Are you an Incorporated Association? A Loophole means Liquidators Lose Out

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A surprising and quite possibly unintended loophole has come to light in a recent Supreme Court decision, confirming that a liquidator, in winding up an incorporated association, does not have the same powers to recover unfair preference payments to creditors and other voidable transactions as are provided for in the winding up of companies under the Corporations Act 2001 (Cth).

In Robson & Ors v Commissioner of Taxation [2015] QSC 76 (Robson) the Court held that Part 5.7B of the Corporations Act is not applicable to the winding up of incorporated associations under the Associations Incorporation Act 1981 (Qld).

Voidable transactions under the Corporations Act
When a company is wound up, certain company transactions, such as unfair preference payments, uncommercial transactions, unfair loans to the company and unreasonable director-related transactions, may be voidable against the liquidator. The provisions of Part 5.7B of the Corporations Act are frequently utilised by liquidators of companies to bring legal proceedings for the recovery of such payments and to set aside such transactions.

Winding up Incorporated Associations
By contrast, incorporated associations are not primarily governed by the Corporations Act. Rather they fall within the scope of the Associations Incorporation Act 1981 (Qld) which is State, rather than Federal, legislation. Section 91 of the AIA expressly picks up the provisions of Part 5.7 of the Corporations Act, which are applied (through the complicated application of the Constitution and other pieces of State and Federal legislation, which we won’t go into here) in the winding up of incorporated associations as if they were laws of the State. Part 5.7B is not specifically mentioned.

The Robson case
The major issue for determination in Robson was whether the juicy provisions of Part 5.7B of the Corporations Act were also picked up by the AIA, so liquidators of incorporated associations could happily recover payments and set aside transactions (for the benefit of all the creditors, of course).

In Robson, liquidators appointed to an incorporated association commenced proceedings against the Tax Office to recover preference payments. The Tax Office argued that Part 5.7B of the Corporations Act did not apply in the winding up of the incorporated association with the result that the liquidators claim against it should fail. The liquidators argued that it did and that sections 582 and 583 of the Corporations Act (which are contained within Part 5.7) allowed the liquidators to exercise any powers in the case of incorporated associations as they could exercise in the winding up of companies (including those powers conferred under Part 5.7B).

The Court, in a very analytical judgment, after considering the various legislative provisions and applying the principles of statutory interpretation, concluded that:

  1. The source of a liquidator’s power to recover payments and set aside voidable transactions lies only in the provisions of Part 5.7B, and not in either of sections 582 or 583 of the Corporations Act;
  2. Properly construed, the AIA, does not pick up and apply Part 5.7B of the Corporations Act to the winding up of incorporated associations;
  3. While the effect of the current statutory provisions may have been unintended, and possibly a mistake, there was not sufficient evidence before the Court that the legislature intended Part 5.7B to apply in the winding up of incorporated associations to ignore the operation of the text of the legislation;
  4. If there is an error in the operation of the AIA, it was up to parliament to correct it, not the Courts.

Change on the horizon?
The loophole this case has exposed means that there is a vast discrepancy in the powers liquidators may exercise for the benefit of creditors of companies, as opposed to incorporated associations. There is no apparent reason for this discrepancy and, in our view, liquidators should not be prevented from recovering unfair preferences and other voidable transactions for the benefit of creditors of incorporated associations.

Given the above, it is likely that parliament will, in the near future, amend the relevant legislation to close this loophole. Until that occurs, however, liquidators will have no power to, and be unable to, pursue what may otherwise be voidable transactions when appointed to an incorporated association.

Should you require further information, or more detailed advice on any of the above matters, please contact our experienced Toowoomba solicitors at Murdoch Lawyers Craig Shepherd or Anneliese Seymour. 

 

Prepared by Craig Shepherd and Anneliese Seymour.

This publication has been carefully prepared, but it has been written in general terms and should be viewed as broad guidance only. It does not purport to be comprehensive or to render advice. No one should rely on the information contained in this publication without first obtaining professional advice relevant to their own specific situation.

 

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