Chapter 11 - Tough choices confront trade creditors when a retailer faces bankruptcy

Dan A Lowenthal. Partner and specialist attorney,
Patterson Belknap, Webb & Tyler LLP.

Following the inquiry into the performance of ASIC, the Senate Economics Reference Committee released its report in June 2014. Among other things the committee recommended that government instigate a review of current insolvency laws.

Recommendation 61 of the Senate report called for the review to look at the potential for incorporating elements of America's Chapter 11 bankruptcy reorganisation provisions down under.

The government's new assistant treasurer Josh Frydenberg told SiN through a spokesman this week that those recommendations will be incorporated into the government's overall response to the findings of the Murray Financial System Inquiry, which is currently subject to a period of consultation with submissions closing on March 31, 2015.

Regardless of when we learn what recommendations have been accepted, talk of applying America's Chapter 11 reconstruction provisions to Australia's insolvency regime is recurrent and will likely persist as long as flaws in the existing legislation periodically throw up problematic outcomes.

Every shockingly expensive insolvency that seems to provide no return for creditors whilst compensating appointees handsomely provides Chapter 11's proponents with another justification for calls to embrace the American way which, in the end, largely sidelines insolvency practitioners and puts lawyers in the box seat.

In the interests of sustaining debate around significant areas of insolvency reform, SiN presents the following piece by New York-based bankruptcy attorney Daniel A. Lowenthal, reprinted with permission from the October 2014 issue of the Journal of Corporate Renewal, published by the Turnaround Management Association.

Bytecan can't - telco servicer installs VA

ESTABLISHED telco services outfit Bytecan has appointed Steve Nicols of Nicols + Brien as voluntary administrator (VA) of the company, putting the immediate future of around 120 staff potentially in doubt.

SiN has learned that the company was until recently quite profitable and that a number of clients and other players in the telco and communications services space are examining various assets. Majority owned by interests associated with Wayne and Lea Kitchener of Como in Sydney's south, Bytecan was established in 1990. A first meeting of creditors is to be held in Sydney on Friday, February 6, 2015.   

Boasting revenue of about $20 million per annum, Bytecan apparently owes around $1.6 million to the Australian Tax Office (ATO). The company provides maintenance, testing and other technical communications services and expertise to telcos and has worked with all the majors. Another victim of the NBN perhaps?

Email SiN

Condon wins property sale proceeds despite court's refusal to brand trust a sham

More red carpet than the Academy Awards after a massacre.
The Robson Road Kenthurst property.
Photo: LJ Hooker

TRUSTEE in bankruptcy Schon Condon has won the right to almost a million dollars in property sale proceeds after the Federal Court ruled that bankrupt Colleen Anne Lewis (Rayhill) is a creditor of a discretionary trust, despite the trust's current trustee arguing she has no interest.

The judgement of Justice Jayne Jagot can be read in full at: Condon (Trustee), in the matter of Colleen Rayhill (Bankrupt) v Truthful Endeavour Pty Ltd. It represents a potentially encouraging outcome for trustees in bankruptcy and creditors who find themselves frustrated by the courts' general reluctance to rule that a trust is a sham or was created specifically to defeat creditors.

The ruling also suggests that submissions in separate proceedings that Condon has been harassing the Lewis family, also known as the Rayhill family, were given short shrift by Justice Jagot.

At the heart of Condon's application was the view that he, as trustee in bankruptcy of the estate of Colleen Lewis (Rayhill), was entitled to funds he alleged she used to buy a sprawling property on Robson Road, Kenthurst in Sydney's north west which was later sold.

Robson Road Kenthurst.
Photo: LJ Hooker

Purchased in 2001 for $1.7 million, the property was an asset of the Kenthurst Investment Trust. Condon has been arguing that payments the bankrupt made in relation to the Robson Road mansion substantially exceeded the eventual sale price and that the excess should pass to himself as trustee in bankruptcy.

The Kenthurst Investment Trust's current trustee is Truthful Endeavour, the respondent in these proceedings and a company connected to Louise Lewis, one of the bankrupt's daughters.  Previously, the bankrupt had been trustee of the Kenthurst Investment Trust.

Truthful Endeavour rejected Condon's claim that the bankrupt had made the payments, arguing that they were made by three companies and if there was a creditor to the trust it is the companies and not Colleen Lewis.

Further, Truthful Endeavour argued that Condon was estopped from bringing the proceedings, given earlier hearings in the Supreme Court.

Whilst declining to rule that the trust was a sham, Justice Jagot rejected the respondent's arguments, finding that Colleen Lewis is a creditor of the trust, that Condon was not estopped and that the bankrupt's entitlement to a portion of the Robson Road sale proceeds therefore vests with Condon.

The judge ordered that the proceeds be transferred to Condon and that Truthful Endeavour pay his costs. Calls to the respondent's solicitor Bruce Dennis seeking to determine if his client would appeal were not returned.

Email SiN

Old insolvency guys just go sailing

Max Prentice at the helm of Ticket of Leave
Photo: Beth Morley @ www.sportssailingphotography.com 

WHEN not engineering commercial outcomes from insolvent scenarios, BPS Recovery co-founder Max Prentice can often be found aboard his beloved Beneteau 40.7, Ticket of Leave, carousing, competing and, on more than the odd occasion, winning.

Most recently, Prentice and an unlikely crew stunned the rest of the 39-strong fleet to take two line honours wins and a Division One non-spinnaker victory in the 23rd annual Sydney Beneteau Cup.

With characteristic modesty Prentice said: "We found the courses fair and we blitzed the field", the "we" being Prentice and his crew, none of whom were under 60 years of age and which included Meyer Knight's Jon Meyer on mainsail, who turns 70 on December 30.

"We have a lot of old farts on board, but that worked pretty well," Prentice added as the post-race celebrations kicked off.

What do they say about old age and treachery? Clearly a winning, if malodorous combination.

Email SiN

Liquidators agree to vacate examinations while ATO audits Sarkis Nassif and Holdmark Group

Sarkis Nassif with former
Governor of NSW Marie Bashir
Photo: Holdmark Property Group

PROPERTY developer Sarkis Nassif has succeeded in postponing a grilling in the NSW Supreme Court after reaching agreement with liquidators to vacate a planned public examination.

Consent orders to vacate five days of examinations into the affairs of 82 - 84 Belmore Street Pty Ltd were made last week, despite Justice Ashley Black previously rejecting an application by Nassif and others to have the examination summons stayed or set aside.

Cor Cordis partners Ozem Kassem and Daniel Juratowich allege the company sold properties to related parties at depressed values and neglected to pay sales tax on apartment sales valued at $173 million.

Sarkis Nassif responded to SiN's enquiries through his solicitor Marc Ryckmans of Somerset Ryckmans.

"Mr Nassif completely rejects the claims made by the liquidators," Ryckmans said.

"We note that there are proceedings currently on foot in which my clients have traversed by way of denial each of the allegations raised by the liquidators of 82-84 Belmore Street Pty Ltd (in Liquidation).

"In particular the liquidators have alleged that certain units were transferred to related entities at undervalue. This particular allegation is strenuously rejected and my clients assert that all units were transferred at values determined by independent expert valuers."

The issue of sales tax is pertinent because the Australian Tax Office (ATO) - potentially the only significant creditor of the company apart from the liquidators - is in the middle of an extensive audit of Nassif and his Holdmark Property Group.

"So far as concerns the ATO, Mr Nassif and his group of companies is a substantial developer. Its current advisers are presently working with the Australian Taxation Office and those discussions remain confidential," Ryckmans said.

Initially Kassem and Juratowitch opposed the set aside application, arguing that another opportunity to hold the examinations might not present itself before April 2015 when the three year statute of limitations on challenging transactions on the basis that they may be uncommercial expires.

But a statement from the liquidators' lawyer indicates that compliance with notices to produce documents - combined with an unspecified "commercial settlement" between the liquidators and Nassif - was sufficient for them to back off.

Ella Rouge Beauty founder pleads guilty to misappropriating $2.6 million

Ella Rouge founder Ali Hammoud

Ali Hammoud, the founder of Ella Rouge Beauty Pty Ltd, which operates the NSW chain of ‘Ella Rouge Beauty’ salons, has pleaded guilty to one count of dishonestly misusing his position as a director of ERB International Pty Ltd (ERB) and one count of making a false statement to obtain a financial advantage.

In a statement issued today, the corporate regulator alleged that between 9 August 2007 and 4 March 2008, Mr Hammoud used his position as a director of ERB dishonestly with the intention of gaining a financial advantage for himself, namely by misappropriating $2,609,831.91 from the company for his own use.

ASIC also alleged that between 8 August 2003 and 26 June 2007, Mr Hammoud, with the intent to gain a financial advantage, recklessly made false statements in workers compensation insurance forms by understating the estimated and actual wages of the company. It is estimated that ERB obtained a financial advantage of approximately $338,709.25 as a result of the false statements.

Mr Hammoud was committed to the Sydney District Court where the matter will be mentioned on 5 December 2014.

Albarran and Pleash repay mystery $16k

ONE consequence of Justice Ashley Black's recent judgement in the matter of Joe & Joe Developments has been the repayment of a curious and unexplained invoice that Joe & Joe's deed administrator Richard Albarran authorised be paid on June 16, 2009.

The invoice came from Shalton Consulting, an entity associated with Dinimus Capital's principal and founder, Oliver Trajcevski. Hall Chadwick partner Blair Pleash told a recent court hearing that his colleague Albarran authorised payment of the invoice in the sum of $16,855.91.

The hearing was a consequence of one of Joe & Joe's shareholders suing Pleash and Albarran for allegedly handling the company's affairs in a manner prejudicial to the interests of its members and shareholders. In Justice Black's judgement, the Shalton payment came in for special attention.

"In my view, a proper basis has been established for an order that Messrs Albarran and Pleash should repay the amount of the payment to Shalton Investments to the Company (Joe & Joe), leaving them to any rights that they may in turn have against Shalton Investments."

What is interesting about the judge's order is the reference to Shalton Investments. According to the deed administrator's cash book, the payment was made to Shalton Consulting.