• The F Troupe

    Summer 2020

Summer 2020

Legislation Update – Reducing Bankruptcy to One Year has Stalled

One of the proposed big insolvency law changes in recent years was the consideration around shortening the period of bankruptcy from three years to one year. The Bill to shorten the default period of bankruptcy from three years to one year was introduced to parliament in late 2017.

The Bill however lapsed in mid-2019 and to date there has been no indication of it being reintroduced.

Legislation Update – Pharmacies

Historically, the appointment of an insolvency practitioner to a pharmacy has sometimes created complexities.

Amendments have been made to the National Health Act 1953 to allow the Department of Health to grant permission to a bankruptcy trustee or external administrator to manage the supply of pharmaceutical benefits at PBS approved pharmacy premises.

Legislation Update – Combatting Illegal Phoenixing

The crackdown on illegal phoenixing continues to expand with The Treasury Laws Amendment (Combatting Illegal Phoenixing) Bill 2019 passing the House of Representatives on 27 November 2019. The Bill gives ASIC, liquidators, and the ATO new powers to help deter and disrupt illegal phoenix activities and prosecute culpable directors and associated persons.

The push to include director identification numbers did not pass, however it is understood that these will be considered as part of the Modernising Business Registers reforms.

Lack of Records and Presumption of Insolvency

Section 286 of the Corporations Act 2001 (Cth) imposes the obligation to keep adequate books and records. Case law has generally held that in order for there to be a breach of Section 286(1), which in turn allows for the presumption of insolvency under section 588E(4), there needs to have been a ‘severe absence of records’.

In the recent case of Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd Limited (Subject to a Deed of Company Arrangement) (No. 4) [2019] FCA 1846 this generally held positon was expanded.

Besanjo J found in this instance that the company’s “failure to record a major liability of the company”, in this case recording $2 million owing to a creditor instead of $12 million, was sufficient to find that there had been a breach of Section 286 of the Corporations Act 2001 (Cth).

Property Held on Trust Vests in Trustee

In the recent case of Boensch v Pascoe [2019] HCA 40 the High Court considered an appeal by a bankrupt for compensation from his trustee who had lodged and maintained a caveat over real property which the bankrupt held on trust. This was the final case in a long running dispute between a bankrupt and his trustee to determine whether there was a basis for the trustee to lodge a caveat over real property which the bankrupt held on trust for his children.

The bankrupt was seeking compensation from the trustee for the (as he claimed) erroneous lodgement of the caveat.

In this instance, the High Court found that:

  • Under section 58 of the Bankruptcy Act 1966, where the bankrupt has the right to be indemnified out of trust assets (or has some other form of beneficial interest in the trust property), then that will be sufficient to vest the property in the trustee under this section
  • The bankrupt had an entitlement to indemnification out of the trust property for liabilities met by the bankrupt over the years in respect of the trust property, therefore the bankrupt had an equitable interest in the real property that existed at the time of bankruptcy. That equitable interest, and with it the equitable estate in the real property, vested in the trustee in bankruptcy
  • That the right to be indemnified out of trust assets amounts to a caveatable interest.

Liquidator’s Warrant for Search and Seizure of Property

Section 530C of the Corporations Act 2001 (Cth) allows the Court to issue a warrant for the search and seizure of property or books of a company that is being would up or has a provisional liquidator appointed upon application by the liquidator, provisional liquidator or the ASIC. In the recent decision of Carello, in the matter of Drilling Australia Pty Ltd (in liquidation) [2019] FCA 1563 the Court reviewed the requirements of such a warrant and was satisfied that same should be issued.

After two equal shareholders were unable to resolve a deadlock, Drilling Australia Pty Ltd was placed into liquidation and a liquidator was appointed. The liquidator wrote to the directors of Drilling Australia Pty Ltd seeking that they deliver up to them the property, books and records of the company however the directors failed to comply with same.

During the course of the liquidation, the liquidator became aware of a number of shipping containers, which contained books and records of the company. The liquidator made an application under Section 530C of the Corporations Act 2001 (Cth) for a warrant to search these containers and seize any company records and property therein. The Court was satisfied it was appropriate to issue the warrant.

In assessing whether it was appropriate to issue the warrant, the Court considered the key elements of same:

  • Whether there had been a persistent pattern of non-co-operation and evasion
  • Whether the Court is satisfied subsection 1(b) of the section has been satisfied, namely that a person:
  • Does the person who is the subject of the warrant have control over the property? Note that the property does not need to be registered to the company, or to the person who is the subject of the warrant.