10 October 2013
In this issue:
- Liquidator applications under section 468(1) Corporations Act considered
- The elements that need to be satisfied to establish a void disposition under that section
- Circumstances where a court may be willing to exercise its discretion to validate a disposition
- The decision in Conlon v Pratt (2013) FCA 19, 17/1/2013 reviewed
In the recent case Conlon v Pratt the Federal Court has provided a cautionary tale, particularly for those who propose entering into property dealings with company directors knowing or suspecting that the directors’ company is in the process of being wound up by order of the court.
In such cases those who deal with directors will need to ensure that the property the subject of their dealing is personal property of the directors and not an asset of the company that only the liquidator is authorised to deal with.
Significance of section 468(1) Corporations Act
Before reviewing Conlon v Pratt it will be useful to reflect on the operation of section 468(1) Corporations Act being the section on which this case was based.
The objective of section 468(1) is to prevent the improper alienation of company property following commencement of winding up of a company. Under the section dispositions of property of a company made after the commencement of a court winding up are declared void, unless the disposition is an “exempt disposition,” for example a disposition made by or with the authority of the liquidator, or is a disposition validated by the court.
There are essentially four aspects of section 468(1):
- A disposition of company property
- The disposition occurred after the commencement of the company’s winding up by the court. The commencement of a court winding up is determined by section 513A Corporations Act
- The disposition is not an exempt disposition
- The court has not exercised its discretion under the section to validate the disposition
All of these elements arose for consideration in Conlon v Pratt.
The decision in Conlon v Pratt
On 25/1/2011, PB Enterprises (WA) Pty Ltd (“PB Enterprises”) commenced to be wound up by order of the court made on that date. Following the commencement of winding up the directors of PB Enterprises negotiated the sale of a truck to Mr Pratt for $66,000. Mr Pratt was informed that the directors were involved in litigation with the liquidator of their company and the truck was owned by the directors personally. He was further told that the directors needed to sell the truck to finance the legal action against the liquidator.
During negotiations Mr Pratt learned that the truck was registered in the name of PB Enterprises, however he was assured that registration in the company’s name was for tax purposes only, and in fact the truck was owned by the directors personally.
In due course the purchase price was paid and the registration transferred to a company nominated by Mr Pratt.
The liquidator’s claim
The liquidator applied to the court for a declaration that the sale of the company’s truck after commencement of winding up was void pursuant to section 468(1), Corporations Act. The liquidator informed the court that at all times the truck was the property of PB Enterprises, and argued that Mr Pratt knew or ought to have known that the disposition related to company property. The liquidator sought an order of the court authorising seizure of the truck.
Arguments advanced by Mr Pratt
Mr Pratt argued that at all times he acted honestly, reasonably and cautiously and as such should not be required to part with the truck having paid for it. Mr Pratt requested the court to exercise its discretion under section 468(1) to validate the sale.
The court’s decision
The court acknowledged that Mr Pratt had at all times acted honestly. However, in the opinion of the court the circumstances of the negotiations revealed sufficient anomalies to cause him to conduct his own enquiries, rather than simply relying on assertions as to ownership of the truck made during the course of negotiations.
Once Mr Pratt was made aware that the directors were in dispute with the liquidator, and that the truck was registered in the name of the company the court was of the opinion that he was on notice to at least make further enquiries as to the true ownership of the truck. Moreover the court was unwilling to accept Mr Pratt’s contention that it was reasonable for him to rely on a distinction between legal ownership and ownership “for tax purposes.” The court concluded:
“It seems that Mr Pratt, while being honest, has been far too trustworthy in this situation….to some extent, regrettably, Mr Pratt was the author of his own misfortune…..It would not be in the interests of creditors to decline to declare the transaction void. The liquidator is entitled to the relief sought.”
As a consequence the court found that the disposition of the truck was void and ordered that the truck be delivered into the custody of the liquidator or his nominated agent.
An improper alienation of company property following the commencement of winding up will be investigated by the liquidator and is likely to be set aside under section 468(1). Moreover, notwithstanding the financial hardship that may flow from the operation of section 468(1), the courts have consistently revealed an unwillingness to validate such dispositions where such validation would be to the detriment of creditors in the winding up.
This case provides a useful reminder of the circumstances that may lead to the effective use of the section, and the consequences for those parties caught by its operation.
As a final note, in the course of its decision the court made reference to police enquiries into the circumstances surrounding the sale of the truck. Ultimately recovery by Mr Pratt may depend on such proceedings against those in receipt of the purchase price monies.