Aug 132017
 

In a recent judgment in the Federal Court the judge, the Honourable David John O’Callaghan, discusses the part that ARITA’s code of professional conduct plays in determining questions concerning the independence and impartiality of an external administrator’s conduct.

What His Honour said – extracts:

There is no doubt that the code is a useful document in assisting practitioners; …. it is “a useful guide to the common practice in such matters, and to the profession’s own view of proper professional standards”; …. it is “… permissible for the Court to take [it] into account, to that extent, in applying the law concerning independence and impartiality to the insolvency practitioner’s conduct in the case before it”; …. On the other hand, the code “has no legal status”; …. Any question relating to the appearance of impartiality must be determined according to law. It is not the Court’s function in a case such as this to either apply or interpret the code.

For more, see his complete comments below.


 

Judge OCallaghan

The Hon David John O’Callaghan

Judgment published 11 August 2017 … In Korda, in the matter of Ten Network Holdings Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2017] FCA 914

….

The code of professional practice

92. I should also say something briefly about the Code of Professional Practice of The Australian Restructuring Insolvency and Turnaround Association (ARITA) (the code), because the administrators sought to rely on the code as providing an independent basis upon which they might be permitted to continue to act as administrators. In particular, submissions were made on behalf of the administrators about those parts of the code which define “exceptions” to the “rule” that, relevantly, practitioners must not take an appointment if they have had a professional relationship with the insolvent company during the previous two years: see section 6.8 of the third edition of the code.

93.  There is no doubt that the code is a useful document in assisting practitioners, including with respect to questions of whether, in accepting or retaining an appointment as an administrator, the practitioner is, and is seen to be, independent: see chapter 6 of the third edition of the code. The code is intended to provide guidance on standards of practice and professional conduct expected of ARITA members.

94.  In Bovis Lend Lease Pty Ltd v Wily [2003] NSWSC 467; 45 ACSR 612, Austin J described (at [163]) the Code of Professional Conduct published by the Insolvency Practitioners Association of Australia (as ARITA was previously known) as “a useful guide to the common practice in such matters, and to the profession’s own view of proper professional standards”. Accordingly, his Honour held that “[i]t is permissible for the Court to take [it] into account, to that extent, in applying the law concerning independence and impartiality to the insolvency practitioner’s conduct in the case before it”: see Bovis Lend Lease Pty Ltd v Wily [2003] NSWSC 467; 45 ACSR 612 at [163]; comparing National Roads and Motorists’ Association Ltd v Geeson [2001] NSWSC 832; 39 ACSR 401 at 403 and Permanent Trustee Australia Ltd v Boulton & Lynjoe Pty Ltd (1994) 33 NSWLR 735 at 738.

95.  On the other hand, the code “has no legal status”, as Sanderson M stated in Monarch Gold Mining Co Ltd; Ex parte Hughes [2008] WASC 201. Relevantly, Sanderson M observed in that case, “a failure to comply with the terms of the code would not render a practitioner liable for prosecution under the Corporations Act or any other statute … Nor does a failure to comply with the provisions of the code mean that there has been a failure to comply with what is required in the DIRRI”: see Re Monarch Gold Mining Co Ltd; Ex parte Hughes [2008] WASC 201 at [37].

96.  Any question relating to the appearance of impartiality must be determined according to law. It is not the Court’s function in a case such as this to either apply or interpret the code.


 

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Australian Building Systems case: plenty of common sense in the dissenting judgment by Justice Michelle Gordon

 Capital Gains Tax, Corporate Insolvency, court decisions, Insolvency Law, Priority Debts, Tax debts, Taxation Issues  Comments Off on Australian Building Systems case: plenty of common sense in the dissenting judgment by Justice Michelle Gordon
Dec 172015
 

(Judgment of December 2015)

By a majority of three to two the High Court dismissed the Australian Taxation Office’s appeal in the Australian Building Systems case: Commissioner of Taxation v Australian Building Systems Pty Ltd (In Liquidation); Commissioner of Taxation v Muller and Dunn as Liquidators of Australian Building Systems Pty Ltd (In Liquidation) [2015] HCA 48 (10 December 2015) .

This test case – run by the Australian Restructuring Insolvency & Turnaround Association (ARITA) and the Australian Taxation Office (ATO) – began in 2013 and has previously been before the Federal Court and the Federal Court of Appeal. It was supposed to settle a far-reaching, long-standing argument that ARITA and the ATO had been having since 2009.

Argument about when obligation arises

The primary argument in this case – framed here as an issue for liquidators in general – has been whether the “retention obligation” placed on liquidators by section 254(1)(d) of the Income Tax Assessment Act 1936 arises prior to the issue of a tax assessment or only after the issue of an assessment.
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May 212015
 

Slap with feather … (updated 4 December 2015)

Case 3

Australian Financial Security Authority – Media release: (NSW) Hull – Bankrupt pleads guilty to three offences under the Bankruptcy Act

Wed 02 December 2015

A man was sentenced for disposing of property within 12 months prior to becoming a bankrupt with intent to defraud his creditors and having made a false declaration on his Statement of Affairs. Mr Denis John Hull was sentenced in the Downing Centre Local Court on 24 November 2015 following a guilty plea being entered to having disposed of property within 12 months prior to becoming a bankrupt with intent to defraud his creditors and to having made a false declaration on his Statement of Affairs.

On 31 March 2012 Mr Hull received a total of $21,175.44 from the sale of two parcels of shares authorised for sale on 26 March 2012. On 10 April 2012 he became bankrupt via Debtor’s Petition, by which time he had disposed of monies totalling $16,000 received from the sale of shares. In his Statement of Affairs completed on 5 April 2014, Mr Hull failed to disclose the sale of the two parcels of shares, and failed to disclose the existence of the bank account into which the share proceeds were subsequently deposited.

During the proceedings Magistrate Milledge remarked that the offending was “quite deceitful and very worrying”. She later stated that the offending was “despicable, mean and criminal”, but acknowledged that it was clear that Mr Hull accepted that as demonstrated in his letter to the court. In passing sentence, Magistrate Milledge gave consideration to Mr Hull’s age at the date of the offending; the fact that he had previously managed to lead a trouble free life; and that his recent efforts to repay the monies showed remorse; and remarked that it was her view that whilst there was serious criminality she saw it as something that was done at a critical place in life and understood that this was why Mr Hull had done what he had done, noting that this did not excuse the offending.

Mr Hull was sentenced and was ordered to enter into a 2 year good behaviour bond in the amount of $200 with nil conviction to be recorded pursuant to Section 19B(1)(d) Crimes Act 1914. Magistrate Milledge noted that no restitution order would be made as this was being taken care of.

The matter was prosecuted by the Office of the Commonwealth Director of Public Prosecutions.;


Amazing … (updated 11 August 2015)

Case 2

Australian Financial Security Authority – Media release: (TAS) Smith – Discharged bankrupt faces court and imprisonment for failing to disclose financial details and withdrawing cash of $72,600

Thu 06 August 2015

A dairy farmer formerly of King Island, Dominic Luke Smith was prosecuted in the Launceston Court of Petty Sessions on 24 July 2015 for removing $72,600 from his bank accounts in 2012, prior to and just after the date of bankruptcy.
Mr Smith also failed to keep appropriate books and records relating to his business transactions for five years prior to his bankruptcy and failed to disclose information as required by the trustee. Mr Smith was not able to account for how he spent a $100,000 loan and failed to produce bank account statements and cheque butts when requested by his bankruptcy trustee. Mr Smith pleaded guilty to 15 offences under the Bankruptcy Act and was sentenced to a total effective sentence of 4 months’ imprisonment, released on a $1,000 two-year good behaviour bond. The matter was prosecuted by the Office of the Commonwealth Director of Public Prosecutions.

Case 1

Australian Financial Security Authority – Media release NSW (McElwaine) – Nine-month bond for offence against the Bankruptcy Act

Thu 14 May 2015

A NSW woman has pleaded guilty to gambling away more than $137,000 from the sale of her property rather than paying creditors before declaring bankruptcy with debts of $438,000. Dee Why resident Bridgett McElwaine was sentenced in the Downing Centre Local Court on 12 May 2015 after pleading guilty to an offence against the Bankruptcy Act. Ms McElwaine filed for voluntary bankruptcy in October 2012 with debts of $438,000 mostly from the use of 22 credit cards. Before her bankruptcy, Ms McElwaine had received proceeds of more than $137,000 after selling her property in Frenchs Forest, NSW. She withdrew more than $96,000 in the 12 months before her bankruptcy and told the court she ‘blew the lot’ on gambling instead of making the money available to her creditors. In sentencing Magistrate Goodwin noted a jail term was available for Ms McElwaine’s serious offence and that a clear message needed to be sent to the community about the unacceptable nature of that behaviour. Ms McElwaine was convicted and placed on a nine-month good behaviour bond, recognisance of $500 and to accept Community Corrections Service supervision. The case was prosecuted by the Office of the Commonwealth Director of Public Prosecutions.Media release NSW (McElwaine) – Nine-month bond for offence against the Bankruptcy Act


 

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Factors considered in court review of provisional liquidator’s remuneration

 Corporate Insolvency, court decisions, External administrators, Insolvency Law, law reports  Comments Off on Factors considered in court review of provisional liquidator’s remuneration
Feb 172015
 

What information should a liquidator supply to the court to have his or her remuneration approved? On the other side, those opposed to the amount of remuneration must “settle on particular aspects of the liquidators’ conduct which can be queried”. This judgment from Western Australia on 11 February 2015 considers some issues.

 

Judgment – Remuneration of Provisional Liquidator – WA

 

Judges Gavel

 

RE PNP PACIFIC PTY LTD; EX PARTE STRICKLAND & HURT as Liquidators of PNP PACIFIC PTY LTD [2015] WASC 49 (11 February 2015)

CORAM : MASTER SANDERSON > HEARD : 6 NOVEMBER 2014 > DELIVERED : 6 NOVEMBER 2014 > PUBLISHED : 11 FEBRUARY 2015 > FILE NO/S : COR 147 of 2014

MATTER : Application for approval of liquidators’ remuneration pursuant to s 504 of the Corporations Act 2001 (Cth) > EX PARTE > KIMBERLEY ANDREW STRICKLAND as Liquidator of PNP PACIFIC PTY LTD  First-named Plaintiff > DAVID ASHLEY NORMAN HURT as Liquidator of PNP PACIFIC PTY LTD > Second-named Plaintiff.

Catchwords: Liquidation – Application for approval of remuneration – Turns on own facts. Legislation:   Corporations Act 2001 (Cth), s 449E (7)

________________________________________________________________

1 MASTER SANDERSON: This was the plaintiffs’ application for approval of remuneration. The application was issued on 6 August 2014. It was supported by an affidavit of the second-named plaintiff, David Ashley Norman Hurt, sworn 29 May 2014, and a further affidavit of Mr Hurt, sworn 6 August 2014. Mr Sean Damian O’Reilly, a secured creditor of the company, appeared and opposed the making of the order for remuneration. I granted Mr O’Reilly leave to file any affidavit in opposition to the liquidator’s remuneration claim by 16 September 2014.

2 The matter came back before the court on 6 November 2014. The plaintiffs were represented, but Mr O’Reilly did not appear. I indicated to counsel for the plaintiffs no affidavit from Mr O’Reilly had been received and I would make orders approving the remuneration in terms of the originating process. I indicated I would give written reasons for my decision. On 16 December 2014 I read short oral reasons into the transcript and published these reasons both to the plaintiffs’ solicitors and to Mr O’Reilly. Regrettably, due to an administrative oversight, I did not take into account an affidavit of Mr O’Reilly which had been filed on 7 October 2014. I have now had the opportunity to consider that affidavit and have concluded that even with the benefit of Mr O’Reilly’s affidavit, the plaintiffs’ application should be approved. These reasons deal shortly with why, in these rather unusual circumstances, I would approve the plaintiffs’ remuneration.

3 The way in which the remuneration of liquidators, provisional liquidators and other company administrators is to be determined was set out by the Full Court of this court in Venetian Pty Ltd v Conlan (1998) 20 WAR 96. It is worth setting out again the regime mandated by the court. It is as follows (103 104):

Ordinarily, to commence the proceedings, the provisional liquidator will provide the court with a statement of account reflecting in appropriate itemised form, details of the work done, the identity of the persons who did the work, the time taken for doing the work, and the remuneration claimed accordingly. The statement of account should also reflect in appropriately itemised form the expenses incurred by the provisional liquidator, accompanied where necessary by voucher proof. Sufficient detail should be provided to enable the court to determine whether the disbursements were reasonably incurred and that the amounts claimed are reasonable.

The statement of account should be verified by affidavit. When the remuneration claimed involves work carried out by the provisional liquidator and his staff, the verifying affidavit need state merely that the work described in the statement of account was done by the provisional liquidator or under his personal supervision, and that from personal knowledge or from the records kept by the provisional liquidator or his firm, or from some other appropriate source, he believes that the information contained in the statement of account is correct. When disbursements are claimed, the affidavit should verify that they were incurred and, if necessary, why they needed to be incurred.

In Re Solfire Pty Ltd (In liq) (No 2), Shepherdson J said (at 1,164):

‘In my view, when a provisional liquidator seeks to have his remuneration determined by the court he should provide a document not dissimilar in form to the bill of costs in taxable form provided by a solicitor to his client … He should identify the person or persons and the grade or grades of the person or persons engaged in the particular task concerning the provisional liquidation, he should identify that task and dates on which time was spent on it, the amount of time spent on it and he should identify the relevant rate, according to the grade of the person or persons performing the work. I also consider that he should require the person performing the work to keep reasonably detailed diary notes and time sheets which documents should be open to inspection by persons entitled to see them.’

In our opinion, however, it is, with respect, unnecessary to lay down an absolute rule, in such detailed terms, concerning the statement of account to be provided by a provisional liquidator. It may well be that in a particular case information particularised as suggested by Shepherdson J would be appropriate. In other cases less detailed information may be required. Every case depends on its own circumstances. But the overriding principle remains: sufficient information must be provided to the court to enable it to perform its function under s 473(2).

If the Master were to be satisfied that the statement of account was sufficiently detailed to enable the remuneration to be determined, but there were objections to the account, special directions should be given in regard to the mode in which the account is to be taken or vouched. The procedure set out in O 45 should as far as possible be adopted. If, for example, the objector challenges whether a particular item of work was in fact done, or whether the person alleged to have done the work spent the time alleged in doing it, it may be necessary for the provisional liquidator to call direct evidence establishing the correctness of the allegations made: see generally Gava v Grljusich (unreported, Supreme Court, WA, Full Court, Library No 970492, 19 September 1997).

Notice should be given of the points on which the provisional liquidator will be crossexamined (if crossexamination is allowed). The notice of objection should be supported by affidavit. Crossexamination of the provisional liquidator and the objecting party may then occur. But care should be taken to follow the admonition of Sir Robert Megarry VC in Computer Machinery Co Ltd v Drescher (at 1386), namely: ‘It would not be right to allow anything resembling a trial of the action to take place in the guise of an argument on costs’.

4 What is anticipated by this regime is a twostage process. The practice is grown up of liquidators swearing an affidavit and attaching to that affidavit copies of the timesheets used to calculate remuneration. In addition, the liquidator will provide a brief description of the role of each person for whom a charge has been made, and the rate at which the time has been charged. I then consider the timesheets and all related material and form a prima facie view as to whether the charge is reasonable.

5 In this case the approach taken by the liquidators was slightly different. They produced a remuneration report pursuant to s 449E(7) of the Act. A copy of that report is annexure DH11 to the first affidavit of Mr Hurt. The remuneration was approved at a meeting of creditors held on 23 April 2012. The liquidators then undertook further work and prepared a further remuneration request report which appears as annexure DH13 to Mr Hurt’s affidavit. It is this report seeking an amount of $25,419 which formed the basis of this application. The report was not approved by a meeting of directors.

6 The first report itself begins by setting out a ‘Schedule of Hourly Rates and General Guide to Staff Experience’. For instance, under the classification ‘Director’ there appears a heading ‘Description’. It reads as follows:

Chartered accountant (or equivalent) and degree qualified with 9+ years (approximately) of experience. Able to autonomously lead complex insolvency appointments.

7 The hourly rate specified is $510. There then follow a number of categories down to the final category of ‘Clerical’. Such persons are charged at $110 an hour. There is then a heading ‘Liquidators’ Disbursements’ which sets out the way in which disbursements are charged. For instance, ‘Printing’ is charged at 30 cents per page. There then follows a heading ‘Remuneration Methods’ and it is said that the liquidators have charged on a time cost basis. There is a further subheading ‘Other Creditor Information on Remuneration’. Reference is made to a number of publications providing some guide as to the way in which liquidators charge generally.

8 The main part of the report appears under the heading ‘Schedule of Liquidator’s Anticipated Tasks and Estimated Remuneration for the Period 5 April 2012 to Finalisation of the Liquidation’. The total shown is $40,230, and it was this amount that was approved.

9 The second report was in a slightly different form. Once again, the hourly rates of staff were set out and it is said charging was based on a time cost method. There then appears a heading ‘Tasks Undertaken by the Liquidators and Time Costs for the Period 5 April 2012 to 30 June 2013’. By way of example as to how these matters are set out, appearing below is the first of a number of discrete boxes setting out what was done in relation to particular matters.

Task area
General description
Includes
Assets
9.9 hours
$2,804
$311 per hour
Stock, Plant and Equipment
  • reviewing asset listings;
  • correspondence and liaison with auctioneers and potential buyers;
  • obtaining valuations; and
  • tasks associated with realising assets.
Debtors
  • reviewing the trade debtor position.
Other assets
  • tasks associated with realising other assets.
Funds in CS Legal trust account
  • tasks associated with realising funds in CS Legal Trust account;
  • correspondence and liaison with solicitors;
  • tasks associated with obtaining court order.

10 There is a final heading ‘Summary of the Liquidators’ Time Costs for the Period 5 April 2012 to 30 June 2013 by Personnel Level and Task’. By way of example, Mr Hurt is described as ‘Associate Director’. His hourly rate is $467. He is said to have spent 6.7 hours working on the liquidation at a total cost of $3,129. That dollar figure is then broken down further. For instance, under ‘Assets’, as set out above, Mr Hurt is said to have incurred an amount of $94 by way of costs.

11 As with every single case I have looked at over the past almost 17 years since Venetian was decided, I was satisfied, prima facie, the charges claimed were justified. It is difficult to see how in any circumstance a different conclusion can ever be reached. All a liquidator can ever do is set out in broad detail what was done in the course of the liquidation and the hourly rate charged. There is no way I could, by looking at the broad description of the work done by Mr Hurt and his hourly rate, assess whether or not the charge is reasonable. Really, the first stage of this two stage process is a waste of time. Of course, if it were the case the material before the court was manifestly inadequate because there were no timesheets, the hourly rate was not specified, or the individuals who did the work were not identified, then the claim would fail. But that is a wholly different thing from requiring a preliminary assessment of the entitlement to remuneration.

12 In any event, having undertaken in this case a preliminary assessment of the material, I was satisfied, prima facie, the plaintiffs were entitled to compensation. It was then a matter of considering the affidavit of Mr O’Reilly. It is somewhat difficult to distil from the affidavit the nature of Mr O’Reilly’s complaint. It would appear to amount to Mr O’Reilly being dissatisfied with the time invested by the plaintiffs in the liquidation. At par 51 of his affidavit he says:

My professional opinion is that the amount of hours that could be substantiated in this matter is less than 50 hours.

13 In a following paragraph he goes on to offer a breakdown of how long various tasks would take. For instance, ‘Creditors’ is suggested to take four hours. Mr O’Reilly also complains about the charges of liquidators generally without reference to this particular liquidation. Mr O’Reilly was also not satisfied there was a need for investigation of the company’s affairs. If an investigation was actually undertaken, he says it was not comprehensive.

14 The difficulty with Mr O’Reilly’s affidavit is its generality. It does not settle on particular aspects of the liquidators’ conduct which can be queried. To refer again to the Venetian decision, Mr O’Reilly does not challenge whether a particular item of work was done or whether a particular person specified actually did the work. Based upon the general affidavit filed by Mr O’Reilly, there was no way I could have directed the liquidator to file further affidavit material. That would have required each and every one of the persons who were associated with the liquidation to swear an affidavit saying what they did, when they did it and why they did it. It is that sort of exercise which, on any approach to a review of remuneration, is to be avoided.

15 Accordingly, I was not satisfied the affidavit of Mr O’Reilly gave rise to any matter about which the liquidators had to provide further information. I am satisfied the approval of that remuneration was proper and appropriate. I made orders accordingly.

___________________________________________________________________

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Dec 152014
 

Registered liquidators are aware that they are prohibited by law from giving, or agreeing or offering to give, someone valuable consideration with a view to securing their own appointment or nomination as a liquidator or an administrator of a company, or an administrator of a deed of company arrangement (section 595 of the Corporations Act 2001).

But I wonder how many of them would be aware that giving an assurance of support for a proposed Deed of Company Arrangement may be an inducement under section 595.

The Chief Justice of the South Australian Supreme Court, Chief Justice Kourakis, took this view in his judgment in the case of Viscariello v Macks [2014] SASC 189, handed down on 9 December 2014.

Mr John Viscariello, a company director, alleged that registered liquidator Mr Peter Macks, administrator of two of Mr Viscariello’s companies, wrongfully failed to negotiate and put in place a Deed of Company Arrangement which would have allowed the companies to continue to trade under a changed ownership structure.

There were several other matters adjudicated upon in this case, and in a sense the allegation that the administrator had given an undertaking to the director that he would support a certain Deed of Company Arrangement (DOCA) became secondary.

But the comments by Chief Justice Kourakis are intriguing.

Chief Justice Kourakis

Chief Justice Kourakis

Mr Viscariello alleged that Mr Macks made certain representations to him and Mr Fred Bart (a businessman and entrepreneur who was a prospective purchaser of the company’s business) in a meeting in November 2001 to the effect that if he (Macks) were appointed as administrator, he would cause the company to enter into a deed of company arrangement reflecting the terms in a Heads of Agreement document, refered to by His Honour as “the proposed Bart DOCA”.

His Honour said:

“I find it unlikely that Mr Macks would have given an unqualified assurance that he would support the proposed Bart DOCA in breach of his duty to investigate the financial circumstances of the Companies and provide opinions to creditors.” [Para 122 of judgment]
….
“It is inherently improbable that he would have made the unqualified representations pleaded by Mr Viscariello.”[Para.125]
….
“If the pleaded representations were made and an agreement or understanding reached to that effect, Mr Macks would have breached s 595 of the Corporations Act and both Mr Bart and Mr Viscariello would have procured him to do so.” [Para.128]
….
“It would be contrary to the public interest to allow Mr Viscariello to recover damages for a misrepresentation which arises out of a failure to give effect to an unlawful arrangement.
(Footnote 76) With respect to the false and misleading conduct alleged against Mr Macks in respect of the 27 November meeting with Mr Viscariello and Mr Bart, I reject Mr Viscariello’s evidence that Mr Macks gave an assurance that he would ensure that the Companies would enter into the Bart DOCA.” [para. 130](Emphasis added)

Footnote 76: Yango Pastoral Co Pty Ltd v First Chicago (Australia) Limited (1978) 139 CLR 410; Brownbill v Kenworth Trucks Sales (NSW) Pty Ltd (1982) 39 ALR 191; Alexander v Rayson [1936] 1 KB 169; McCarthy Rose (Milk Vendors) Pty Ltd v Dairy Farmers Coop Milk Co Ltd (1945) 45 SR(NSW) 266; Mason v Clarke [1955] AC 778.

Click here for pdf copy of judgment by Chief Justice Kourakis on 9 December 2014: Judgment in Viscariello v Macks [2014] SASC 18

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Oct 102014
 

The Federal Court of Appeal has dismissed an appeal by the Australian Taxation Office against a court ruling that where a tax assessment has not been issued liquidators have no obligation under s 254(1)(d) of the Income Tax Assessment Act to retain from the proceeds of sale an amount sufficient to pay an apparent Capital Gains Tax liability . (Judgment dated 8/10/2014, Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) [2014] FCAFC 133.)

The liquidators of Australian Building Systems Pty Ltd entered into a contract of sale of real property in Creastmead, Qld. The ATO argued that a tax liability for the capital gain arising from the sale arose when the sale occurred, and, accordingly, on receipt of the proceeds of sale, the liquidators were obliged under s 254(1)(d) to retain from the proceeds of sale an amount sufficient to pay that tax liability regardless of whether a tax assessment had been issued.

ATO-logoARITA logo

A couple of years ago the Australian Restructuring Insolvency & Turnaround Association (ARITA) (then the IPAA) and the ATO decided to run a test case on the obligations of liquidators upon the occurrence of a CGT event.

Justice-Blind-Scales

 

The decision in the first instance by Justice Logan of the Federal Court (in March 2013) has been confirmed by Justices  Edmonds, Collier and Davies.  Davies J summed up the decision as follows (paragraphs 34 and 35):

“Section 254(1) of the Income Tax Assessment Act 1936 (Cth) (“ITAA36”) applies to liquidators because liquidators are deemed to be “trustees” for the purposes of the taxation laws: see definition of “trustee” in s 6(1) of the ITAA36. As the consequence, a liquidator is “answerable as taxpayer” in respect of income, profits or capital gains derived by the liquidator in his or her representative capacity (s 254(1)(a)), and is required to lodge returns of such income, profits or capital gains and liable to “be assessed thereon”, but in his or her representative capacity only (s 254(1)(b)). Section 254(1)(d) then requires the liquidator to retain “out of any money” which comes to the liquidator in his or her representative capacity, sufficient money to pay tax that “is or will become due” in respect of such “income, profits or gains”, and s 254(1)(e) makes the liquidator personally liable for the tax payable to the extent of the amount retained, or which “should have been retained”. On its proper construction, it seems to me that the section contemplates that in the circumstances where the section is engaged, a post appointment tax liability, if any, will be assessed to the liquidator in his or her representative capacity, rather than to the company. That said, the analysis serves in my view to confirm that any personal liability falling upon the liquidator arises only if, and where, an assessment has issued, and there is an amount of tax that “is or will become due” in the sense of “assessed as owing”. For the reasons expressed by Edmonds J, the Commissioner’s construction of the phrase “is or will become due” as it is used in s 254(1)(d) is to be rejected. In my view the primary judge was correct to hold that the reasoning in Bluebottle UK Ltd v Deputy Commissioner of Taxation [2007] HCA 54; (2007) 232 CLR 598 in respect of the proper construction of s 255 of the ITAA36 applies equally to the proper construction of s 254, and that s 254(1)(d) is to be read as referring to an amount of tax that has been assessed. “

Interestingly, the appeal judges did not comment on Justice Logan’s cautionary advice to liquidators at the first hearing, which was:

“… Even though, for the reasons given, s 254 does not require retention upon the mere happening of a CGT event, that does not mean that a liquidator is obliged immediately to distribute the resultant gain or part thereof as a dividend to creditors in the course of the winding up. A prudent liquidator, like a prudent trustee of a trust estate or executor of a will, would be entitled to retain the gain for a time against other expenses which might arise in the course of the administration. Further, in relation to income tax, the liquidator would at the very least be entitled to retain the gain until the income tax position in respect of the tax year in which the CGT event had occurred had become certain by the issuing of an assessment or other advice from the Commissioner that, for example, no tax was payable in respect of that income year….” __________________________________________________________________________________

For my other posts on this topic see: “Post-appointment income tax debts of liquidator” 10 October 2010 “Decision only partly resolves tax puzzle for liquidators” 7 March 2014 “ATO appeals against decision in Australian Building Sysytems case” 19 March 2014

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Jul 212014
 

 

In a recent decision concerning liquidators of the Walton Construction group, Justice Robertson of the Full Court of the Australian Federal Court has determined that it would be inappropriate and against the law to take into account the insolvency practitioners’ Code of Professional Conduct.

In Australian Securities and Investments Commission v Franklin (liquidator), in the matter of Walton Constructions Pty Ltd [2014] FCAFC 85 (judgment 18 July 2014), His Honour said:

“I should add that I do not regard the Insolvency Practitioners Association of Australia’s guide entitled Code of Professional Practice for Insolvency Practitioners, on which ASIC relied, as extrinsic material appropriate or permitted to be taken into account in construing ss 60 and 436DA of the Corporations Act. To my mind, the general law would not permit that guide to be taken into account in construing those provisions and that guide is outside the scope of s 15AB of the Acts Interpretation Act 1901 (Cth). For example, the relevant parts of that guide were not reproduced or referred to in the explanatory memorandum to the Corporations Amendment (Insolvency) Bill 2007 (Cth). ”           (Judgment paragraph 38.)

what-how-when-why

Conflict of interest

At the heart of the main decision in this case is the issue of conflict of interest and duty. I will analyse this part of the decision in a separate post. But here I want to discuss issues concerning compliance with and enforcement of the association’s Code of Professional Conduct.

An interesting predicament for ARITA

Justice Robertson’s comments are likely to cause something of a predicament for the association of insolvency practitioners, the Australian Restructuring Insolvency and Turnaround Association (ARITA). Naturally its Code of Professional Conduct (the Code) is binding on its members. So, it will probably review and amend this particular rule to bring it into line with the comments by Justice Robertson. Otherwise it would be imposing a requirement that the law does not acknowledge.

But, theoretically, it is not essential that ARITA bring its rules into line. If it thinks it necessary to have ethical rules that impose on its members duties greater than those imposed by the insolvency laws, it is entitled to do so. And it is entitled to take disciplinary action against members who breach such rules. Any member who doesn’t want to be bound by these extra duties can choose to resign from the association.

However it appears that enforcement of those rules by ARITA would be problematic. At the moment ARITA appears to enforce its rules only after a law enforcement agency (e.g. the Australian Securities and Investments Commission and the Companies Auditors and Liquidators Disciplinary Board) has made an unfavourable decision.

Apart from ARITA’s Code containing guidance as to what is meant by sections 60 and 436DA of the Corporations Act, ARITA has rules that impose greater duties and obligations than those imposed by the law. In constructing these extra duties and rules ARITA hopes that the courts will recognise them as a proper standard for judging the behaviour of insolvency practitioners and, by doing so, raise the standard of practice in the profession.

Until the comments by Justice Robertson in the Walton Constructions appeal case, it was widely believed that the statements and rules in ARITA’s Code applied not only to members of the association but effectively applied to all liquidators, because the courts would look to the Code when assessing whether the behaviour of a liquidator complied with his or her duties.

ARITA could suffer financially if this belief, based as it is on previous judgments by the courts, has been thrown into doubt by Justice Robertson. ARITA says that around 83% of all registered insolvency practitioners in Australia are ARITA members. But if its Code continues to impose standards that are more onerous than those imposed by the Corporations Act, and if the courts don’t continue to support its Code, more practitioners may choose not to join ARITA.

Comment by ARITA

Writing on behalf of the authors of the Code – the Australian Restructuring Insolvency & Turnaround Association (ARITA) – Michael Murray, Legal Director of ARITA,  says:

“Interestingly, Justice Robertson said that he did not regard the ARITA Code of Professional Practice for Insolvency Practitioners, on which ASIC relied, as extrinsic material appropriate or permitted to be taken into account in construing ss 60 and 436DA of the Corporations Act. This was the case as a matter of law under the Acts Interpretation Act 1901 (Cth).  As a matter of interpretation of the sections that comment is no doubt correct.  But it continues to be the case that the Code is relied upon by the courts in assessing standards of practitioners’ conduct: Dean-Willcocks v Companies Auditors and Liquidators Disciplinary Board [2006] FCA 1438.”


END OF POST

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Mar 192014
 

The Australian Restructuring Insolvency & Turnaround Association (ARITA) reported yesterday that the Australian Taxation Office is appealing against the decision in the test case on the obligations of liquidators upon the occurrence of a Capital Gains Tax (CGT) event.

Hand objection

ARITA’s report is as follows:

CGT UNCERTAINTY by Kim Arnold, 18/3/2014

Further to our recent article on the decision in Australian Building Systems Pty Ltd v Commissioner of Taxation [2014] FCA 116, the ATO have lodged an appeal.  The grounds of the appeal are that:

  • the judge erred in concluding that the liquidators were not required under s254(1)(d) of the Income Tax Assessment Act 1936 to retain proceeds from sale sufficient to pay any net capital gain arising from the sale; and
  • the judge erred in concluding that the obligation to retain monies sufficient to pay any tax in respect of the sale only arises when and if an assessment is issued.

The ATO’s view is that there is an obligation for the liquidators to retain proceeds from sale sufficient to meet any tax obligation and that an assessment is not required for that obligation to arise.

The issue of CGT priority and external administrator obligations on the sale of assets in insolvency administrations has been outstanding for many years and it seems that there will be no certainty for some time to come.

For my earlier post on this subject CLICK HERE.
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Mar 072014
 

[UPDATE 19/3/2014: THE ATO HAS APPEALED AGAINST THE DECISION DISCUSSED IN THIS POST] [UPDATE 10/10/2014: THE ATO FAILED IN ITS APPEAL; THE DECISION OF LOGAN J WAS CONFIRMED.]

When the Insolvency Practitioners Association of Australia (since renamed the Australian Restructuring Insolvency & Turnaround Association, or ARITA) and the Australian Taxation Office (ATO) decided to run a test case on the obligations of liquidators upon the occurrence of a Capital Gains Tax (CGT) event, they probably knew they risked broadening the contentious issues.  But they had to try settling a far-reaching and long-standing argument ­ which ARITA and the ATO had been having since 2009.  (1)

Unfortunately for ARITA and the ATO, the Court decided not to adjudicate in one important area, deeming it “unnecessary to answer in light of the conclusion reached …”

In running Australian Building Systems Pty Ltd v Commissioner of Taxation ([2014] FCA 116), decisions were sought on the following questions:

–          whether the liquidators (this was a joint appointment) are obliged by s 254 of the Income Tax Assessment Act 1936 , prior to the issuing of a notice of assessment to Australian Building Systems Pty Ltd (ABS), to retain monies so as to meet what may be a taxation liability in respect of the income year when the CGT event occurred; and

–          whether the liquidators are obliged to pay to the Commissioner the whole of any tax due by ABS in priority to other creditors of that company notwithstanding  ss 501, 555 and 556 of the Corporations Act.

Tax law gavel

On the first question the Court –  Logan J presiding – concluded:

“ … that s 254 of the ITAA36 had no application to the liquidators. They were not, in the absence of any assessment, subject to any retention and payment obligation derived from that section…..” (para 25 of the judgment) and “s 254 does not require retention upon the mere happening of a CGT event …” (para 31).

As the ATO had argued that it was not necessary for there to be a notice of assessment before the retention obligation of S. 254 could arise, this decision was a victory for the liquidators.

But Logan J added the following cautionary advice:

“… Even though, for the reasons given, s 254 does not require retention upon the mere happening of a CGT event, that does not mean that a liquidator is obliged immediately to distribute the resultant gain or part thereof as a dividend to creditors in the course of the winding up. A prudent liquidator, like a prudent trustee of a trust estate or executor of a will, would be entitled to retain the gain for a time against other expenses which might arise in the course of the administration. Further, in relation to income tax, the liquidator would at the very least be entitled to retain the gain until the income tax position in respect of the tax year in which the CGT event had occurred had become certain by the issuing of an assessment or other advice from the Commissioner that, for example, no tax was payable in respect of that income year….” (para 31).

Caution-taxes

ATO back to the drawing board

The ATO will need to withdraw its exhaustive Draft Taxation Determinations TD 2012/D7 and TD 2012/D6 of September 2012 and try again to state the correct legal position.  In those determinations the ATO took the view that

  • “a receiver who is an agent of the debtor is required by paragraph 254(1)(d) of the ITAA 1936 to retain from the sale proceeds that come to them in the capacity of agent sufficient money to pay tax which is or will become due as a result of disposing of a CGT asset”; and
  • “The phrase ‘tax which is or will become due’ in paragraph 254(1)(d) of the ITAA 1936 is not restricted to tax that has been assessed, and includes tax that will become due when an assessment is made. Consequently, the obligation to retain an amount under paragraph 254(1)(d) can arise in respect of tax that has not yet been assessed”.

 

An advisory note from ARITA?

One can imagine that the decision and the words of caution by Logan J will eventually find their way into an advisory note or practice guide from ARITA to liquidators and other insolvency practitioners.  But in getting there the Judge’s caution is bound to cause ARITA’s technical advisers and members considerable trouble.

ARITA’s initial interpretation

ARITA posted a summary of the judgment on its website on 23 February  (“Liquidator succeeds in CGT dispute with ATO” by Michael Murray), and ended with a note that it will closely examine the decision and the Judge’s comments and will raise the matter at its next liaison meeting with the ATO.

ARITA’s interpretation included the following comment:

In the case in hand, no assessment had issued when the sale took place.  This means that there is no personal liability for a liquidator if, once the assessment issues, there are insufficient funds to meet the liability.

Kicking off the discussiondiscussion meeting

I would make a couple of preliminary observations regarding this comment.

First, the fact that no assessment had issued when the sale took place is unremarkable.  Normally, a tax assessment is not made until after an event occurs.  Ordinarily, the ATO would not even be aware that an event had occurred until it was disclosed in a return lodged by the taxpayer.  (2)

Secondly, I agree that, based on this decision, there would be no personal liability under s. 254(1)(d) or (e) of the ITAA 1936 for the tax payable as the result of a profit, etc., if the money the liquidator had was expended and/or disbursed before a tax assessment was issued.

But there are other important issues to consider.  If a tax return covering
a post-appointment period was lodged and/or a tax assessment was issued showing tax payable in respect of that period, this would give rise to a debt payable by the company; and that debt would, it seems to me, be entitled to priority payment under the Corporation Act, as are other costs
of the winding up.

Such a tax debt would probably be entitled to classification as an expense “properly incurred by a relevant authority” (e.g., a liquidator) (S. 556(1)(dd) of the Corporations Act).  If so, it would have a higher priority than, for example, liquidator’s remuneration (S. 556(1)(de)) and employee entitlements (S. 556(1)(e) and (g)).

So … if, when the assessment issues “there are insufficient funds to meet the liability”, the liquidator may be deemed to have breached his or her duty to distribute the proceeds in accordance with the priorities established by law.

It seems to me that this very issue was the one being broached by Logan J in his caution at para 31 of the judgment when he said:

“ … in relation to income tax, the liquidator would at the very least be entitled to retain the gain until the income tax position in respect of the tax year in which the CGT event had occurred had become certain by the issuing of an assessment or other advice from the Commissioner that, for example, no tax was payable in respect of that income year….”.

_______________________________________________

NOTES:
(1)    In October 2012 the ATO issued draft rulings on the subject; and in February 2013 the  hearing of the test case began.
(2)    In the case being examined here, the ATO was informed of the CGT event when the company sought a private ruling from the Commissioner on whether s.254(1)(d) applied.

_______________________________________________

For more on this topic see my article “Post-appointment income tax debts of liquidator” published on this site on 10 October 2010.

 

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IPA guide: acceptable creditor resolutions for external administrators seeking future remuneration encompassing increases in hourly rates.

 Checklists and guides, Corporate Insolvency, court decisions, Insolvency Law, Insolvency practices  Comments Off on IPA guide: acceptable creditor resolutions for external administrators seeking future remuneration encompassing increases in hourly rates.
Dec 182013
 

Several years ago an external administrator (Paul Gidley) went to the Federal Court for advice on the validity of resolutions passed approving his remuneration prospectively (i.e. ahead of the work being performed).  It was a treated as test case, and in it he was supported by the Insolvency Practitioners Association of Australia (IPA) and opposed by the Australian Securities and Investments Commission (ASIC).

The judgment of Justice Gyles favoured the external administrator and opened the way for liquidators and other external administrators to have their remuneration “fixed by reference to a formula based upon time, provided that the formula is objective enough to satisfy the test laid down by the High Court ….”  He decided that “the resolutions in question in this case are capable of objective application. All of the necessary elements can be objectively identified. The person doing the work, that person’s category and the period spent are all the elements required. The sum can be calculated or ascertained definitely….” (Gidley re: Aliance Motor Body Pty Limited [2006] FCA 102).

Now the IPAA has drafted two examples of alternative resolutions that it believes meet the test in situations where the external administrator seeks prospective (future) remuneration that allows for the increase of hourly rates. See IPAA release 17 December 2013: Prospective remuneration approval – Increase in hourly rates

The sample resolutions are:

“That the future remuneration of the [appointee type] from [date] is determined at a sum equal to the costs of time spent by the [appointee type] and their partners and staff, calculated at the hourly rates as detailed in the report to creditors of [date] that will be increased at a rate of X% at 1 July each year, up to a capped amount of $[capped amount], exclusive of GST, and that the [appointee type] can draw the remuneration on a monthly basis or as required.”

OR

“That the future remuneration of the [appointee type] from [date] is determined at a sum equal to the costs of time spent by the [appointee type] and their partners and staff, calculated at the hourly rates as detailed in the report to creditors of [date] that will be increased in accordance with the June quarter Consumer Price Index (all groups) at1 July each year, up to a capped amount of $[capped amount], exclusive of GST, and that the [appointee type] can draw the remuneration on a monthly basis or as required.”

In providing these examples the IPAA says:

 “The Third Edition of the IPA Code of Professional Practice (effective from 1 January 2014) provides further clarification that hourly rates can only be increased where an objective formula is approved by creditors as part of the resolution …In practice this means that, should a practitioner wish to adjust their hourly rates, they must include a definitive formula in the resolution – a resolution which refers to an increase “from time to time” or similar is not acceptable.  The IPA also considers that a resolution that refers to increases of “up to X%” does not meet the definitive requirements of the Gidley decision.  Should practitioners wish to be able to increase rates during the period of a prospective fee approval, they should consider resolutions which refer to increases of X%pa or in accordance with CPI. “

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