Belinda Ryan

Liquidators’ Equitable Lien “hammered”

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In Volkswagen Financial Services Australia Pty Ltd v Atlas CTL Pty Ltd (Receivers and Managers Appointed)(In liquidation) [2022] NSWSC 573, Justice Hammerschlag of the Supreme Court of New South Wales dismissed a claim by administrators/liquidators to an equitable lien over secured assets.

The administrators/liquidators’ claim failed because they were not able to prove that their costs, expenses and remuneration were exclusively connected with the care, preservation or realisation of any particular asset.

Facts

This case involved a claim by voluntary administrators, subsequently appointed liquidators, of Atlas CTL Pty Ltd (Receivers and Managers Appointed)(In Liquidation) (Atlas) for the unrecovered costs and expenses incurred by them in trading the company’s business together with their remuneration.

Atlas and a related company, PJM Fleet Management Pty Limited (Receivers and Managers Appointed) (In Liquidation) (PJM) were part of a group which operated a business of retail short-term car and truck rentals and leasing vehicles to rideshare operators.  The group operated from nine locations across the country.

PJM purchased or leased vehicles from a number of manufacturers including BMW, Nisan Volkswagen and Toyota.  Those vehicles were then made available to Atlas.  There were 2000 vehicles in the Atlas fleet.  Each of the manufacturers held security over vehicles supplied by them, some also taking a general security agreement from PJM and Atlas.

Both PJM and Atlas failed. The administrators determined to trade the Atlas business and had in mind the sale as a going concern. The administrators conducted a campaign seeking expressions of interest from potential buyers. Some potential buyers expressed interest and two proposals were received.  Those interested parties did not provide ongoing funding for the administration.  A company associated with Atlas’ director offered an indemnity which later transpired to be worthless.

By the time of the administrators’ initial report to creditors, they predicted a trading loss for the next three month period.  As events transpired, Toyota and BMW appointed receivers – which had the practical effect that those vehicles would not be part of any going concern business sale.  Nissan held off appointing receivers for a short period while they could determine whether an agreement to sell the business was able to be achieved.

In the administrators’ major report to creditors, they revealed a trading loss of $422,213.  By this time, they had earned remuneration in excess of $1m and expected a further $250,000 in remuneration up to the date of the second meeting.  The administrators recommended that Atlas be placed in liquidation.

Ultimately little, if anything, was realised from the assets of PJM or Atlas.  The only identified fund was that comprised entirely of the proceeds of Volkswagen vehicles (Volkswagen fund).  The proceeds of sale of the other vehicles had been paid to the secured creditors.

Claim

The administrators/liquidators claimed that their costs in trading the business and remuneration collectively totalling approximately $2.5m was secured by an equitable lien over the funds in the hands of the company and over the traceable proceeds or other property to which a lien is capable of attaching.  Relevantly, the only identified fund of assets in the winding up to which the lien could conceivably attach was the Volkswagen fund.

The administrators/liquidators relied solely on the equitable lien established by Dixon J in Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171 at 174 commonly known as the “Universal Principle”.

It is common ground that secured creditors rank ahead of the administrators/liquidators except so far as the claims made by them are secured by an equitable lien.

Applying the Universal Principle, a creditor who holds security which forms part of an administration or winding up and which is exclusively cared for, preserved or realised at the expense of the administrator or liquidator cannot conscientiously take advantage of the efforts of the administrator or liquidator without meeting his or her expenses in so doing.   Equity creates a charge over a fund created by the realisation of the security as a result of those efforts.

Although it has been held that the existence of the fund is not a pre-requisite for the application of the Universal Principle (see Primary Securities Ltd v Willmott Forests Ltd (Receivers and Manages Appointed)(in liquidation) 2016 50 VR 752) (Primary Securities), Hammerschlag J said that Primary Securities does not stand for the proposition that equity will create a charge over property (or proceeds of it) other than the property which was the subject of the care protection and realisation at the claimant’s expense.

The concept that the expenses and the benefit must be directly related is reflected in the requirement that they be incurred for the exclusive purpose of raising the fund or caring for preserving and or realising property.  Here, not only had the secured creditors not taken advantage of the administrators avowed protection of Atlas’ goodwill, but the only asset to which the lien could or would attach was the goodwill – which no longer existed (if it ever had).

Findings

Hammerschlag J concluded that the Universal Principal did not assist the administrators/liquidators because:-

  1. The claims for the trading losses and remuneration for exertions during the administration did not give rise to any lien over the Volkswagen fund as those claims did not have the necessary nexus with that fund which the principal requires.
  2. The administrators’ decision to trade on and continue trading was not reasonable in the sense in which the Universal Principle requires it to be.
  3. The efforts of the administrators were not directed to the preservation of vehicles. Rather they were directed at preserving the goodwill of the business.  The administrators gave evidence that they needed to keep the vehicles in commission to continue trading the business while a sale was explored.

His Honour observed that the statutory position of an administrator who decides to trade on is that he or she is personally liable for the debts incurred in doing so.  The administrators were highly experienced and acutely aware that trading was at their own risk.

The secured creditors were fully entitled to take a “wait-and-see” approach and the administrators knew they were doing this. Trading on remained the decision of the administrators alone.

Finally, despite rejecting the equitable lien, Hammerschlag J went on to make some observations about the manner which the administrators/liquidators sought to prove their claims.  His Honour said the administrators/liquidators had wrongly taken a global approach without seeking to establish the particular amount attributable to each asset.  That approach did not enable the court to make a finding that any specific amount was secured against any of the secured creditors individually.

In relation to application of the Universal Principle, Hammerschlag J also pronounced:-

  • The principle leaves no room to charge against that security expenses incurred for the benefit of someone else.
  • The principle leaves no room for the application of speculation or guesswork as to what was spent for the creditors’ exclusive benefit.  Justice does not dictate that it be “plucked out of the air”.
  • The burden of quantification rests on the claimant.

Take Aways

This case serves as a salient reminder that incursions into secured assets or the proceeds of those assets to meet the costs and remuneration of an administrator or liquidator have principled constraints.

Critically, it is only work which can be exclusively attributed to the care, preservation and realisation of those assets forms part of an equitable charge.  That work must also be reasonably performed.

Where there may be some doubt as to the utility of proposed work or whether the secured creditor is truly the beneficiary of that work, it is prudent to reach agreement with the secured creditor to ensure that a course is not adopted which might otherwise lead a practitioner out of pocket.

Approbate and reprobate – does an administrator need to inquire into the validity of their appointment?

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Introduction

On 9 May 2022, the Supreme Court of Brisbane handed down its decision in Stimpson v Allied Rural Pty Ltd (subject to deed of company arrangement) & Ors [2022] QSC 74. The case concerned an application by an administrator to review a remuneration determination.  The fairly routine application was opposed on unusual grounds, namely, that the appointment was invalid.

Background

The company, Allied Rural Pty Ltd (“Company”), was incorporated in 2009. Josephine Doolan was appointed the sole director and trustee of the Doolan Trust and all the shares came to be held by her as trustee for the Doolan Trust.  From the outset, the business of the Company was managed by Ms Doolan’s brother, William Doolan.  The beneficiaries of the Doolan Trust were Ms Doolan and her niece (Mr Doolan’s daughter).

Ms Doolan ultimately resigned as director and was replaced in 2012 by Hugh Blennerhasset.  Mr Blennerhasset also replaced Ms Doolan as trustee of the Doolan Trust.

By 2020, Mr Blennerhasset had stopped any day-to-day involvement in the management of the Company. Mr Doolan carried out the role of General Manager from then on. Mr Doolan and Mr Blennerhasset did not get along.

In November 2020, Mr Doolan filed an application to restrain the Company from selling certain real property, and to remove Mr Blennerhasset as trustee of the Doolan Trust.  Around the same time, Mr Blennerhasset’s access to the Company’s electronic accounting records was terminated (facilitated by Mr Doolan’s accountant).  In February 2021, Mr Doolan caused the Company to send an email directing customers to pay outstanding amounts to an entity controlled by him.

The administrator’s appointment

On 2 March 2021, Mr Blennerhasset resolved that the applicant, David Michael Stimpson, be appointed voluntary administrator by reason of the Company’s actual or likely insolvency.

On 4 March 2021, Mr Doolan’s solicitors served a draft application to terminate the administration on the basis that the Company was solvent and that the administrator had been appointed for an ulterior purpose.  However, the application was never filed.

On 26 March 2021 (following the first creditors meeting), the administrator filed his own application to terminate the administration on the basis of his “conditional opinion” that the Company was solvent.

On 29 March 2021, an application was filed by an entity related to Mr Blennerhasset for the Company to be wound up on “just and equitable” grounds.  Later that day, Mr Doolan approached the administrator with a proposal for a deed of company arrangement (“DOCA”).

Ultimately, the administrator formed the view that the Company was insolvent and the creditors resolved at the second meeting that the Company and creditors enter into a DOCA on the terms proposed by Mr Doolan (which saw, amongst other things, the removal of Mr Blennerhasset as director and the creation of a deed fund which Mr Doolan and his daughter were excluded from).

The creditors also resolved (instigated by Mr Doolan) that the remuneration of the administrator be fixed “on an ad valorem basis” and to 20 per cent of the creditor value as admitted for dividend purposes in the DOCA in the event that the appointment was valid.

The Decision

The administrator applied to the Court for a review of the remuneration determination.  The application was opposed by Mr Doolan and others on the basis that the administrator was not entitled to additional remuneration because his appointment was invalid.

In considering the application, and whether there was a general duty imposed on an administrator to inquire as to the validity of his or her appointment, the Court had regard to the decision in Re Condor Blanco Mines Ltd [2016] NSWSC 1196.  In that case, a claim for declaratory relief as to the invalidity of an administrator’s appointment was granted in circumstances where one of the directors was motivated by an improper purpose, and the other did not hold a genuine belief the company was solvent or likely to become so.

The Court in Condor observed that a duty to inquire may exist if an administrator is put on notice of possible invalidity.  However, the Court opined that the duty is restricted to seeing that the board adopted due process to pass a resolution in all but very exceptional circumstances (i.e. where it was obvious the directors were resorting to administration for an extraneous purpose).

While having regard to the principles espoused in Condor, His Honour Justice Jackson expressed doubt as to a “general duty” of an administrator to inquire as to the validity of his or her appointment.  However, His Honour ultimately concluded he was not required to reach a decision on these “potentially complex questions,” because the opponents were precluded from raising the question of invalidity by virtue of the doctrine of approbate and reprobate (i.e. you can’t have your cake and eat it too).

The opponents had deliberately chosen to approve the validity of the administrator’s appointment so as to carry the administration through to the second meeting of creditors and into a DOCA. The opponents then wished to reject the validity of the appointment so as to deny the administrator remuneration.

The Court noted that the statutory right to remuneration is for “necessary work properly performed.”  Had the administrator’s appointment been promptly and successfully challenged, most of the work claimed would not have been necessary or done.  The Court ultimately varied the amount of the remuneration determination to $228,891 plus GST.

Take-Aways

  • A challenge to a voluntary administrator’s appointment should be made as soon as possible after the appointment.
  • While it is doubtful that a voluntary administrator has a “general duty” or responsibility to inquire into the validity of their appointment, a duty may arise if the administrator is put on notice as to possible invalidity.

~ with Helen Hodgins, Lawyer

Full Court shuts down set-off as a defence to unfair preference claims

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In Morton as Liquidator of MJ Woodman Electrical Contractors Pty Ltd v Metal Manufacturers Pty Limited [2021] FCAFC 228 (“Morton“), the Full Court of the Federal Court has delivered a resounding “No” to the question of whether set-off is available to a creditor required to disgorge an unfair preference payment.

The decision resolves a long line of diverging authorities and commentary on the subject, providing welcome clarity for liquidators.

Background

Section 553C(1) of the Corporations Act 2001 (Cth)(“Act”) provides, in effect, that a person seeking to have a debt or claim admitted against a company in liquidation is entitled to the benefit of set-off where there have been mutual credits, mutual debts or other mutual dealings between the parties.

Section 553C(1) requires ‘mutuality’ of the claims being set-off, which essentially means between the same parties and in respect of the same interests. Academics and practitioners alike have been critical of the application of this provision to unfair preference claims and there has been a range of commentary and opinion as to why a set-off is not available in those circumstances.

The judgments typically relied on by proponents of set-off include those handed down in insolvent trading cases, such as Re Parker (1997) 80 FCR 1 (“Re Parker“) and Buzzle Operations Pty Ltd v Apple Computer Australia Pty Ltd (2011) 81 NSWLR 47 (“Buzzle“) and some first instance unfair preference decisions.

Facts

In Morton, the liquidator brought an unfair preference claim against the defendant creditor for payments received totalling $190,000. The defendant creditor sought to set-off a separate debt of $194,727.23 owing by the company to the defendant creditor against the liquidator’s claim.

After hearing the matter at first instance, Derrington J referred the question of whether set off was available to the defendant creditor to the Full Court of the Federal Court .

Decision

In his leading judgment, Chief Justice Allsop held that the question was ultimately one of statutory construction.

After considering the relevant statutory provisions, the Full Court of the Federal Court was unanimous in holding that set-off under section 553C(1) of the Act was not available to the defendant creditor, because the requisite element of mutuality was not satisfied.

In particular the debt of $194,727.23 which the creditor sought to have set off arose from “historical events in the ordinary course of business dealings” (i.e. the supply of goods by the creditor to the company). Conversely, the creditor’s obligation to disgorge the unfair preference payment arose pursuant to court order obtained by the liquidator in the exercise of his statutory duties, which occurred after the “relevant date.”

What now for Re Parker and Buzzle?

The Full Court of the Federal Court distinguished the past decisions in Re Parker and Buzzle, having regard to the difference between the legislative purposes of unfair preference versus insolvent trading provisions (sections 588V and 588W).

The Court ultimately left the question of correctness of the Re Parker and Buzzle decisions undecided. Therefore, these decisions can still be relied on in relation to insolvent trading claims.

Key takeaways

Morton is a seminal decision, which resolves with finality the long running controversy of whether statutory set-off is available in the context of unfair preference claims. In summary:-

  • Set-off under section 553C is no longer available as a defence to an unfair preference claim brought by a liquidator.
  • Set-off may be available in respect of other voidable transaction claims brought by a liquidator and also insolvent trading proceedings.

~ with Alexandra Culshaw, Lawyer

Full Court overturns trustee’s win in McMillan v Warner

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Introduction

In McMillan v Warner (Trustee) [2022] FCACF 20 the Full Court of the Federal Court of Australia allowed an appeal against a judgment made in favour of a trustee in bankruptcy who was successful in voiding a transfer of property from husband to wife made 16 years prior to the husband’s bankruptcy.

The facts

Mr McMillan owned a panel beating business. In 1995 Mr McMillan and his wife purchased a property in Strathfield (“Property”) as joint tenants.  In 2001, Mr McMillan was approached by Rolls-Royce to open a car dealership. Mr McMillan subsequently entered into a dealership agreement with Rolls Royce, and proceeded to obtain finance from the Commonwealth Bank and St George Bank to help cover associated costs.  Both Mr and Mrs McMillan gave personal guarantees and the Property was subject to two mortgages. In 2002, ownership of the Property was transferred into the sole name of Mrs McMillan for the stated consideration of $1.

In 2018, Mr McMillan became bankrupt.

Mr McMillan’s trustee in bankruptcy brought proceedings seeking to void the transfer of the Property pursuant to s.121 of the Bankruptcy Act 1966 (Cth)(“Act”).  Pursuant to that section, a transfer of property made prior to bankruptcy will be void if the bankrupt’s “main purpose” in making the transfer was to prevent, hinder or delay the property from being divisible amongst creditors.

The decision at first instance

At first instance, the primary judge rejected Mr McMillan’s evidence that he had transferred the Property to his wife “out of love”. Rather, His Honour inferred, from the surrounding facts and circumstances, that the main purpose of the transfer was for Mr McMillan to protect the Property from the risks associated with his expanding business ventures.  Accordingly, the Court ruled in favour of the trustee.

Appeal

On appeal, Mrs McMillan took issue with the inferences drawn by the primary judge from the surrounding facts and circumstances as to Mr McMillan’s “main purpose” in making the transfer.

In allowing the appeal, the Full Court acknowledged that it can be “readily accepted” that a bankrupt’s creditors for the purposes of s.121 include “anticipated and future creditors.”  However, the Full Court emphasised that the absence of a temporal connection between the liabilities that led to Mr McMillan’s bankruptcy, and the liabilities at the time of the impugned transfer, was a significant factor that should have been given “significant weight” in any determination of the main purpose of the transfer.

Further, the Federal Court noted at [195] that an inference that the main purpose of a bankrupt was to defeat creditors must be a “reasonable and definite inference, not merely one of a number of conflicting inferences with equal degree of probability.”

The Full Court identified many factors that suggested Mr McMillan’s main purpose in transferring the Property was not to protect it from creditors, including:-

  • The fact that Rolls-Royce had written to Mr McMillan asserting that there was not enough separation between his personal finances and that of the business.
  • There was no evidence that the creditors most affected by the Property transfer sought any security over the Property.
  • Commonwealth Bank remained a mortgagee of the Property after the transfer.
  • Mrs McMillan had given personal guarantees, as well as the mortgage over the Property, to support the loan from Commonwealth Bank.
  • Mr McMillan’s business venture was not hazardous.

Mr McMillan was solvent at the time of the Property transfer.

Accordingly, the Full Court allowed the appeal and overturned the primary judgment.

Comment

It might be said that logic in this case prevailed. The passing of 16 years alone would seem to make it difficult to draw an inference that Mr McMillan’s main purpose of the transfer was to prevent the Property from becoming divisible among creditors.

No doubt this case will give some comfort to those many business people and professionals who structure their affairs so as to best protect their assets.

However, in principle, it remains possible for a court to draw an inference of the requisite intention in cases where the transfer was made at a time the transferor was solvent and also when there has been lengthy period of time between transfer and bankruptcy. As noted by the Full Court in McMillan v Warner, this might arise where a person makes a transfer before entering a financially hazardous venture in which the risk of insolvency is a real one.

~ with Sean Hollis, Graduate at Law

Hunt & Hunt lawyers recognised in Best Lawyers 2022 Awards

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Congratulations to Nick Miller, Jim Harrowell, Steve Aitchison, Marcus Easthope and Sebastian Greenway who have been recognised in the Best Lawyers in Australia 2022 awards.

Nick has been awarded across four practice areas – Commercial Law, Corporate/Governance Practice, Corporate Law and Mergers & Acquisitions Law.  Heading our Melbourne Corporate and Commercial Team, Nick works closely with clients across a range of industries both public and private to help them grow and develop their business to achieve the best commercial outcomes.

Awarded for his skills in Alternative Dispute Resolution, Jim’s recognition is testament to the invaluable skills he brings to our Sydney office.  With clients spanning Australia and the globe, Jim’s commercial law expertise is widespread, and his in-depth knowledge of international legal issues is second to none. 

Nick and Jim have been recognised in their respected categories for the 10th consecutive year, a tremendous achievement and a testament to not only their skills and expertise, but also their dedication to delivering a high standard of service to their clients.

Joining Hunt & Hunt in 2020, Steve Aitchison has been recognised for his expertise in Real Property and Leasing Law.  As head of our Melbourne Property Team, Steve has a broad knowledge of all the interconnected aspects of real estate transactions and development projects, including structuring, duty, construction, funding and leasing. This is the fifth consecutive year Steve has been awarded in these areas. 

A key member of our Hunt & Hunt Group firm Culshaw Miller Lawyers in Perth, Marcus Easthope has been recognised for his expertise in Real Property Law for the third year in a  row.

Sebastian Greenway definitely fits his recognition in the inaugural Best Lawyers – Ones to Watch category.  A compulsory acquisition law specialist who works tirelessly to achieve the best possible outcomes for his clients, Sebastian has been recognised in Real Property Law.  Promoted to Principal in July 2021, Sebastian continues to develop and grow his skill set and leadership both within the firm and the property law space.

Congratulations to all awardees!

 

Is it safe to rely on an artist’s impression when buying a new apartment ‘off-the-plan’?

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As the term suggests, when buying ‘off-the-plan’ a purchaser can only assess what it is they will be buying from the plans and images provided by the developer. The detail and accuracy of the plans and images will vary from one project to another, and may depend on how early the project goes to market and how advanced (or not advanced) the design work is at that time.  There is also often an element of ‘selling the dream’ in the way a project is promoted.  We’ve all seen the glossy brochures and computer generated images of completed developments, often with an ‘artist’s impression’ footnote in the small print.

A recent decision of the Federal Court considered whether marketing material containing an ‘artist’s impression’, that turned out not to be realistic, could be relied on by the purchaser to cancel the contract.  The case was Ripani v Century Legend Pty Ltd where the developers used a computer generated image, known as a render, in their marketing of the apartment, which illustrated a flush to the floor, seamless transition from living area to outdoor terrace, despite knowing that from an engineering perspective, it was impossible to construct the apartment in that way. Justice Paul Anastassiou held that the render, despite being described as an ‘artist’s impression’, amounted to a representation which was important to, and relied upon by, the purchaser, and therefore entitled the purchaser to cancel the contract.

These types of cases will often turn on the specific facts and circumstances, and so it is important to look at the details of the case.

Background

In 2017 Century Legend Pty Ltd was developing a multi-storey apartment building to be known as ‘the Victoriana’. Marketing materials included floor plans and renders of what the development, and individual apartments, would look like when finished. A render of apartment 14.01, which was used widely as a ‘hero shot’ in promoting the Victoriana, illustrated a large free-span opening between the inside of the living areas and the outside terrace, i.e. the indoor and outdoor areas would flow seamlessly into each other when the doors were drawn back.  The purchasers, Walter and Nina Ripani, were very much taken by the images and signed a contract to buy this apartment for $9.58 million. When they were later told that the free span opening as depicted in the marketing material was not achievable, they sought to cancel the contract on the grounds of misrepresentation.

In order to succeed in their claim, the Ripanis needed to show two things – that the marketing material did convey the representation alleged, and secondly that they relied on that representation in agreeing to buy that apartment and signing the contract.

Did the render convey the representations as alleged by the Ripanis?

Although the image was an artist’s impression, i.e. conceptual and did not contain any dimensional notations, it clearly depicted the scale of an opening which extended almost entirely the length of the living areas adjacent to the terrace. It was irrelevant that the render was not a ‘precise depiction’ of apartment 14.01. Further, the words ‘artist’s impression’ on the image do not suggest that the key elements of the render would not be constructed. While Century Legend contended it was ‘patently unrealistic’ to have a large void without any mullions, Justice Anastassiou rejected this argument outright because it was not unrealistic to the purchasers or the agent who was promoting the apartment to the purchasers. The disclaimer that the image may not necessarily depict the finished state of the property inside the marketing brochure, which was ‘barely legible’, was vague and ineffective especially when considering the stark disparity between the representation and the true state of affairs. Importantly, there was no reasonable basis for making the representations because Century Legend was warned by their architects, prior to using the ‘hero render’ in their marketing, that it was impossible to construct apartment 14.01 in the way in which the image depicted.

Did the Ripanis rely upon these representations when entering into the contract?

The render was displayed prominently on the wall of the display suite at the Victoriana, as well as the brochure for apartment 14.01. When visiting the display suite, the Ripanis disclosed to the agent that they were greatly interested in the seamless indoor-outdoor feature. While an architect attached to the project insisted that she informed the Ripanis of the impossibility of the free span opening in 2017, the Ripanis gave evidence that they did not discuss the feature prior to purchasing as they thought it ‘was a given’ that the apartment would have a large opening onto the terrace given the major promotional picture.

Would the Ripanis have entered into the contract had they not believed that the apartment would be constructed as depicted in the render?

This free span opening was a feature of the apartment that was of significant attraction to the Ripanis as they were specifically looking for an apartment with a suitable outdoor area for entertaining guests. Justice Anastassiou concluded that, had the Ripanis been told the apartment would or could not be constructed to the design depicted in the render, they would not have agreed to purchase it.

Outcome

The contract was cancelled and the court ordered return of the deposit and payment of damages to the Ripanis.  However, the case is not over yet, as Century Legend has lodged an appeal.

Are you looking to purchase a property off the plan and want to be sure you’re getting what you’ve been promised? Hunt & Hunt’s Property Team can assist you with all aspects of our property transaction.  Contact our team today.

~ with Pippa Thorne, Graduate-at-Law