Case Analysis About the Corporations Act 2001

The Corporations Act 2001 (Cth), that is the Corporations Act (the Act), is an act of the Commonwealth of Australia which provides rules relating corporations–such as company formation, company management, company finance, company insolvent–and other entities, for example, partnerships and managed investment schemes.

In the case New South Wales v Commonwealth (1990) 169 CLR 482 (“The Corporations Act Case”), the judge found the Commonwealth and Section 51(xx) of the Australian Constitution did not have rules about the formation of companies. After this judgment and a referral, the Act had been created and all Australian States have adopted the Act.

The Act has been modified for many times since it has been issued. The newest amendment is the Corporations Regulations 2001 (Statutory Rules 2001 No.193 as amended) and the Corporations (Change of Incorporation) Regulations 2002 (Statutory Rules 2002 No.168 as amended). [1]

The competing rights of Trustme Ltd and the liquidator to the stock and advise who is likely to succeed

Trustme Ltd is the trustee for debentures holders, for example the Fishtight Financial Ltd, and represents those debentures holders’ interests. The liquidator is appointed to wind up the insolvent corporation and represents the debtor’s interest. Because there is a floating charge over the debtor’s assets as the security for the debentures, the result is a zero sum game. If the floating charge is valid, the debentures holders and the trustee Trustme Ltd win and they could take away the debtor’s assets. If the floating charge is void, the liquidator could control the debtor’s all assets and distribute all assets to all creditors under complicated and long-time proceedings. So the validity of the floating charge is the key issue in this case.

Legislation

The floating charge is a form of security interests and has been described as one of equity’s most brilliant creations by Getzler & Payne (2006, p.11). The Act defines the floating charge in Section 9 as a charge that conferred a floating security when it was created but would become a fixed or specific charge eventually and stipulates several rules relating to the floating charge, such as Section 262, Section 566, Section 588 and so on.

Section 262 provides that several charges are required to be registered, including floating charge (Section 262(1) (a)). However, according to Section 262(11), a charge will not become invalid only because it has not been registered by lodging with the Australian Securities and Investment Commission (ASIC). The floating charge has been created on 10 July, 2009. The only flaw of this floating charge is that it has not been registered by the trustee. So the floating charge in this case is not void.

Section 566 and Section 588FJ both stipulates the effectiveness of the floating charge but under two different conditions. IF the floating charge was created before 23 June, 1993, the former may apply. In this case, the floating charge was created after 1993, which is 2009, and Section 588FJ may apply. Section 588FJ (1) stipulates two conditions as follows,

(a) a company is being wound up in insolvency; and

(b) the company created a floating charge on property of the company at a particular time that is at or after 23 June 1993 and:

(i) during the 6 months ending on the relation‑back day; or

(ii) after that day but on or before the day when the winding up began.

The company I-Sparts Ltd was under winding up, and the floating charge has been created on 10 July, 2009. The relation-back day is interpreted is the Section 9 which means the day when an order that the company or body be wound up was made or when the winding up is taken, which in this case is on or before 5 August, 2009. So this case should apply Section 588FJ.

Section 588FJ (2) provides the charge is void as against the company’s liquidator and some exceptions, such as a fresh advance and its interest, a new guarantee on behalf of or for the benefit of the company and some payable for the future supply of property or services ant its interest (Richard Hoskins, p497-498). However, this does not mean the charge is also void as against holders of later charges even though the latter have been registered, because according to Section 262 this floating charge is still valid.

Section 588FJ (3) further provides that Section 588FJ(2) does not apply if it is proved that the company was solvent immediately after that time. So if the debtor became insolvent immediately after the creation of the floating charge, the floating charge is still valid as against liquidator and the trustee could enjoy the assets. Otherwise, the liquidator won. The question is whether it is an immediately situation in this case?

The Act itself does not afford any suggestions about under what conditions 588FJ (c) applies for us. We should find answers from the case law.

Case law

In the case Cuthbertson v Thomas (1999) FCA 315, the primary judge held that the appellant should bear the burden of proof [2] . After considering the whole of the company’s resources, such as its credit resources (Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699), current and future debts (Bank of Australasia v Hall (1907) 4 CLR 1514) and the “cash flow test” rather than the “balance sheet test” (Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 17 ACSR 187), the primary judge regarded 588FJ(c) applied [3] . The appeal judge analyzed the debtor’s assets and debts and found the debtor’s debts exceeded its assets after the creation of the floating charge. So the appeal judge finally approved the primary judge’s conclusion [4] .

Conclusion

Back to this case, although there are only 25 days between the day of the creation of the charge and the day of the appointment of the liquidator, we could not judge whether the debtor had passed the “588FJ(3) test”. Besides, the trustee did not afford any evidence about this issue. So the floating charge would be void as against the liquidator and Section 588FJ (2) applies. The liquidator is likely to succeed.

Should ASIC have allowed registration of the charge on 1 September?

Legislation

According to Section 263(1) the company’s charge must be lodged in 45 days after the creation of the floating charge with the ASIC. But Section 266(4) stipulates if the court finds “the failure to lodge a notice in respect of a charge… (a) was accidental or due to inadvertence or some other sufficient cause;…may … by order, extend the (lodgment) period …”

In this case the creation of the charge is on 10 July, 2009 and the lodgment period expired on 25 August, 2009. Only if the company’s failure to lodge belonged to the three conditions mentioned above will the ASIC allow the registration of the charge after the court issue the relevant order.

Case law

There are several cases about this issue.

Several cases demonstrate the judge will not likely to extend the lodgment period if the company is under insolvent or liquidation [5] . But there is also opposite cases [6] . The judge will give the unsecured creditors’ interests much but not overriding weight [7] .

In National Australia Bank Ltd v Davis & Waddell (Vic) Pty Ltd (2003) 44 ACSR 296; 21 ACLC 1401; (2003) VSC 1, a mistake could be seen as accidental and if there is no proof about willful or deliberate contravention of the law, the judge could extend the lodgment period.

In Standard Chartered Finance Ltd v De Barros Nominees Pty Ltd (In Liq) (1988) 7 ACLC 15, the judge regards the notices were lodged shortly after the respective deadlines as inadvertent.

In Re Investa Properties Ltd (2001) 187 ALR 462, the judge thinks in deciding whether issue the relevant extension order or not the fact of solvency is also one of the relevant factors.

In Sanwa Australia Finance Ltd v Ground-Breakers Pty Ltd (in liq) (1991) 2 Qd R 456; (1990) 2 ACSR 692; 8 ACLC 852 (FC), the judge issued the order because the applicant registered the Notices as soon as the applicant was aware of the oversight.

In a recent and similar case Dempsey Resources Pty Ltd v Continental Coal Ltd (2009) FCA 1157, the judge granted the extension after considering the above four cases.

Conclusion

In this case, we found that the trustee had forgotten to check whether the debtor had registered the charge. Obviously it is inadvertent. And after recognizing its negligence, the trustee moved into action and registered the charge with ASIC. We can conclude that the court is likely to grant the extension and the ASIC should allow the registration of the charge on 1 September.

Fishtight Financial Ltd’s rights against I-Sparts Ltd, RS Kerr-Downs, and the Trustme Ltd.

The provisions about remedies to investors are contained in part 6D.3 of the Act. According to Section 728(1), it is prohibited that offering securities under a disclosure document if it contains a misleading or deceptive statement. After the reform of the Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 (Cth), there is no need to prove material in civil suits [8] . Where there is a breach of this prohibition, any person who suffers loss or damage may seek recovery from the issuer, its directors and the underwriter under Section 729(1)(Table, Items 1-4) and advisers and experts under Section 729(1)(Table, Item 5).

Against I-Sparts Ltd

As to the case law, lots of cases declare the scope of “misleading and deceptive conduct” is wide. For example, Fraser v NRMA Holdings Ltd (1995) 55 FCR 452; 127 ALR 543; 15 ACSR 590; (1995) ATPR 41-374; (1995) 13 ACLC 132 (FC) and ENT Pty Ltd v Sunraysia Television Ltd (2007) 61 ACSR 626; 25 ACLC 399; (2007) NSWSC 270). In this case these were completely inaccurate and constituted the deceptive statement.

Because the accounts which are forged to attract investors and not accurate, constituted an application form that accompanies the disclosure document, meaning I-Sparts had contravened subsection 728(1). Fishtight Financial Ltd had the right to obtain compensation for its loss or damage from I-Sparts Ltd under Section 729(1)(Table, Item 1), each director (including shadow directors) of I-Sparts Ltd under Section 729(1)(Table, Item 2).

Against RS Kerr-Downs

In Arthur Young & Co v WA Chip & Pulp Co Pty Ltd (1989) WAR 100, 13 ACLR 283, 7 ACLC 496, the judge held the auditor’s duty went beyond the need to examine the accounts of a company, ensure that they were vouched therefor and produce a true balance sheet for the benefit of shareholders. Clearly if fraud was uncovered, or even if there was a suspicion of it gained in the course of an audit, failure promptly to report it to the directors or senior management constituted negligence.

In this case the auditor, RS Kerr-Downs helped I-Sparts prepare the deceptive accounts and bring loss and damage to the debenture’s purchaser. Only with the RS Kerr-Downs’ consent could the deceptive statement be turned up in the annual accounts. Fishtight Financial Ltd. Fishtight Financial Ltd had the right to obtain compensation for its loss or damage from RS Kerr-Downs under Section 729(1)(Table, Item 5).

Against the Trustme Ltd

As the trustee for debentures holders, Trustme Ltd must obey the duties provided in the Section 283DA which includes “(b) exercising reasonable diligence to ascertain whether the borrower…has committed any breach of :…(2) the provisions of the trust deed or this Chapter;…”. However Trustme ltd forgot to check whether I-Sparts Ltd has registered the charge and contravened the Act. So Fishtight Financial Ltd. Fishtight Financial Ltd had the right to recover the amount of the loss or damage from Trustme Ltd under Section 283F.