Allied Express Transport Pty Ltd v Exalt Group Pty Ltd

Supreme Court of NSW|2020-05-14|Before: Rees J

These proceedings

On 29 October 2019, Mr and Ms Brenchley issued a statutory demand to Glenvine based on the judgment debt in the Building Defect case. Similar statutory demands were issued by the other plaintiffs in the Building Defect case, both to Glenvine and to Paragon Construction.
On 15 November 2019, Mr Van Beek sent a letter to the plaintiffs' solicitor referring to the recent correspondence concerning Paragon Construction and Glenvine, advising: "Unfortunately the companies are in no position to be able to pay these debts". On 11 February 2020, Mr and Ms Brenchley commenced these proceedings seeking to wind up Glenvine on the grounds of insolvency. Mr and Ms Brenchley also filed an originating process to wind up Paragon Construction.

Appointment of administrator

On 16 March 2020, Registrar Walton stood these proceedings over to 7 April 2020. On 2 April 2020, Mr Hodgkinson was contacted by officers of Glenvine. Glenvine's solicitors also spoke with the plaintiffs' solicitors as to how the judgment debt may best be resolved and various options were discussed. On 3 April 2020, the plaintiffs' solicitors wrote to Glenvine's solicitors noting that the matter was next before the court on 7 April 2020 but suggested that the proceedings be further adjourned to permit the parties sufficient time to properly consider the various options which had been discussed on 2 April 2020. The plaintiffs offered to enter into a Deed of Forbearance and to stay any enforcement action for three weeks if a charge was granted over the Darlinghurst property and caveats lodged to secure the plaintiffs' interest in the meantime.
On 5 April 2020, Mr Hodgkinson met with Mr and Mrs Van Beek. A DOCA proposal was prepared, which would return the management of Glenvine to Mr Van Beek. Under the proposed DOCA, Mrs Van Beek agreed to the orderly sale of the Darlinghurst property and, after payment of some $950,000 to secured creditor, Australia and New Zealand Banking Group Limited (ANZ), to establish a deed fund comprising cash at bank, monies owed by the lessee of the restaurant up to the date of administration and 30% of the net proceeds of sale. The deed fund was to be distributed to pay the administrator's remuneration and disbursements, then to admitted priority unsecured creditors, and then admitted ordinary unsecured creditors.
On 6 April 2020, Mr Hodgkinson was appointed as a voluntary administrator. Glenvine's solicitors also rejected the plaintiffs' request that a charge be granted over the Darlinghurst property together with entry into a Deed of Forbearance. On 7 April 2020, there was no appearance for Glenvine in these proceedings and Registrar Walton stood the matter over to 28 April 2020.
On 16 April 2020, the administrator's staff spent time with Mrs Van Beek, explaining proxies and proof of debt forms, and spent more than two hours preparing proof of debt forms and proxy forms. It is apparent that proof of debt forms were pre-populated by the administrator's staff marking an "X" in the relevant box in respect of proposed resolutions to be considered at a meeting of creditors, being to vote against appointment of a committee of inspection and to vote against removal of the administrator. In cross-examination, Mr Hodgkinson agreed that this was not appropriate.
From 16 to 20 April 2020, Mrs Van Beek gathered proofs of debt from various minor creditors of Glenvine, including the company's solicitors, tradespeople, accountant and tenants of the boarding house. Three tenants submitted proofs of debt totalling some $880 in respect of the unused portion of rent paid in advance. A proof of debt was signed by Mr Van Beek for some $180,000. Mrs Van Beek signed a proof of debt for $3 million. Mrs Van Beek sent the proofs of debt to the administrator's offices, reporting on her progress from time to time: "I have a couple more" and "still waiting for the tenants to send theirs back to me".
On 17 April 2020, the administrator's staff asked Mrs Van Beek to complete a Report on Company Activities and Property (ROCAP), which is slightly odd given that she was not a director of Glenvine. When asked why it was that his staff were only communicating with Mrs Van Beek in respect of the ROCAP shortly before the first meeting of creditors, and why the administrator's staff indicated that preparation of the ROCAP could wait until after the first meeting, Mr Hodgkinson agreed that this was not an appropriate thing for his staff to do. It appears that Mrs Van Beek was driving the administration for Glenvine rather than her husband, its director.
At the first meeting of creditors on 20 April 2020, Mrs Van Beek's proof of debt was admitted for $1 for voting purposes. Four judgment creditors with debts totalling $4,671,594.33 - or 96% of creditors by dollar value - voted in favour of a resolution to replace the administrator. Those who voted against the resolution comprised nine unrelated creditors with debts totalling $11,767 and three related party creditors totalling $183,645. Thus, the resolution could not pass without Mr Hodgkinson exercising his casting vote in favour of his removal. According to the minutes, Mr Hodgkinson noted that he would not exercise his casting vote as the resolution had a personal interest to him. Although the minutes refer to an explanation being given as to why he did not exercise his casting vote, it appears that Mr Hodgkinson did not voice that explanation at the meeting but simply said that he would not be using his casting vote.
Mr Hodgkinson said he did not give any consideration to exercising his casting vote. Whilst Mr Hodgkinson agreed that any conflict of interest did not preclude him from exercising a casting vote that went against his personal interest, he did not consider whether he should exercise the casting vote against his personal interest, but only that he had a personal interest. Mr Hodgkinson did exercise his casting vote in favour of the establishment of a committee of inspection, which was formed.
On 13 May 2020, Mr Hodgkinson provided a report to creditors recommending entry into the DOCA. The report was the subject of much criticism by plaintiffs' counsel, Mr Golledge SC, in cross-examination, including: 1. The report stated that, at the first meeting of creditors, Mr Hodgkinson's appointment as administrator "was confirmed", rather than that a resolution to remove Mr Hodgkinson was supported by the overwhelming majority of unrelated creditors by dollar value, but such resolution failed by reason of Mr Hodgkinson's decision not to exercise his casting vote. 2. The chronology of the Building Defects case was incomplete as it did not refer to events at [10]. The report suggested that the Family Court consent orders were made before the Building Defects case emerged rather than after. Mr Hodgkinson agreed that, where the legitimacy of the Family Court order was in issue, this was an important piece of information for creditors. Mr Hodgkinson said that the report had been prepared in a short time: "In normal circumstances, and with more time, this report would have been prepared in a far more detailed fashion and I would have included that". 3. Mr Hodgkinson suggested that, as Ball J's judgment was given in undefended circumstances, the administrator may need to review the judgment creditors' proof of debts and look to home builders' insurance instead. Mr Hodgkinson agreed that he had not given consideration to the limitation period for claims on home builders' insurance. 4. The judgment debts arising from Ball J's orders were not accurately recorded in the balance sheet of Glenvine, which gave the misleading impression that Glenvine was solvent until March 2019. 5. The report did not suggest that a payment made from Glenvine to Paragon Construction of $40,000 in the month before the administrator was appointed may amount to a voidable transaction. Mr Hodgkinson agreed that this was an error in his report. 6. Mr Hodgkinson suggested in his report that Mrs Van Beek may have a claim against Glenvine, rather than against her husband for breach of the Family Court orders. On the other hand, the report did not suggest that Glenvine may have a claim against Mr Van Beek for disposing of the company's sole asset in order to discharge a personal obligation. Mr Hodgkinson said that he did not have sufficient information to consider that matter when he prepared his report.
More importantly, Mr Hodgkinson estimated the return to creditors in either a liquidation or DOCA scenario. 1. In either scenario, the secured creditor would be paid in full. 2. In a liquidation scenario, unsecured creditors were estimated to receive between nil and 67 cents in the dollar. 3. In a DOCA scenario, unsecured creditor were estimated to receive between 15 and 31 cents in the dollar. It was only in the "low" scenario that unsecured creditors will do better under a DOCA. In the "medium" and "high" scenario, unsecured creditors were estimated to receive a higher dividend (roughly double) in a liquidation scenario. It is not obvious from this analysis how the proposed DOCA is in the interests of creditors.
Mr Hodgkinson deposed that he was of the view that it was in the interests of creditors for Glenvine to continue in administration rather than be wound up because, if Glenvine is wound up, then Mrs Van Beek would make a claim in respect of the Darlinghurst property or take steps to prevent any sale of the property by a liquidator. This would likely prevent an immediate sale of the property, which would result in the closure of the boarding house, affect the lease of the restaurant premises and delay any distribution to creditors. It was not made plain why any delay in selling the property would necessitate the closure of the boarding house or affect the restaurant lease. If the administration continued under the proposed DOCA then Mrs Van Beek would not prevent any sale of the Darlinghurst property and marketing could commence immediately. Mr Hodgkinson was of the view that the Darlinghurst property would sell without difficulty; and an orderly sale would take three to four months to complete.

Submissions

The administrator's solicitor, Wendy Jacobs, submitted that the proposed DOCA was a "holding DOCA" which permits the Darlinghurst property to be sold while the dispute with respect to its ownership is resolved during the continuation of the administration. In the event that the property dispute is resolved in favour of Mrs Van Beek, then she will make a contribution to the deed fund. It is not clear to me that this is what the DOCA proposal involves. As to whether creditors could expect to receive more under the DOCA than in the liquidation scenario, Ms Jacobs submitted that, as the pool of assets was unknown until Mrs Van Beek's interest in the Darlinghurst property was determined, then the return to creditors was also unknown. I do not consider that this submission reflects the DOCA proposal and defer to Mr Hodgkinson's analysis in his second report to creditors set out at [36].
It was said there was no prejudice to the plaintiffs if the administration continued until the "holding DOCA" was effectuated. It was said that the litigation history militated against a liquidation as the DOCA proposal had the effect of 'ring fencing' the dispute and permitting a prompt determination of substantive rights with the consent of all parties affected, being Mr and Mrs Van Beek and the replacement trustee. A prompt sale of the Darlinghurst property was achievable if the administration continued but less likely if it did not. The lateness of Mr Hodgkinson's appointment was said to be explicable in light of the lengthy history of disputation between the parties "and the efforts of the plaintiffs to secure their interest to the detriment of other creditors". With respect, the latter submission should not have been made.
Mr Golledge SC submitted that this was not a "holding DOCA", as the DOCA did not refer to determination of property interests but simply referred to the Darlinghurst property being sold, with 30% of net proceeds after payment to ANZ available to the remaining creditors. Mr Golledge SC submitted that a liquidator could equally attend to the sale of the property. The proposed DOCA envisaged that the only asset of Glenvine will be sold and, thereafter, the company will have no assets and no business. The DOCA proposal was not about saving the company or reviving its fortunes but winding down its affairs and distributing its assets. This task could be attended to by a liquidator attending to the interests of all stakeholders. Nor did the DOCA proposal ensure that litigation costs would be saved as it appeared to be contemplated that the administrator would obtain some form of Court order in respect of Mrs Van Beek's interest in the Darlinghurst property.
Further, the circumstances surrounding Glenvine and the suggestion that the wife of the director for the company has an interest in the property called out for an independent liquidator to be appointed to the company. The Family Court consent orders did not purport to extinguish or affect Glenvine's right as trustee to be indemnified from the trust assets in respect of any liability which Glenvine incurred as trustee, including its liability to the plaintiffs and other supporting creditors. Even if the Family Court consent orders had the effect of transferring ownership of the Darlinghurst property to Mrs Van Beek, Glenvine's right of indemnity against that property remained unaffected: Ng Van Der Velde [2011] FCAFC 35 at [73]-[75].
The plaintiffs submitted that Mr Hodgkinson had not obtained legal advice as to the effect of the Family Court orders and did not appear to have appreciated that Glenvine was not a party to the orders and thus not subject to any obligation under the orders; Glenvine received no consideration for the transfer of its only asset; and Glenvine remained entitled to be indemnified by the trust in respect of obligations incurred in its capacity as trustee. This case was to be distinguished from Official Trustee v Mateo (2003) 127 FCR 127; [2003] FCAFC 26, where Court orders bound the owner of the property, whilst here, the Court orders did not bind Glenvine at all. Any claim which Mrs Van Beek may have against Glenvine was said to be very weak. It was thus unclear why it was that Mr Hodgkinson concluded that a DOCA proposal, whereby Mrs Van Beek would keep 70% of the net proceeds of sale of the Darlinghurst property, was in the interests of creditors.
The plaintiffs also submitted that the proposed DOCA had the effect that third party creditors would be bound by the DOCA and have their debts discharged, whilst debts owed to shareholders or amounts owed to beneficiaries of the VBC Trust would remain. Thus, if Mrs Van Beek were to re-introduce funds to the company from the proceeds of sale, her husband Mr Van Beek would stand to recover his debt in full.
Further, there had been no investigation by the administrator, nor any explanation from Mr Van Beek as the director of Glenvine, or Mrs Van Beek as to why it is only in the face of an imminent winding up of the company that the Family Court consent orders had "surfaced". Nor was it explained how Mrs Van Beek could seek to take advantage of some of those orders whilst she had not performed some of the concurrent obligations imposed on her by the same orders. Thus, it was submitted that the Court should be sceptical about whether deferral of the winding up application was truly in the interests of anyone except Mr and Mrs Van Beek and a small group of small creditors aligned with them.
The plaintiffs submitted that third party creditors of Glenvine were willing to take the risk of an unfavourable outcome in a determination of Mrs Van Beek's claim to be the equitable proprietor of the Darlinghurst property in preference to the DOCA proposal. Further, under the DOCA proposal, Glenvine would lose the opportunity to pursue Mr Van Beek for breach of duty by transferring Glenvine's only asset to his wife to discharge his personal obligations to his spouse as well as other claims available to a liquidator, including for insolvent trading and recovery of preferences. The plaintiffs and supporting creditors expressed no confidence in Mr Hodgkinson and, if a winding up order was made, sought the appointment of the plaintiffs' nominee.

Conclusion

The late appointment of an administrator is cause for some scepticism but, more importantly, I am not satisfied that it is in the interests of creditors to adjourn the winding up application. Mr Hodgkinson's analysis in the second report to creditors, set out at [36], suggests that unsecured creditors will receive a substantially higher dividend in a liquidation in the "medium" or "high" scenario. The weight which can be placed on Mr Hodgkinson's analysis is lessened by the fact that he does not appear to have received accurate information from Mr and Mrs Van Beek as to when, in the evolution of the Building Defects case, the Family Court consent orders were entered into, nor considered the implications of Mr and Mrs Van Beek's reconciliation, nor the late and apparently incomplete performance of the pre-conditions to the transfer of the Darlinghurst property to Mrs Van Beek, nor the implications of Mr Van Beek transferring the sole asset of Glenvine to Mrs Van Beek for no consideration to the company. It is reasonable to think that, with the benefit of accurate instructions and legal advice, Mr Hodgkinson's analysis would have produced a different result although what that result might be cannot be guessed at. In circumstances where Mr Hodgkinson's analysis was equivocal in any event, and I can place little weight on it given the matters to which I have referred, the onus to show, by persuasive evidence, that it is in the interests of the company's creditors that the administration continue has not been discharged.
The evidence suggests that the late reliance on the Family Court orders is part of a sustained attempt by Mr and Mrs Van Beek to avoid Glenvine complying with the orders made by Ball J on 25 March 2019, initially by purporting to change the trustee of the VBC Trust and later by appointing an administrator after these winding up proceedings had commenced. Whether this attempt will succeed seems unlikely given the decision of the Full Court of the Federal Court of Australia in Ng v Van Der Velde where relevantly identical orders were held not to transfer a company's interest in property as the company was not a party to the Family Court orders, nor was there any reason to conclude that any such transfer would extinguish the company's right of indemnity as trustee and the related right to recover the property and satisfy that indemnity from the sale proceeds of the property: at [73]-[75].
Essentially for the reasons advanced by the plaintiffs, I am not satisfied that the winding up proceedings should be adjournment until after the second meeting of creditors. It is unclear how it is that the creditors, apart from the Van Beeks, will stand to benefit if the proposed DOCA is approved. Under the DOCA proposal, Glenvine will not continue to trade: its sole asset will be sold and the proceeds distributed amongst creditors. A liquidator is equally well placed to attend to this task. The majority of third party creditors wish to place the company into liquidation; they have already made their choice. Nor does the DOCA suggest that the administrator is to determine Mrs Van Beek's claim. If this needs to be determined in the liquidation, then the Court can give directions as needed.
For these reasons I make the following orders: 1. Order that the defendant, Glenvine Pty Limited ACN 003 793 360 be wound up. 2. Order that Christian Sprowles be appointed as liquidator of the defendant company. 3. Order that the defendant pay the plaintiffs' costs of these proceedings. 4. Dismiss the Further Amended Interlocutory Process dated 14 May 2020. 5. Order that the applicant on the Further Amended Interlocutory Process, Damien Hodgkinson, pay the plaintiffs' costs of the interlocutory process.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 27 May 2020

Legal principles

Section 440A(2) of the Corporations Act provides: The Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up.
I outlined the principles relevant to an application such as this in In the matter of Edifice Australia Pty Limited [2019] NSWSC 1215 at [26]-[31] and In the matter of Cresco Opus Fund No 4 Pty Ltd (administrator appointed) [2019] NSWSC 941, at [23]-[25]. Drawing on those judgments, the principles are not controversial. There must be a sufficient possibility, as distinct from mere optimistic speculation, that the interests of the company's creditors will be accommodated to a greater degree in an administration than in a winding up. The onus is on the administrator to show, by persuasive evidence, that it is in the interests of the company's creditors that the administration continue rather than liquidation ensue. The question whether an administration should continue is closely related to whether the creditors can hope to get more by way of payment of their debts by administration than from liquidation. Where there is a realistic possibility that a deed of company arrangement (DOCA) may be proposed, it will generally be in the interests of creditors for the administration to continue in order to ascertain whether it will be "beneficial for creditors overall", especially where the adjournment is sought for a short period early in the administration: In the matter of Bobos Engineering Australia Pty Ltd [2015] NSWSC 2027 at [9]; In the matter of Denham Constructions Pty Ltd [2016] NSWSC 1426 at [10]; and In the matter of Dan Phillips Holdings Pty Ltd [2017] NSWSC 954 at [5].
In Deputy Commissioner of Taxation v KJ Consulting Pty Ltd (administrators appointed) [2005] FCA 1827, Gyles J pointed to several factors which may support an adjournment under section 440A(2), including: 1. that the administration process enables the general body of creditors to exercise commercial judgment as to where their best interests lie; 2. where contributions to a deed fund are to be made by related parties which would not be available if the company enters liquidation; and 3. where the administrator supports the adjournment.
His Honour also suggested factors which tell against an adjournment, including: 1. where the company is not trading and is not "liable to be revived or its fortunes revived by trading on as such"; 2. where the company is (as it almost always is) insolvent; and 3. where the majority of creditors oppose the adjournment. See also Weriton Finance Pty Ltd v PNR Pty Ltd (in administration); Australian Residential and Commercial Finance Pty Ltd v PNR Pty Ltd (in administration) (2012) 92 ACSR 88; [2012] NSWSC 1402 at [15]-[21], where Black J conducted a review of the authorities as to relevant factors in such applications.
Applications brought at the last minute should be treated with some scepticism: In the matter of Offshore & Ocean Engineering Pty Ltd [2012] NSWSC 1296 at [15] per Brereton J. In Allied Express Transport Pty Ltd v Exalt Group Pty Ltd (Administrator Appointed) [2013] FCA 455 at [19], Jacobson J noted the use of administration as a last ditch effort to stave off proper winding-up proceedings. See likewise Waste Recycling and Processing Services of New South Wales v Local Government Recycling Co-operative (1999) 32 ACSR 194; [1999] NSWSC 507 at [17]-[18] per Santow J; Gorst Rural Supplies Pty Ltd v Glenroy (Lake Bolac) Pty Ltd [2012] VSC 60 per Gardiner AsJ at [13]. Against this, it may be easier for an administrator to obtain an adjournment where the administrator has only very recently been appointed and only a short adjournment is sought: Bobos Engineering at [5].
Even if the Court is not satisfied that the requirements of section 440A(2) are met, the Court theoretically has a separate discretion to adjourn the proceedings, as it has the power to adjourn any proceedings. But as Campbell J noted in Deputy Commissioner of Taxation v Bradley Keeling Management Pty Limited (2003) 44 ACSR 377; [2003] NSWSC 47 at [45], there may be no additional factors which make it appropriate to otherwise adjourn the winding up proceedings.
Thus the question at its heart is whether it is in the interests of creditors to adjourn the proceeding, this usually depending on reliable evidence that the creditors have a reasonable chance of receiving more money in an administration. If the Court concludes from the evidence that it is in the interests of creditors to adjourn the winding up application, then the Court must do so; it is not a matter of discretion.

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