The last week has seen a flurry of interesting court decisions from State and Federal courts. Six decisions are of particular note, and each is worthy of a separate, detailed update.

However, six consecutive updates would just be annoying, so all six cases will be dealt with briefly in this all-in-one update – Fraud, corruption, and coldies at the Lord Stanley.

 

• In the matter of El Zorro Transport Pty Limited (link)

The NSW Supreme Court has questioned the correctness of a 2011 decision that said that a CVL meeting cannot approve VA fees.

>> Read more below

 

• In the matter of AAA Financial Intelligence Ltd (in liquidation) (link)

The NSW Supreme Court has reiterated the circumstances in which a liquidator winding up a corporate trustee may pay fees from trust assets.

>> Read more below

 

• Canadian Solar v ACN 138 535 832 Pty Ltd (SDOCA) (link)

The Federal Court has denounced back-room deals to buy creditor votes as “fraudulent” and “corrupt”, and set aside the DOCA.

>> Read more below

 

• In the matter of Sales Express Pty Ltd (Administrators Appointed) (link)

The NSW Supreme Court has terminated a VA prematurely where it looked like a questionable DOCA was about to be pushed through by non-participating creditors.

>> Read more below

 

• Soong v Director of Public Prosecutions (Cth) (link)

The ATO has flexed its new statutory muscles, demanding a security bond from a taxpayer and prosecuting the taxpayer’s director for failing to provide it.

>> Read more below

 

• DCT v YCGGFATO Pty Limited (link)

The ATO has wound up a tax minimisation expert’s company in mildly amusing circumstances.

>> Read more below

 

 

In the matter of El Zorro Transport Pty Limited [2014] NSWSC 135

Back in 2011, the Queensland Supreme Court said, straight up, that a CVL meeting cannot approve a former VA’s fees (Re CMC Cairns Pty Ltd (in liq) [2011] QSC 240 – link).

Obviously this was a massive nuisance as it meant that, in every prematurely-terminated VA (and often when a VA transitioned into a CVL) a court application would be required for fee approval – solicitors, affidavits, Registrars – the whole catastrophe.

The decision was so unpopular that, despite its clear wording, both ARITA (then the IPA) and ASIC quickly issued statements saying that, despite CMC, the law was “not settled” and “the better approach is to review matters on a case-by-case basis” (link).

Thankfully, in El Zorro decision (published last week – link), Brereton J cast doubt on the correctness of CMC, observing that the ability of a meeting of creditors to approve a VA’s fees:

…ought not be construed as being limited to a resolution of the company’s creditors while the company is a company under administration, and would extend to a resolution of the company’s creditors even after the company has gone into liquidation.

This is a positive development. It is to be hoped that the courts will build on it. In the meantime, of course, practitioners in doubt should continue to seek the advice of specialist insolvency lawyers.

 

 

In the matter of AAA Financial Intelligence Ltd (in liquidation) [2014] NSWSC 1004

This case, decided on Friday, is the most recent in a series of decisions which analyses the circumstances in which a liquidator is permitted to look to trust assets for his or her fees.

Practitioners should refer to paragraph 13 of the decision (link) for five useful principles, remembering however that they are not as straightforward as they seem.

Note, for instance, the apparent inconsistency between paragraph 13(4) (liquidators may pay themselves from trust assets for non-trust-related work) and paragraph 14 (liquidators may not pay themselves from trust assets for non-trust-related work).

If in doubt in a particular situation, advice should be sought from lawyers with specific expertise in this area.

 

 

Canadian Solar v ACN 138 535 832 Pty Ltd (SDOCA) [2014] FCA 783

Canadian Solar (link) concerned an application to terminate a DOCA and appoint liquidators. The decision makes interesting reading. One of the more notable points was the court’s strong condemnation of the practice of soliciting creditor votes by way of “secret deals”:

…of the 57 creditors that voted in favour of the resolution, 54 had appointed employees or officers of the Mawson Group as their general proxy. Material produced under subpoena revealed that Mr Young had offered some creditors special deals, either in cash or by discounted terms on future trading, in return for their agreement to the appointment of Mr Young’s nominee as proxy and/or their vote in favour of the proposed DOCA…

The court accepted the plaintiff’s submission that:

[T]hat material reveals a concerted, and successful, effort on behalf of [Mr Young], and those advising him, to procure the support of individual creditors by the making of secret side deals with individual creditors. The effect of these arrangements was to substantially corrupt the voting process. The making of secret side deals is, and has always been treated by the courts, as deeply inimical to the spirit and objectives of statutory regimes such as Part 5.3A and its equivalents in the bankruptcy laws.

The court described the practice as “a species of equitable fraud” and said it was “corrupt”. It terminated the DOCA and wound up the company.

 

 

In the matter of Sales Express Pty Ltd (Administrators Appointed) [2014] NSWSC 460

Sales Express (link) concerned an application to terminate a VA as an abuse of process.

The court concluded that the director had appointed administrators not in order to meet the objectives of Part 5.3A of the Act (i.e. rehabilitate a viable business or provide a better return to creditors), but rather in order to foist a questionable DOCA on an unrelated, and extremely upset, creditor.

“Foist” was the court’s expression, and it was used in circumstances where the vast majority of creditors were related, and had agreed not to participate in any distribution of the DOCA fund. Accordingly, the court observed that the DOCA proposal was one where:

…even if one looks at the interest of creditors generally, there is nothing in the proposed deed of company arrangement for the benefit of the related creditors who propose to vote in favour of the deed. The only apparent benefit in the deed is for the unrelated creditor, who does not support it.

This feature of a DOCA proposal (related creditors agreeing not to prove) is therefore a double-edged sword. Although it increases the dividend to unrelated creditors, it also gives them ammunition to attack the DOCA proposal.

Ultimately, the court was persuaded by the submission of the plaintiff’s Counsel, Mr Angyal SC, that the VA should be terminated summarily because the provisions of Part 5.3A were being abused.

 

 

Soong v Director of Public Prosecutions (Cth) [2014] NSWSC 1030

This case (link) is notable because it involves the prosecution of a director for failing to cause her company to give the ATO a “security bond”.

In 2010, the ATO introduced legislation enabling it to require a taxpayer to put up a security bond on account of possible future tax liabilities. The provisions are set out in Subdivision 255-D of Schedule 1 to the Taxation Administration Act 1953 (Cth).

Failure to put up a bond when demanded is a criminal offence. This is a big deal for company directors because, when a company commits a tax offence, the directors may be prosecuted personally, by virtue of section 8Y of the Act.

This appears to be what happened to Mrs Soong. Those familiar with cases concerning the recovery of unpaid tax may be familiar with the name – Mr and Mrs Soong have made significant contributions to the law in this area.

The relevant facts were quite simple: The ATO demanded a security bond, Mrs Soong’s company failed to provide it (at least not all of it), and Mrs Soong was consequently prosecuted, convicted and fined. She then appealed the conviction (this case), and lost.

Ms Soong argued that it was impossible for her to pay the bond because she did not have the means. The Local Court did not accept this, and concluded that her failure to furnish a bond was “voluntary and deliberate”. On appeal the Supreme Court noted that, on the evidence, the Local Court’s conclusion “was not only correct: it was inevitable”.

The requirement for a bond is a powerful weapon. At the time the provisions were introduced, the ATO indicated it would use the power sparingly. However, the law does not require this and, in Soong, the court noted that, under the Act, it does not matter whether the ATO’s demand for security is reasonable or unreasonable.

Of course, not every taxpayer gets asked for a bond. It can be assumed, given the history, that Ms Soong is on the ATO’s Naughty List. How does one get on this list? One might ask Mr Morris, the protagonist in the next case.

 

 

Deputy Commissioner of Taxation v YCGGFATO Pty Limited (unreported)

Morris Accounting Pty Limited ran an accounting practice in Brisbane.

Mr Morris boasted specific expertise in “tax minimisation strategies” and “asset protection”. His marketing patter included such statements as:

All the tradies I know hate tax.  They love most things in life, time with mates and family, the reward of a cold beer after a hard week on the tools, but not working out (or paying!) that BAS bill every quarter and the tax bill once a year…

…

So get educated! Come along to one of our seminars about things important to your business such as tax planning prior to 30 June, or even have a cold one with our director Nathan Morris at the Lord Stanley Hotel.

Seemingly, in April, Mr Morris was in a bad place. In a blog post dated 30 April he referred to the imminent loss of his tax agent’s registration, adding “I have been scrambling to get the compliance work done and have not been able to concentrate on advising my clients”.

One might infer from this that the taxation authorities were not, at that point in time, at the top of his Christmas card list.

It was about then that he changed his company’s name to “YCGGFATO Pty Limited” – perhaps a suggestion to his colleagues at the ATO that “You Can Go Get–” something. Fries, perhaps. Or maybe flowers, or frozen yoghurt. Who knows.

On 19 June, the ATO commenced proceedings to wind the company up. A winding up order was made last Friday, no doubt to the consternation of Mr Morris and the tax-hating tradies of the Lord Stanley Hotel.

This case is not particularly significant for anything. It is simply your reward for reading this far. Thank you for persevering; that is the end of this update.

 

 

Further information

The foregoing are brief summaries of recent court decisions in the area of insolvency law and practice. If you would like any further information about the cases above, or how they might impact you, please do not hesitate to contact one of ERA Legal’s specialist insolvency lawyers.