Adamopoulos v Olympic Airways SA

REASONS FOR JUDGMENT Jekos Holdings Pty Ltd (Jekos) applies to wind up Australian Horticultural Finance Pty Ltd (AHF). AHF seeks an injunction restraining Jekos from further prosecuting its winding up application until the outcome of an appeal, presently before the Queensland Court of Appeal in proceedings between Jekos and other creditors of AHF, on the one side, and AHF, on the other. AHF also applies to set aside statutory demands issued by Jekos and those other creditors. Notwithstanding the relief claimed by AHF, I accept that the decisive question is whether I should stay, or more appropriately, adjourn Jekos' winding up application until the appeal proceedings are completed. Jekos seeks to wind up AHF, not on the basis of non-compliance with its statutory demand, which was served after it filed its winding up petition, but rather on two other bases: firstly, that AHF has not traded for a whole year (see s 461(c) the Corporations Law) and, secondly, that it is insolvent (see s 459A). The relationship between AHF and Jekos (and the other 10 persons who are respondents to AHF's application to set aside the statutory demands) arose in the context of a tax avoidance scheme based on a macadamia plantation operation. AHF's role was to provide finance to persons like Jekos, who were participants, as investors, in the scheme, on terms intended to produce tax and other benefits to those investors. The loans to be made by AHF to Jekos and others were to take the form of advances of the relevant loan amounts to the scheme representative for disbursement to the other organisations who were to be responsible for implementing the scheme. The scheme failed, apparently because of the lack of investor interests. The litigation in the Supreme Court took the form of an action by Jekos and the other 10 persons to recover from AHF pre-payments of interest made by each, to AHF, in respect of its participation in the scheme, as money paid on a consideration that wholly failed. AHF counter-claimed for the amounts it allegedly lent to each, for investment in the scheme. Dowsett J, in a reserved judgment, gave judgment for Jekos and the other applicants for a total of about $615,000 and dismissed AHF's counter-claim. Central to this litigation in the Supreme Court was AHF's contention that it had discharged its obligation to Jekos and each of the other plaintiffs to advance to the scheme representative the loan funds agreed to be made available by AHF on behalf of each. Dowsett J said: "Much of this case depends upon the significance of the defendant's participation in the 'round-robin' transactions. If there was an agreement between each of the plaintiffs and the defendant, it obliged the defendant to lend to the plaintiff in question the sum specified in the Deed of Loan signed by that plaintiff, by paying that sum to the Representative. The defendant claims that it discharged these obligations by engaging in the 'round-robin' transactions, but I do not agree. There is no sensible way in which it can be said that the 'round-robin' transactions amounted to payment of the principle sums to the Representative. Mr Normand made it clear that the transactions were designed to ensure that the amount of each cheque drawn upon an account was matched by a deposit to the same account. The various cheques were not intended or able to facilitate transfers of funds to the Representative. Neither the Representative nor any of the other companies which participated in the 'round-robin' acquired control over any funds. Ľ That the Representative chose to release the 'funds' does not mean that the effect of the cheques drawn on the defendant's account in favour of the Representative was any different. The cheques were not intended to effect the transfer of funds. They were never more than props in an elaborate facade. It is true that at the end of the day, Okari Plantations and Okari Management were owed money by the defendant and that none of the cheques had been dishonoured, but these results were also merely elements of the facade. Although the defendant had a significant sum derived from prepayment of interest, it had no prospect of repaying those debts. As to the fact that none of the cheques had been dishonoured, this was because none of the payees had sought to present them other than in a way which would not lead to payment. In the circumstances, it is impossible to say that the defendant performed its obligation to pay the principal sum to the Representative. In those circumstances, if there were enforceable agreements for loan, whether pursuant to the Deeds of Loan or otherwise, the defendant failed to advance the funds as required by those agreements. The plaintiffs were therefore entitled to terminate the agreements as they have done." His Honour also said: "As a matter of common understanding, what each plaintiff had contracted for was the advance of funds to the Representative. No funds were advanced, and in those circumstances, it is clear to me that the defendant did not discharge its obligations pursuant to the various agreements, nor does the defendant now offer to do so." It appears that his Honour did not regard the "round robin" as a sham, as between AHF and the other parties to the round robin transaction, because he inferred that each participant in the "round robin" accepted what was done as discharging their various obligations inter se (see p 26 of his Honour's reasons). However, his Honour concluded that, as between AHF and the applicants, AHF's role in the "round robin" could not be regarded as the performance by AHF of its obligation to each applicant to advance moneys to the representative for disbursement to the other scheme organisations. Contrary to my initial impression, at the moment the appeal does, I think, involve only a fairly narrow question of law as to whether AHF's role in the "round robin" was sufficient to amount to the performance of its obligations under the loan agreements with Jekos and the other plaintiffs to make the promised loan advances. It is common ground that AHF was set up as a single venture company, ie, solely for the purpose of acting as financier to persons who, like Jekos, decided to become involved in this tax avoidance scheme. While AHF has, in the past five years, once been deregistered for its failure to file returns, its inactivity needs to be balanced against the fact that it has sought to recoup from Jekos and others moneys allegedly due in respect of loans made by it for their benefit in connection with the scheme, that it has actively participated in the Supreme Court litigation, which involved fairly extensive interlocutory litigation, and that it is actively pursuing its appeal in those proceedings. Even if it could be said that AHF has not carried on business over the past five years, so that the Court's discretion to wind it up on the ground provided for by s 461(c) is enlivened, having regard to the fact that it was incorporated for this single venture and to its litigation activities that have arise out of that venture to which I have referred, there would still be a good discretionary argument that it should not be wound up pursuant to s 461(c). If that were the only ground upon which the petition were based, it would, in my opinion, be appropriate to grant an adjournment of the petition until conclusion of the appeal proceedings. It is also common ground that AHF is presently insolvent. However, if it wins its appeal, it appears that it may well become solvent. Moreover, success in the appeal will give it good reason to think that it can recover substantial moneys from other investors in the tax avoidance scheme, apart from Jekos and the other plaintiffs in the Supreme Court proceedings, or at least so it was submitted. AHF claims to have advanced what now amounts to in excess of $9M (with interest) to about 200 investors. It appears that, apart from the judgment debts the subject of the appeal proceedings, the only other significant indebtedness of AHF is, firstly, to the scheme manager and scheme plantation owner, companies associated with AHF: both have written off the debts owed by AHF and, consistently with that, appear not to have sought to pursue AHF for repayment, although the debts may not yet be statute barred; and, secondly, in the sum of about $1M in respect of a guarantee AHF gave to a person who appears to have sold to one of the scheme organisations some of the properties around which the scheme was structured. However, the evidence shows that while about three years ago, ie, at the time Jekos and the other plaintiffs commenced the proceedings in the Supreme Court, this person took some steps to recover from AHF the unpaid purchase price of $1M, there is nothing in the evidence before me to suggest that that person is now, or has for some years past, taken any action to pursue his claim for payment. It is arguable that, apart from the judgment debt the subject of the pending appeal, AHF may not be insolvent in a commercial sense, in view of the apparent lack of interest of its only other creditors in recovering the payments due to them. AHF's contention is that, if it were to be wound up now, that would result in its appeal, if well-founded, being rendered nugatory. Jekos' primary contention is that AHF is really seeking a stay from this Court of proceedings before the Court of Appeal to which it is not entitled: as a successful plaintiff, there is no justification for keeping Jekos out of its moneys. AHF's response is to concede that it would be difficult for it to obtain a stay of the Supreme Court judgment notwithstanding the pendency of the appeal. AHF relies on cases in bankruptcy and refers to what is suggested to be the practical improbability of a liquidator pursuing the appeal if winding up is now ordered. It relies on Adamopoulos v Olympic Airways SA (1990) 95 ALR 525. There, a sequestration order was made, although an appeal was pending against the judgment the subject of the bankruptcy notice on which the petition was based. The Full Court said: "Ľ the governing principle is that a court in bankruptcy should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment founding the bankruptcy notice provided the appeal is based on genuine and arguable grounds." At 531, after referring to a comment by the trial judge to the effect that if a sequestration order was made, it would be a matter for the trustee in bankruptcy to determine whether to pursue the appeal and that one could be confident, if there was any substantial merit in the appeal, that it would be pursued, the Full Court said: "With respect, we do not think this view of the matter is consistent with authority. An appeal against the very judgment which founds the bankruptcy notice is a matter of significance requiring advertence to the possibility that the appeal may be justified. Nor is it realistic to entertain any confidence, in other than a special case, that a trustee in bankruptcy will decide to pursue an appeal with merit. The extremely experienced counsel who appeared for the respondents was unable to recall any instance where such a thing had happened. A much more likely consequence of a sequestration order is the abandonment of the appeal, whatever its merits, and its dismissal for non-prosecution." The Full Court therefore set aside the sequestration order and adjourned the hearing of the petition to allow the appeal to be determined. While there is an analogy, I do not think there is a complete analogy between the position of a natural person facing bankruptcy for non-payment of a judgment debt that he is appealing and a company facing winding up on the ground of insolvency brought about by its liability established by a judgment which it is appealing. The likely fate of a bankrupt's appeal will not necessarily befall a company's appeal, even if it is wound up before the appeal is heard, if those behind the company consider that it is worthwhile to put the liquidator in funds to prosecute the appeal that, in a case like the present, will turn the company from insolvency to solvency. A bankrupt, however, will often not be able to procure third party assistance to put his trustee in funds to continue an appeal instituted by the bankrupt as readily as a company in liquidation may be able to achieve that. There is reason to think that those behind this insolvent company, who have been able to ensure that AHF has run its case in the Supreme Court proceedings to date and who also have been able to arrange funds to offer as security for Jekos' costs of AHF's appeal, may be able to ensure that the appeal will not die if AHF is wound up. I do not, however, accept the applicant's submission that the position is equivalent to an unsuccessful defendant seeking to keep a successful plaintiff out of his moneys by a stay until appeal proceedings are over. AHF is, at the moment, plainly insolvent. Jekos acknowledges that. Jekos is not seeking to enforce its right to the payment determined by the judgment. It wishes to wind up this insolvent company in circumstances in which it cannot expect to receive any significant dividend. This is a case in which there is neither a prospect of a dividend from the liquidation of the debtor company nor uncertainty as to whether a liquidator's administration might turn up assets capable of producing a dividend: winding up would be appropriate in either situation. Jekos' true objective is, I think, to terminate the appeal proceedings. While there is no reason to doubt AHF's intention to prosecute its appeal expeditiously, Jekos and the other respondents to the appeal consider that it is necessary to go back to the trial judge, on his return from leave next month, to seek further findings of fact before the appeal is heard. The appeal for them is therefore a rather complicated and expensive exercise. They cannot expect to recover all the costs they will incur, if they defeat the appeal. In Ataxtin Pty Ltd v Gordon Pacific Developments Pty Ltd (1991) 29 FCR 564, Heerey J refused to adjourn a winding up petition based on a statutory demand for payment of a judgment debt, although there was an appeal pending against the judgments. But that was a case in which a winding up was likely to produce a real dividend to creditors, including the petitioner (see pp 574-575). So was the decision relied on by Heerey J, Re Amalgamated Properties of Rhodesia (1913) Ltd [1917] 2 Ch 115: the petition there was brought to prevent the appellant company continuing to dissipate its assets in order to ensure that the judgment creditor would be able to recoup in the winding up something of what was owed to it: see p 117. If a winding up application is brought for an improper purpose, it is clear that it will be an abuse of process: see L & D Audio Acoustics Pty Limited v Pioneer Electronic Australia Pty Ltd (1982) 7 ACLR 180 at 183. It was because the creditor brought its winding up petition in the Re Amalgamated Properties of Rhodesia case to recoup as much as possible of the moneys owed to it by means of an administration of the debtor company in insolvency that Sargant J rejected the appellant company's argument that the winding up petition should be dismissed as an abuse of process as having been brought not for the purpose of obtaining payment of moneys due by the company under the judgment the subject of the appeal but for the ulterior motive of stifling the company's appeal (see p 121). The petitioning creditors in Ataxtin, supra, and Re Amalgamated Properties of Rhodesia, supra, were both within the general rule that a creditor who cannot obtain payment is entitled to a winding up order as a right. For the reasons given, I do not think Jekos is entitled to rely on that rule.