04 Aug 2016

Short cuts make for even longer delays

by Svetlana Zarucki

Any legislation or action which seeks to alter the pari passu distribution of an insolvent company's property amongst its creditors needs to be very carefully and comprehensively considered, and have regard to accrued rights and interests.

The insolvency of Alan Bond's Bell Group empire heralded the commencement of Australia's longest-running piece of litigation, brought by the liquidator of the Bell Group companies against a number of domestic and international lenders.  That litigation was notorious for the length of the hearing (404 sitting days), the magnum opus which was the first instance judgment of Justice Owen of the Supreme Court of Western Australia (2,643 pages) and the quantum involved (about $1.5 billion).

Despite the liquidator's success in the litigation and on appeal, and the subsequent resolution of a potential High Court appeal threat, the road ahead in this complex liquidation was never going to be easy.  The liquidator's recovery of $1.7 billion for distribution to the Bell Group creditors simply prompted a fresh round of complex litigation by parties with competing interests in the distribution of those funds.

Having funded the liquidator's recovery proceedings for such a lengthy period, the State of Western Australia sought to forestall another generation of litigation by the introduction of the Bell Group Companies (Finalisation of Matters and Distribution of Proceeds) Act 2015 (Bell Group Act).  That legislation was intended to expedite and simplify, under the supervision and dominion of the State, the assessment of claims and the distribution of proceeds.  It was a novel concept but proved to be flawed. 

What the Bell Group Act attempted to achieve

The Bell Group Act set out a legislative framework for the dissolution of certain companies in the Bell Group and the administration of their property.  In short, the Bell Group Act provided for the State to collect, pool and vest the property of each WA Bell Company in a State authority.  The Bell Group Act then provided for the State to determine in its absolute discretion who would be paid and the amount it would receive from the pooled property.  To the extent that the State chose not to distribute the pooled property of the WA Bell companies, the surplus vested in the State. 

The Bell Group Act imposed strict penalties, in the forms of a fine of $200,000, imprisonment for five years or both, against any person who sought to directly or indirectly defeat, avoid, prevent or impede the operation of the Bell Group Act.

The ramifications of the Bell Group Act were obvious in that it sought to impact on the accrued rights of parties and, if valid, would set a precedent which other States could seek to follow. 

Shortly after the enactment of the Bell Group Act, three constitutional challenges were filed in the High Court of Australia.

The High Court allows the challenges to the Bell Group Act

The High Court was asked to consider whether the Bell Group Act or certain provisions of that Act were invalid by operation of section 109 of the Constitution because of inconsistency with one or more provisions of the:

  • Income Tax Assessment Act 1936 (Cth) and the Taxation Administration Act 1953 (Cth) (collectively, the Tax Acts); 
  • Corporations Act 2001 (Cth); and 
  • section 39(2) of the Judiciary Act 1903 (Cth). 

On 16 May 2016, the High Court unanimously held that the Bell Group Act was invalid in its entirety by reason of the operation of section 109 of the Constitution and the inconsistencies between provisions of the Bell Group Act and Tax Acts (Bell Group NV (in Liquidation) v Western Australia; WA Glendinning & Associates Pty Ltd v Western Australia; Maranoa Transport Pty Ltd (in Liquidation) v Western Australia [2016] HCA 21). 

The legal operation and practical effect of the Tax Acts mean that the production of a notice of assessment is conclusive evidence of the due making of the assessment of a taxation liability, and that the amount and all the particulars of the assessment are correct.  The rights of the Commonwealth and the Commissioner of Taxation to rely on an assessment in relation to the existence, quantification, enforceability and recovery of a taxation liability accrued under a law of the Commonwealth that existed before the Bell Group Act came into operation. 

Under the Bell Group Act, the State authority was provided with an absolute discretion to determine the existence of a liability of a WA Bell Company to the Commissioner of Taxation.  The State authority also had an absolute discretion as to the quantification of any liability of a WA Bell Company to the Commissioner of Taxation.

As such, the Bell Group Act purported to create a scheme under which Commonwealth tax debts were stripped of the characteristics ascribed to them by the Tax Acts. That alteration, impairment or detraction from the Tax Acts were so significant as to engage section 109 of the Constitution.  While the High Court considered whether certain provisions of the Bell Group Act could be severed and read down, it found that the offending provisions of the Bell Group Act were so fundamental to the Act's scheme, and so bound up with its remaining provisions, that severance was not possible. 

The High Court did not consider it necessary to consider the remaining challenges to the validity of the Bell Group Act.   As such, the High Court findings were ultimately relatively confined.  However, they may have parallel application to other accrued rights, for example, those arising under the Corporations Act 2001 (Cth). Subject to very clear legislative exceptions, a fundamental principle of insolvency law is the equitable distribution of an insolvent company's property amongst its creditors pro rata having regard to the quantum of their claims. 

Lessons from the Bell Group litigation for long-running liquidations

The State of Western Australia's response to the long-running and costly Bell Group liquidation was novel and interesting.  However, two clear lessons flow:

  • any legislation or action which seeks to alter the pari passu distribution of an insolvent company's property amongst its creditors needs to be very carefully and comprehensively considered, and have regard to accrued rights and interests; and
  • long-running liquidations are challenging, costly and onerous for all stakeholders.  There is no easy or quick fix solution in those regimes.  Schemes of arrangement have been implemented in both the HIH Insurance and Lehman Brothers liquidations to provide a framework for the resolution of particularly thorny creditor claims which would otherwise protract the winding up.  It is safe to assume that schemes of arrangement are being considered in relation to the Bell Group liquidation, although even then the solution is inevitably bound to be challenging.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.