Allways Resources Holdings Pty Ltd & Anor v Samgris Resources Pty Ltd & Anor

FACTUAL BACKGROUND 4 Samgris Resources was a coal exploration company based in Queensland. In late 2014, the company's minority shareholders commenced oppression proceedings in the Supreme Court of Queensland. On 8 May 2017, following a trial, Bond J ordered that the company be wound up on just and equitable grounds and that liquidators be appointed for that purpose (see Allways Resources Holdings Pty Ltd & Anor v Samgris Resources Pty Ltd & Anor [2017] QSC 74). However, in the third last paragraph of his reasons for judgment (at [387]), Bond J proposed a course which would "give the parties a chance to resolve their differences in a manner which might avoid the liquidation". His Honour provided the parties with that opportunity by ordering that the winding up and appointment orders be immediately stayed until 4.00 pm on 15 May 2017. Those orders do not appear to have achieved the desired result because, at a subsequent hearing on 12 May 2017, the stay was extended until an appeal against the winding up order could be heard and determined (see Allways Resources Holdings Pty Ltd & Anor v Samgris Resources Pty Ltd & Anor [2017] QSC 112). That extension was conditional on Mr Wei Mu, the Chief Executive Officer of the company, and three of its directors, giving undertakings in the following terms: [1] not to cause Samgris to carry out any exploration activities or incur any expenses in relation to exploration other than to make rental payments in respect of the Exploration Permits for Coal (EPCs) held by Samgris (the Tenements) to the Department of Natural Resources and Mines (DNRM), or other payments necessary to maintain the Tenements in good standing, or payments necessary for the renewal of the Tenements; [2] not to cause Samgris to incur expenditure other than in the ordinary course of business; [3] for the avoidance of doubt, not to cause Samgris to do any of the following except by super majority resolution of the board of directors of Samgris or order of the Court: (a) cause Samgris to take any steps to progress the field exploration work on EPC 2221; (b) cause the contract with the Xi'An Institute of Geological and Mineral Exploration in connection with a revaluation of the Tenements to be performed, or make any other payments in connection with a revaluation of the Tenements; (c) cause Samgris to make any payment to directors of directors' fees; (d) cause Samgris to sell any assets; (e) cause Samgris to enter into a new premises lease which exceeds a term of 12 months; (f) cause Samgris to encumber any asset except as may be necessary to provide security in the event that Samgris enters into a new lease; (g) cause Samgris to voluntarily relinquish any Tenement. [4] to cause Samgris to take all reasonable steps to preserve the Tenements subject to any contrary super majority resolution of the board of directors of Samgris or order of the Court; [5] to cause Samgris to send to Dr Huang and Mr Howard by email, on a weekly basis, a summary of the cash assets position of Samgris; [6] to cause Samgris to send to Dr Huang and Mr Howard by email, on a daily basis, bank statements of the bank accounts of Samgris showing bank balances and transactions effected on the accounts. 5 On 23 March 2018, the appeal was dismissed by the Queensland Court of Appeal (see Asia Pacific Joint Mining Pty Ltd v Allways Resources Holdings Pty Ltd & Ors [2018] QCA 48) and, as a consequence, the stay order was lifted.

THE UNUSUAL FEATURE 6 The unusual feature concerning Order 4 above arose from the combined effect of the following matters. First, because the winding up of the company was not occasioned by insolvency, no issue arose as to the solvency of the company throughout the period of the stay mentioned above. Secondly, as can be seen from the terms of the undertakings given as a condition of the extension of the stay order, while that order was in force, it had the effect that the company remained under the control of its directors. Hence, subject to the constraints imposed by those undertakings, the company continued to acquire and pay for a broad range of goods and services, including rent, wages and general office supplies. Thirdly, because the winding up order was made under s 461(1)(k) of the Act and the company was not, at the time it was made, subject to any other winding up order, or under administration, or operating under a Deed of Company Arrangement, s 513A(e) of the Act provided that "the winding up is taken to have begun or commenced … on the day when the order was made". As is recorded above, that day was 8 May 2017. Fourthly, s 468 of the Act provides that: (1) Any disposition of property of the company, other than an exempt disposition, made after the commencement of the winding up by the Court is, unless the Court otherwise orders, void. … 7 Fifthly and finally, the exception described in the first line of this provision did not apply because none of the transactions that the company entered into was an exempt disposition within the terms of s 468(2) of the Act. 8 The combination of all these matters meant that the transactions that were entered into by the company during the period of the stay were void. In the words of Kirby P in National Acceptance Corporation Pty Ltd v Benson (1988) 12 NSWLR 213 (Benson) at 215, that meant they were: … void for all purposes related or incidental to the administration of the winding up of the company and as between the company and a person dealing with the company. At the least that is what the word means. Upon that basis, when the winding up order was made in the present case, payment by the company to the appellant was thereby rendered by the Act to be "void" when made. In the result, at least between the company and the appellant and [a person dealing with the company], the law treats the payment as never having happened … (Emphasis added) 9 That outcome had the following consequences. First, from their analysis of the details of the transactions in question, the liquidators had formed the view that almost all of them related to the supply of goods or services which had benefited the company. Secondly, and conversely, the liquidators had also formed the view that it would be detrimental to the company's interests if they were required to treat the dispositions connected with the transactions as void and attempt to disentangle them. Among other things affecting this view was their belief that it would be almost impossible to return the suppliers to the position they would have been in before the transactions were entered into.

THE DETAILS OF THE TRANSACTIONS 10 It was this unusual state of affairs that caused the liquidators to apply for Order 4 above. In total, approximately 380 transactions were carried out during the period of the stay. As the form of Order 4 indicates, the details of those transactions were set out in annexure JH-26 to Mr Harris' affidavit filed on 4 July 2018. I interpose to note that Mr Harris filed two affidavits on that day and the affidavit containing JH-26 was annexed to the second of those affidavits. In the first of his affidavits, Mr Harris grouped the transactions into seven general categories as follows: (a) payment of rent to a landlord; (b) payment of employee wages and superannuation; (c) payment for professional services (licence fees for software and general office expenses such as telecommunications, photocopier lease, insurance and IT equipment and services); (d) payment of legal costs; (e) payments relating to maintaining the Company's tenements; (f) payment of motor vehicle expenses; and (g) payment of travel, accommodation and food and beverage expenses for directors and employees. 11 In that affidavit, Mr Harris went on to explain the practical consequences for the liquidation of the company if all of the dispositions of property connected with the transactions were to be treated as void, as follows: 15. I consider that almost all of the payments were made for supplies of services or consideration that have been used by the Company and therefore cannot be returned to the supplier. The most obvious examples are services (for example, occupation of premises, travel, or services provided by employees) that have already been provided and which form the majority of the transactions. The parties to the transaction cannot be put back in the position they were in prior to the transaction. 16. In those circumstances, I do not know what would be the practical result of those transactions continuing to be void for the liquidation and the liquidators. 12 Mr Harris expanded on this explanation in his second affidavit of 4 July 2018 as follows: 6. Further, and for the sake of clarity, in referring to the transactions set out in [the first affidavit filed on 4 July 2018] and in particular the categorisation of those transactions, I have not sought to identify a separate category in respect of the transactions which have been undertaken using a number of Company credit cards because for the purposes of this proceeding I have treated the purchase of a supply or good with the credit card, and the subsequent payment by the Company to Westpac in reduction of the corresponding credit card debt as one and the same transaction. 7. I have done this because it is the service or good received by the Company which I have assessed when deciding whether to seek relief under section 468, rather than the actual recipient of the cash payment by the Company (being the disposition of the Company's property. From my perspective as liquidator, it does not matter whether the cash was paid directly to the supplier, or to a bank (in this case Westpac) which paid the supplier via the credit card system 8. It follows that if the transaction continues to be void, I will be required to take steps to recover from Westpac Bank the amounts paid in reduction of credit card debts relating to the various supplies made by third parties, the benefit of which have been received by the Company.

THE RELEVANT PRINCIPLES 13 In Benson, the New South Wales Court of Appeal considered s 368(1) of the then applicable Companies (New South Wales) Code, which was almost identical in its terms to s 468(1) of the Act. The observations of Kirby P (as he then was) in Benson at 215 on the meaning of the word "void" have already been set out above and do not require repeating. However, Priestley JA (with whom Clarke JA agreed) made some additional pertinent observations about the effect of an order under s 368(1) as follows (at 220): … it seems to me that the meaning of the subsection is that unless the court otherwise orders, upon a winding up order being made any disposition, transfer or alteration within the meaning of the subsection that has taken place after the time of the filing of the application for the winding up is to have no legal effect from the time that it took place. That is, once the winding up order is made, the transaction must be regarded as never having taken place at all in law, unless the court otherwise orders. If the court does order otherwise under s 368(1) then the transaction will at all times have been. I think, a valid one, because the court's order will prevent the voidness attaching at the date at which it would have attached had the order not been made … (Emphasis added) 14 In its earlier judgment of Tellsa Furniture Pty Ltd (In Liq) v Glendave Nominees Pty Ltd (1987) 9 NSWLR 254 (Tellsa), while emphasising that "the circumstances in which dispositions of property may be made by a company are so various that it is inappropriate for courts to lay down, by reference to particular kinds of factual situations, how such power will or should be exercised" (at 255), the New South Wales Court of Appeal provided some general guidance on the considerations that courts could take into account in cases involving such dispositions. In particular, Mahoney JA said (at 256): … that usually payments made by a company for goods honestly and in the ordinary course of business will be protected by an order [validating those dispositions]: see Palmer's Company Precedents, 17th ed (1960) vol 2 at 298; Re J Leslie Engineers Co Ltd (In Liq) (at 301-303; 92-95). This is in accord with the general basis of liquidation to which I have referred. In such a case, the delivery of goods to the company after the date of the commencement of the liquidation increases the assets of the company and to provide properly for payment of them is not inconsistent with that principle … 15 Similarly, Priestley JA said (at 260): … A disposition carried out in good faith at a time when the parties are not aware that a petition has been presented will, generally speaking, be validated. In what he described as a limitation to this proposition Young J stated some further considerations which perhaps strictly speaking are independent of it, but which I will deal with as part of it, namely: on the one hand both bona fide payments where parties are unaware of the presentation of a winding up summons and bona fide payments in the ordinary course of business … might ordinarily be validated so long as they "related to any need to continue business, and earn income, or save loss, during the pendency of the petition" … 16 The Queensland Court of Appeal considered the same issue under s 368(1) of the then applicable Companies (Queensland) Code in Re Allan Fitzgerald Pty Ltd (In Liq) [1989] 2 Qd R 495. In concluding that the Court should not validate the relevant dispositions, Matthews J stated (at 501): … [Section 368(1)] clearly expresses the policy of the law that, subject to the rights of creditors with particular legal interests, the rateable division of the assets among the unsecured creditors is to be accomplished by liquidation of the company (Tellsa Furniture Pty Ltd (in liq.) v. Glendave Nominees Pty Ltd per Mahoney J.A. at 255). Exception may be made to this general policy, however, if the court so orders. As a starting point and by reference to the appeal, I think that facts make it clear that rateability among unsecured creditors has not been preserved by reason of the payments which were made to the respondent and I do not see this as a case for departure from general policy. Having regard to the facts, the payments to which I have referred were not only made outside the ordinary course of business but, in my opinion, the respondent could not be said to have acted with good faith, as that term is understood in insolvency proceedings … (Emphasis added) 17 Vasta J also considered that the dispositions should not be validated. His Honour summarised the matters that persuaded him to that view as follows (at 508): The view I take in this case is that the material discloses no considerations which warrant departure from the principle that the company's assets should be distributed rateably among the unsecured creditors. The evidence does not support a conclusion that the respondent's actions were motivated by a wish to assist creditors as a whole or that in fact, what was done between 3 April and 23 June was in the interests of those creditors. Moreover, I am firmly of the view that the respondents enjoyed an advantage against other creditors in that they were able to enforce payments by the company at times when it was obvious that other unsecured creditors were being made to wait or were not going to be paid at all. To validate such payments would in my opinion be an obvious breach of the basic premise of the Companies Code that in a winding up, all unsecured creditors are to be paid pari passu. (Emphasis added) 18 Kelly ACJ dissented, concluding at 497-500 that validation orders were appropriate in the circumstances.

WHY THE VALIDATION ORDER WAS MADE 19 Section 468(1) grants the Court a wide discretion to make an order validating a disposition of the property of a company rendered void by its provisions. In an insolvency winding up, that discretion is to be exercised for "the promotion of the interests of [the] creditors as a whole" and is to take the form of "a commercial or economic [inquiry], calling for a balancing of the anticipated net gains or losses from the transaction for which approval is sought": Jardio Holdings Pty Ltd v Dorcon Constructions Pty Ltd (1984) 3 FCR 311 at 317. In the unusual circumstances of this matter, as the principles outlined above demonstrate, where transactions have been carried out in the ordinary course of a company's business and to its benefit in the sense that it is able to continue to trade, absent a lack of good faith or some similar factor, a validation order will generally be warranted. 20 Having considered the contents of Mr Harris' affidavits and the circumstances in which the transactions in this matter occurred, I was satisfied that it was appropriate to make a validating order under s 468(1) with respect to them. In reaching that conclusion, I had particular regard to the following matters. First, during the period of the stay, the company was not insolvent and the promotion of the interests of its creditors was therefore not a relevant consideration. Secondly, subject to the matter mentioned below, all of the transactions concerned were covered by the undertakings given to the Supreme Court of Queensland. Thirdly, all of the transactions were conducted in the ordinary course of business and in order to enable the company to continue to trade pending the determination of the appeal. Fourthly, and finally, in addition to the transactions being to the benefit of the company, the liquidators had expressed the view that it could be detrimental to the company if they had to treat the dispositions of property concerned as void and therefore attempt to reverse them. 21 Before concluding, there is one further matter that I should mention. In his first affidavit filed on 4 July 2018, Mr Harris expressed the following concerns: 17. I am investigating whether some of the transactions might potentially have been undertaken in breach of the undertakings. I have not formed any definite views, but I consider that some of the transactions should be further investigated in this respect. 18. If it is the case that I conclude that any of the transactions were likely carried out in breach of one or more of the undertakings, and we as the liquidators determine that one or more of the directors might be liable to answer a charge of contempt, having sought legal advice on the matter, I have formed the view that such a charge would be problematic if the transactions continue to be void due to section 468 of Act because by operation of the legislation, the transactions have not occurred at all, and therefore it is arguable that they could not have been carried out in breach of any undertaking. 22 The undertakings described above were given to the Supreme Court of Queensland by the company's Chief Executive Officer and three of its directors, and not by the company itself. Accordingly, if it later emerged that one or more of those undertakings had been breached, that breach would have been committed by the individual who gave the undertaking concerned. In that event, the liquidators would not be prevented from taking action on behalf of the company against that individual. For these reasons, I did not consider Mr Harris' concerns above provided a valid reason why Order 4 should not have been made. 23 For these reasons, having regard to the unusual feature applying to Order 4, I considered it was appropriate, in all the circumstances, to make that validating order under s 468(1). I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Reeves.