The Australian unit trust industry recently experienced financial difficulties. The formal legal process of handling those difficulties has revealed gaps in the Australian regulatory map.

This article highlights some of those problems and the Government’s response to them.

Background

Few now remember that Chapter 5C of the Corporations Act can trace its origins to the afternoon of 23 July 1991. For the past year, the unlisted property trust industry had been in meltdown. The value of the assets held by the industry had fallen over 20%. Investors were scrambling to get out, and collapses seemed imminent.

During the administration of a company, liquidators may identify creditors who have received payments in preference to other creditors, and apply to the court pursuant to section 588FF of the Corporations Act 2001 (Act) to recover those payments in order to achieve a more equitable distribution amongst all creditors.

What constitutes a preferential payment?

Our clients must be sick to death about hearing us comment on the Australian Sons of Gwalia saga (which we have been doing for more than three years) but finally there is good news to report. The short version of the saga is thatSons of Gwalia was a decision by Australia's highest court that shareholder damages claims should be treated as pari passu unsecured claims in an Australian insolvency proceeding.

Introduction

On 26 November 2010, the Federal Parliament passed the Corporations Amendment (Sons of Gwalia) Bill 2010 (“Bill”). The Bill amends section 563A of the Corporations Act 2001 (Cth) (“Act”) such that any claim brought by a person against a company that arises from the buying, selling, holding or other dealing with a shareholding will be postponed in an external administration until all other claims have been paid. The Bill has the effect of reversing the High Court decision of Sons of Gwalia v Margaretic [2007] HCA 1.

Statutory Demands pursuant to the Corporations Act are a mechanism available to creditors for the payment of debt. Upon the expiry of a Statutory Demand, the Corporations Act presumes that the company is insolvent and allows the entity making the demand to apply to the court for their winding up on grounds of insolvency.

Key Points: The High Court held there was no variation in the terms of the Charge and therefore no registration was required.

On 1 September 2010 the High Court handed down its much anticipated decision in the appeal from the Queensland Court of Appeal in Re Octaviar Ltd (No 7) [2009] QCA 282, unanimously dismissing the appeal in Public Trustee of Queensland v Fortress Credit Corporation (Aus) 11 Pty Ltd [2010] HCA 29.

The fixed and floating charge

Your insurer goes bust – can you as an insured claim the reinsurance proceeds? An important decision in the NSW Supreme Court gives useful guidance on when a court will allow departures from the statutory scheme controlling the application of reinsurance proceeds (Amaca Pty Ltd v McGrath & Anor as liquidators of HIH Underwriting and Insurance (Australia) Pty Ltd [2011] NSWSC 90).

The insurer goes broke, and there are all these claimants at the door…

In brief

A recent decision by the New South Wales Court of Appeal in Buzzle Operations Pty Ltd (in liq) –v- Apple Computer Australia Pty Ltd [2011] NSWCA 109 provides useful guidance on the key aspects of shadow directorships and to what extent advices can be given by an interested party such as a financial accountant or a lender to a debtor without that interested party falling within the definition of "shadow director".

Background

Section 588G of the Corporations Act 2001 (Cth) imposes a positive duty on directors of a company to prevent insolvent trading. Due to the economic downturn, the Australian Securities and Investments Commission (ASIC) believed the market, which includes directors and professional advisors, would benefit from clarification as to what factors ASIC considers prior to commencing an investigation into insolvent trading.