Boensch v Pascoe [2019] HCA 49

The High Court has recently considered the question of whether, and in what circumstances, property held by a bankrupt on trust for a third party vests in the trustee in bankruptcy pursuant to s 58 of the Bankruptcy Act 1966 (Cth): Boensch v Pascoe [2019] HCA 49. The decision was handed down late last year, providing further guidance for trustees following Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth (2019) 93 ALJR 807.

On 4 February 2020, the Federal Court of Australia considered the circumstances in which it might be said that a provisional liquidator of a company ought not be appointed as the official liquidator because of an alleged "reasonable apprehension of bias". The issue was ventilated before the Court in the matter of  Frisken (as receiver of Avant Garde Investments Pty Ltd v Cheema [2020] FCA 98.

Appointing a provisional liquidator

Liquidators are often in a position where they have information which might be subject to the Australian Privacy Principles (APP) and may need to use or exchange that information in performing their duties. Under the Insolvency Law Reform Act 2016 (Cth), liquidators are also obliged to send initial reports to creditors within tight timeframes and potentially in circumstances where they may have limited contact details for creditors.

Entering into liquidation can be a scary time for any company and its officers, even one which chooses to do so voluntarily. However, the directors, shareholders and creditors of a company entering into liquidation do not have absolute discretion as to who they may appoint as the liquidator of the company. Together, the Corporations Act and common law principles of independence regulate the eligibility of a liquidator to be appointed to a company, and to remain in the appointment.

Overarching eligibility

The COVID-19 outbreak, this week declared a pandemic by the World Health Organization, is presenting new and unprecedented challenges for businesses across the globe, including in Australia. Challenging trading conditions are bringing into sharp relief the duty of directors to avoid trading whilst the company is insolvent. The safe harbour provisions in the Corporations Act 2001 (Cth) provide an opportunity for directors to weather the storm, whilst avoiding personal liability for insolvent trading.

This week’s TGIF considers the recent case of In the matter of Newheadspace Pty Limited (in liq) [2020] NSWSC 173, where the Supreme Court of New South Wales set aside a liquidator’s examination summonses on the grounds of an abuse of process and failure to satisfy s 596B of the Corporations Act 2001 (Cth).

What happened?

As the social and economic disruption caused by coronavirus (COVID-19) continues to rapidly evolve, the boards of Australian companies are facing solvency related issues. These issues extend to the solvency of suppliers and customers, and the potential consequences of the appointment of a voluntary administrator.

Whilst Australia navigates the effects of COVID-19 including health authorities advising people to stay home to contain the spread of COVID-19, people are likely to consume less and spend differently. The ultimate impact on Australian businesses may be significant.

Government Economic Stimulus Package

A new 'safe harbour' regime was implemented in September 2017 to provide directors who were trying to save a business with protection from future insolvent trading claims. No one could have predicted how important that regime is about to become. Given the escalating stress that is being placed on businesses because of COVID-19, many otherwise successful businesses may risk meeting the definition of insolvency.

In its recent decision in the ongoing Solar Shop litigation,[1] the Full Federal Court established two key principles which will have significant ongoing implications for the conduct of unfair preference claims: