A new priority of the Commonwealth in an insolvency?

The move generally in insolvency law, and under Australia’s Insolvency Law Reform Act 2016 (ILRA), has been to give creditors greater ‘say’ in an insolvency, including by having a statutory right to request information, subject to restrictions in respect of irrelevant, vexatious or other such requests. This right of creditors is provided for in section s 70-40 and related sections of Schedules 2.[1]

Right of the Commonwealth to request information –  s 70-55

The ILRA seems to have created a new category of creditor, the Commonwealth of Australia, with a right to ask for information without the restrictions imposed under s 70-40. While the Commonwealth is an ordinary creditor in any insolvency, the ILRA has given it power to request information once a threshold exists of there being employee claims, for which the Commonwealth has a statutory obligation to fund, under the Fair Entitlements Guarantee Act 2012 (FEG).

The ILRA introduced s 70-55, which allows the Commonwealth to make a request of a liquidator or trustee for information or documents. The section appears to be predicated on a ‘FEG claim’ having been made by unpaid employees or being likely, for which employees the Commonwealth can be required to pay.

Oddly, although the Commonwealth is likely a creditor in that circumstance, subrogated, section 70-55 is largely unlimited in its scope, as to what information and documents the Commonwealth can request, in contrast to s 70-40, which imposes restrictions on what information creditors can have.

That interpretation of s 70-55 comes from a decision of Justice Ashley Black in 1st Fleet Pty Ltd, [2019] NSWSC 6, involving a liquidation dating back to 2012.

1st Fleet

In that case, the Commonwealth, in essence, FEG, made a request of liquidators for their WIP in relation to their remuneration. The request was made under s 70-55, among others.

Without the Judge suggesting anything about the liquidators’ remuneration, he said it was ‘hardly surprising’ that the Commonwealth was inquiring given that the remuneration exceeded $4.4m over the period of 7 years.

It had been approved by the other Commonwealth creditor in the liquidation, the ATO. The ATO’s responsibility, or otherwise, for the accumulation by the company of $9.4m in unpaid taxes is not explained.

The broad scope of s 70-55 is revealed by the judgment. The Commonwealth’s request need not be confined to information about the employees’ claims, as might appear. Nor does the section cease to be available once the Commonwealth becomes a creditor, with its rights as a creditor under s 70-40 then being superfluous in these sorts of circumstances.

As Justice Black acknowledges, the Commonwealth might use the section for de facto pre-trial discovery.

Although the section is clear in its wording, and the Explanatory Memorandum cannot assist, the EM adds little to the interpretation. No doubt s 70-55 was the subject of a specific request by the Commonwealth when the law was being drafted, the policy details of which are not explained.

A new category of creditor?

Section 70-55 does create a new category of creditor, one which is armed with more information than is available to an ordinary creditor. There is no obligation of the Commonwealth to share that information with other creditors. Its decision making at a meeting of creditor is more informed.

The Commonwealth long ago removed its dividend priority in insolvencies, through the ATO; this has some appearance of restoring the Commonwealth’s rights as a creditor, beyond those of ordinary creditors.

Conceivably, the Commonwealth could ask for information that would not be available to it as a creditor if it made the request under s 70-45. One can’t imagine the Commonwealth being vexatious in its claims, or seeking irrelevant or confidential information, or information that would put the estate to undue extra expense.

Model litigant constraints

One constraint is that the Commonwealth is bound by its model litigant obligations, imposed likewise on its private lawyers, under the Legal Services Directions 2017. They call for broad consideration of whether litigation is necessary, by ‘endeavouring to avoid, prevent and limit the scope of legal proceedings wherever possible, including by giving consideration in all cases to alternative dispute resolution …’. A like obligation applies to a liquidator, in avoiding unnecessary litigation that might deplete creditors’ funds. References are made to the discussions between the parties in the judgment.

It may be that the model litigant requirements were one factor in the drafting of s 70-55, with an expectation that the Commonwealth would only make ‘reasonable’ requests.

Intended?

In any event, if that is what parliament intended, so be it. It would apply in both personal and corporate insolvency. I have nevertheless alerted the relevant government agencies to this broad interpretation of s 70-55 lest it be an unintended consequence of the drafting.

See also the report of this judgment by one of the Australian industry bodies, ARITA.

Comments to me are welcome

 

 

[1] To the Bankruptcy Act 1966 and the Corporations Act 2001

 

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