November 2011, proceedings were commenced in the Czech Republic to have the compensation judgment recognised.² On 7 November 2011, Jan Emil became bankrupt.³

Foreign Judgments Act
In order to assist an Australian judgment creditor to prove to a court of a foreign country (where they seek to enforce the judgment) that the judgment is valid and enforceable, section 15(1) of the Foreign Judgments Act allows the judgment creditor to apply to obtain a certificate from the court that issued the judgment about its authenticity (Section 15 Certificate). However, section 15(2) of the Foreign Judgments Act says the judgment creditor cannot apply for a Section 15 Certificate ‘until the expiration of any stay of enforcement of the judgment in question’.

Following Jan Emil’s bankruptcy, his sister and the other judgment creditors sought issuance of a certificate under section 15(1) of Foreign Judgments Act to facilitate the enforcement of the 2009 judgment against Jan Emil in the Czech Republic.⁴ Jan objected to the issuance of the certificate given his bankruptcy.

The dispute made its way to the VCA, which had to consider whether a ‘stay of enforcement’ of a judgment within the meaning of section 15(2) of the Foreign Judgments Act is brought about by the operation of section 58(3) of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act), which provides that when a debtor has become bankrupt, it is not competent for a creditor to enforce any remedy against the person in relation to a ‘provable debt’ (i.e. a debt which is caught by the bankruptcy). The VCA held that the bankruptcy did not preclude the issuance of a certificate under section 15(1) of Foreign Judgments Act.⁵

Jan Emil appealed to the High Court, submitting that the interpretation by the VCA majority of section 15(2) would circumvent the purposes of the Bankruptcy Act, because such an interpretation would mean that, upon the debtor’s bankruptcy, a judgment creditor of the bankrupt would be prohibited from enforcing the judgment in Australia, but would not be prohibited from enforcing it overseas.⁶

The respondent siblings contended that a ‘stay of enforcement of a judgment’ has a settled, technical legal meaning – that is, a stay ordered by a court that operates directly on an order or judgment, rather than a statutory prohibition on enforcement against the judgment debtor generally.⁷

High Court decision
The HCA unanimously allowed Jan Emil’s appeal.

The majority (comprised of Kiefel CJ, Bell, Keane, Gordon and Edelman JJ) evaluated the content and context of section 15(2) of the Foreign Judgments Act and held that the section prohibited the making of an application in relation to a judgment that could not, under Australian law, be enforced by execution. The majority therefore concluded that the word ‘stay’ is not confined to stays imposed by courts, but extends to any legal impediment to execution upon the judgment.⁸

The majority found it ‘impossible to conceive of any good reason why a judgment that could not be executed in Australia should be capable of being enforced outside Australia at the behest of an Australian court’.⁹ Accordingly, there was no reason to distinguish between a court-ordered stay and a stay imposed by statute.¹⁰

When considering the operation of the Bankruptcy Act, the majority found that section 58(3) constituted a statutory stay which applied to section 15(2) of the Foreign Judgments Act. To remove section 58(3) from the reach of section 15(2) because it does not expressly refer to a ‘stay’ would be to elevate form over substance without justification.¹¹

Conclusion
This High Court decision clarifies that an Australian judgment cannot be enforced overseas where its enforcement would be prohibited in Australia by the bankruptcy of the judgment debtor. The purpose of the Foreign Judgments Act is to provide a mechanism for the smooth transition in the enforcement of Australian judgments overseas. It is not designed to facilitate a means of obtaining a benefit that would otherwise not be available to the judgment holder in Australia.
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¹ Talacko & Ors v Talacko [2009] VSC 533.
² Bennett v Talacko [2016] VSCA 179 [4].
³ Ibid [5].

⁴ Ibid [27].

⁵ Ibid [27].

⁶ Talacko v Bennett [2017] HCA 15 [56].

⁷ Ibid [60].

⁸ Ibid [66]-[67].

⁹ Ibid [69]

¹⁰ Ibid [70].

¹¹ Ibid [71].

Scott Butler

Ann Watson

Patrick Stanhope

How to advance your career in corporate restructuring and insolvency

2017-07-06T15:00:00.000+10:00

At the age of 40, Grant Thornton Partner and Head of Financial Advisory Said Jahani has been involved in some of Australia’s biggest cross-border matters.

In this insightful interview, Said reflects on his career in restructuring and insolvency and outlines what he believes are the critical factors in achieving success.

Conducted by McCullough Robertson Partner and restructuring and insolvency specialist Scott Butler this interview is part of the INSOL International Younger Members Committee Interview series.

Said & Scott_INT2017

To view the rest of the interviews, click here.

Scott Butler

Creditors become a weaker Linc in the chain: You can’t disclaim the environment in insolvency

2017-05-04T10:02:00.000+10:00

Regional towns across Queensland are often recognised, remembered and cherished for their unique attributes and historic events. Birdsville has their famous races, Barcaldine has the tree of knowledge, Longreach has the Stockman’s Hall of Fame and the Qantas Museum, and now the town of Chinchilla, in addition to being the melon capital of Australia, has a new claim to fame as the town where the environment conquered creditors.

The recent Linc Energy¹(Linc) decision did not frame the arguments in such terms, but nonetheless considered whether the liquidators of Linc were justified in causing the company not to comply with an Environmental Protection Order (EPO). Ultimately, Jackson J of the Queensland Supreme Court held that the liquidators had to use available money to help the environment at the expense of other claims.

Of course at the outset it’s important to note that Jackson J confined his analysis and the direction he gave to the specific set of facts before him. Nonetheless, there are lessons to be learnt from this fracas.

How did we end up at a face-off?

It’s undoubtedly well known that the Linc underground coal gasification project at Chinchilla did not go to plan. Some have described the venture into so-called ’clean energy‘ as “the biggest pollution event probably in Queensland’s history.”²

The underground coal gasification plant operated by Linc is alleged to have polluted soil and groundwater during its operation in a significant way. In April 2016, Linc was placed into administration. Shortly thereafter the Department of Environment and Heritage Protection of the Queensland Government (DEHP) issued an EPO to Linc, which imposed obligations on Linc regarding environmental monitoring and reporting. When the company was placed into liquidation in May 2016, the issues regarding those EPOs and in particular who was liable for the obligations under them, came to a head.

Asking nicely: the liquidators seek clarity

After Linc went into liquidation, the liquidators gave notice under the Corporations Act 2001 (Cth) (Corporations Act) disclaiming land at Chinchilla, the Environmental Authorities (EAs) issued under the Environment Protection Act 1994 (Qld) (EP Act) and the Mineral and Petroleum Licences.

The liquidators sought directions as to whether they would be justified in allowing Linc to not comply with the EPO issued. If the liquidators were obliged to cause Linc to comply with the EPO, it would require them to use all available money to do so (money, which would otherwise go to creditors such as employees). Linc’s liquidators argued that:

the disclaimer of the land, licences and authorities had the effect of discharging Linc from future compliance with the EPO
the requirement to make Linc comply under the EP Act was inconsistent with the termination of that liability by the disclaimer
to the extent of the inconsistency, the EP Act was invalid by reason of section 109 of the Constitution of Australia, and
they were not ‘executive officers’ of Linc under Queensland’s environmental laws.

The DEHP contrarily argued that the liquidators were executive officers of Linc and that in this capacity they were obliged to cause Linc to comply with the EPO.

It’s the law. It’s the vibe. It’s the Constitution.

The Court considered the inconsistency of the EP Act and the Corporations Act. Ordinarily, there is a general rule that where there is inconsistency between State and Federal legislation, the Federal legislation will prevail; but this was no ordinary case.

The Queensland Attorney-General weighed in on the matter on behalf of the DEHP and successfully utilised section 5G of the Corporations Act, which doesn’t typically see the light of day. This rarely used provision gives State laws a leg up over federal laws where the State law was in operation when the States referred their corporations’ powers to the Commonwealth in 2001. The result was a finding by the Court that the EPOs established by Queensland law were inconsistent, but ultimately prevailed, over the disclaimer provisions of Corporations Act.

Liquidators left lonely at the top

Linc’s liquidators contended they were not executive officers under the EP Act, meaning they didn’t have to cause Linc to observe its environmental obligations. Jackson J didn’t see it that way and found no difficulty in resolving that the liquidators were executive officers of Linc for the purposes of the EP Act.

In reaching his decision, Jackson J looked to the general purpose of the EP Act, which was to ”protect Queensland’s environment while allowing for development that improves the total quality of life, both now and in the future, in a way that maintains the ecological processes on which life depends.“ He went on to say that if the liquidators’ argument were accepted, there would be no-one with a personal statutory obligation to ensure that the obligations of Linc under the EP Act were met during the liquidation.

What was not decided

There was no dispute that the liquidators were able to disclaim the land and the Mineral and Petroleum Licences. The result of disclaiming such land and licences is that Linc ceased to have any further rights, liabilities or obligations in relation to the land or under the licences.

As for the EAs, because Jackson J had found that in these circumstances the Queensland EP Act prevailed over the Federal Corporations Act, he felt it was unnecessary to decide the question of whether the EAs were property able to be disclaimed under the Corporations Act. Unfortunately for our readers, this means that the question as to whether you can disclaim an EA is still up in the air.

The DEHP has power to issue an EPO for many reasons, including securing compliance with the general environmental duty that a person must not carry out any activity that causes, or is likely to cause, environmental harm, unless the person takes all reasonable and practicable measures to prevent or minimise the harm. His Honour conceded that it wasn’t completely clear that an EPO could be made to secure compliance with a general environmental duty relating to activities that had ceased.

But what does it all mean?

The broad brush view is that those accepting insolvency appointments in Queensland, whether as liquidator, administrator or a receiver, need to very carefully consider any environmental concerns facing the company they’re involved with. The Linc decision is authority that liquidators are executive officers under the EP Act. This means liquidators have duties to cause the company to comply with environmental responsibilities under the EP Act. The same would apply to administrators or receivers. Failure to do so could lead to prosecution, because where a company commits an offence under the EP Act, each executive officer of the company is deemed to have committed an offence.

Given this decision (unless overturned), it now appears Jackson J has significantly altered the landscape of insolvency law in Queensland. This ‘environment-comes-first’ notion, whilst arguably admirable depending on your view on the environment versus economic development debate, departs from well-established standards of insolvency law. It means that money that would otherwise be paid to creditors, including employees, will have to be spent on environmental issues. For example, it would push the Federal Government down the queue in recovery of payment of unpaid entitlements which it has paid under the Fair Entitlement Guarantee scheme. This is of course relevant to other insolvent mining companies like Queensland Nickel.

The decision may result in insolvency practitioners refusing to accept insolvency appointments over any insolvent company that has environmental obligations. This places directors in an invidious position. If they continue to trade whilst the company is insolvent, they risk being liable for insolvent trading. If they decide to do the right thing and place the company into administration or liquidation, they may be unable to find anyone willing to take the appointment. The end result may be directors simply resigning from their positions leaving companies with environmental responsibilities without any officers at all.

Of course, it is noteworthy that this decision did not consider the amendments to the EP Act under the Environmental Protection (Chain of Responsibility) Amendment Act 2016 (Qld) (Chain of Responsibility amendments). These amendments came into force in 2016 and widened the definition of a ‘related person’ and hence extended the persons to whom the DEHP can issue an EPO.

Insolvency practitioners had been concerned about the impact of the Chain of Responsibility amendments on them as they would fall within the definition of ‘related persons’. The recently issued Issuing ‘chain of responsibility’ environmental protection orders guidelines (Guidelines) clarifies how the DEHP will apply the Chain of Responsibility amendments when issuing EPOs to ‘related persons’. Importantly, if it is determined that the related person was not culpable for a matter, or was culpable but took all reasonable steps in the circumstances, DEHP will not issue the person with an EPO. The Guidelines provide some level of comfort to ‘related persons’ about when they may or may not be issued with an EPO. But these are cold comfort to administrators, receivers and liquidators given they are executive officers and have obligations as such, even if an EPO is not issued directly to them as a related person.

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¹ Linc Energy Ltd (in Liq) [2017] QSC 053
² http://www.theaustralian.com.au/life/weekend-australian-magazine/linc-energys-ucg-plant-at-chinchilla-a-smart-state-disaster/news-story/89096454ced60874c5d8e2e967fb9c1c

Scott Butler

Patrick Stanhope

Proposed changes to PPS lease definition

2017-03-15T13:27:00.001+10:00

On 1 March 2017 the Federal Government introduced the Personal Property Securities Amendment (PPS Leases) Bill 2017 into parliament, which, if passed, will amend section 13 of the Personal Property Securities Act 2009 (Cth) (PPSA) to:

replace the current one year threshold for deeming a commercial lease or bailment to be a PPS lease to two years, and
remove the much criticised ‘indefinite term’ category of PPS lease, unless the lessee or bailee has held the goods for longer than two years with the lessor or bailor’s consent.

A PPS lease is deemed to be a security interest under the PPSA which means that a lessor or bailor whose arrangement falls within section 13 of the PPSA must perfect it, usually by registration on the Personal Property Securities Register (PPSR), even if the arrangement is not designed to provide security. A failure to do so can lead to the lessor or bailor losing their rights to the goods should the lessee or bailee go into voluntary administration, liquidation or bankruptcy.

The impact of the changes will be that only commercial hire arrangements of longer than two years, or potentially longer than two years including options, will need to be registered on the PPSR as a PPS lease.

These proposed changes have no doubt been proposed because of the impact of recent cases such as Power Rental Op Co Australia, LLC v Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed) [2017] NSWCA 8 where the New South Wales Court of Appeal upheld a decision that the PPSA applied to four mobile turbines (worth $44 million USD) leased by Forge Group Power Pty Ltd (Forge) from General Electric International Inc (GE) because they were each for a period in excess of 12 months, GE was regularly engaged in the business of leasing goods and the turbines had not become fixtures. This finding meant that the current lessees of the turbines lost any interests in the turbines they held when Forge entered into administration.

Click here to read McCullough Robertson’s detailed focus article on this case and the implications of it in industry.

Whilst on the topic of PPS leases, the case of Re OneSteel Manufacturing Pty Ltd (administrators appointed) reinforces the importance of not only registering your PPS lease, but registering correctly.

OneSteel leased equipment from Alleasings Pty Ltd. The equipment had a value in excess of $23,000,000. Unfortunately, the Alleasing employee responsible for making the registrations failed to register the security interest in accordance with the specific registration requirements (in this instance, the incorrect ABN was used in the registration) which ultimately resulted in the registrations being defective. This was only bought to Alleasing’s attention once OneSteel had appointed administrators and by then it was too late; Alleasing’s security interests were lost, in that they vested in OneSteel immediately prior to the commencement of the voluntary administration.

Click here to read McCullough Robertson’s detailed focus article on this case and the implications of it in industry.

Do you need help?

McCullough Robertson can assist you or your business with identifying how best to protect your interests under the PPSA.

If you have any questions about the above cases or would like any advice on PPSA issues, please contact us:

Scott Butler

Ann Watson

Hanjin Shipping recognition proceedings answer question about extent of the automatic stay under the Model Law on Cross-Border Insolvency

2017-01-17T10:29:00.001+10:00

Readers will recall that on 23 September 2016 we posted an article about recognition under the UNCITRAL Model Law on Cross-Border Insolvency (Model Law) of the Korean rehabilitation proceedings for Hanjin Shipping.

After granting interim recognition of the rehabilitation proceedings in September 2016, the Federal Court granted final recognition orders on 11 November 2016. The final orders obtained and the court’s reasons for granting the orders are significant as they answer the question of how the scope of the automatic stay is determined upon recognition of a foreign main proceeding of a corporate debtor under the Model Law.

The confusion about the extent of the stay had arisen because article 20 of the Model Law (which provides for the automatic stay) is subject to section 16 of the Cross-Border Insolvency Act 2008 (Cth) which states that:

For the purposes of paragraph 2 of Article 20 of the Model Law (as it has the force of law in Australia), the scope and the modification or termination of the stay or suspension referred to in paragraph 1 of that Article, are the same as would apply if the stay or suspension arose under:

the Bankruptcy Act 1966 (Cth), or

Chapter 5 (other than Parts 5.2 and 5.4A) of the Corporations Act 2001 (Cth), as the case requires.

Chapter 5 of the Corporations Act covers schemes of arrangement, voluntary administration, court-ordered liquidation and voluntary liquidation. No stay applies to schemes of arrangement and the stays which apply in voluntary administration, court-ordered liquidation and voluntary liquidation are all different.

Rares J in Hur v Samsun Logix Corporation [2015] FCA 1154; (2015) 238 FCR 483 at [21] described the operation of these provisions as “beguilingly ambiguous, since the Corporations Act has a variety of different stay provisions that differentially affect the position of secured creditors, sometimes at different points in the same overall process”.

In Hanjin, the court confirmed that the applicable stay is determined by the nature of the foreign proceedings compared to the nature of proceedings under the relevant Parts of the Corporations Act. This meant that the court had to identify which Parts of the Corporations Act would apply to the foreign proceedings if they were taking place under that Act.

Hanjin had entered rehabilitation proceedings under the Debtor Rehabilitation and Bankruptcy Act 2005 (Republic of Korea) (Rehabilitation Act). A partner of a law firm in Korea gave expert evidence about the operation of the Rehabilitation Act, explaining that:

A debtor company may file for commencement of rehabilitation proceedings, which commence only when the court issues a commencement order.
Upon commencement, the court appoints a custodian; usually an existing representative of the company unless the insolvency was caused by the representative, in which case the court will appoint an independent administrator (in this case, a director of Hanjin had been appointed as custodian for the purposes of the rehabilitation proceedings).
The custodian has the power to conduct all of the debtor’s business and manage all of its property, subject to the court’s supervision. However, if/when the custodian intends to perform any of a designated list of acts affecting the debtor’s property or liability, approval from the court is required.
The goal is to rehabilitate insolvent debtors by restructuring their debt pursuant to a rehabilitation plan approved by the creditors and the court.

The foreign representative argued and the court agreed that, whilst the rehabilitation proceeding had some characteristics in common with a scheme of arrangement, the proceedings most closely resembled voluntary administration and therefore the stay which should apply was that applicable to a voluntary administration. The court ordered that the stay be that which would apply in a voluntary administration under Part 5.3A of the Corporations Act.

The effect of this was that secured creditors without security over all or substantially all of the assets of Hanjin would be prevented from enforcing their security in Australia without leave of the court or consent of the foreign representative. This would prevent the holders of maritime claims in rem from from enforcing those claims by arresting ships. The court was cognisant of this, but was comforted that maritime claimants were required to bring an application to issue an arrest warrant and leave could be sought upon that application.

Key takeaways
When seeking recognition of a foreign main proceeding under the Model Law, foreign representatives need to put on evidence about the nature of the foreign proceeding so the court can determine which of the Australian insolvency proceedings the foreign proceeding most closely resembles and thus the nature of the automatic stay which applies. If the extent of the automatic stay will not be wide enough, additional orders should be sought under Article 22 of the Model Law.

Scott Butler

Unchain my … environmental responsibilities. The Environmental Protection (Chain of Responsibility) Amendment Act 2016 (Qld) explained

2016-12-01T16:29:00.001+10:00

The insolvency profession (and the Queensland market in particular) has been abuzz this year with the issue of CORA – a shorthand reference to the Environmental Protection (Chain of Responsibility) Amendment Act 2016 (Qld).

What does it mean for insolvency practitioners? Can banks really be hit with a bill to clean up their borrowers’ environmental damage? Will turnaround and restructuring professionals refuse to accept appointments out of fear of falling foul of the new regime?

This post explains what you need to know.

What is CORA?
‘CORA’ refers to the Environmental Protection (Chain of Responsibility) Amendment Act 2016 (Qld). This legislation took effect on 27 April 2016.

The Act itself is not particularly long – only 27 pages in total. But, as always, the devil is in the detail.

What does it change?
As its name suggests, CORA amends Queensland’s Environmental Protection Act 1994 (Qld) (EP Act). CORA does so principally by inserting a new Division 2 into Chapter 7, Part 5 of the EP Act.

What was the position prior to CORA?
Prior to CORA, Queensland’s Department of Environment and Heritage Protections (DEHP) held the power under section 358 of the EP Act to issue environmental protection orders (EPOs). This power has not changed.

An EPO requires the recipient to take steps to ensure compliance with, amongst other things, any of the following:

that person’s ‘general environmental duty’ – being a duty not to undertake any activity that causes, or is likely to cause, environmental harm unless the person takes all reasonable and practicable steps to prevent or minimise that harm
a condition of an environmental authority (being an authorisation previously granted by DEHP, or its predecessor Departments, to engage in environmentally relevant activities), or
a development condition contained within a development approval.

It was (and remains) an offence not to comply with an EPO. The maximum penalty (if wilful contravention of the EPO can be shown) is over $760,000, or 5 years imprisonment.

If a corporation fails to comply with an EPO and thereby commits an offence, each of the corporation’s ‘executive officers’ is also deemed to have committed an offence under the EP Act. ‘Executive officers’ include any person ‘concerned with, or [who] takes part in, the corporation’s management, whatever the person’s position is called and whether or not the person is a director’.

In this sense therefore, receivers, administrators and liquidators were already subject to potential criminal sanctions under the EP Act should the company to which they are appointed (or, in the case of receivers, the company owning the assets over which they are appointed) breach an EPO. CORA does not change this position.

How has the position changed?
CORA greatly expands DEHP’s powers to issue EPOs.

DEHP now has the ability to issue an EPO (CORA EPO):

where an EPO has already been issued to a company, or is about to be issued – to a ‘related person’ of that company
to a ‘related person’ of a ‘high risk company’ – even if no EPO has been issued to that ‘high risk company’.

The function of a CORA EPO has not changed from the pre-CORA position – in other words, DEHP can use a CORA EPO to direct the recipient to take steps to, for example, comply with a general environmental duty or the conditions of an environmental authority.

As will be seen below however, the effect of the amendments is to create a power on the part of DEHP to issue CORA EPOs, and therefore direct steps to be taken to minimise environmental harm or risk, to persons or corporations who are not directly participating in the activities causing environmental harm or risk.

Analysis – who are ‘related persons’, and why does this matter to the insolvency profession?
Section 363AB of the EP Act introduced by CORA establishes a very wide definition of ‘related person’.

Relevantly for the insolvency profession, a CORA EPO can be issued to any person who DEHP decides has a ‘relevant connection’ to, and is for that reason a ‘related person’ of, a company that has received an EPO.

A person can have a relevant connection to an EPO recipient company:

‘Relevant Connection’ Test One – if that person ‘is capable of significantly benefiting financially, or has significantly benefited financially, from the carrying out of a relevant activity by the company’, or
‘Relevant Connection’ Test Two – if that person ‘is, or has been at any time during the previous 2 years, in a position to influence the company’s conduct’ in relation to the company’s compliance with the EP Act.

The first risk for the insolvency profession arising out of CORA is that financiers and shareholders:

would seem to satisfy Test One
could therefore potentially be decided by DEHP to have a ‘relevant connection’ to a company-recipient of an EPO, and
could therefore be made subject to a CORA EPO.

Furthermore, it seems clear that a receiver, administrator or liquidator would satisfy Test Two, and could therefore be subject to a CORA EPO in relation to the company to which they are appointed – or were appointed at any point over the last 2 years!

Analysis – who are ‘high risk companies’, and why does this matter to the insolvency profession?
The CORA amendments provide that a ‘high risk company’ includes any company subject to external administration within the meaning of the Corporations Act 2001 (Cth) – so, any company in administration, liquidation or which has had a receiver appointed in respect of its assets.

Accordingly, given CORA EPOs can be issued to the related persons of high risk companies, the discretion now rests with DEHP to issue a CORA EPO to any administrator/liquidator/receiver, or even potentially any financier or shareholder for, an externally administered corporation – regardless of whether that corporation itself has received an EPO.

The restraints on DEHP’s new powers to issue CORA EPOs
The potential for DEHP to issue CORA EPOs is very wide. There are real risks for insolvency professionals and banks to be subject to a CORA EPO, and the potential obligations to spend time and money taking steps to minimise environmental harm.

However, it is helpful to bear in mind that firstly, when deciding whether to issue a CORA EPO, DEHP may consider whether the proposed recipient of the CORA EPO ‘took all reasonable steps, having regard to the extent to which the person was in a position to influence the company’s conduct, to ensure the company complied with its obligations’ under the EP Act.

It is hoped that this discretionary factor will lead to CORA EPOs being directed at persons genuinely culpable for environmental harm and risk, and will ensure that financiers, shareholders or external administrators that have acted reasonably and prudently are not subject to CORA EPOs.

Secondly, DEHP must have regard to any statutory guidelines published by the Chief Executive of DEHP in relation to the issuing of CORA EPOs. These guidelines presently remain in draft form, however the current draft states that DEHP will consider its Enforcement Guidelines when deciding whether to issue a CORA EPO to a particular person. Those Enforcement Guidelines make it clear that culpability is a key consideration of DEHP when deciding what enforcement action to take. Again, it is hoped that consideration of culpability will steer DEHP away from issuing CORA EPOs to external administrators, financiers or shareholders who have acted reasonably and prudently.

What’s next
CORA remains in its infancy. Its development will in particular be shaped by the CORA Guidelines, which are expected to be finalised shortly.

McCullough Robertson will track developments in this area of law and remains able to assist insolvency professionals, financiers, shareholders and other participants in the industry with issues arising out of CORA.

Scott Butler

Daniel MacKenzie

The Arrium Administration breaks new ground with a novel group DOCA structure

2016-11-22T12:12:00.002+10:00

‘Shipping steel, shipping steel . . .
Nobody knows, the way it feels
Caught between Heaven and the Highway
Shipping steel, shipping steel . . .’ ¹

On 7 April 2016, Administrators were appointed to South Australian-based steelmaker and iron ore miner Arrium, which reportedly owed approximately AUD4.3 billion to its lenders, suppliers and staff. The appointment covered 94 direct and indirect subsidiaries of Arrium Limited (the Arrium Companies), which at the time employed around 8,100 employees and contractors.

The broader Arrium Group also includes the Moly-Cop group, which is located mostly overseas, trading profitably and not subject to the insolvency proceedings. The Administrators announced on 4 November 2016 that US private equity firm American Industrial Partners had bought Moly-Cop for US1.23 billion (AUD1.6 billion). The proceeds of the sale will predominantly go to Moly-Cop’s lenders, reducing their debt by about 50%.

Complexities in the Administration
As is to be expected, the Arrium Companies have complex inter-company financing arrangements. They operate a complex integrated mining, iron ore export, steel manufacturing, steel recycling and steel distribution business under numerous business divisions. Of the 94 companies under administration, only 25 actually conduct businesses or hold property which the administrators may wish to sell.

The Administrators determined that the optimal sale structure (if a sale is to occur) is a share sale of at least 13 key trading companies in the group. However, the historical operation of the Arrium Companies complicated things as the various business divisions operated by Arrium have not been operated on an entity-by-entity basis. The Administrators’ investigations found that, for example:

numerous legal entities held assets used in more than one division
about 430 employees were employed by an entity which did not operate the division in which they worked
numerous Enterprise Bargaining Agreements apply to employees based on geographical location, as opposed to an entity by entity basis
of the 1,074 items of intellectual property, 154 spanned multiple business divisions, and
of the 150 national contracts managed by a centralised procurement team, 70 operated across a number of divisions.

A novel deed of company arrangement (DOCA) structure
The Administrators needed a way of getting the right assets and employees into the right companies prior to a sale. Following the Administrators’ recommendation, creditors voted for 93 out of the 94 Arrium Companies to enter into Transaction Support DOCAs. These enable the Deed Administrators to align the various business units to separate legal entities by authorising the transfer of assets, employees and operations internally within the various Arrium Companies as they see fit. This will enable each business to be acquired in its entirety by way of share sale.

The final Arrium Company renamed ‘The Arrium Creditor Distribution Company Pty Limited’ (the Distribution Company), entered into the Arrium Distribution DOCA. The 93 Transaction Support DOCAs all authorise the Deed Administrators to transfer the sale proceeds from any sale occurring within the other 93 Arrium Companies to the Distribution Company, who will hold it as part of an Arrium Distribution Fund.

The Transaction Support DOCAs also authorise the transfer of liabilities of the Arrium Companies to the Distribution Company, so the businesses can be sold free of liabilities. Historically, the structure most commonly used to enable creditors of various group companies to share in the one pool of assets is a creditors’ trust, where assets are transferred to be held on trust for the creditors. This use of a ‘distribution company’ is a new variation of that practice.

How is this approach unusual?
The Transaction Support DOCAs are what are commonly known as ‘holding DOCAs’. A holding DOCA is one where the deed administrators continue to operate the company’s business as usual for a period of time before trying to either sell the business or find a recapitalisation proposal.

Holding DOCAs present some difficulties when administrators are preparing their report to creditors under section 439A of the Corporations Act 2001 (Cth) (Act). When preparing a section 439A report to creditors, the Act requires that administrators provide creditors with their estimated return should a company go into liquidation, compared to their estimated return pursuant to any DOCA that is proposed. In the case of a holding DOCA (as was the case with Arrium), the eventual return to each individual Arrium Company under the DOCAs is unknown.

In addition, Arrium’s Administrators want to keep their options open. It may be that Arrium ends up being recapitalised instead of its remaining operations sold. Although they have a preferred idea of how a sale should be structured, they don’t know what form an eventual sale will take. A report to creditors would usually set out what transaction would occur under the DOCAs, but that was not possible.

In order to overcome these difficulties, on 26 October 2016 the Administrators obtained orders and directions from the Court that dispensed with some of the requirements under the Act.

The Court authorised the Administrators to prepare a single report to all creditors of the Arrium Companies, prepared on an aggregate basis dealing with the Arrium Companies as a whole, but which did not provide any estimated return to creditors under the DOCAs versus in liquidation. Despite this, the report was still required to provide a statement setting out the Administrators’ opinion as to whether it was in the creditors’ interests for the Arrium Companies to execute the proposed DOCAs, end the administration, or wind the companies up.

Despite ASIC’s concern that, if endorsed by the court, this style of DOCA, which fails to identify a transaction or agreement resulting in an identifiable return to creditors and so operates as a sort of ‘extension’ of the administration process (with the administrators enjoying more extensive powers), could become a feature of voluntary administrations in the small to medium enterprise market, the Court approved the Administrators’ actions.

While ASIC’s concerns are not unfounded, the risk of this approach and type of DOCA becoming commonplace (particularly in smaller, less complex administrations), is minimal. The Arrium administration is anything but commonplace, and contains significant complexities warranting this novel approach by the Administrators.

What next?
In the last few weeks, it was reported that four bidders have entered the second and final round of an auction for the purchase of certain business divisions in the group, including the company’s steelworks and steel distribution network. It is expected that secured creditors will be paid in full from the sale, while unsecured creditors will receive between 60 cents and 65 cents in the dollar – a return only made possible due to the flexibility and operation of the DOCAs – but its anticipated to leave shareholders with nothing.

Full settlement of any deal is not expected to take place until late March 2017 or thereabouts.

____________________________

¹ Lyrics from ‘Shipping Steel’ from the Breakfast at Sweethearts album released by Cold Chisel in 1979.

Amanda Walker

The regulatory crackdown on the illegal phoenix

2016-11-08T10:40:00.000+10:00

Unscrupulous advisors, unconscionably preying on desperate directors driven by the fear of losing everything, have created a boom in illegal phoenix activity. The below article, originally published on the McCullough Robertson white collar crime blog, Collared, sheds some light on the illegal phoenix, the gravity of the problem in Australia and considers what is being done to monitor and control the issue.

‘We didn't start the fire
It was always burning since the world's been turning
We didn't start the fire
No, we didn't light it, but we tried to fight it’[1]

The Illegal Phoenix

Illegal phoenixing is a major problem in corporate Australia. In this post we consider what illegal phoenix activity is, how the problem is affecting the Australian economy and the recent regulatory crackdown on the issue.

In Greek mythology a phoenix is a mythical bird which obtains new life by rising from the ashes of its predecessor. Illegal phoenix activity involves the intentional transfer of assets at an undervalue from an indebted company to a new ‘phoenix’ company. The old company remains with its debts and is often placed into liquidation (or is left to be wound up on the application of a creditor) – stripped of any valuable assets, with nothing left to pay creditors.

How significant is the problem?

Illegal phoenixing has been estimated to cost the Australian economy more than $3 billion a year.[2]

Employees, businesses and the Government are affected by:

· unpaid wages and other entitlements

· unpaid debts and unpaid tax

· goods and services paid for, but not provided, and

· the cost to Government of payments made to employees under the Fair Entitlement Guarantee.[3]

The negative economic impact of illegal phoenix activity is exacerbated by unquantifiable factors, including the unfair competitive advantage obtained by companies that avoid paying their debts.

Illegal phoenixing in the construction industry in particular lead to a Senate Inquiry, the outcomes of which were published on 3 December 2015 in the Senate Report ‘Insolvency in the Australian Construction Industry’.

Pre-insolvency advisors

The relatively recent advent of pre-insolvency advisors has undoubtedly fuelled an increase in illegal phoenix activity in Australia.

While sometimes touted as a ‘guardian’ against insolvency, many are unqualified and trawl the Australian Securities and Investment Commission’s (ASIC) winding up application notices, preying on directors desperate to find a way out of the company’s financial difficulties. Debtors all too often find themselves in situations where they incur further debts, in the form of substantial pre-insolvency advisor fees, to ‘rebuild’ their company. In some circumstances this leads to a commercial resolution with creditors that avoids a formal insolvency, however, in many cases, the advice results in illegal phoenix activity.

Putting out the ashes: how is illegal phoenixing regulated?

There is no legislative definition of illegal phoenix activity, or a specific phoenixing offence. This has presented difficulties for regulators trying to target illegal phoenix activity, such as the Australian Taxation Office (ATO) and ASIC.[4] Those regulators have therefore developed indicia to spot illegal phoenixing. Central to these is an ‘intent’ by directors and company secretaries to avoid liabilities.

ASIC, the ATO, the Australian Competition and Consumer Commission and the Fair Work Ombudsman have combined forces to proactively identify, monitor and challenge suspected illegal activity, via the creation of the ‘Phoenix Taskforce’. Driven by ASIC, the Taskforce uses data matching tools to monitor behaviour, particularly where a failed entity’s directors resurface in the same pursuit under the veil of a new entity.

The Phoenix Taskforce (Taskforce) works closely with the Serious Financial Crime Taskforce which is headed by the Australian Federal Police and monitors and targets criminal behaviour, following the success of Project Wickenby.

So far the Taskforce has been focused on identifying and (hopefully in time) removing from the industry those involved in enabling illegal phoenix activity; being pre-insolvency advisors, the lawyers who work on the pre-insolvency transactions and the liquidators who willingly take the appointment as liquidators of the company shell and who fail to take any proper steps to investigate or prosecute the directors.

Much of the Taskforce’s work remains confidential; however, the Taskforce conducted two recent joint raids by the ATO and ASIC on over 13 homes in Melbourne and the Gold Coast in August of this year. The raids were conducted after investigations identified the homes as being linked to firms providing pre-insolvency advice who would encourage debt-ravaged businesses to participate in illegal phoenix activity as well as assisting businesses to avoid paying taxes on an estimated collective sum of $22 million in unreported income.

In comments following the raids, the Deputy Commission of Taxation reiterated the dangers of unqualified pre-insolvency advice and confirmed that the Taskforce was keeping a close eye on service providers in this section of the market.

Further, in a proactive approach, ASIC have commenced a program which sees them writing to directors of companies subject to winding up applications with a view to reminding those directors of the serious consequences associated with phoenixing.

The James Nelson decision – a judicial shift?

Despite its prevalence, regulators have had limited success in prosecuting illegal phoenix activity.

In ASIC v Somerville & Ors (2009) 77 NSWLR 110, the New South Wales Supreme Court found eight directors of unrelated companies to have acted in breach of the Corporations Act 2001 (Cth) by engaging in what ASIC regards as illegal ‘phoenix’ activity and that their legal adviser, Mr Timothy Donald Somerville, also contravened the Corporations Act by being involved in the directors’ breaches.

The court found that Mr Somerville had devised a series of transactions, with the appearance of legitimacy, to bring about asset stripping and disadvantage to creditors. On 24 September 2009, the New South Wales Supreme Court disqualified Mr Somerville from managing corporations for six years commencing on 24 October 2009. The Court also disqualified the directors from managing corporations for a period of two years commencing on 24 October 2009.

In 2013 and 2015, following investigations by ASIC, the two pre-insolvency advisers from the Gold Coast, Graeme Dwyer and Paul Scott, were found guilty of creating and using a fictitious director in companies in order to avoid any real director potentially being liable for breaches of directors’ duties because of transactions entered into - see ASIC's media release.

However, the punishment handed down by the court (six months imprisonment, suspended upon entering in a $1,000 recognisance to be of good behaviour for a period of 12 months and eight months imprisonment, to be served by way of an intensive correction order, respectively) is unlikely to be sufficient to be a serious deterrent to others who operate on the fringes of the law and who may wish to engage in similar behaviour.

More encouragingly, in the recent Federal Circuit Court decision of Fair Work Ombudsman v James Nelson Pty Ltd & Anor [2016] FCCA 531 (James Nelson), the Federal Circuit Court of Australia ordered Ms Langridge, a sole company director and secretary, to pay around $98,000 in penalties for her involvement in facilitating illegal phoenix activity. Ms Langridge failed to pay the employees of her company their appropriate wage entitlements, in contravention of the Fair Work Act 2009 (Cth) and transferred her company’s assets to a new phoenix company.

Legislative Reform

In March 2016, the Fair Work Amendment (Protecting Australian Workers) Bill 2016 (Cth) was introduced into the Australian Senate (FWA Bill). If enacted, the FWA Bill would have enabled courts to require directors of phoenix companies to pay amounts owed by failed companies and orders disqualifying certain persons from managing corporations. It would have also given the Fair Work Ombudsman increased powers to pursue employers and directors engaging in phoenixing in their personal capacities. Following the dissolution of parliament earlier this year, the FWA Bill lapsed and it remains to be seen whether the FWA Bill will be re-introduced in the next parliamentary session.

Separately, the Australian Government’s proposed changes to insolvency laws to introduce a safe harbour for directors whilst attempting to restructure a business, may reduce the rates of illegal phoenix activity by providing better ways for troubled companies to turnaround.

Conclusion

The difficulty defining and proving illegal phoenix activity has made it hard for regulatory authorities and courts to prevent and penalise it. The Government’s investment into specialised taskforces and the Senate Inquiry reveal its prioritisation and commitment to the issue. The recent James Nelson decision may indicate that the Government’s initiatives are paying off. It will certainly be interesting to monitor the effectiveness of the Government’s initiatives over the next few years.

Scott Butler

Ann Watson

[1] Chorus from ‘We Didn’t Start the Fire’ by Billy Joel, from the Storm Front Album, released 1989.

[2] Phoenix activity: sizing the problem and matching solutions, commissioned by Fair Work Australia (read the report at: http://bit.ly/2e1NNqo).

[3] Ibid.

[4] http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Insolvency_construction/Report/c05#content - ASIC, Submission 11, p. 26.

Will a deed of company arrangement be recognised and enforced by US and Canadian courts?

2016-11-03T14:53:00.001+10:00

In August I presented on cross-border insolvency at the joint Federal Court of Australia and Law Council of Australia conference on corporations law. The audience consisted of over 30 Federal Court judges and a range of other experienced corporate and insolvency lawyers. I decided to present a case study, a major part of which was considering whether a hypothetical deed of company arrangement (DOCA) could be recognised and given the force of law in the US and Canada under their legislation based on the UNCITRAL’s Model Law on Cross-Border Insolvency (Model Law) in order to prevent US based creditors seeking court orders against assets in the US and Canada. This sparked sufficient interest that I was then asked to present the same paper at the annual conference of the Insolvency and Reconstruction Law Committee of the Law Council of Australia a few weeks ago. I thought I would share some insights from the paper in this blog.

Preventing overseas creditors seeking orders in their local courts
A DOCA is binding on the company and all its unsecured creditors and members. Often a deed of company arrangement will compromise creditors’ claims in return for a dividend under the DOCA and prevent them from taking any further action against the company or its assets in respect of those claims. But what if some of the creditors are located overseas? In particular, what if the company has assets in the jurisdiction where the overseas creditors are located, which the overseas creditor could seek to enforce against by seeking orders in their local courts? What is to prevent them doing so?

A lot of thought is commonly applied to the terms of a proposed DOCA to make sure it meets the requirements to be enforceable under the Corporations Act 2001 (Cth) and under relevant case law, however, little thought is generally given to whether the DOCA will be binding and enforceable in practice against overseas creditors. Where there are overseas creditors and a risk they will not accept and agree to be bound by the DOCA, thought should be given at an early stage to whether the DOCA can, if necessary, be enforced against those creditors and how that may be done.

The experience to date
As far as I am aware, there are no reported decisions where US or Canadian courts had recognised and given force to a DOCA. On the other hand, there are a number of cases where US courts have recognised and given force to restructuring plans from other jurisdictions, such as plans under the Canadian Companies’ Creditors Arrangement Act (CCAA) and Bankruptcy and Insolvency Act (BIA), plans under the Mexican Bankruptcy Act (Ley de Concursos Mercantiles) and plans under the judicial reorganization procedure (recuperação judicial) under the Brazilian Bankruptcy and Reorganization Law.

Likewise in Canada there are a number of cases where the Canadian courts have recognised and given force to US Chapter 11 plans of reorganization.

An analysis of the US cases reveals that the key issues which the US courts will consider when deciding to recognise and give force to a DOCA under the Model Law are:

whether doing so would be manifestly contrary to the public policy of the US
whether the interests of US creditors and other stakeholders are sufficiently protected, and
whether the DOCA will reasonably assure:

just treatment of all creditors and shareholders
distribution of proceeds of the debtor's property substantially in accordance with that prescribed under the US Bankruptcy Code.

Similarly, in Canada, the courts will consider whether it would be contrary to public policy to recognise and enforce the DOCA. In answering this, the courts would likely consider:

whether the recognition and enforcement of the DOCA is necessary for the protection of the debtor’s property or the interests of creditors
whether the differences in the process that generated the DOCA are so radically different from the process in Canada under the CCAA or BIA that it should not be recognised and enforced, and
whether the DOCA and its terms treat creditors and shareholders so different from the bankruptcy and insolvency laws of Canada that it should not be recognised and enforced.

Both the US and Canadian courts have made it clear that the foreign laws under which the plan has been approved and the way the plan treats creditors do not have to be identical to those in the US and Canada.

Clear differences in processes according to jurisdiction
However, there are clear differences in the process used in Australia, the US and Canada to approve restructuring plans. In Australia, DOCAs are voted on by creditors in a single class, can be approved by the chair of the meeting where there is a deadlock and there is no court approval required. In the US and Canada, plans are voted on by creditors split into classes (similar to schemes of arrangement) and then approved by the court if they meet other requirements set down by relevant law. In the US, plans can be approved via a cram down against the vote of certain classes if at least one class whose rights are being compromised under the plan vote in favour (as long as the plan meets other requirements of fairness and equitable treatment). In Canada there is no cram down procedure and a plan will fail if not approved by all classes.

There are also clear differences in how creditors can be treated under a DOCA and under a US or Canadian plan. For example, under a DOCA there can be some level of discrimination between creditors even if they are of a similar ‘class’ (i.e. unsecured creditors) as long as all will get more than they would in a liquidation. In the US, there is a prohibition against "unfair discrimination" which requires the holders of similar claims or interests (which includes holders of equity) to be treated similarly. Under a DOCA, you could theoretically have lower ranking creditors or even equity holders getting a return even though higher ranking creditors do not. In the US, this could contravene the absolute priority rule which provides, as a general rule, junior classes cannot receive anything unless and until senior classes are paid in full, or voluntarily agree to different treatment as part of a consensual plan.

Early consideration is key
Accordingly, even though a DOCA may be approved in Australia, there is no guarantee that it would have been approved in the foreign jurisdiction in which you are seeking to ask the court to recognise and enforce it, had it been subject to their procedures for voting and plan approval. This could mean that the court will not recognise and approve the DOCA. To minimise the risk of this happening, consideration should be given when formulating a DOCA proposal as to whether a plan in similar terms could be approved in the foreign jurisdiction you will need to seek to enforce the DOCA in.

If you are interested in a more in-depth discussion of these issues, click here to read my detailed case study paper.

Scott Butler

Property developers – do you really need to batten down the hatches?

2016-10-26T11:44:00.000+10:00

Last Wednesday we held the first event in our relaunched Restructuring and Insolvency Forum.

A few days before the forum the Reserve Bank of Australia warned that the massive number of new apartment blocks approaching completion could send developers broke and leave the banks nursing big losses. The day after the forum, The Australian reported the findings of Morgan Stanley research which forecast a credit crunch and a hard landing for the new apartment construction cycle with a surplus of 100,000 apartments by 2018. The investment bank predicts a 'sudden stop' of apartment activity, triggered by regulator-driven rationing of credit, which will cause the construction industry to shed some 200,000 jobs.

Senior partners from our Finance and Real Estate groups joined Executive Director of independent financial advisory business, Allegiant FS, Sean Birchley on a panel to discuss whether it really is all doom and gloom for property developers, as predicted by some.

The sentiment among the panellists was less bearish which, to some extent, could be attributed to their developer clients’ fortunes being linked to positive consumer sentiment. That said, they don’t forsee the hard landing predicted by Morgan Stanley and, while they acknowledge growing issues with settling apartment sale contracts on time, they believe developers are taking active steps to deal with this. Here is a summary of their comments.

The property market in Australia – it’s really not such a bad news story

Large scale apartment projects are only one segment of the residential property market. Other sectors such as residential subdivision and smaller scale apartment developments are all selling well and sales are settling. But the successful projects and the good news stories tend not to be reported in the media.

Queensland – the fundamentals

Traditionally the demand for residential property in a particular state was driven by immigration and interstate migration. Slowed population growth in Queensland in recent years would ordinarily raise questions about who is going to buy all the apartments being built. But something different is happening in Queensland at the moment. In the past year, more than 58% of high density dwellings such as apartments were purchased by foreign investors. Thus, demand for apartments is no longer dependent on population growth. People need not be concerned about an over supply; but acknowledge that the supply and demand chain is taking on a different form.

The tourism effect

The impact of tourism on growth in certain pockets of the property market cannot be underestimated. Just last year more than 250,000 Chinese tourists visited the Gold Coast. This has stimulated the economy and driven demand for better infrastructure, which has created jobs and (as people relocate to follow the job market) a greater demand for housing.

What about Brisbane?

Looking at development approvals in Brisbane and surrounding areas shows that there is something like 15,000 – 20,000 units approved for construction in the next five years. The question of course is whether those approvals will proceed and whether the projects will eventuate.

According to the panel, and the statistics presented at the forum, there’s an undersupply of apartments in the Brisbane market with developers not able to acquire sites quickly enough. Additionally, even if local banks are less willing to fund the developments, most developments are being driven by foreign entities with sufficient funding to enable the projects to proceed.

Mitigating settlement risk

There’s also a question around whether purchasers will be able to secure the finance necessary to complete purchases, which puts settlement at risk. At present many purchasers of current projects are struggling to obtain finance from Australian banks due to a tightening in lending criteria, which generally requires purchasers to save larger deposits.

Developers are taking a number of steps in order to mitigate this risk however. Some of these include:

extending settlement dates up to six or nine months
allowing contracts to be rescinded and new contracts entered into with related parties to the purchasers who have the ability to settle, and
combining the rescission of a contract with an arrangement where the deposit from the first contract is set aside and a second deposit taken on the new contract, with both deposits going towards the eventual purchase price when the new contract settles.

Despite these steps, one can’t help wondering whether the extensions of the settlement date are only kicking the can down the road and delaying the inevitable?

Want to hear more?

If you were unable to attend the forum or would like to revisit any of the content that was covered please click here for the video link (supported by Google Chrome). The password required for this video recording is: mcculloughrobertson

McCullough Robertson Restructuring and Insolvency Forums

For many years, McCullough Robertson’s Insolvency Forums were one of the go to events in the Brisbane insolvency market, with audiences regularly topping 100. After a two year hiatus, we successfully relaunched the forum on Wednesday 19 October, with more than 75 professionals across a number of industries in attendance.

McCullough Robertson Restructuring and Insolvency Forums will be run on a quarterly basis in 2017. Please email tkingsley@mccullough.com.au if you would like to be added to our mailing list for future events.

Scott Butler

Ann Watson

Will APR be Forge-ing ahead with its threatened action against Australia, or is it all a bit of hot air?

2016-10-20T11:49:00.004+10:00

There have been recent reports that APR Energy PLC has threatened the Australian Government with a demand for $200 million in damages based on a claim under the Australia-United States Free Trade Agreement after it lost its security interest in multi-million dollar wind turbines it leased to an Australian company due to the operation of a provision in the Personal Property Securities Act 2009 (Cth) (PPSA).

Facts
In January 2013, Horizon Power (Horizon), a statutory body in Western Australia, retained Forge Group Power Pty Ltd (Forge) to design a power station and supply its equipment. In March 2013, Forge entered into a lease with General Electric International Inc. (GE) under which Forge agreed to lease four mobile gas turbine generator sets (Turbines) from GE for a fixed term.

In October 2013, the relevant part of GE’s rental business was sold to APR Energy PLC (APR). GE assigned the benefit of its lease to Power Rental Op Co Australia LLC (OpCo) and assigned title in the Turbines to Power Rental Asset Co Two LLC (AssetCo), both American corporations. OpCo and AssetCo were formerly subsidiaries of GE and became subsidiaries of APR. GE, OpCo and AssetCo are collectively the Defendants.

In February 2014, shortly after the installation of the Turbines at the project near Port Hedland, Western Australia, Forge entered voluntary administration. In March 2014, the company went into liquidation.

Forge Group Power Pty Limited (in liquidation) (receivers and managers appointed) v General Electric International Inc & Ors (2016) 305 FLR 101
In the Supreme Court of New South Wales, Forge sought a declaration that the Defendants’ interests in the Turbines vested in Forge immediately before the company entered administration. Forge’s claim was based upon the failure of GE to register the lease under the PPSA.

Subject to some exceptions, under the PPSA, a lease of goods for longer than 12 months is a ‘PPS Lease’. The PPSA treats a PPS Lease as if the lessee owned the leased property and had granted a security interest over the leased property in favour of the lessor. Section 267 of the PPSA has the effect that unless the security interest created by a PPS Lease is registered on the Personal Property Securities Register (PPSR) before a company enters administration, the security interest vests in the grantor/lessee immediately before the administration, leaving ownership of the goods with the lessee.
GE or APR failed to register the lease of the turbines on the PPSR and, in consequence, if the PPSA applied to the lease between APR and Forge, property in the turbines would have vested in Forge. The question for determination by the Supreme Court, then, was whether the PPSA applied.

After deciding GE was regularly engaged in the business of leasing goods and deciding the Turbines had not become fixtures to Horizon’s land, the Court found that the PPSA applied to the lease and that the Defendants’ interests in the Turbines vested in Forge immediately before it entered administration.

OpCo has appealed this decision in the New South Wales Court of Appeal. The appeal was heard on 23 September 2016. Judgment was reserved at the time of publication.

The cost of (not) registering an interest
OpCo purchased the Turbines for a reported USD$64 million. At the present rate of currency exchange, this equates to more than AUD$84 million.

The lease was for an initial term of two years, with the possibility of extension for a maximum effective term of approximately four years. At the time of making the lease, the fee applicable to register a security interest for a term of no longer than 7 years was $8.00 (the fee is now $6.80). A party may, of course, incur legal fees in the preparation and registration of the financing statement. In all, however, it appears the Defendants lost their interest in equipment worth $84 million as a consequence of a failure to perfect their security interest by registering it for a nominal cost.

Recourse against Australia
APR has indicated an intention to pursue an action against the Commonwealth of Australia for breach of protections in the free trade agreement between the United States and Australia (AUSFTA). In particular, APR contends that its assets have been expropriated, especially given the Turbines are still being used to generate electricity for the state-owned utility Horizon. Article 11.7 of the AUSFTA prohibits expropriation by a signatory state, except on payment of adequate compensation. Similarly, APR relies upon article 11.6, which requires that international investors be treated no less favourably than domestic investors, and that the signatory state provide compensation for losses in consequence of the state’s requisitioning of an investment.

However, unlike many other free trade agreements and investment treaties, the AUSFTA does not provide an investor-state dispute settlement (ISDS) process by which a foreign investor such as APR can bring an action against a signatory state alleged to have breached its obligations under the agreement. An ISDS generally provides an aggrieved investor with a dispute resolution method that can be outside the host state’s legal system and potentially conducted in a mutually convenient location. At the moment, the AUSFTA provides that Australia and the United States may consider establishing such a procedure to hear a claim by an investor, if there is a change in the Parties’ robust, developed legal systems or stable political environments. Until then, APR’s only recourse may be to travel to Australia and pursue its claim through the Australian courts which can be a lengthy and expensive process.

The AUSFTA does allow for dispute resolution by one state against the other. Under article 21, a claim for breach of the AUSFTA can be referred to a joint committee established by the states, and then to a dispute settlement panel appointed by the states. Ultimately, the complainant state can suspend benefits ordinarily conferred upon the other state. This protection may only be of value to an aggrieved investor, if they are successful in lobbying their government to bring a dispute against a trading partner.

It is worth noting that if the Trans-Pacific Partnership (TPP), a fully negotiated multilateral free trade agreement which includes the United States and Australia as parties, was in force at the time the lease was entered into, APR could have had access to an ISDS process which would have allowed it to initiate arbitration proceedings against Australia for breach of the TPP.

In any event, the present case differs from the only ISDS challenge that has been brought against Australia. That case was Philip Morris Asia Ltd v Commonwealth of Australia (PCA Case No. 2012-12), in which Philip Morris underwent a restructure in an attempt to gain the protection of the Hong Kong-Australia bilateral investment treaty because it knew that tobacco plain packaging laws were being contemplated by the Australian Government. In consequence, the arbitral tribunal found the claim to be an abuse of process as the dispute was foreseeable (legislation was contemplated) and the main purpose of the restructure was to gain treaty protection.

In the present case, APR does not appear to have an argument that this dispute was not foreseeable as the PPSA has been in force since January 2012, approximately 12 months before the execution of the lease between Forge and GE.

In addition, it is arguable that APR’s loss of its interest in the turbines was not a product of supervening government action, but rather a consequence of GE’s failure to comply with existing laws. It is not the case that the government deprived APR of its interest by force of law, but rather that APR forfeited that interest by neglecting to comply with the inexpensive requirement to register its interest on the PPSR. APR was not deprived of a reasonably expected economic benefit of the investment, because it could not reasonably expect to retain its interest without registration, especially given there was no change in the state of affairs during the period of the investment, as the PPSA had been in effect before entry into the lease. The conduct of the Australian government likely did not rise to the standard of ‘malfeasance, misfeasance or nonfeasance’ that would give rise to a claim of expropriation. Finally, as a general principle of customary international law, expropriation will not be established by a non-discriminatory regulation for the purpose of general welfare of the state or of regulating economic activity. It appears unlikely that APR would be able to discharge its burden of demonstrating the impropriety of the PPSA.

GE would also struggle to establish that it was treated less favourably than domestic investors within Australia. This is because the PPSA applies to Australian companies as much as to foreign investors. In addition, registration on the PPSR, which is conducted online, is equally accessible to domestic and overseas investors.

Conclusion
The situation in which APR finds itself demonstrates, above all else, the importance of registering an interest on the PPSR. It also highlights the fact that there is presently no ISDS mechanism for Australian or American parties who make investments in the other state.

Investors should ensure that they take steps to identify and comply with the laws of the investment destination. The PPSA, while novel, is not likely to be regarded as a means of expropriation against investors, but more likely to be recognised as an inexpensive means by which to protect an investment.

Foreign investors may benefit from reading another article by the author’s firm which considers proactively structuring foreign investments to gain access to free trade agreements and investment treaties which contain investor-state dispute settlement mechanisms – Protect your investment - important advice for inbound and outbound investors.

Scott Butler

Kristen Podagiel

Erika Williams

Model Law on Cross-Border Insolvency comes to the rescue for foreign representative seeking funds

2016-10-13T10:49:00.000+10:00

On Friday 7 October 2016, McCullough Robertson successfully obtained orders on behalf of a US Chapter 7 bankruptcy trustee, requiring payment to her of money held by the Public Trustee of Queensland (Public Trustee) on behalf of a US bankrupt and her former husband. As far as we know, this is the first time that the Model Law on Cross-Border Insolvency (Model Law) has been used in Australia to obtain an order allowing the repatriation of funds to a foreign representative that are not the foreign debtor’s assets.

Mr and Mrs Digrigoli reside in California and have lived there most of their lives. In 2011 Mrs Digrigoli filed for bankruptcy in California. In 2012 they got divorced after 40 years of marriage. During their marriage they acquired a property in Western Queensland.

In Australia, upon the bankruptcy of one of the owners, a joint tenancy is severed and the property becomes held as tenants in common. The non-bankrupt then retains their share of the property and it does not form part of the estate of the bankrupt. However, under US bankruptcy law, property acquired jointly during marriage (referred to as ‘community property’) forms part of the estate in bankruptcy. After payment of fees and expenses of the bankrupt estate, the proceeds of the community property must first be applied to pay the married couple’s joint debts, after which the remainder, if any, is then divided equally between the estate and the non-bankrupt spouse.

In February 2013, the local Queensland council sold the property to recover unpaid rates. Relying on her right to community property, the bankruptcy trustee asked the council to pay the balance proceeds of sale to her, but the council ignored her request. Accordingly, the bankruptcy trustee obtained an order from the Bankruptcy Court in California requiring the council to pay the funds to her. Despite the order, the council refused to pay over the funds and paid them to the Public Trustee.

Exasperated by the head in the sand attitude of the council, the bankruptcy trustee asked us whether we could assist. Frustratingly, following a number of written requests from our firm and a comprehensive explanation of relevant US Bankruptcy law, the Public Trustee also refused to pay the proceeds to the bankruptcy trustee, refusing to recognise the US Bankruptcy or that the bankruptcy trustee had any right to the funds.

Not to be defeated, we recommended that we seek recognition of the US bankruptcy as a ‘foreign proceeding’ under the Model Law and then seek orders requiring the Public Trustee to pay the funds to the bankruptcy trustee. In doing so, we agreed to cap our fees to ensure this action remained commercially viable for our client.

Upon recognition of a foreign proceeding, under article 21 of the Model Law, the court can grant any appropriate relief, including entrusting the:

(a) administration or realisation (article 21(1)(e)); or
(b) distribution (article 21(2)),

of the debtor’s assets to the foreign representative (in this case the bankruptcy trustee).

The issue that we faced was that (as far as we could determine) all the previous Australian authorities that had entrusted the administration, realisation or distribution of assets to a foreign representative had only done so in respect of the foreign debtor’s property, and not the property of another party, as was required in this case.

Happily, the court agreed with our argument that the circumstances of the matter meant that ‘appropriate relief’ included entrusting all the funds held by the Public Trustee, including the portion of the funds that under Australian law would remain Mr Digrigoli’s, to our client.

Click here to see a copy of the recognition order and the order requiring payment of the funds by the Public Trustee.

Scott Butler

To set-off or not to set-off in unfair preference claims?

2016-10-06T13:21:00.000+10:00

Last year’s Queensland District Court decision in Morton v Rexel Electrical Supplies Pty Ltd [2015] QDC 49 (Rexel) caused quite a stir in insolvency circles. In Rexel, Searles DCJ (a former partner of McCullough Robertson) found that section 553C of the Corporations Act 2001 (Cth) (Act) could apply to reduce an unfair preference claim brought by a liquidator, by allowing the amount still owing by the company to be set-off against the liquidator’s claim.

Section 553C of the Act requires a creditor or debtor and a company in liquidation who owe each other debts to set them off against each other, so that only the net balance is either owed or owing. However, a set-off cannot be claimed if, at the time of giving or receiving credit from the company in liquidation, the person had notice of the fact that the company was insolvent.

Since Rexel we have raised the set-off defence to our client’s advantage when defending and settling a number of unfair preference claims. However, the decision has raised questions which we and others have grappled with. How does the set-off defence interact with other defences advanced? Should set-off be denied in cases where a running account is advanced, to ensure only the ‘ultimate effect’ of the transaction is considered? Should set-off be allowed if a company is found to have had reasonable grounds to suspect insolvency (and thus the good faith defence has no application), so long as the higher threshold of actual notice of insolvency is not met?

In Rexel, it was held that the time of ‘giving credit’ to the company in liquidation for the purposes of section 553C was the dates when each unpaid invoice was rendered. In a recent matter we acted in, our client issued an invoice on the day after administrators were appointed, but before they were aware of the appointment. Arguably, at the time of rendering the invoice our client had no notice of the fact that the company was insolvent. Should the fact that, as at the relation-back day (i.e. the date of appointment of the administrators) the company had not yet ‘given credit’ to the company by rendering its latest invoice, deny the company the entitlement to a set-off for that amount?

An interesting article by Matt Hudson of SV Partners in Queensland as to whether set-off against unfair preference claims should be allowed at all was recently published in the ARITA journal. You can read Matt’s full article here.

At the very least, whilst it remains good law, Rexel has added another avenue for creditors to defend preference claims and given them added leverage to settle claims. Until the courts clarify this issue, the insolvency profession will continue to ponder - to set-off, or not to set-off? That is the question.

Amanda Walker

Taken to the Kleeners – When insolvent trading becomes criminal

2016-09-30T11:54:00.001+10:00

Last month former Kleenmaid director Bradley Young not so valiantly marched into the history books when found guilty of 17 charges of insolvent trading and one count of fraud after one of the longest criminal trials ever held in Queensland. This followed fellow director, Gary Armstrong, pleading guilty to two counts of insolvent trading and one count of fraud.

Background: what lead to this outcome?
Prior to its collapse, Kleenmaid provided retail whitegoods to customers Australia-wide. Deloitte were appointed as voluntary administrators in April 2009 and liquidators a few months later and, at the time of writing, its website notes that the Kleenmaid group has over $102 million in liabilities.

Reports issued to creditors during the administration and liquidation tell a story of missing records, questionable transactions, minimal cash flow and unrecoverable inter-company loans, leading to a devastating “little chance of dividend” outcome for creditors.

What is abundantly evident some seven years on is that the Kleenmaid group was suffering for a long time before its ultimate demise and, given the palpable ways in which this manifested, the directors ought to have known about it.

An important part of Kleenmaid’s final moments, and a key component of the case against the directors, was the provision of a multi-million dollar loan by Westpac. This loan was provided at a time when Kleenmaid was hopelessly insolvent (a fact masked by an intra-group restructure and various inter-company loans) and, as was alleged in the criminal trial, at a time when the directors must have known that Kleenmaid had limited means to repay the money borrowed.

The duty: what should the directors have done to avoid this?
The duty to prevent insolvent trading sits within s588G of the Corporations Act. It imposes on directors a duty to prevent a company from incurring a debt when:

the company is insolvent, or
there are reasonable grounds to consider the company is likely to become insolvent by incurring the debt.

A director who allows a company to incur debts in these circumstances:

can be ordered to compensate the company for any loss suffered
may be liable for a pecuniary penalty up to $200,000, and
can be disqualified from managing a corporation.

If the director suspected at the time when the company incurred the debt that the company was insolvent or would become insolvent as a result of incurring that debt, and the person's failure to prevent the company incurring the debt was dishonest, the director commits a criminal offence and can be liable to:

a penalty of up to 2,000 penalty units (currently amounting to $243,800), or
imprisonment.

The prosecution
Having regard to the grave factual circumstances, it came as no surprise when the Commonwealth Director of Public Prosecutions, on behalf of ASIC, commenced criminal proceedings against the directors in 2012.

Following the imposition of the charges, one of the directors, Gary Armstrong, pleaded guilty to one count of dishonestly gaining loan facilities from Westpac in 2007 and two counts of insolvent trading. Armstrong was subsequently sentenced to seven years in prison and is eligible for parole in February 2018.

Notwithstanding Armstrong’s capitulation, fellow directors Bradley and Andrew Young vehemently denied the charges filed against them. Both were charged with one count of fraud and 18 counts of insolvent trading.

Relying on evidence obtained by the liquidators in their investigations, including a public examination of the directors, the prosecution argued that the directors knew of the company’s financial instability and egregious debt position but did not disclose this information to Westpac when applying for the loan.

After nine days of the eventual 71 day trial, the trial against Andrew Young was adjourned to allow him to find another barrister to represent him. His trial will continue another day.

When the trial against Bradley Young continued, his lawyer tendered over 60 character references with respect to his client. Unfortunately, that was of no avail as the jury found Mr Young guilty of the fraud charge as well as 17 of the 18 charges of insolvent trading.

When delivering his sentence, District Court Judge Farr commented on what he considered to be Mr Young’s ‘callous disregard’ for those who would ultimately be affected by his actions. His Honour sentenced Young to nine years in jail; he is eligible for parole after six years and three months.

A trial date for the third director and brother to Brad, Andrew Young, is yet to be set.

McCullough Robertson has been the primary legal advisors to the liquidators since 2009.

Scott Butler

Ann Watson

Welcome to Back to Black

2016-09-27T08:47:00.000+10:00

Welcome to our new restructuring and insolvency blog, Back to Black.

At McCullough Robertson, we pride ourselves on our expert industry knowledge and ability to provide innovative, commercial and cost-effective advice. As such, our approach to restructuring and insolvency goes beyond working on the files on our desk. We are active participants in our industry, remaining at the forefront of emerging trends and legal developments.

This blog draws upon our expert industry knowledge and resources to help you stay up-to-date with proposed changes in law, landmark cases and new and novel approaches to corporate restructuring, turnaround and insolvency both in Australia and around the globe.

Please be sure to enter your email address in the top right field to keep updated.

We look forward to sharing this knowledge with you.
Yours in restructuring and insolvency,

The Back to Black Team

Is it smooth sailing for Hanjin Shipping Co in Australia from now on?

2016-09-23T15:01:00.001+10:00

Late on Friday, in an ex parte hearing in the Federal Court in Sydney, Korean shipping company Hanjin Shipping Co (Hanjin) obtained an interim order under article 19 of the UNCITRAL Model Law on Cross-Border Insolvency (Model Law). The order prevents the enforcement of any charge or lien over the ship "Hanjin Milano", its cargo, containers and bunker fuel and oil until 30 September 2016 or further order of the court.

Friday’s Federal Court orders do not prevent owners of cargo from removing the cargo from the Milano and the orders appear designed to allow the Milano to come into port and discharge its cargo without being arrested. However, despite the orders, it may not all be smooth sailing in Australian waters for Hanjin.

The Hanjin Shipping Collapse

South Korea’s largest shipping firm and the world’s seventh-biggest container carrier went into receivership in Korea in late August leaving more than 100 ships and their cargos at sea. Since then a number of its ships have been arrested by charterers, port authorities or other parties with maritime claims. The Milano's sister ship, the Hanjin California, was arrested on 6 September 2016 by a creditor, Glencore, when it berthed at Port Botany in Sydney.

Many of Hanjin’s ships were denied entry to ports as authorities around the world worried they would not be paid port fees or that the ships would be arrested and tie up busy berths for extended periods whilst the arrest proceedings play out. Others were told by Hanjin not to come into port for fear of being arrested by creditors and to remain at sea. One of those was the Hanjin Milano, which had been ordered to drop anchor outside Port Phillip Bay near Melbourne.

Recognition under Model Law
To stop vessels being arrested, so that Hanjin can continue to effectively operate its business while it attempts to restructure, the Korean appointed receivers started seeking recognition of the Korean proceeding in countries around the world. This recognition is being sought under the Model Law, in countries that have adopted it, to hopefully obtain a stay against arrest of ships in that country.

In some instances, recognition can still be sought in countries that have not adopted the Model Law. For example, the receivers successfully sought recognition in Singapore even though Singapore has not adopted the Model Law. The High Court of Singapore gave interim recognition to the Korean proceedings under the common law. When granting interim recognition, the court made orders preventing the arrest of ships in the Hanjin fleet (excluding the existing arrest proceedings involving the Hanjin Rome). The Singapore court has since made orders allowing the discharge of cargo controlled by five container shipping companies on the Hanjin Rome.

Australian Courts and maritime claims
So far, recognition of the Korean proceeding has been granted under the Model Law by courts in Japan, the USA and the UK. Australia has adopted and legislated the Model Law in the Cross-Border Insolvency Act 2008 (Cth) (CBIA) and Australian courts have recognised a number of foreign shipping insolvencies over recent years, including other Korean shipping related proceedings involving STX Pan Ocean Co Ltd, Daebo International Shipping Co Ltd, Samsun Logix Corporation and SW Shipping Co Ltd. However, our courts have made it clear that they will not lightly interfere with the rights of parties with maritime claims to arrest ships, a right which is at the heart of admiralty law.

While recognition in Australia of a foreign proceedings taking place in the debtor’s ‘centre of main interests’ results in an automatic stay, the scope of that stay is subject to Australia’s insolvency laws. The stays under Australian insolvency laws do not necessarily prevent secured creditors from enforcing their rights, which may allow a maritime lien to be enforced by arrest of a ship, despite the automatic stay.

Case example
In Yu v STX Pan Ocean Co Ltd [2013] FCA 680, Korean rehabilitation proceedings were recognised as foreign main proceedings by the Federal Court in circumstances where there was a risk that local creditors would take steps to arrest the debtor’s ships were they to call into Australian ports. However the court refused to make orders which would prevent creditors from applying for the arrest of ships. The Court ordered that any application for the issue of an arrest warrant of any vessel owned or chartered by STX Pan Ocean Co Ltd be dealt with by a Judge of the Federal Court (rather than a Registrar as would usually be the case), and that the reasons for judgment be drawn to the attention of the court at the time any such application is made.

Despite the order for recognition in Yu v STX Pan Ocean Co Ltd, one day later a creditor applied for the arrest of a ship operated by STX Pan Ocean Co Ltd and the Federal Court issued the arrest warrant and the ship was arrested.

Where a CBIA application “relates to an owner of a ship or ships engaged in any commercial trade”, this must now be brought to the Court’s attention before, or at the time, the application for recognition is filed, together with a copy of the reasons of the Court in Yu v STX Pan Ocean Co Ltd.

The Federal Court also ordered that a copy of the orders be provided to the Victorian Supreme Court, so that the court is aware of them if an application is filed with it for the arrest of the Milano. The stay granted by the Federal Court is only an interim one and is subject to any further order of the court. Given recognition in Yu v STX Pan Ocean Co Ltd did not prevent the arrest of a ship soon afterwards, it is not a fait accompli that creditors will be prevented from arresting the Hanjin Milano.

Read a recent article about the overlap between insolvency and maritime law in Australia co-authored by Scott Butler, INSOL Fellow.

About the author
Scott Butler (Fellow INSOL International) specialises in corporate restructuring and insolvency, banking and finance recovery and dispute management and resolution. He is an expert in cross-border insolvency law, completing INSOL International’s Global Insolvency Practice Course with Honours.

Scott Butler