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?

Over the past few months there have been a number of insurance portfolio transfers and a winding up of a general insurer.  Various judges of the Federal Court have considered aspects of the Insurance Act (Cth) 1973.

Portfolio transfers

There have been two scheme transfers of insurance portfolios from Australian branches of overseas insurers to Australian subsidiaries.  While objections to the transfers were raised, the Federal Court confirmed the schemes.

Amaca Pty Ltd v McGrath & Anor as liquidators of HIH Underwriting and Insurance (Australia) Pty Ltd [2011] NSWSC 90

Following the 2011/2012 Federal Budget announcement that directors will be made personally liable for any unpaid superannuation guarantee contributions, Treasury has released the Tax Laws Amendment (2011 Measures No. 7) Bill 2011 (Bill).

The legislation extends the current director penalty regime for unpaid PAYG. Whilst the announcement from Bill Shorten MP on 5 July 2011 highlights the need to prevent companies engaging in phoenix activities, the legislation will have a much broader impact.

Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FACFC 89 concerned the powers of liquidators in Australia.  In 2009, joint liquidators were appointed to Octaviar Limited (Octaviar) and Octaviar Administration (Funder).  Fortress claimed to be a secured creditor of Octaviar under a charge, and was owed approximately $71 million.  The liquidators arranged for Octaviar and the Funder to enter into funding agreements that provided for the Funder to fund an investigation into the actions of Fortress and to commence litigation against Fortress.

In Saker, in the matter of Great Southern Managers Australia Ltd (Receivers and Managers Appointed) (in liquidation), the plaintiffs were the liquidators of Great Southern Managers of Australia Limited (GSMAL).

The recent English decision in the Australian liquidation, New Cap Reinsurance Corpn Ltd (in liquidation) and another v Grant and others (available here), has further opened up the possibility for New Zealand insolvency proceedings to be recognised and enforced in the United Kingdom. 

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.

The Government has passed amendments to the Corporations Act 2001 (Cth) and the Corporations Regulations 2001 (Regulations) to overturn the impact of the decision in Sons of Gwalia v Margaretic (2007) 231 CLR 160 (Sons of Gwalia) and reinstate the longheld convention that creditors’ rights take precedence over shareholders’ rights in the instance of a winding up.

What was the outcome of Sons of Gwalia?