Creditors be aware of who authorised the payment

  • TurkAlert
  • Published 02.06.2020

Yeo (as joint and several liquidator of Ready Kit Cabinets Pty Ltd) v Deputy Commissioner of Taxation [2020] FCA 632 

Summary

In the recent case of Yeo (as joint and several liquidator of Ready Kit Cabinets Pty Ltd) v Deputy Commissioner of Taxation [2020] FCA 632 the Victorian Federal Court considered whether payments made by a company to a creditor whilst subject to a Deed of Company Arrangement (‘DOCA’) could be clawed back by liquidators (who had also been the Deed’s Administrators) as voidable unfair preference payments. 

The main issue for determination was the statutory construction of ss588FE(2B)(d) of the Corporations Act 2001 (Cth) (‘the Act’) and whether the impugned payments were made on behalf of the company, by or under the authority of the Deed Administrators. If they were, then by operation of ss588FE(2B)(d), the payments would not be caught by the voidable unfair preference legal framework. 

Ultimately, Justice Middleton found that the payments made by the company were made under the authority of the director of the company and not the Deed Administrators, so were voidable. 

Background facts 

On 29 October 2013 Mr Yeo and Mr Rambaldi (‘Yeo and Rambaldi’) were appointed joint and several administrators of Ready Kit Cabinets Pty Ltd (‘the Company’). On 11 December 2013 the Company entered into a DOCA. The DOCA was executed on behalf of the Company by Yeo and Rambaldi in their capacity as its Administrators, by Yeo and Rambaldi in their capacity as Deed Administrators and by the sole director of the Company. 

The DOCA included the following relevant terms: 

  • The management and day-to-day control of the Company was returned to the director;
  • The Company and director made various covenants, including to comply with the Company’s taxation obligations, including making payments which may become due to the Australian Taxation Office during the period of the DOCA. 
  • On default, a meeting was to be convened to decide whether to terminate the DOCA and wind up the Company. 

From 11 December 2013 to 5 July 2017 the Company returned to the management and control of the director and continued trading as permitted by the DOCA. During this time and as a result of the ongoing trading of the Company, it incurred taxation liabilities and made payments to the Deputy Commissioner of Taxation (‘DCT’) in partial satisfaction of those taxation liabilities (‘the Payments’). 

From about June 2017 the Company failed to comply with its taxation obligations. Due to the default it was subsequently resolved that the DOCA be terminated and the Company be placed into liquidation.

After the Company was put into liquidation, Yeo and Rambaldi (now liquidators of the Company), commenced proceedings against the DCT to recover the Payments as unfair preferences pursuant to s588FA of the Act.

The DCT relied on ss588FE(2B)(d) of the Act to argue that the Payments were not voidable unfair preference transactions because they were made whilst the Company was subject to a DOCA, and entered into on behalf of the Company, under the authority of the Deed Administrators. 

Sub-section S588FE(2B)

Ss588FE(2B) was inserted into the Act by virtue of the Corporations Amendment (Insolvency) Act 2007 (Cth) and provides that an unfair preference transaction is voidable if it is entered into during the six month relation back period, by a company which is subject to a DOCA immediately before it is wound up, and (pursuant to ss588FE(2B)(d)) the transaction was not entered into, or done, on behalf of the company by, or under the authority of either the administrator of the DOCA, or the administrator of the company. 

The Applicants’ submissions

In support of the unfair preference claim, and in refuting the s588FE(2B)(d) argument, the Applicants submitted as follows:

  • The director of the Company made the Payments  pursuant to his authority as director, derived from the Act and from the Company’s constitution; 
  • The DOCA did not give the Deed Administrators authority to make the Payments and they did not make the Payments, or in fact know about the Payments until after they were made;
  • Just because the DOCA was executed by the Deed Administrators on behalf of the Company, and the DOCA contained a covenant by the Company requiring it to comply with its taxation obligations, did not mean that payments were made ‘by or under the authority of’ the Deed Administrators. The authority to make the covenant should be distinguished from the authority to make good on that covenant;
  • Construction of ss588FE(2B)(d) should be on its plain meaning, and alternatively, extrinsic material (specifically the Explanatory Memorandum of the Corporations Amendment (Insolvency) Act 2007) supports a finding that the intention of the legislature in drafting the sub-section was that it was to apply when the control of a company under a DOCA is returned to a director. That is, there was a propensity for abuse of directors who entered into a DOCA, to enter into uncommercial transactions whilst the company was the subject of a DOCA and it was for that reason ss588FE (2B)(d) was inserted into the Act. It should only be when the Deed Administrators explicitly authorise a payment, that that payment should be excluded from the unfair preference scheme. 

The Respondent’s submissions

In support of the argument that the Payments were made ‘by or under authority’ of the Deed Administrators, the DCT submitted as follows:  

  • The DOCA required the Company to comply with its taxation obligations, therefore the making of the Payments were obligatory under the terms of the DOCA and because the Company expressly made the covenants to comply with its taxation obligations, this covenant was made through Yeo and Rambaldi as agents of the Company;
  • Because Yeo and Rambaldi were aware of the terms of the DOCA specifically addressing the Company’s duties to comply with its taxation obligations and that if the Company was to continue to trade (as anticipated by the DOCA) the Company was certainly going to accrue taxation liabilities, the Payments were made under Yeo and Rambaldi’s authority;
  • Extrinsic material, namely Reports of the Legal Committee of the Companies and Markets Advisory Committee (‘CAMAC’), supported an interpretation of ss588FE(2B)(d)(i) whereby transactions authorised by a DOCA, and carried out as a matter of course by a director who has been given day-to-day control of a company pursuant to a DOCA, should not be voidable unfair preferences. In practice, this interpretation would maximise the chances of a company or its business continuing in existence, which is consistent with the objects of Pt 5.3A of the Act. 

The Court’s findings 

The Court considered the Explanatory Memorandum and CAMAC reports raised by the parties but ultimately declined to rely on extrinsic material to inform its interpretation of ss588FE(2B)(d) in circumstances where the words of the provision were not unclear. Middleton J held at [62] that extrinsic material is secondary. Rather, it was said that the task of the Court is “to construe the words employed by Parliament in the context to which they have been used”, thereby placing emphasis on consideration of the words of the statute itself to determine its meaning.  

Further, any policy considerations should be viewed in context and in conjunction with the terms of the DOCA itself. The Court held, at [56], that “it cannot be the position that all transactions carried out (even by a director if permitted) during the operation of the DOCA are carried out by or under the authority of the Deed Administrators” especially in circumstances where a DOCA requires transactions to be entered into on behalf of the Company by the director with no involvement of the Deed Administrators.

The Court applied a plain meaning interpretation of the phrase ‘by, or under the authority of’, and when having regard to the circumstances of the case before it and the terms of the DOCA, the Court found that the Payments were not made under the authority of the Deed Administrators. Rather, they were made by the director and it was the director who had the authority to make the Payments on behalf of the Company. 

In reaching this conclusion, the Court considered the Company’s constitution which vested authority in the director to exercise all powers of the Company; these powers are also contained in the Act. Further, whilst the director’s powers are suspended once administrators are appointed they were revived on the entering of the DOCA and the DOCA gave the director explicit managerial power and control. In contrast, the powers of the Deed Administrators were provided for solely in the terms of the DOCA and did not confer on them any day-to-day managerial or control powers, or limit the authority of the director. Rather, the Payments were made during the day-to-day running of the Company by the director who was expressly authorised by the DOCA to manage it. 

The Company and its director were obligated to comply with taxation laws and provided covenants in the DOCA to that effect. The Court found that in meeting these obligations, it was the Company who made the Payments, as it had covenanted to do and importantly, the Deed Administrators’ consent was not required. 

The Court ultimately held that the responsibility for making the Payments was on the Company and its director. The director made the Payments on behalf of the Company, as authorised by the Company’s constitution and the DOCA itself and not under the authority of the Deed Administrators. Therefore the payments were recoverable from DCT as unfair preferences under s588FA of the Act.

Takeaways

  • Creditors who have been subject to unfair preference claims in circumstances where a company was subject of a DOCA immediately preceding liquidation, may argue that any allegedly impugned payments were made by, or on the authority of the Administrators so as to avoid the unfair preference framework. 
  • For such an argument to be successful, it seems that the DOCA itself should give explicit authorities to an Administrator, and limit the authority of the director, especially in terms of management of the company.  
  • When the DOCA itself contemplates and requires transactions be entered into on behalf of the Company by a director with no involvement of the Deed Administrators, a Court may find that those transactions are voidable unfair preferences. 
  • Each matter, and DOCA, must be determined on a case by case basis.

Fiona Reynolds

Partner

P: 02 8257 5751

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Lucy Tindal

Senior Associate

P: 02 8257 5714

Email Lucy