Manipulation of theRelation-Back Day Nadia Angelo Melbourne Forum Conference Cairns 22-26 August 2012
Introduction• Clawback provisions - Part 5.7B Division 2 of the Corporations Act 2001 (Cth) (the Act)• Purpose = protect ...
Introduction• Manipulation when company enters voluntary administration (VA) after a winding up application filed• Calls...
Current Avoidance Regime• Division 2 details pre- • Transactions to defeat liquidation transactions that cred...
Current Avoidance Regime: Timing Unfair Transactions Uncommercial Unreasonable ...
Relation-Back Day• Point which is used for measuring time periods• RBD is defined in s 9 of the Act as: – the day the app...
Commencement of Winding Up• Part 5.6 Division 1A governs the commencement of a winding up, in three sets of circumstance...
Court Ordered Winding Up: s 513AIf the Court orders under ss 233, 459A, 459B or 461 that a company bewound up, the winding...
Court Ordered Winding Up• The CD will be the day the order is made unless a VA has previously commenced: s 513A• If a VA ...
VA Progressing into Winding Up: s 513CThe s 513C day in relation to the administrationof a company is:(a) if...
Voluntary Winding Up• The CD will be the day the resolution was passed by the members that approved the winding up: s 51...
Anomalies: RBD and CD• Lingren J (Federal Court of Australia) at 6th Annual Insolvency Practice Symposium (2006) noted “...
Anomalies: RBD and CD• Because the RBD ultimately defers to s 513C, which determines the relevant day as the commencemen...
Raffertys Resort• 20 September 2007 winding application filed• If the winding up had proceeded in the ordinary course, 20...
Raffertys Resort• $840,000 in various unfair preferences, some involving payments to one of Rafferty’s directors and to e...
Raffertys Resort• On 29 February 2008 Barrett J (NSWSC) ordered winding up the company, appointing the voluntary adminis...
Raffertys ResortAustin J:• s 447A was not a source of power that could be relied on by the liquidators for the winding up...
Raffertys ResortAustin J:• To make the order and deprive those parties of their immunities would be inconsistent with the...
Raffertys ResortAustin J:• However, it is an "unfortunate application" where the originating process for winding up is fi...
Other ways to preserve RBD• Voluntary administrators could have encouraged creditors to vote that the VA should end purs...
Re Octaviar Ltd• Re Octaviar Ltd (formerly MFS Ltd) [2008] QSC 216• McMurdo J followed Austin J’s decision in Rafferty’s ...
Re Octaviar Ltd• Octaviar argued that the risk of prejudice to creditors may be avoided by making of orders under s 447A(...
Need for Reform• Australian Treasury 2010 Corporate Insolvency Reforms, the Government announced that it intends to amen...
Need for Reform• Creditors vote that the VA should end pursuant to s 439C(b) and Re Octaviar not enough• Dependent on a n...
Nadia Angelo T: 8680 5360E: nangelo@harriscarlson.com.au
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Nadia Angelo - Harris Carlson Lawyers

Manipulation of the Relation-Back Day
Published on: Mar 3, 2016
Source: www.slideshare.net


Transcripts - Nadia Angelo - Harris Carlson Lawyers

  • 1. Manipulation of theRelation-Back Day Nadia Angelo Melbourne Forum Conference Cairns 22-26 August 2012
  • 2. Introduction• Clawback provisions - Part 5.7B Division 2 of the Corporations Act 2001 (Cth) (the Act)• Purpose = protect interests of unsecured creditors• Pivotal to clawback is the timing that applies• Relation-back day (RBD) and commencement date (CD) under the Act critically determine that timing• Anomalies exist in the meanings of RBD and CD• Potential for manipulation by directors to limit the time period to which the clawback provisions apply
  • 3. Introduction• Manipulation when company enters voluntary administration (VA) after a winding up application filed• Calls for law reform, notably by Austin J in Raffertys Resort (Chief Commissioner of State Revenue v Raffertys Resort Management Pty Ltd (in liq) (2008) 217 FLR 230)• Government intends to amend the Act: – date of winding up application = RBD – where a voluntary administrator is subsequently appointed (but no winding up in progress when administrator appointed)
  • 4. Current Avoidance Regime• Division 2 details pre- • Transactions to defeat liquidation transactions that creditors: s 588FE(5) are voidable and • Related entity transactions: recoverable s 588FH• Unfair preferences: s 588FA • Circulating security interest• Uncommercial transactions: created within six months of s 588FB the RBD: s 588FJ• Unfair loans: s 588FD • NB: Unfair preferences,• Unreasonable director- uncommercial transactions related transactions: and transactions to defeat s 588FDA creditors are only voidable if they are also insolvent transactions: s 588FC
  • 5. Current Avoidance Regime: Timing Unfair Transactions Uncommercial Unreasonable Uncommercial Unfair Circulating loans for purpose transactions or director- transactions preferences security of defeating unfair related interests creditors preferences transactions with related entity s 588FD s 588FE(5) ss 588FA & 588FB s 588FDA s 588FB s 588FA s 588FJ Relevant time period At any time During the 10 During the 4 During the 4 During the 2 During the 6 During the 6 on or before years ending years ending years ending years ending months months ending the winding on the RBD on the RBD on the RBD on the RBD ending on the on the RBD or up began or on or RBD or after after that day before the that day but but before the day when the on or before day when the winding up the day when winding up began the winding began up began s 588FE(6) s 588FE(5) s 588FE(4) s 588FE(6A) s 588FE(3) s 588FE(2) s 588FJ(1)(b)In addition, the liquidator may challenge uncommercial transactions occurring from the RBD to the date of aliquidation that arises out of a voluntary administration or deed: s 588FE(2A), (2B). Timeline: Murray Michael and Harris Jason Keay’s insolvency: personal and corporate law and practice (Thomson, Australia: 7th ed, 2011)
  • 6. Relation-Back Day• Point which is used for measuring time periods• RBD is defined in s 9 of the Act as: – the day the application for the winding up order was filed if, because of Division 1A of Part 5.6, the winding up is taken to have begun on the day of the winding up order; or – otherwise, the day on which the winding up is taken, because of Division 1A of Part 5.6, to have begun• So RBD is determined by reference to CD
  • 7. Commencement of Winding Up• Part 5.6 Division 1A governs the commencement of a winding up, in three sets of circumstances: – A court ordered winding up: s 513A – A voluntary winding up: s 513B – A voluntary administration progressing into a winding up: s 513C
  • 8. Court Ordered Winding Up: s 513AIf the Court orders under ss 233, 459A, 459B or 461 that a company bewound up, the winding up is taken to have begun or commenced:(a) if, when the order was made, a winding up of the company was already in progress – when the last-mentioned winding up is taken because of this Division to have begun or commenced; or(b) if, immediately before the order was made, the company was under administration – on the s 513C day in relation to the administration; or…(d) if, immediately before the order was made, a deed of company arrangement had been executed by the company and had not yet terminated – on the s 513C day in relation to the administration that ended when the deed was executed; or(e) otherwise – on the day when the order was made.
  • 9. Court Ordered Winding Up• The CD will be the day the order is made unless a VA has previously commenced: s 513A• If a VA had previously commenced, the winding up will be deemed to have commenced on the day on which the administration began: s 513C• If a deed of company arrangement (DOCA) was in place immediately before the order was made, the winding up will be deemed to have commenced on the day upon which the VA began giving rise to the DOCA: s 513C
  • 10. VA Progressing into Winding Up: s 513CThe s 513C day in relation to the administrationof a company is:(a) if, when the administration began, a winding up of the company was in progress – the day on which the winding up is taken because of this Division to have begun; or(b) otherwise – the day on which the administration began.
  • 11. Voluntary Winding Up• The CD will be the day the resolution was passed by the members that approved the winding up: s 513B(e)• If the company had previously been in administration, the CD will be the day the VA began: s 513B(b)(c)(d) read with s 513C(b)• If a DOCA was in place immediately before the resolution was passed, the winding up will be deemed to have commenced on the day upon which the voluntary administration began giving rise to the DOCA: s 513C
  • 12. Anomalies: RBD and CD• Lingren J (Federal Court of Australia) at 6th Annual Insolvency Practice Symposium (2006) noted “directors may choose to delay appointing an administrator until the last possible moment in hope of postponing the relation-back period”• Where a voluntary administrator is appointed after the filing of a winding up application, the RBD for the purposes of the clawback provisions is the CD of the administration, not the day of the filing of the winding up application
  • 13. Anomalies: RBD and CD• Because the RBD ultimately defers to s 513C, which determines the relevant day as the commencement of the administration• Open to directors to take advantage to manipulate the time period that applies to transactions that can be recovered by liquidators
  • 14. Raffertys Resort• 20 September 2007 winding application filed• If the winding up had proceeded in the ordinary course, 20 September 2007 = RBD• Significant delay, and on 29 January 2008 the directors appointed voluntary administrators• By virtue of s 513C, 29 January 2008 became the RBD• 8 February 2008, at the first meeting of creditors it was resolved to appoint new voluntary administrators
  • 15. Raffertys Resort• $840,000 in various unfair preferences, some involving payments to one of Rafferty’s directors and to entities associated with one of its officers within six months of the filing of the winding up application on 20 September 2007, dating back to March 2007• Filed an interlocutory process returnable upon the hearing of the winding up application, seeking orders under s 447A that: (a) the administration be terminated; (b) the company be wound up in insolvency, or alternatively, the company be wound up in insolvency pursuant to s 459A; and (c) the s 513C day in relation to the administration is the day on which the originating process was filed
  • 16. Raffertys Resort• On 29 February 2008 Barrett J (NSWSC) ordered winding up the company, appointing the voluntary administrators as liquidators, but the application for the alteration of the s 513C day was adjourned to be dealt with by a Corporations Judge, Austin J• Abuse of process for the directors to utilise the VA process for the purpose of deferring RBD and frustrating the recovery of potential unfair preferences• Good reasons for the liquidators to seek an earlier RBA and to end the VA because of the abuse of process
  • 17. Raffertys ResortAustin J:• s 447A was not a source of power that could be relied on by the liquidators for the winding up nor for the alteration of the RBD• To deem that the VA had commenced on the day of the filing of the winding up application would create a fiction that the directors had resolved to appoint voluntary administrators many months before they actually did, which could not occur• A s 447A order would have the effect of altering accrued rights of the parties who benefited from the winding up order. This order made those parties, who had the benefit of unfair preference payments outside of the six months before the appointment of the voluntary administrators, immune from challenge by the liquidators under the voidable transaction provisions
  • 18. Raffertys ResortAustin J:• To make the order and deprive those parties of their immunities would be inconsistent with the High Courts observations in Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270• 29 January 2008, rather than 20 September 2007, was the RBD which would prevent the liquidators from recovering unfair preferences of significant value• s 513A(b) achieved the sensible result of "backdating" the time of the commencement of a winding up to the date of the appointment of a voluntary administrator where a company is under administration, a winding up application is subsequently filed and a winding up order is made
  • 19. Raffertys ResortAustin J:• However, it is an "unfortunate application" where the originating process for winding up is filed before an administrator is appointed, as the RBD is only backdated to the time of the appointment of the voluntary administrator• More likely for a voluntary administrator to be appointed after the filing of a winding up application, rather than for a winding up application to be filed after the appointment of a voluntary administrator (leave required to commence the proceeding to wind up, s 440D)• Issue should be addressed by legislative amendment
  • 20. Other ways to preserve RBD• Voluntary administrators could have encouraged creditors to vote that the VA should end pursuant to s 439C(b) thereby terminating the VA prior to the winding up hearing• Court would need to be satisfied that sufficient time had passed so that the company was not under VA “immediately before" the making of a winding up order
  • 21. Re Octaviar Ltd• Re Octaviar Ltd (formerly MFS Ltd) [2008] QSC 216• McMurdo J followed Austin J’s decision in Rafferty’s Resort but found a way to deal with the anomalies• On 4 June 2008, winding up application filed• At the hearing of an application to prevent Octaviar from appointing a voluntary administrator, it was argued by the Public Trustee of Queensland that there was a risk of prejudice to creditors from the difference in the RBD between 4 June 2008 and 9 September 2008, if a winding up occurred at the second meeting of creditors
  • 22. Re Octaviar Ltd• Octaviar argued that the risk of prejudice to creditors may be avoided by making of orders under s 447A(1) and Octaviar and its directors giving various undertakings• McMurdo J, pursuant to s 447A, made orders that s 439C would operate as if it did not include s 439C(c), which allows creditors to resolve that a company may be wound up at the second meeting of creditors under Part 5.3A• Octaviar and directors gave undertakings that, in the event a DOCA was not executed, they would not seek any further adjournment of the winding up application and would consent to an order for a court winding up
  • 23. Need for Reform• Australian Treasury 2010 Corporate Insolvency Reforms, the Government announced that it intends to amend the Act• It is intended that an amendment will be legislated to render the date a winding up application is made to be the RBD where a voluntary administrator is subsequently appointed (but no winding up is actually in progress when the administrator is appointed)
  • 24. Need for Reform• Creditors vote that the VA should end pursuant to s 439C(b) and Re Octaviar not enough• Dependent on a number of uncertain factors, including requiring involvement from creditors to vote a certain way, applications to be made to the Court and undertakings given by directors• Offers no certainty in addressing the anomalies in RBD and CD and are a costly and time consuming way of addressing the problem• Legislative amendment will ultimately achieve what Division 2 seeks to do and protect the interests of unsecured creditors from transactions that prejudice unsecured creditors
  • 25. Nadia Angelo T: 8680 5360E: nangelo@harriscarlson.com.au

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