There has been some recent discussion around the use by insolvency practitioners of the security of payment legislation. The benefits of engaging this process are obvious – there is an opportunity to secure payment for the insolvent company in a quick and cost efficient manner while also avoiding the financial burden of a security for costs order which the insolvent company (and hence insolvency practitioner) is likely to face in court proceedings.  

The Fair Entitlements Guarantee Act 2012 (Cth) requires the Commonwealth Government to pay outstanding superannuation, annual leave, redundancy and wages entitlements for eligible employees who have lost their jobs due to the liquidation or bankruptcy of their employers. It is generally recognised as an important safety net for employees, so that their superannuation is guaranteed.

The point at which a company becomes insolvent is not always clear. The Courts will consider “various indicia of insolvency”, including the company’s ability to raise further capital and access to alternative finance. In some situations, a director or related entity may be willing and able to contribute funds to the company to allow it to pay its debts. This can affect whether a company is viewed as solvent or not. Once insolvency is reasonably suspected, directors must prevent the company from incurring further debts or risk being held personally liable for the debts incurred.

Research and development expenditure not incurred

In Commissioner of Taxation v Desalination Technology Pty Limited [2015] FCAFC 96, the Full Federal Court upheld the Commissioner’s appeal from the earlier decision of Justice Perram in the Federal Court. That earlier decision was the result of an appeal by the Commissioner, on a question of law, from the decision of the Administrative Appeals Tribunal (AAT) in favour of the taxpayer (DST). 

Key Points:

A DOCA can extinguish claims under a guarantee, even where those claims arise following the DOCA's termination.

If the underlying debt has already been extinguished by a DOCA, can a secured creditor still enforce the charge? A recent case explored the role of section 444D(2) of the Corporations Act in this situation, with implications for parties seeking to rely on guarantees from companies that have been through a DOCA (Australian Gypsum Industries Pty Ltd v Dalesun Holdings Pty Ltd [2015] WASCA 95).

Key Points:

Section 562A of the Corporations Act does not apply where liquidator realises a sum of money by assigning the proceeds of the reinsurance claim to a third party.

Liquidators of insurance companies face a major quandary when assessing reinsurance recoveries.

A new Court decision may undercut the legislative policy that reinsurance proceeds should be quarantined from the normal rules for paying out creditors of insolvent companies.

Key Points:

These three cases illustrate that strict compliance with legislative requirements continues to be imperative when serving statutory demands.

Despite what appears to be a fairly straightforward legislative regime, creditors' statutory demands appear to generate an entirely disproportionate volume of litigation in the courts. The drastic consequences of failing to comply with a creditor's statutory demand warrant very strict compliance by creditors with the technical requirements of the regime.

BACKGROUND

A fruit and vegetable supplier supplied the defendants’ company with fruit and vegetables over a number of years.  The defendants, who were brothers, were the directors of the company to whom the fruit and vegetables were supplied.

The company fell behind in its payments to the fruit and vegetable supplier.  A guarantee was provided by the brothers in order to secure the payment of debts owed by their company and ensure further supply.

Based on the current state of judicial consideration of s 548 (1) of the Corporations Act 2001 (Cth) (the Act), liquidators cannot be certain that a committee of inspection (COI) established at a general meeting of creditors alone is valid with the consequence that liquidators may be concerned about their reliance on past and future COI approvals to draw remuneration and take other steps in the winding up.

Re: the Bell Group Ltd (In Liquidation)

The Bankruptcy Act 1966 (Cth) (the Act) provides a regime by which a debtor can compromise with his/her creditors outside formal bankruptcy. The provisions are found in Part X (Personal Insolvency Agreements) and Part IX (Debt Agreements) of the Act.

DEBT AGREEMENTS