Australia: Dont sweat the small stuff - Let the courts help resolve uncertainty for insolvency practitioners

This week's TGIF considers some ways insolvency practitioners can make their lives easier by proactively using the courts to resolve uncertainty – such as liquidators seeking appointment as receivers of trust property as in the recent Federal Court decision of Freeman; In the matter of Blue Oasis Holdings Pty Ltd [2018] FCA 822.

WHAT HAPPENED?

Liquidators were appointed to the corporate trustee of a family trust.

As is often the case, the trust deed provided that because of that appointment, the trustee was removed from its position as trustee. No new trustee was appointed in the company's place.

THE PROBLEM OF UNCERTAINTY

The liquidators needed to realise the assets of the trust so that they could be applied in satisfaction of claims that the former trustee company had incurred in its capacity as trustee.

However, there is ongoing uncertainty about whether, as a matter of law, a liquidator has the power to sell assets held on trust.

The liquidator's capacity to sell property is obviously fundamental to any sale process – any uncertainty in that capacity can scupper a promising sale process.

HOW THE COURT HELPED

Upon an application by the liquidators, Greenwood J of the Federal Court held that, in circumstances like this, the "most sensible course" was to remove any ambiguity by appointing the liquidators as receivers of the trust property.

His Honour took the belt-and-braces approach of not only appointing the liquidator as receivers of the trust property, but also ordering that "property of the company" in s 420 of the Corporations Act 2001 (Cth) be read as meaning "property of the trust". The precise terms of the relevant order were that:

  • The applicant be appointed as receivers with the powers recited in s 420 of the Corporations Act 2001 (Cth) as if the reference in s 420 to "property of the corporation" were a reference to "property of the trust" and those powers so conferred are in addition to the powers conferred upon the applicant under s 477(2) in respect of the property of the company in its sole capacity as legal owner and trustee.

CERTAINTY FROM THE COURTS

Uncertainty is party of life – it is also part of practice. One thing courts can provide is certainty in the form of a binding decision of right.

The most obvious way courts can assist practitioners is pursuant to an application for directions – now contained within the broadly worded s 90-15 of the Insolvency Practice Schedule1.

But as the decision in Blue Oasis shows, there are routine (and not so routine) ways that practitioners will benefit from the certainty that only a court's decision will provide:

  • The Court can assist practitioners who want to grant new PPSA security interests over company property as part of operating the business. The Courts can fix a later time for the registration of post-appointment security interests, ensuring that the new security interests are enforceable (discussed in our TGIF A Commercial Solution to a Re-Vesting Problem).
  • Where there are poorly documented inter-group transactions and it is unclear which entities own certain stock, the Court can resolve the factual issues and determine competing claims efficiently,2. This may help practitioners resolve suppliers' claims over stock more quickly while also minimising the risk of personal liability.
  • Where dealing with company property involves expensive and exhaustive work, confirmation from the Court that the practitioners will be paid for their work out of that property is a sensible step. Not doing so may lead to great disappointment, as considered in another of our recent TGIFs – Lien on Me: Administrators Criticised for Seeking Directions After the Fact

With the right approach at an early stage, the effort of proactively seeking court assistance can often pay great dividends.

Footnotes

1 Being Schedule 2 to the Corporations Act 2001 (Cth).

2 See, eg, Warehouse Sales Pty Ltd (in liq) v LG Electronics Australia Pty Ltd [2014] VSC 644.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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