No difference between liquidation and administration when it comes to distribution of trust funds

No difference between liquidation and administration when it comes to distribution of trust funds

JHK Legal has acted in the recent WA Federal Court case of Ross & ors v Manpak Holdings Pty Ltd, in the matter of Manpak Holdings Pty Ltd [2018] FCA 1548 where Justice McKerracher has applied the decision in Killarnee regarding the distribution of pooled trust assets, and confirmed that there is no difference between assets of a company in liquidation and assets held by the administrators of a company subject to a DOCA with respect to the rules of distribution.

Background

Manpack Holdings carried on the business of a product wholesaler, in its capacity as trustee of a trust. During the company’s administration, some of the credit applications received from creditors had however been executed by the company without reference to its role as trustee of the trust. As a result, some of the assets and liabilities had been acquired in the company’s role as trustee of the trust, and others in its own right.

The company was placed into voluntary administration, through which a Deed of Company Arrangement was executed by resolution of the creditors. The company was vacated of its office as trustee upon the appointment of the administrators, making the administrators bare trustees of the trust.

The company entered into a business sale agreement in its own capacity and in its capacity as trustee of the trust, which provided for consideration in a monetary amount, as well as the assumption of various liabilities (including employee and certain secured creditor debts).

The external administrators sought declarations from the Court validating the sale of the business, and sought directions with respect to the distribution of the proceeds for the benefit of creditors.

Manpak followed reasoning in Killarnee

The Federal Court in Manpak first confirmed as settled law that the right of indemnity and its equitable lien in support of that right are ‘property of the company’ within the meaning of section 9 of the Corporations Act 2001 (Cth) (“the Act”). It also outlined that giving the fact the Act does not empower liquidators to sell trust property, liquidators ought to seek orders from the Court regarding any proposed sale of trust property.[1]

McKerracher J in Manpak also confirmed that this ‘property’, being the right of indemnity, may only be used to satisfy debts incurred by the trustee in administering the trust. As a result, the trustee may only apply trust assets to extinguish debts of creditors of the trust, and not the company in its own capacity.

The Court finally considered the practical implications of Killarnee as being, relevantly, that once trust assets are realised, liquidators may distribute the proceeds of the sale pursuant to the priority regime under the Act. It then clarified that in circumstances where a company has acted in both its capacity as trustee and in its own right, liquidators must deal with creditors of each body separately, including by applying the assets of each body to its respective creditors.

McKerracher J found that the reasoning in Killarnee was not “couched in the confined language of liquidations”, rather having consideration of the insolvency regime generally. On this basis, he found no “appreciable difference” between administration and liquidation of a company for the purpose of the distribution of trust assets to creditors, and therefore, Killarnee should be followed.

The decisions in Killarnee, as followed in Manpak, provide guidance as to how external administrators, not just liquidators, are to deal with assets held on trust and how proceeds of such assets may be utilised.

The law seems to be settled for now….until the High Court says otherwise.

[1] Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) 354 ALR 436[79], [82] and [210]

Chiara Becattini – Associate

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Tips, tricks and traps of debt recovery litigation

As an unfortunate bi-product of a tough economy, debtor delinquency is on the rise. While sometimes an unavoidable aspect of doing business, an outstanding invoice or neglectful debtor can cause unnecessary stress to any business.

While any number of debt disputes may be sorted with a friendly reminder email or call, an increasing proportion of overdue accounts are finding their way in to some form of debt collection or recovery proceeding.

Although debt collection proceedings can be relatively quick and simple to resolve, it is a common misconception that all debtor disputes will resolve this way.

Debt disputes have an inherent ability to become protracted, laborious and costly if not approached correctly. However, there are a number of steps that can be undertaken before and during litigation that can greatly assist with your prospects of recoverability if litigation is instigated. t’s fairly common in real estate contracts to see the deposit broken down into two components, an initial deposit on signing (or within a couple of business days of signing) and then the balance deposit on the satisfaction of finance, other conditions precedent, or just simply later in the contract negotiations.  The standard form contracts in Queensland contain a condition that allows for the Vendor to claim the balance deposit as a part of its damages in the event that a Buyer defaults on the contract terms.

THE TIPS

Written Contracts & Agreements

It should go without saying, but a timely reminder is always good to remember to confirm your dealings in writing.

Recovery litigation may be made all the more difficult where there is no enforceable contract between the parties, or the terms of the agreement are ambiguous.

A written record of the terms of your agreement clearly setting out the rights and responsibilities of the contracting parties and should be considered critical in all business dealings. A contract will often make it easier to prove and enforce the terms of your contract in a dispute should your matter progress to litigation.

Terms of a contract should ideally be drafted to suit an individual business’s needs.

There are a number of basic clauses that should definitely be included in your contractual terms. These basic terms include (but are not limited to) the following:

  • A definition of the goods/services to be provided;
  • Price, invoicing and payment;
  • Default or payment failure;
  • Guarantees and warranties;
  • Defect liabilities;
  • Variations;
  • Interest; and
  • Dispute resolution.

This is of course by no means an exhaustive list of the terms that should be incorporated. However, the above is a good selection of terms that should in all situations be incorporated in to your contract.

Personal & Directors Guarantees

A personal guarantee is a written promise to guarantee the liability of one party for the debts of another party. Commonly, personal guarantees are given by directors and shareholders of companies to personally guarantee the payment of money or obligations on behalf of their company.

A personal guarantee can be unsecured (general and not attached to an asset) or secured (attached to an asset, i.e. security over land). Importantly, a guarantee may be worded to include sundry items such as collection costs, legal fees, interest and other items.

When drafted and used properly, the use of a personal or directors guarantee allows the corporate veil to be pierced and the director of a company to be pursued for the debts of the company.

When effective, a personal or directors guarantee will provide greater opportunity for recovery and recourse in the event of a payment default or dispute.

The use and effective drafting of a personal guarantee is a subject well covered. Please click here to read on for “everything a small business needs to know about personal guarantees”:

http://www.jhklegal.com.au/everything-a-small-business-needs-to-know-about-personal-guarantees/

Execution

Equally as important to having a well drafted contract and guarantee is ensuring it is properly executed. Taking steps to ensure you are having your contract executed by the correct party is vital.

In all circumstances, the execution of a contract should be done by a company’s director and should co-signed or witnessed appropriately. Your contracts should be executed in accordance with the requirements of section 127 of the Corporations Act 2001 (Cth) being by:

  • 2 directors of the company; or
  • A director and a company secretary; or
  • If a sole director, who is also the sole secretary, by that director.

If you are unsure you are dealing with a company’s director, a search of the public register of the Australian Securities Investments Commission is a relatively simple and inexpensive coverall.

Ensuring your contract is properly executed is a good step in demonstrating the binding intentions of the parties to enter into contractual relations, and a properly executed contract will often be the key piece of evidence in any debt recovery litigation.

THE TRICKS

File noting & supporting evidence

When talking to the customer about an outstanding debt, a key tip is to take careful notes of any discussion. Your notes should include:

  • The date and time;
  • The customer’s name (who you spoke to); and
  • What was discussed (including details of any payment arrangements agreed).

It is best practice to then follow up the discussion with an email to confirm your understanding. Notes and emails of this nature are contemporaneous file notes and are extremely useful to instruct your solicitor and to be annexed to any future affidavits as evidence.

THE TRAPS

Instructions

Timely and relevant communication is key to any litigation. Costs can quickly blow out on any matter where there are lengthy telephone discussions and or correspondence between you and your solicitor. Debt collection litigation is stressful and often there is a long period of time between filing your claim and your day in Court.

However, your litigation can become difficult where your solicitor has difficulty in obtaining instructions from you, or is forced to consider lengthy correspondence sifting through irrelevant material. Be prepared to provide instructions on the critical details, these include:

  • Dates and times of events;
  • The details of conversations had;
  • Attempts to resolve the matter previously; and
  • Periods of delay.

Before you contemplate litigation, you should consider building a timeline of the events of your dispute with supporting documentation (if available). Having a comprehensive timeline of key events is great starting point for any litigation and will:

  • Assist to refresh your memory as to the pertinent details of any dispute;
  • Will provide your solicitor with a good working narrative of the dispute; and
  • Is a useful document to refer to throughout the litigation and build on for any affidavits.
  • Can save you time and costs.

CONCLUSION

Debt recovery litigation can be an effective means of recovering your debts due and payable.

The cost, duration and difficulty of your matter can be greatly minimised by taking active and effective steps before a dispute arises! For example, making sure you have enforceable terms, and an executed contract or agreement.

Being proactive is often the key to a dispute! The creation and maintenance of documentary evidence can have a vast impact on the prospects of the recovery of your debt, and also assist in reducing your overall legal costs.

If you have a delinquent debtor or are considering debt recovery litigation for the recovery of a debt owed to your business, please contact the team at JHK for a chat today.

Kate Witt – Lawyer

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