Welcome to BILS Blog

By admin | Published: April 5, 2011

Welcome to BILS blog. This blog is authored by Associate Professor Christopher Symes and Associate Professor David Brown, Co-Directors of BILS @ Adelaide Law School, University of Adelaide.

We will bring you details of news and events at BILS, plus insolvency news and events, case comment and developments from Australia and round the world., and links to our publications and website. We aim to stimulate discussion and collaboration amongst insolvency academics, practitioners and policymakers worldwide.

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Has the rescue culture lost its way?

By David Brown | Published: February 14, 2012

In this blog we reproduce (with kind permission) a blog by Chris Laughton, of Mercer & Hole in the UK, who is immediate past President of INSOL Europe, see www.mercerhole.co.uk

Some of the issues in this blog, though tuned to the UK/European  framework and context, seemed to us to resonate here in Australia. In particular the view that administration is perceived as just another terminal insolvency procedure, is something which was addressed in our recent BILS/Annual Insolvency Review UBC stigma conference in Vancouver last month.

The recent attempts to lobby to relax insolvent trading laws were in the context of the argument that value destruction occurs on entering voluntary administration, due to this perception. David Brown will be pursuing this idea of ‘stigma’ in relation to corporate insolvency and rescue procedures, and Chris Symes is focusing on personal insolvency stigma in Australia.  The issue of practitioner fees, and perhaps also practitioner communication of their role, are certainly relevant here too, and ongoing in the light of the Treasury paper.

” Has the rescue culture lost its way? Chris Laughton, 31 January 2012

The UK insolvency regime began preparing for the 21st century with the Cork Report in 1982. That led directly to the Insolvency Act 1986, introducing the rescue mechanisms of administration and voluntary arrangements. Major refinements followed with the Enterprise Act 2002, enhancing the new mechanisms and facilitating the constructive use of insolvency procedures.

Since then, however, it has not been entirely plain sailing:

administration is widely seen as terminal: “going bust” is a common media description although the procedure is designed as a temporary opportunity for restoration;

the effectiveness of administration has been seriously blunted by various rent, pension and other claims being elevated to the status of administration expenses, payable before creditors;

similarly, TUPE (the implementation of the European Acquired Rights Directive) and its application by employment courts has stymied business rescue and failed to preserve employment;

pre-pack administrations have been occasionally abused and widely misunderstood; and

an erroneous perception of insolvency practitioners charging huge fees whilst failing to act in creditors’ best interests has been allowed to emerge.

Many of these challenges can be attributed, at least in part, to the insolvency profession not explaining itself sufficiently well, either generally or in individual cases and either to creditors and other stakeholders or to the media and politicians.

The influencing of legislative change has certainly improved, led by the trade body, R3, whose recent success in persuading the government to abandon its ill-advised proposal to require 3 days’ notice of business and asset sales to related parties is noteworthy.

However, more needs to be done to remedy defects in the law. Take for example the undue emphasis on rescuing the company (usually a valueless capital structure that is no longer fit for purpose) rather than the business, the craftable value creation unit at the heart of the enterprise, which can often be restored to health, perhaps under different ownership. More specifically, incursions into the administration expense regime need to be halted to restore the value of administration as a rescue tool. Goods and services actually used during an administration are proper expenses that should be paid, but contracts should be terminable by administrators (with damages constituting an unsecured claim). Post-insolvency Financial Support Directions from the Pensions Regulator should also, statutorily, constitute an unsecured claim. TUPE should be revised at least to exclude liquidation and liquidation-type administration sales.

Another area where legislative change is necessary is insolvency practitioner regulation. We need a single regulator that is and is seen to be independent and effective. Nothing less will do, despite the self-interested argument of some of the existing self-regulatory bodies.

The final area for improvement is a cultural issue for many practitioners. The art of communicating – through whatever might be the best medium – to all the relevant stakeholders in the distressed environment of a formal insolvency, where many have lost money, is often neglected by practitioners. They do so at their peril. This is especially so because a few communication failures damage the whole profession. The debacle of poorly explained IPs’ fees and the contortions of the legislation and professional guidance on disclosure that were imposed because of public dissatisfaction is a case in point. IPs of course also need to communicate publicly – and in this age of instant 24/7 media coverage that is a skill to be learnt and honed.

Has the rescue culture lost its way? We certainly need more appropriate legislation, but the impetus for the right changes must come from the insolvency profession.”

 

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PPSA GOES LIVE –HISTORY IN THE MAKING

By David Brown | Published: January 30, 2012

At the same time as history was in the making at the epic
Australian Open final last night, the Personal Property Securities Act came
into force, and the PPS Register ‘went live’. See www.ppsr.gov.au

This too, is history
in the making, not only in Australia, where it is undoubtedly the most major
development in commercial and finance law for decades, but also
internationally, in that the achievement of a national legislation and
register, on a 24/7 online basis, for personal property security, is something
that has so far eluded the other Federal jurisdictions where this system
originated.

Bold statements to the effect that the Act will ‘change the
way we do business’ are not wildly inaccurate, at least insofar as confined to
the concepts and mechanisms for taking and protecting security interests in
personal property. The objective of the Act is to facilitate credit
transactions, and to render more predictable and certain the rules and the
transparency around the taking of security, in particular by casting a wide net
as to what counts as ‘security, so that familiar title-based claims such as
retention of title, long leases and transfers of accounts, are all brought
within the system, and providing clear rules for priorities between secured
parties and the effect on third parties such as purchasers.

At this stage, on Day One, we need only mark the achievement
of the Government, and although it has had a long gestation period since the
initial seeds of discussion and persuasion were planted, the last few years
have seen an enormous effort to finetune the legislation and in particular, to
implement the mechanisms to administer the system and the register. At this
point, there are already millions of registrations on the register, due to the
huge number of entries on ‘migrated’ registers, such as the ASIC Company
Charges Register, and State-based REV or Vehicles Registers. In addition, some  1.4 million ‘pre-loaded’ registrations by
large commercial users.

Over the coming months and years, we will have occasion in this Insolvency Blog to deal with many issues arising out of the PPSA, not least of which arise from the ambitious attempt to amend Part 5 Corporations Act (External Administration) which has arguably muddied the waters in comparison with the other choices for dealing with this interface with the PPSA. The PPSA will impact on all insolvency procedures in Part 5, and on retention of title and chattel leasing arrangements, as well as a myriad of other issues. Whilst there is Canadian and NZ case law to draw upon, Australia has not resisted the temptation to reinvent the wheel and attempt to improve upon the solutions in these jurisdictions. In some respects this has taken the most up to date jurisprudence from those countries, in other respects, it has adapted rather than adopted them, and this will have some unintended consequences which will unravel over the next few years. The Act comes up for review in three years, and there have been a number of (not necessarily major) areas which commentators have already earmarked for amendment. In addition, there are those things which were compromised with the States, such as licences, in order to broker a national system.

The PPSA will impact on insolvency, since after all, that is the main rationale for protection sought through security interests. For now we welcome this important reform, and are sure that its long-term benefits will vastly outweigh any short-term adjustment to the new dispensation.This is true for insolvency practitioners as well as for secured creditors. In terms of reaching the small businesses who might not be aware of the new requirements in order to protect themselves, information and awareness are the key to success in the roll-out over the 24 month transition period, though the migration of  existing registers and transitional perfection provisions give rise to some issues too.

Congratulations to the late Professor David Allan of Bond University, Phillip Ruddock and Robert McLelland, and a number of key government and ITSA officials, and practitioners who have supported and contributed to the development,  and shaped the development of the legislation and the Registry.

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Insolvency Regulation proposals: casting a careful Eye

By David Brown | Published: January 3, 2012

IN THIS COLUMN WE GIVE SPACE TO OUR GUEST BLOGGER WHO GOES BY THE AVATAR OF ‘THE EYE’. He also writes for the Insolvency Law Bulletin (LexisNexis). Here he reflects on the Christmas reading provided by the Government’s response to its consultation on Insolvency Practitioner Reform (Treasury,15  December 2011), and subjects a well-known journalist’s instant reaction to careful scrutiny. These are the personal views of The Eye.

“ Refugees, tax and insolvency practitioners are not often associated, except that they both provide ready copy for the populist parrots of the press, and politicians. Just as we are being “invaded”, as one newspaper put it, by refugees, and being subjected to other frightening incursions, and being subjected to tax “slugs” and “skyrocketing” charges, so also are creditors and others being gouged by insolvency practitioners, over-serviced and delayed, confronted with opacity and abuse, and subjected to gross misconduct. It’s not the directors, the aggressive banks and preferred creditors, the devious debtors and conspiratorial spouses, and others who were implicated in the insolvency that we should fear, it’s the insolvency practitioner. Let’s have a look at one press article, by Adele Ferguson in the Fairfax press of 15 December 2011. The Senate inquiry into liquidators apparently released a “damning proposals paper into the industry and the ineffectiveness of the regulator”. One can’t see too much damning in the Senate report, not when one of its recommendations was that there be an entrance examination to become a practitioner. And it must be “closed book”, the Senate accepting advice of a lawyer that this was necessary in order to stop students simply parroting their Nutshell books, or even more worthy texts. This is one insight into the Senate’s thinking … But there is the “real issue”, Ferguson tells us, ominously. ASIC was “asleep at the wheel”. (This is a well worn journalist’s phrase, perhaps past its prime, but then many of this journalist’s words are – like rogue, bombshell, cosy monopolies busted open to competition, a system spiralling out of control, and worse). Yes, asleep or dozing ASIC may have well been, and in response, the government has unfortunately decided not to set up a full time insolvency regulator. But a review of ASIC’s latest annual report, and of ITSA’s, shows the actual number of complaints against practitioners, and of those, how many are found valid. The courts have their fair share of unsuccessful challenges to alleged practitioner misconduct. It helps to read around one’s topic, rather than parroting government reports. And we have to agree with our journalist’s list of systemic issues in insolvency: • conflicts of interest – certainly a significant obligation and one often tested in the courts, a most recent example being Viropoulos v Falcon G.T. Pty Ltd [2011] NSWSC 1509. The court refused the application to remove the practitioner. • fee gouging – apparently meaning overcharging, even though all gouging must be approved by creditors or the court. The Senate report’s recommendations about this were tame. For those interested, a close review of a practitioner’s remuneration, in the hundreds of thousands, is determined in Joe & Joe Developments, 20 September 2011, NSW Supreme Court. • over-servicing – yes, all those statutory obligations of a practitioner, under long unreformed 19th century law. Practitioners must give notice by newspaper for example, at $2000 a go. • protracted settlements – yes, settling an insolvency claim against someone who has made off with company assets can be protracted, and claims can be complex, and defended. Defendants just will not hand over the money. • lack of transparency – an interesting one, though opaque in its meaning in the insolvency context. There is a large amount of reporting to the creditors and the world expected of a practitioner. This is one reason for the substantial lessening of the reporting obligations in these reform proposals. • conflicts of interest, again! – just for emphasis? • abuses of power – indeed, a real no-no for anyone, including the press, but rarely upheld against liquidators under court scrutiny; • gross misconduct – also no good, for anyone, again not often upheld. Certainly Ariff was guilty of some of these, and he is in gaol. The last major finding of practitioner misconduct before that was probably Edge, in 2007, and then some cases in past law reports. And finally, Ferguson thinks there are “too many loopholes”. Yes, all loopholes must be closed, as a matter of principle, and urgently, just as white collar crime, according to Senator John Williams, must be done away with. Then our journalist offers a “frinstance”, by-passing some useful legal analysis. Frinstance, the government thinks that creditors should have the power to remove a liquidator but it is to be weakened, alarmingly, according to our journalist, by the ability of the practitioner to apply to the court to prevent their own removal. Insolvency law goes back some centuries and requires some appreciation of the deviousness of its stakeholders. Creditors being sued by the liquidator for recovery of ill-gotten moneys may well vote to remove that liquidator, but the law thinks sensibly in responding to that, even if others don’t. Wise Justice Clyne said in Crawford’s case back in 1943 that “there is probably no reason why, when a trustee who is honestly and properly carrying out his duties, should not be removed from his office if the creditors so desire, but, when creditors make improper and unfounded allegations against a trustee to secure or justify his removal, and the conduct of these same creditors leads to the strongest suspicions that their reason for having the trustee removed is a desire to help an important shareholder of a company which is a creditor, the Court should interfere”. And other Judges have since decided accordingly. As to other frinstances, yes we need better education of many professionals, including insolvency practitioners, and others …. And a “fee cap is long overdue”. Some know capped fees have been around for a long time. The decisions in Aliance and Wenkart are but two one may read. But, alarmingly, the cap can be raised. The courts don’t find that of concern: Paul’s Retail Pty Ltd v Morgan [2010] NSWCA 217. And why should it be raised? Construction companies can provide an estimate of their jobs, and if they get the estimate wrong, they wear the cost, we are told. Having quantity surveyors, engineers and builders review a building project before estimating a price is very different from taking an appointment to an insolvent company. The appointment is taken cold – practitioners must be independent – and absconding directors and bankrupts are often not fulsome in their assistance to the new practitioner. Trying to price such work and indeed it is often best not to. And finally, our journalist has counted 9 insolvency law reviews in 20 years, and only now is the government getting around to implementing reforms recommended in the 1988 Harmer Report. The lack of attention to insolvency reform has hampered insolvency administrations for a long time. The law reform process – whether it be law in relation to refugees, tax or insolvency – requires input from those who can give considered and unemotional attention to what can be complex issues. The Eye 15 December 2011 Further readings of the author, for those interested in thinking: • Articles by The Eye, in the Insolvency Law Bulletin, LexisNexis • Australian Insolvency Management Practice, Murray Taylor, CCH, in particular newsletter 138 • Keay’s Insolvency, Murray Harris, LBC, 2011, Ch 21.”

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BILS/UBC Workshop on Stigma in Insolvency

By David Brown | Published: November 19, 2011

On 17 January at the University of British Columbia, BILS will co-host (with the Annual Review of Insolvency Law, based at UBC) a one-day workshop on the Impact of Stigma in Insolvency, which will be chaired by Professor Janis Sarra (BILS Advisory Board), and commentator will be Emeritus Professor Jacob Ziegel, University of Toronto. Associate Professors Chris Symes and David Brown of BILS will both speak, as well as speakers from other Canadian universities. The workshop will be attended by legal profession and judiciary.

More news about this event will follow.

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An advertised post: ASIC Commissioner (Insolvency)

By David Brown | Published: November 19, 2011

 

ASIC on 20th October announced that Michael Dwyer, was retiring as Commissioner after three busy years. Mr Dwyer’s experience in the insolvency industry has coincided with the GFC, and with the Senate Inquiry into Liquidators, Administrators. Like the ASIC Chair, we pay tribute to Mr Dwyer’s efforts (particularly as a former Adelaide practitioner) and look forward to his continuing contribution in the insolvency field.

Two new Commissioners have since been appointed by the Treasurer, clearly eminently experienced, though with focus on securities regulation/international, and competition/consumer protection backgrounds. This leaves ASIC bereft of a Commissioner with insolvency focus or experience.

Last weekend(12th November) , we noticed the advert for another Commissioner, tucked away at the bottom of the Inquirer section of the Weekend Australian. If you were thinking of a new job or even browsing, you would probably go to the Professional supplement of the newspaper, or if you were in the business/regulatory area, you might read the Business supplement. Indeed, the main section of the newspaper also carries several large job advertisements, including for the CEO of Drinkwise Australia, and a new V-C for Macquarie University. So if you had time on your hands, you might read the Inquirer section, and you might spot the advert for a new ASIC Commissioner inside it, at the bottom of the page, next to the advert for the Tiwi Islands Assistant Director of Infrastructure. Hopefully, all this means that the Government has someone in mind for the position, and hopefully they are an insolvency expert. At least this position has been advertised, unlike the Chairman’s position earlier in the year, which itself has been the subject of recent press comment, see November 12th Sydney Morning Herald), Should any readers wish to apply to be the newest ASIC Commissioner, the closing date is 25th November 2011, total package around $500 000 (no doubt requiring some of our readers to take a pay cut!).

However, even though it has been advertised,  the Treasurer did earlier indicate that he would be looking to replace Mr Dwyer, so it is somewhat regretful to observe that the job advert does not specifically refer to insolvency as an essential or desirable area of knowledge, but instead to ‘financial system and regulation’. Whilst it is appreciated that being an ASIC Commissioner requires one to have understanding and working knowledge of the whole range of ASIC’s ever-expanding activities, there are particular reasons why insolvency needs to be a focus for ASIC right now.

First, its the economy of course. Despite the Chinese firewall, the latest statistics from ASIC itself, show a sharp rise in insolvency activity other than in mining, compared to the same time last year. That is already recent history, but the Euro crisis may mean worse is to follow.

Secondly, there was the Senate Inquiry in 2010  into Liquidators and Administrators, which raised concerns about ASIC’s role in insolvency, lack of statistics, responsiveness, and its resourcing of the area, and which questioned whether the role should not be handed over to a new insolvency regulatory authority responsible for personal and corporate insolvency.

Whilst stating during the Inquiry that it was adequately resourced and/or could call on more government resources if needed, ASIC’s outgoing chairman, Michael D’Aloisio, in his retiring comments earlier this year, eventually acknowledged the need for more resources and focus by ASIC on insolvency regulation. The Treasury’s Options Paper (June 2011) firmly suggested, we think mistakenly, that there is no need to shift corporate insolvency practitioner regulation from ASIC (Treasury-there is still time to change your mind!).  However, now ASIC, and certain insolvency practitioners, are under attack from the Age newspaper, which has pulled no punches, in relation to ASIC waivers in certain restructurings. As is often the case, it is difficult for ASIC to respond, since much of its work is confidential and has to follow due process in relation to complaints. Nevertheless, in relation to insolvency, it could be said to have been a double ‘annus horribilis’ for ASIC in the last two years. Some changes, albeit not as radical (and indeed offbeam) as some of those put forward by the Senate Inquiry Report, will no doubt emerge from the Treasury’s June Options Paper and will require to be implemented by ASIC. Now more than ever, if it is to retain insolvency regulation, it needs a firm, experienced insolvency expert, but with the ability to act independently from the insolvency profession.

So despite the breadth of the job advert, we hope, for ASIC’s sake and that of the insolvency community, and wider public interest, that the next Commissioner to be appointed has some specialist knowledge of insolvency. If not, then the sentiment of the Senate Inquiry that ASIC does not give sufficient priority to its insolvency work will start to ring true.

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Celtic Tiger refugees and their debt tail

By David Brown | Published: November 8, 2011

As I sit in my University sabbatical office in mid-west Ireland, surrounded by the signs of an economy staggering, my office door opens and my office neighbour introduces herself and then starts, “I have a friend….” Well this friend, her husband and two children have left Ireland and gone to Australia, but they have a house in Ireland that they bought in the boom times and at boom-time prices with the support of a very generous bank, and cannot sell it now. The bank is owed heaps. My office neighbour asks:

“Do the laws of Australia mean that when the Irish bank repossesses and suffers loss once the property is eventually sold these new Australians will be bothered with the debt from their previous life?”

Now perhaps this doesn’t seem like a huge problem but then there are reports that 2,000 people a week leave Ireland permanently. There is over 14% unemployment here and the Irish banks have huge debts and mounting portfolios of repossessed property. The government have set up NAMA (National Asset Management Agency) to address the problem as a result of excessive property lending and as an example of their work they have acquired loans with a nominal value of 72.3billion euro ($A96.69billion) from participating financial institutions.  And then there is the report from Irish national television station RTE1 that there is an increasing rate of Irish emigrating to Australia, and that Australia has 30,000 two year work visas! http://www.nationalvisas.com.au/blog/australian-news/the-increasing-rate-of-irish-emigrating-to-australia/

One migration expert said she was expecting between 20,000-30,000 Irish will emigrate this year. http://www.visafirst.com/en/news_and_updates.asp?item_id=815

The short answer to my Irish neighbour is ‘yes’. Foreign debts can be the basis of foreign judgments, which can be used to issue bankruptcy proceedings in Australia. Worst still, if the former Irish residents were made bankrupt in Ireland the bankruptcy lasts 12 years (and changing now to 5 years) ,and Australian bankruptcy law provides that foreign courts can seek the assistance of the Australian courts.

Ireland has not enacted the UNCITRAL Model Law, as in the Cross Border Insolvency Act 2008 (CBIA) in Australia. Under CBIA, foreign creditors have the same rights regarding the commencement of, and participation in a recognised foreign proceeding under Australian law (Art 13).

The Foreign Judgments Act 1991 (Cth) provides for holders of money judgments to register and enforce that judgement in Australia. However Ireland’s superior courts are not listed in the Foreign Judgments Regulations 1992 (Cth). The common law with its principle of ‘comity’ could be of assistance to a plaintiff such as an Irish bank seeking to enforce a final judgment of a debt or definite sum of money provided they can show that the court has jurisdiction over the defendant.

The Bankruptcy Act in s29 provides that Australian courts will act in aid of and be auxiliary to courts of prescribed countries [of which Ireland is not] and to other countries that have jurisdiction in bankruptcy [which Ireland does]. The Australian court may exercise its powers as if the matter had arisen in Australia. The leading case is Ayres v Evans (1981) 39 ALR 129.

So perhaps some Celtic Tiger refugees turning up in Australia on work visas, or with the desire to permanently emigrate, will have not successfully fled the lair.

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The Great and the Goode Gather in Cambridge

By David Brown | Published: October 27, 2011

A Postcard from Chris Symes.

One of the benefits of being in the Northern Hemisphere and reasonably located here in Ireland close to much of Europe, is the ability to get to events in other parts of Europe, and recently I flew over the Irish Sea to Cambridge for the Society of Legal Scholars annual conference at Downing College.  In attendance was a scattering of insolvency people including Prof Sir Roy Goode. Roy’s fourth edition of Principles of Corporate Insolvency Law has just been released and in the Preface he announces that he will take a bow and leave the stage to younger and more vigorous scholars. At the conference dinner he made a valedictory speech that was amusing and reflective. For example he recalled the story of an examination question he set asking about the ‘securing of a Mini Cooper’ and the one student answer that considered the many ways a female called Mini Cooper could take action for her false imprisonment and the like. He never said how far that student went in an insolvency career!

 Another notable feature of the presentations was the influence of former Aussie’s on the current scholarship. In sessions I attended there were presentations from a former PhD student of Andrew Keay (formerly USQ), a postdoctoral student of Roman Tomasic (formerly Uni Canberra and VUT) and the attendance of Sarah Worthington (formerly Uni of Melb) who has just been appointed Downing Professor at Cambridge.

 By far the most intense insolvency discussions were those with John Tribe and his colleagues at Kingston University in London. John set up a very early blog on insolvency related affairs and continues to serves the English profession so well with his current commentary and technical information.

 And finally what was the one thing I learnt from four days swanning around like a Cambridge Don, well its this… the Crimean War influenced why we have limited liability for companies. A young academic from Aberdeen has been researching, amongst other things, the parliamentary debates of the mid 19th century around the time of the first Limited Liability Act 1855 and has evidence that the parliament was so focused on  the Crimean War that it rushed the passage of limited liability. Now, in Goode’s book, he states that “corporate insolvency initially piggy-backed on bankruptcy law and did not assume a truly distinctive status until the advent of limited liability for members of a company with the enactment of the Limited Liability Act 1855; and the first modern company law statute was the Companies Act 1862, which contained detailed winding up provisions, including a provision for pari passu distribution.” (page 11 and 12 of Goode, RM, Principles of Corporate Insolvency Law  4th ed 2011) So from now on, when you think of the history of corporate insolvency and wonder where it came from, you may consider one influence might have been Russian!

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BILS/Limerick Conference- Insolvency in the 21st Century

By David Brown | Published: October 26, 2011

Insolvency Law in the 21st Century: Irish and International Experience

UNIVERSITY OF LIMERICK , SCHOOL OF LAW, and

BILS (BANKRUPTCY AND INSOLVENCY LAW SCHOLARSHIP UNIT) @ ADELAIDE LAW SCHOOL

ARE PROUD TO PRESENT:

A gathering of national and international experts on insolvency law and practice to discuss their experience and share their expertise from Ireland, the United Kingdom, Canada, Australia and the United States.

 

Speakers will include:

Gerry Harrahill, Collector General, Revenue Commissioners

Tom Kavanagh, Kavanagh Fennell, Insolvency Practitioners, Dublin

Professor Christopher Symes, University of Adelaide, Australia

Senior Insolvency Partner, Holmes O’Malley Sexton Solicitors, Limerick

Jason Harris, UTS, Sydney, Australia

Mr Eddie Keane, School of Law, University of Limerick

Professor Steven Ware, University of Kansas, USA

 

When: Saturday, November 5, 2011 from 9.00am to 1.00pm

Where: School of Law, University of Limerick

How much: €120 per delegate. Includes refreshments. Discounted early registration fee of €100 for applications received prior to October 15, 2011. Discounts are also available for multiple delegates from more than one firm or institution.

Who should attend: lawyers, accountants, academics, law, business and accountancy students, business executives, government agencies. CPD points will be available.

Organised by the International Commercial and Economic Law Group at the School of Law, University of Limerick.

Director: Raymond J Friel

For more information, or to register for this conference, please contact

Carol Noonan

School of Law

University of Limerick

Limerick

Tel:

Email: carol.noonan@ul.ie

 

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Postcard from Europe

By David Brown | Published: August 10, 2011

Chris Symes here, writing from Limerick. Its late summer in Europe, and you might expect the insolvency business to be slow, but there appears to be a certain ‘scurrying’ – perhaps its an early preparation for winter. I’ve been in the Czech Republic, Slovak Republic and Spain talking to lawyers about the euro debt crisis and the reforms that could follow but now I’ve  temporarily ‘settled’ in Ireland. Ireland has a draft Companies Bill 2011 and interestingly it is structured so that the private company limited by shares is the default company type and forms ‘Pillar 1’ which has been released for comment. The second part of the legislation dealing with all other types of companies will be released later. For the insolvency reform, the Bill aligns the court winding up provisions with the creditors’ voluntary winding up provisions, it moves some of the existing court supervisory roles to liquidators and as a consequence introduces liquidator qualifications for the first time, and generally modernises the existing law.

 

Insolvency is all around me in Ireland. Figures released here last week show 4 companies have gone bust every day since the New Year, 26% of all insolvencies are in the construction industry, and receiverships for the month of July rose 102% over June! Two insolvency cases have been making news in Ireland over the last few weeks. A large supermarket company Superquinn has been in receivership since the day I arrived. On the next day the receivers from KPMG, who were appointed by a syndicate of banks, were able to arrange a buyer, the opposition retailing group, Musgrave! Two days later the directors of Superquinn made application to the High Court of Ireland to appoint an examiner [close to what in Australia would be administration, but court-appointed process- it is interesting to note that in this case and the one set out below, application to court for an examiner happened after the receiver/liquidators were appointed. In other words, examinership is not seen as the first resort to try to rescue a business, as in Australia]. The company had been in existence for over 50 years and concentrated on the ‘upper segment of the market’ and this and its move into property seems to have caused problems when Irish property values dropped [by up to 60% suggested by some commentators] and customers falling on hard times moved to purchase from cheaper competitors. The company has debts estimated at 450million euros and 3,500 workers.

 

The second newsworthy insolvency in Ireland was last Friday’s announcement that Home Payments Ltd was in liquidation with provisional liquidators appointed from KPMG with the approval of the High Court. The company, again in operation for a long period (1962), collected payments from customers and then paid their household debts, they provided a household budgeting service that consolidated its customers bills into fixed weekly or monthly payments. It also provided loans. Again, the company during the Celtic tiger boom bought 12 properties as investments. The company had 2,300 customers and most are in credit with the company for less than 3000 euros with only 23 owed more 10000 euros. By closing their doors without notice last week they prevented a ‘run’ of customers withdrawing their ‘deposits’. This is something of an unusual business for us Australians and will be interesting to watch as it proceeds in the court with the company, banks and depositors having different positions.

 

Slan (thats Goodbye in Irish!)

 

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Can we Trust Creditors Trusts?

By David Brown | Published: July 19, 2011

 

Some years ago it became fashionable  to avoid statutory protections of the Deed of Company Arrangement provisions of Part 5.3A, by resolving to enter into a DOCA which would immediately terminate and be replaced with a trust, extinguishing creditors’ claims in the VA/DOCA procedure and replacing them with claims as beneficiaries to the like extent against a trust fund, which would comprise of any company assets and often, some funding by a director or third party. Described by one judge as ‘ingenious’, it certainly was not envisaged that this would be permitted or even necessary, given the flexibility of Part 5.3A to achieve an arrangement which would further the objectives set out in s435A. Worrying, and open to abuse, were other phrases that sprang to mind, and which were used by ASIC when it was sufficiently concerned to issue specific guidelines in 2005 about the use of creditors’ trusts (RG 82, May 2005).

The ASIC Guidelines opine that it would be rarely appropriate for such a route to be adopted, since a DOCA could usually achieve the same objectives, and that it would amount to abuse if, for example, a creditors trust was used in order to facilitate return of an insolvent company to its directors to continue trading. Once the DOCA terminates, there is no need to advertise the company as subject to a DOCA (see s450E, subject of our AMI Blog). Also, many other protections which creditors have to apply to court, and to terminate the DOCA for default and resolve to liquidate the company, do not apply once the DOCA has terminated. As beneficiaries of a trust, the [former] creditors do have some rights under trust law, and of course the trustee is a fiduciary, but depending on the terms of the trust deed, they are unlikely to have the same security of payment of their agreed dividends, or the same rights if they are not paid, and there is a real danger that in resolving for the creditors trust, creditors will not be fully informed of this erosion of their rights.

Nevertheless, the ASIC Guidelines do not say that creditors trusts are unlawful, and they acknowledge that they are not always an abuse. ASIC considers that s435A does not, despite its width, always justify use of a creditors trust mechanism as consistent with the objects of Part 5.3A. They consider that a trust would not be appropriate if it was inconsistent with the public interest, or if there was no sound and compelling reason for using a trust rather than a DOCA.

Creditors trusts have proved attractive as enabling a company to trade in the company name free from the DOCA tag, and have proved a way of achieving a backdoor listing on the ASX. They enjoyed some popularity in Western Australia in the mining sector in more recent years.

However, in Parkview Constructions Pty Ltd v Tayeh [2009] NSWSC 186, Barrett J expressed reservations, endorsing the cautious approach of the ASIC guidelines. In that case he could not see any need for use of the trust rather than the DOCA. He said that the administrators would have a ‘heavy burden’ of explaining to creditors why a creditors trust was needed. The ASIC guidelines state that they would consider disciplinary action against administrators who did not discharge that burden.

Now Bergin CJ in Eq, in Bevillesta Pty Ltd (In Voluntary Administration)[2011]NSWSC 417, 10 June 2011, has taken what might be described as a more liberal view of creditors trusts.  Ultimately, she did so by concluding that the ASIC Guidelines had interpreted the law too strictly by requiring a ‘compelling’ commercial reason before allowing a trust in a VA. In fact, in this case, the administrators went carefully through the ASIC Guidelines in their report to creditors, and specifically stated that they could not find a compelling reason, but that they nevertheless found that, despite being ‘very risky’, the trust proposal was in the best interests of creditors. ASIC intervened in the proceedings, and seemed to have mistakenly argued that the administrators, who had applied to court for directions, should not have done so. Given that ASIC’s own guidelines encourage such applications, as the judge pointed out, the administrators could not be criticised here for bringing the application, given that the professional consequences threatened in the ASIC Guidelines. If anything, the judge was impliedly critical of ASIC, who were ‘amicus curiae’ but not very friendly, more adversarial in their stance here.

Not only could the administrators not be criticised for bringing the application for directions, they could not be faulted for compliance with the ASIC Guidelines, in that they explained to creditors in painstaking detail the relative advantages and disadvantages of their rights and remedies, as far as they could tell, in a creditors trust compared to a DOCA, and they explicitly warned them that there was no guarantee that the funder would provide the ‘top up’ funds which might lead to the promised 100% payment of unsecured creditors. In this case, the Funder rejected several of the amendments proposed by ASIC and the administrators. In particular, if the company should go into liquidation or the trust deed  terminate by resolution of the beneficiaries, the funder was entitled to be repaid amounts it had paid into the trust fund to that point. There would be no such right within the DOCA regime. A reading of the s439A report extracts suggests that the administrators are no fan of creditors trusts as a rule.

Ultimately, commercially the administrators recommended it because there was a chance, albeit one fraught with risks, that creditors would get something, possibly, though with no security promised, 100%, as against a nil dividend on liquidation, and something in between in various DOCA scenarios. This deal was being presented as a take-it-or-leave-it deal by the Funder, which was promising to put in 2.5 million if it could be done through the trust. And what was the reason, sound, compelling or otherwise, why this had to be done through a trust? As far as the judge could ascertain from counsel, the company wished to ‘clean up its balance sheet and remove some creditors’.

Bergin CJ concluded that, absent any clear evidence of insolvent trading, a sound commercial reason put forward by the administrators, who would have to comply with the ASIC guidelines as far as disclosure to creditors was concerned, would not amount to abuse of Part 5.3A. In this case the administrators had discharged the ‘heavy burden’ which she seemed to agree with Barrett J, had to be discharged.

“Where the creditors stand a chance of receiving something under a structure that is somewhat controversial and prima facie unsafe, but nothing under a structure which is conventional (liquidation) there seems to be a commercial reason that may present as compelling and if not certainly sound.”

Comment:

ASIC are right to be concerned about creditors trusts. They avoid the mechanisms put in place to protect creditors, and to some extent, the public interest, in Part 5.3A. Like pre-packs, they were never envisaged by the legislature, and little thought has been given into their impact. Creditors trusts certainly lend themselves to abuse. Administrators must surely be on their guard as to why directors or others are pushing this route, particularly if it is a dealbreaker. Starting from a position of scepticism might reflect the view of ASIC and Barrett J. However, in this particular case, the administrators’ report was almost a model of perfection, and certainly few of those creditors could be said to be under any illusions about the risks, it was a case of caveat emptor. The risks of abuse of Part 5.3A by directors is not down to creditors trusts alone, and not foreign to DOCAs. DOCAs still enable companies to be returned to the directors in circumstances where they fly under the radar of a liquidator’s scrutiny in relation to insolvent trading or voidable transactions. That is the price we pay for allowing in s435A, the survival of a company or its business in the interests of creditors, or a better return than on a liquidation.

However, should we be endorsing  opportunities for contracting out of the protections in Part 5.3A  and for possible abuse? Should we permit Part 5.3A to be substituted with trust law, including State-based Trustee Acts which do not offer the same protections to beneficiaries as DOCAs do to creditors.

More work needs to be done on whether creditors trusts are lawful within Part 5.3A, whether the ASIC guidelines are sufficient protection, the lack of supervision and regulation of trustees once the DOCA has terminated, and whether trust law can protect beneficiaries(creditors). Ultimately, even if Bergin CJ’s position reflects a plausible interpretation of the law, and reflects the exemplary nature of the administrators’ report here, the question should be whether these trusts should be outlawed in a VA situation.

Until that question is decided, we should all maintain the approach of caveat emptor, rather than amicus, to the creditors trust.

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