New Zealand: What's up in Australian insolvency law, and why should we care?

Brief Counsel

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.

1. Disclaimer of assets

The High Court of Australia (their equivalent of our Supreme Court) has ruled that liquidators may disclaim unprofitable leases that were granted by the company as lessor, extinguishing the tenant's interest in the land.1 This creates risk for both the lessee and any lender who takes security over the leasehold property.

Traditionally the ability to disclaim assets has been used only as a tool to allow a liquidation to be resolved quickly. This judgment, by contrast, seems to allow liquidators to claw back assets to increase the funds available for distribution.

Preferring unsecured creditors over those with rights in real property in this way is a troubling move from Australia's highest court.

2. Scope of the requirement to be independent

ASIC has reconfirmed its intention to enforce rigorously the requirement that insolvency practitioners be, and be seen to be, completely impartial by seeking through the Federal Court of Australia to have liquidators removed on the basis of a "reasonable apprehension" of a lack of independence.2

The liquidators had been appointed on the referral of a financial advisory firm which, prior to the liquidation, had advised the troubled company to transfer assets to entities associated with the financial advisers. ASIC contended that the liquidators, who secured a significant amount of work through the firm, were engaged in an "ongoing commercial relationship" so could not be relied upon to apply appropriate scrutiny to these transactions.

The Court declined the application, finding that a fair minded observer would be satisfied that the liquidators would discharge their statutory duties impartially. The Court noted that the reality of the market was that liquidators were commonly referred work by solicitors, business advisors and accountants.

ASIC has already lodged an appeal.

The tensions around independence in a regulated profession would likely be even more acute in the smaller New Zealand market.

3. Focus on liquidators' conduct

An Australian career liquidator was recently prosecuted for improper remuneration, resulting in hefty repayment orders and a five year ban, after it was found that he had provided inaccurate reports to both creditors and ASIC with regard to estimates of work completed and anticipated to be charged.3

While this kind of litigation is not presently a feature of the New Zealand insolvency law landscape, the case may well provide a window into the future should we adopt a prescriptive procedural regime.

4. Lien for liquidators' fees enforceable against secured creditors

Australia's High Court has reconfirmed that the longstanding rule in Universal Distributing is good law of broad impact.4 Liquidators, by operation of an equitable lien, are entitled to deduct reasonable costs incurred in realising an asset before distributing funds to secured creditors. This remains true even if the liquidator's costs are incurred in challenging the creditor's security.

In the case, the secured creditor asserted that the lien did not arise because the liquidation was funded by the largest unsecured creditor, and the liquidator was indemnified for his remuneration and expenses. These arguments were of no avail. The Court's approval of Universal Distributing despite the complicated circumstances of the litigation is a strong policy statement and a welcome result for liquidators.

5. When does liquidation topple a Deed of Company Arrangement?

In the lower Australian courts, contrasting approaches have been taken to the question of when liquidation should override a Deed of Company Arrangement (DOCA).

The Queensland Court of Appeal set aside a DOCA despite the forecast return to creditors being higher than under liquidation because the DOCA led to an injustice.5 It effectively prevented investigation into pre-administration related-party dealings. Public interest considerations therefore trumped the potential harm to creditors.

The test employed leaves the law somewhat uncertain; the Court found that it would be "detrimental to commercial morality" to shut out the liquidator's investigatory powers. In Queensland, it appears, money isn't everything.

But the decision in a New South Wales case took a more creditor-focussed approach.6 Here, the forecast return to creditors was higher under liquidation than under the DOCA, but a resolution in favour of the DOCA had been passed by a bloc of related-party voters.

The Court used its discretionary powers under the Australian legislation to set aside the DOCA. In doing so, it noted that in certain cases, "the financial disadvantage to the creditors voting against the proposal is so substantial, and certain, that it amounts to prejudice which is unreasonable".

6. Sale of assets – best price obligation

A recent Supreme Court of Victoria judgment that receivers had taken "all reasonable care" to sell assets for not less than market value would be unexceptionable – except that there was no marketing campaign nor any sale offer made to anyone other than parties associated with the debtor companies.7

The situation was complicated by a number of uncertainties including whether there was in fact a charge over some of the assets, deficiencies in documentation and difficulties in valuing the assets with any precision.

The decision demonstrates that the Court will take a practical stance where there are "special and difficult circumstances" that negatively affect the saleability of assets in a receivership situation.


1Willmott Growers Group Inc v Willmott Forests Ltd (in liq and in rec) [2013] HCA 51

2Australian Securities and Investments Commission v Franklin [2014] FCA 68

3Australian Securities and Investments Commission v Dunner [2013] FCA 872

4Stewart v Atco Controls Pty Ltd (in liq) [2014] HCA 15

5Promoseven Pty Ltd v Prime Project Development (Cairns) Pty Ltd [2013] QCA 405

6DSG Holdings Australia Pty Ltd v Helenic Pty Ltd [2014] NSWCA 96

7Boz One Pty Ltd v McLellan [2014] VSC 208

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

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Michael Arthur
Michael Harper
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