News

Are trust assets safe if a corporate trustee is liquidated?

In a majority of the insolvency appointments we undertake, we are appointed to a trustee company of a trading trust.

From time to time the question is raised as to whether the trustee (now in liquidation) has the capacity to sell the assets of the trust and discharge liabilities incurred on the trust’s behalf. The question is often asked by a director or shareholder seeking to avoid the trust’s assets being used to discharge liabilities of the trustee.

In the recent Federal Court of Australia decision of Kitay, in the matter of South West Kitchens (WA) Pty Ltd [2014] FCA 670 the Federal Court held that a liquidator of a corporate trustee could sell the trust assets without first obtaining a court order.

The Court held that Section 477(2)(c) of the Corporations Act 2001 (“the Act”) provided a liquidator with the requisite power to sell the trust assets.

With the benefit of the Federal Court decision it is now beyond any reasonable argument that when a company is the trustee of a trust (the corporate trustee) and that trustee is placed into liquidation, the liquidator will be able to sell the assets of the trust without obtaining a court order. This also applies when the trust deed states that if the corporate trustee falls into liquidation it is disqualified from acting as trustee.

PPSR Clarification

Many readers may have experienced uncertainty or concern at some of the implications of the Personal Property Securities Act 2009 (“PPSA”).

The PPSA has been operating for some time now and a review of the legislation is currently taking place.

We understand the review has highlighted suggestions that the PPSA and the Personal Property Securities Register (“PPSR”) need to be clarified or simplified.

In addition, evidence has shown that many small businesses have not fully appreciated the extent the PPSA impacts their business, proving the need for greater education.

It is therefore likely that simplification and some potential areas for reform will be considered in the future regarding the PPSA.

Two of the key areas we would expect to be clarified include:

• increasing the timeframe for which  security interests over leased serial numbered assets must be registered on the PPSR
• removing the extension of the PPSA relating to bailments

From our perspective, the PPSA has been very helpful with the issue of retention of title claims being made against stock; however, we do acknowledge there have been instances where small businesses have not understood the requirements of the PPSA.  In these cases, we have encouraged suppliers to take legal advice, learn more about the PPSA and consider the costs versus benefits of a PPSR registration.

What to do when receiving a Statutory Demand

In our experience many directors of small to medium-sized companies in financial strife have overlooked the importance of receiving certain documents, leading to significant problems.

We have been involved in a number of court-appointed liquidation jobs where the directors were completely oblivious to the impending liquidation appointment, simply because they had not recognised the significance of certain mail they received. They had been so busy dealing with operational matters and cash management aspects of their businesses that they overlooked other matters of importance.

As this presents a significant risk to any business trying to restructure itself, we decided to focus an article on a very important document that can be received in the post: a Creditors Statutory Demand.

This document can be issued by a creditor who has monies owing totalling at least $2,000. It is a formal document issued under section 459E of the Act in an effort to prompt payment from the company.

If a company is served with this notice, it is vital that it not be ignored.

Upon the receipt of a Creditors Statutory Demand, the company must pay the debt within 21 days or make an application to court to have the demand set aside under section 459G of the Act.

Grounds to have the demand set aside include:

• there is a genuine dispute between the debtor and creditor
• there is an off-setting claim reducing the undisputed amount to less than $2,000
• there is a defect in the demand causing substantial injustice

If the demand is ignored or no action is taken within the 21 days after service then:

• a presumption arises under the Act that the company is insolvent and may be liquidated
• you will need to commence court proceedings to prove that your company is not insolvent
• the creditor may make an application to wind-up the company

Therefore, acting upon receipt of a Creditors Statutory Demand is of vital importance. To avoid ending up in liquidation, it is paramount that a director does not wait for the 21 days to expire and that they engage an experienced lawyer to take appropriate steps to respond to the demand.

Liquidator fees in the spotlight

There has been recent publicity concerning several judgments of the Supreme Court of New South Wales, criticising the charging of liquidators’ remuneration based on hourly rates.

The court has suggested that in certain circumstances charging for services on a percentage of realisations and/or percentage of distribution may have been more appropriate.

We are very aware that the cost of external administrations and the total of surplus funds available for distribution to creditors are directly related and therefore the cost of an external administration needs to be proportionate and fair. In our view the assessment of what is proportionate and fair needs to be measured on the facts of each case and not by any arbitrary rule of thumb.

Excluding circumstances where it is clearly feasible to charge for services on a fixed fee basis (for example a straight forward Members’ Voluntary Liquidation) we consider that if properly applied, hourly based remuneration does result in a fair outcome.

Our professional association (ARITA) recognises that proportionality of fees in an insolvency administration is an important concern, but it is not the only consideration relevant to an assessment of the amount of work an insolvency practitioner must complete in an external administration.

ARITA advises its members that the basis of the remuneration method chosen should be appropriate under all circumstances and be properly applied.

The ARITA Code of Professional Practice makes it an obligation at the commencement of an administration for members to inform directors and creditors of the different methods of calculating remuneration and the intended basis of remuneration to be used. This obligation helps with open disclosure and prevents future issues.

We welcome the debate into remuneration and the cost of external administration that is currently in the spotlight. 

When creating Heard Phillips almost eight years ago, one of our primary objectives was to deliver above expectation financial returns to creditors.  One critical aspect of delivering that objective is to ensure the costs of external administration remain fair and reasonable. 

We are pleased to report that in the 2013/14 financial year, Heard Phillips was successful in distributing dividends to unsecured creditors totalling $5.5 million from 28 external administrations.

Comparison of Liquidation vs. Deregistration

Part of our job is to assist with the affairs of a solvent company that has ceased operating and the question is often asked whether the company should be liquidated or de-registered.

There are two ways to bring an end to the existence of a company when it has fulfilled its purpose.

The first of these methods is a procedure known as voluntary deregistration.  Section 601AA of the Act enables a company, a director or a member to apply for deregistration if the following criteria apply:

• all the members of the company agree to the deregistration
• the company is not carrying on business
• the company's assets are worth less than $1,000
• the company has paid all fees and penalties payable under the Act
• the company has no outstanding liabilities
• the company is not a party to any legal proceedings

The effect of the voluntary deregistration is that the company ceases to exist. Should there be any company property left or unaccounted for at the time of the deregistration, that property vests in the Commonwealth/ASIC.

To determine whether a company should be deregistered, the directors of the company should complete significant due diligence to be satisfied that the company has no outstanding liabilities that need addressing. For a company that has a trading past, directors must be confident that there are no tax debts, contingent liabilities, guarantees or other matters that are unresolved when the deregistration occurs.

Due to the uncertainty that can surround these issues, we would usually recommend that a company with a trading history should end its life with a Members’ Voluntary Liquidation. The liquidation process involves a formal procedure calling for final claims from creditors and obtaining a tax clearance. The liquidation, therefore, provides more certainty that the affairs of the company are fully in order. 

However, the most common reasons for a company to be liquidated vs. deregistered are:

• there are stamp duty benefits of making in specie distributions of assets to members
• there are untaxed capital profits and other shareholder tax benefits available using the liquidator’s ability to distinguish the nature of the final distribution to members between income and capital

There is a cost difference between the two processes, with deregistration costing very little (a filing fee plus a small accounting fee) and a liquidation costing in the thousands (depending on the size and complexity of the estate being administered).