​As New Zealand inches sloth-like toward a more regulated regime through the Insolvency Practitioners Bill, introduced in April 2010 and yet to have its third reading, Australian court decisions may become more relevant here.

After regulation, our two systems will still be different but less so than they are now, and already Australia provides a pointer to some of the issues which may arise here.

With that in mind, we have identified the top six insolvency law developments in Australia as we see them.

In brief

The recent decision of Divitkos, In the matter of Ex DVD Pty Ltd (In liquidation) has paved the way for secured creditors who pay employee entitlements out of secured assets to receive a priority for that payment from preference claims recovered in a subsequent liquidation.

Summary

The statutory demand is one of the most frequently used (and misused) tools utilized by companies and other persons to obtain payment of debts owed to them by a company. Service of a statutory demand can be the first step towards placing insolvent companies into liquidation.

The consequences for a company that does not respond to the service of a statutory demand can be severe.

One of those consequences is that the company may find itself in the position where it is required to prove solvency before a court, in order to avoid a winding up.

The Financial System Inquiry was formed on 20 November 2013 by our Federal Treasurer to examine how our financial system could be positioned to best meet Australia’s evolving needs and support economic growth. The Inquiry received over 280 first round submissions and released it’s Interim Report earlier this week. ^[1] 

Last Friday, the Full Court of the Federal Court of Australia handed down its decision in ASIC’s case seeking the removal and replacement of the liquidators of the Walton Constructions group, on the grounds of a perceived lack of independence.

Key Points:

A forbearance arrangement is a useful instrument to ensure that both the lender and the customer are aligned on the proposed turnaround or workout.

In the decision Equititrust Limited (In Liq) (Receiver Appointed) (Receivers and Managers Appointed) in its capacity as responsible entity of the Equititrust Income Fund v Equititrust Limited (In Liq) (Receiver Appointed) (Receivers and Managers Appointed) in its own capacity [2014] FCA 692,the Federal Court of Australia considered an application to set aside or stay indefinitely liquidator examinations of former auditors under s596B of the Corporations Act 2001 (Cth).

Liquidators are commonly appointed to a company where, prior to liquidation the company was a trustee of a trust. Often when the liquidators are appointed, the company has ceased to be the trustee and a replacement trustee has not been appointed.

In these circumstances, the company in liquidation is a bare trustee in relation to the trust assets and the liquidator will assume this role until a replacement trustee is appointed. Often a replacement trustee is not appointed.

Does the liquidator as bare trustee have a power to sell trust assets?

When a Bank appoints a receiver under a charge, section 433 of theCorporations Act 2001 (Act) requires the proceeds of certain chargedassets to be used by the Receiver to satisfy certain employee entitlementsin priority to the Bank. Section 561 of the Act has a similar effect where acompany is in liquidation, but only if there are insufficient uncharged assets available.

The Supreme Court of Queensland decision of First Strategic Corporation Limited (In Liq) and Anor v Chan and Ors [2014] QSC 60 gives insolvency practitioners guidance as to what consideration can be taken into account when assessing the solvency of a company by the means and preparedness of someone to support the company.

Background