Application for termination of winding-up
8By originating process filed on 9 September 2014, Mr Vrkic, who is the deed administrator, now seeks an order pursuant to Corporations Act, s 482(1A)(c), that the winding up of the company be terminated.
9The factors that generally inform the exercise of the Court's discretion on an application to terminate a winding up have been referred to in many cases [for example, Re Warbler Pty Ltd (1982) 6 ACLR 526; Mercy and Sons Pty Ltd v Wanari Pty Ltd [2000] NSWSC 756; (2000) 35 ACSR 70, [47]ff; Anderson v Palmer [2002] NSWSC 192, [6]; Vero Workers Compensation (NSW) Limited v Ferretti Pty Ltd [2006] NSWSC 292; (2006) 57 ACSR 103, [17]; Re Yeling Group Pty Ltd [2012] NSWSC 74, [8]-[11]; In the matter of TMPL Pty Limited (in liquidation) [2012] NSWSC 1059, [10]; In the matter of 311 Hume Highway Liverpool Fund Pty Limited (in liquidation) [2013] NSWSC 465, [4]]. They include the attitude and interests of the creditors, the interests of the liquidator, the interests of contributories, the public interest, whether the company's debts have been paid, and the company's trading position and general solvency [In the matter of Glass Recycling Pty Ltd (ACN 001 332 654) [2014] NSWSC 439, [15]]. On such an application, the Court must be satisfied, first, that the state of affairs that required that the company be wound up no longer exists; thus, where the winding up was on grounds of insolvency, it will be necessary for the applicant to demonstrate that the company is not, or is no longer, insolvent, and in addition that it is likely to remain, solvent. The second broad consideration that informs the exercise of the Court's discretion - once satisfied that the state of affairs that originally required winding up no longer exists - is that it would be reasonable to entrust the affairs of the company, once again, to the directors, under whose management it previously failed [Glass Recycling, [18]].
10In addition where, as here, the application is made by a company subject to a DoCA, Corporations Act, s 482(2A), provides that the court must have regard to all the following matters, some of which overlap the usual considerations already mentioned [see In the matter of Vietface TV Australia Pty Limited [2014] NSWSC 76]:
(a) any report that has been given to the Court by:
(i) the administrator, or a former administrator, of the company; or
(ii) the liquidator, or a former liquidator, of the company; or
(iii) ASIC;
and that contains an allegation that an officer of the company has engaged in misconduct;
(b) any report that has been lodged with ASIC by:
(i) the administrator, or a former administrator, of the company; or
(ii) the liquidator, or a former liquidator, of the company;
and that contains an allegation that an officer of the company has engaged in misconduct;
(c) the decision of the company's creditors to resolve that the company execute a deed of company arrangement;
(d) the statement that was given under paragraph 439A(4)(b) when the company was under administration;
(e) whether the deed of company arrangement is likely to result in the company becoming or remaining insolvent;
(f) any other relevant matters.
11In the light of the history of expressions of interest and the information memorandum, it is reasonable to proceed on the basis that Benelong's recapitalisation proposal would not likely be bettered. The effect of that proposal is that after the consolidation of existing shares (into approximately 3.3 million shares), 150 million shares (approximately) will be issued to the investors represented by Benelong in consideration of the subscription of $405,000, and 3.5 million to a creditors' share trust referred to in the DoCA. The subscription of $405,000 would be applied in large part to repayment of advances already made by Benelong on account of liquidators' costs, or compensation for Benelong, leaving net assets in the company of only $81,000 cash. Subsequently, the investors would receive a further 150 million shares (approximately) for a further subscription of $500,000. Thus, after the first phase of the recapitalisation and establishment of the creditors share trust, there would be a total of just under 157 million issued shares (of which the creditors trust would hold about 2.1%), and after the second phase, potentially 307 million shares (of which the creditors trust would hold about 1%). The first phase who leave the company with net assets of $81,000, increasing to perhaps $581,000 in the event of the second phase being successful. This implies that the total value of the creditors' trust would be $1,805, perhaps increasing to $6,623.
12The effect of the DoCA is that, upon termination of the winding up, the new directors representing the interests of the investors will assume control of the company; all debts of the company (other than those to Benelong) will be released; the deed fund will be established, from which creditors with priority under s 556(1)(e) will receive a dividend in the order of 60 cents; and creditors with priority under s 556(1)(g) and ordinary creditors will receive, pro rata between them, about 2.1% of the share capital in the recapitalised company (reducing to 1% if the second stage capital raising proposal is successful). The company will have no debts, no recurrent or overhead expenses, and cash of $81,000.
13I am satisfied that if the DoCA is implemented the company will be solvent, and likely to remain solvent, in that it will have net assets of $81,000, in liquid form. Accordingly, for the purposes of s 482(2A)(e), the DoCA is not likely to result in the company remaining insolvent; to the contrary, it is likely to result in the company being and remaining solvent.
14As the company is not to be returned to the control of the former directors, but to new directors, questions pertaining to misconduct by the former directors, and commercial morality, while usually relevant on such an applicant, are of little significance. There is no reason to suppose that the company cannot safely be entrusted to the management of the proposed new directors. The liquidators have lodged with ASIC reports of a kind that would be within s 482(2A)(b), and ASIC has advised that it has completed its investigations. The officers in respect of whom those reports were made will not resume management of the company if the liquidation is terminated, as new directors will take office. In those circumstances, where the company will be under new management, the considerations referred to in s 482(2A)(a) and (b) do not tell against termination of the winding up.
15The liquidators consent to the application. Notice of the application was given to the Australian Securities and Investments Commission, which responded that it considered that the matter was one properly left for the determination of the Court and confirmed that it did not propose to intervene.
16The administrator's statement under s 439A(4)(b) recommended that creditors vote in favour of the DoCA, and expressed the opinion that it would not be in the creditors' best interests for the administration to end as the Company is insolvent, nor that the company be wound up as that would provide no return to any class of creditor, whereas a DoCA would result in a better return for creditors and members and would maximise the chances of the company's business continuing in existence. While that last observation is somewhat difficult to appreciate, given that the company's business no longer exists, a decision to terminate the winding-up would be consistent with the administrator's recommendation, for the purposes of s 482(2A)(d).
17However, the rationale for the administrator's recommendation, and his explanation of it to creditors in his s 439A report, warrants further comment. The administrator's report explained that, under the DoCA, priority creditors would receive a cash dividend of between 60 and 63 cents in respect of claims under s 556(1)(e) (which amounted to $59,623 in total) and an in specie share dividend in respect of the unpaid balance of their s 556(1)(e) claims and their s 556(1)(g) claims (which amounted to $51,748); while ordinary creditors would receive "an in-specie share dividend (3.5m shares)"; whereas, in a liquidation scenario, neither priority nor ordinary unsecured creditors would receive anything. However, no attempt was made to explain the likely worth of the proposed share dividend. A careful reader who reviewed the annexed copy of the DoCA proposal could have gleaned that 150 million shares - and potentially a total of 300 million - were to be issued to Benelong, so that the creditors' share trust would represent, at best, little more than 2%, and potentially barely 1%, of the capital; but this was not explained in the report. The careful reader would also have gleaned that Benelong, as well as establishing the deed fund with $60,000 (clause 9.2), was also going to subscribe $405,000 for its allotment of 150 million shares (clause 7.1(a)(iii)); but they would not have understood, as now appears intended, that not only was the $60,000 to establish the deed fund to be subtracted from the $405,000, but also that $165,000 was to be reimbursed to Benelong, with the result that, after various other expenditures, the net equity created would be only $81,000. (Whereas the DoCA apparently obliges the company to issue 150,000,000 shares to Benelong for a subscription price of $405,000 (cl 7.1(a)(iii)), and Benelong to pay the deed administrator $60,000 for payment into the deed fund (cl 9.2), it appears from the affidavit of Mr Nicols (para 6) that it was intended that the $60,000 for the deed fund in fact be provided by the company out of the subscribed capital. This does not appear to conform with the terms of the DoCA as it was put to the creditors. While it was submitted that the commercial effect of the DoCA is that Benelong will recapitalise the company by subscribing for shares to the value of $405,000 - as to $60,000 by making the payment to the deed fund "on behalf of the Company" - and that it was not intended that Benelong subscribe for shares to the value of $405,000 and contribute separately and additionally $60,000 to the deed fund; that as a payment "on behalf of the company" direct by Benelong to the deed administrator for the deed fund would be a loan by Benelong to the company, the practical effect would not differ from the company making the payment out of its new capital; and that there was no material prejudice to creditors; it seems to me that a creditor considering the DoCA was entitled to assume that they would receive shares in the company recapitalized by the subscription of $405,000, and in addition there would be a deed fund of $60,000. That, it seems to me, is what the DoCA states. In that event, the company after recapitalisation would have net assets of $141,000, rather than $81,000, with the consequence that the value of the creditors' share trust would be almost doubled - albeit only to about $3,000 from $1,680).
18In the context of total creditors of in the order of $75 million, the idea that there is benefit for creditors in the share trust seems quite illusory, but that is not conveyed by the administrator's report which, to the contrary, by referring only to a distribution of 3.5 million shares, gives an appearance that it involves a real tangible benefit. Accordingly, I am concerned that the explanation to creditors of the effect of the DoCA was inadequate, and does not convey the illusory nature of the apparent benefit to ordinary unsecured creditors.
19Moreover, the administrator appears to have accepted, without further examination, the situation with which he was presented by the liquidators, where all the receipts of the liquidation - in excess of $725,000 - had been consumed by their remuneration and expenses. No scrutiny appears to have been applied to their remuneration. The liquidators apparently recovered $726,687 (including $422,099 from Opes Prime and $181,135 from Motorlink); but this has been expended, as to $441,008, on liquidators' remuneration; as to $159,258 on legal costs and disbursements; as to $55,457 on printing, stationery and postage; as to $55,832 on "sundry expenses"; as to $29,243 on GST; and the balance on miscellaneous specified expenses of the liquidation. This expenditure has exhausted the recovered assets, and there has been no dividend at all for creditors - even for the relatively small claims of the priority creditors. Thus the practical effect of the liquidation has been to recover in excess of $725,000 of assets and transfer it to the liquidators, their agents and advisors, with no benefit at all to those for whose benefit the liquidation is supposed to be conducted. I find this profoundly disturbing.
20When I raised my concern that it was surprising that a liquidation that had realised in excess of $600,000 (as the material originally put before me suggested) had generated nothing even for the priority creditors, the liquidators sought an opportunity to adduce evidence to explain the complexities of the liquidation. In an affidavit sworn by one of the liquidators, Mr Jess, on 1 October 2014, they have adduced evidence of the complexities of the liquidation and the work done. But even assuming that every dollar of remuneration can be supported on the basis of time spent at their usual rates, it is difficult to see how it can be justified having regard to considerations of proportionality [cf In the matter of AAA Financial Intelligence Ltd (in liquidation) ACN 093 616 445 (No 2) [2014] NSWSC 1270]. I cannot help but think that the position of at least the priority creditors might be enhanced - potentially above that which obtains under the DoCA - by a review of the liquidators' remuneration. While it is true that the remuneration has been approved by the creditors, only the liquidators were present in person at those meetings, the motions approving their remuneration being carried on their votes, albeit as special proxies of creditors who had apparently directed a vote in favour of the relevant motions. The remuneration remains subject to review on application by a creditor under s 504. While that right of review may well enure despite the DoCA, the beneficiary of any successful review would be the recapitalised company rather than the creditors, while but for the DoCA it would be the creditors. The administrator appears to have given no consideration to whether a superior result might be achieved, at least for priority creditors, by such a review.
21While the creditors have resolved that the company execute the DoCA, and this would ordinarily be a significant consideration in favour of terminating the winding up (as referred to in s 482(2A)(c)), its weight in this case is seriously eroded by the circumstance that only a very small proportion of the creditors participated in the decision, and that the information provided to them was deficient in the ways I have mentioned. While Mr Vrkic's affidavit of 29 September 2014 proves that, with the exception of one creditor which is now a deregistered company, all creditors were duly notified of the meeting, the only creditors present, by proxy, were the Department of Education, Employment and Workplace Relations (DEEWR), which was admitted for $66,825 (in respect of payments made under GEERS), and gave a special proxy in favour of the chair and abstained; Peter Couper, who was admitted for $1 and gave a proxy in favour of the administrator's assistant; and Michael Williams, who was admitted for $40,831 and gave a proxy in favour of the chair. The only persons present in person were the administrator and his assistant. The minutes, while no doubt conforming to statutory requirements, are somewhat artificial. Insofar as this was an exercise in corporate democracy, the meeting approached a solemn farce.
22While the liquidators of Bill Express Limited - a creditor for $21,526,787, which represents almost one-third by value of the creditors - have subsequently, by letter to the administrator of 29 September 2014 confirmed that they support the DoCA on the basis that it appears that there will be no return for creditors under a liquidation scenario, and the DoCA provides the only current basis on which there will be any return for them, it is not clear that they appreciate just how fanciful is the prospect of any benefit under the DoCA.
23Accordingly, it seems to me that while the DoCA will result in the company being and remaining solvent and thus remove the circumstances that required that it be wound up, and while the concerns that sometimes arise about returning a company to the control of directors under whose control that state of affairs has come about are not relevant in this case, and while termination of the winding-up would be consistent with the resolutions of the creditors and employees and the recommendation of the administrator, the end result will be of no significant benefit to ordinary creditors, and of dubious benefit (compared to that which might result from a review of the liquidators' remuneration) to priority creditors. Moreover, having regard to my concerns about the s 439A report, I am not satisfied that the resolutions in favour of the DoCA, such as they were, were informed by an adequate explanation of the effect of the DoCA and the alternatives. As presently advised - and subject to the caveat that the administrator has not at this stage had an opportunity to address these concerns - I am inclined to the view that the DoCA may be liable to be terminated under s 445D(1)(b) and/or (c), if a creditor were to make such an application.
24That said, it is unlikely that any alternative to the DoCA would produce a materially better outcome for ordinary creditors. It is, therefore, the position of the priority creditors that chiefly concerns me. There seems to me a real possibility that a review of the liquidators' remuneration could result in there being a sufficient fund available to result in all priority creditors - both s 556(1)(e) and s 556(1)(g) - receiving a 100c dividend.
25The priority creditors are DEEWR ($66,826) and Mr Williams ($40,831); the liquidators do not appear to have accepted Mr Couper's claim. Strangely, although Mr Williams participated, by proxy, in the creditors meeting on 27 February at 10 am, he did not participate in the meeting of employees on the same day at 9.30 - although the evidence establishes that notice of the employee meeting was sent to him by email on 19 February 2014 following a discussion between him and the administrator's assistant. Nonetheless, at the creditors meeting, he voted in favour of the DoCA, pursuant to a special proxy to the chair. At both meetings, DEEWR abstained, pursuant to a special proxy. At the employees meeting, the resolution was carried on the solitary vote of Peter Couper, who was admitted for voting purposes for $1 only (although the liquidators had expressed the view that he was not a creditor), and who gave a proxy in favour of the administrator's assistant.
26I am conscious that a review of the liquidators' remuneration would incur further costs, and that as to date the creditors have been conspicuously unwilling to fund the liquidators to bring recovery proceedings, it may be questioned whether any of them would embark on or fund an application to review the liquidators' remuneration. The two priority creditors whose interests are chiefly at stake - DEEWR and Mr Williams - have apparently made deliberate decisions respectively to abstain and to support the DoCA. No creditor has opposed the DoCA, or applied to have it terminated. The liquidators' remuneration has been approved by resolution of creditors' meetings, and no creditor has made an application under s 504(1) for review of their remuneration. DEEWR is of course an experienced and resourced creditor and, it may be thought, well able to determine and conserve its own interests.
27In those circumstances, it might well be said that I should not go behind the decisions of the creditors as expressed in the resolutions of their meetings. That argument would be compelling if the decision of creditors was a properly informed one. If I were satisfied that, despite my reservations about there being any benefit to them, the creditors - having been apprised of the potential alternatives and given a realistic appraisal of the potential benefits under the DoCA - supported termination, I would so order, because the Court's reservations about such a proposal should not displace the informed commercial judgment of the creditors. But my reservations about the s 439A report mean that I cannot be so satisfied.
28It is a usual requirement on an application for termination of a winding up that notice of the application be given to all the creditors and contributories. The often cited list of relevant considerations to be found in Re Warbler Pty Ltd includes:
2. There must be service of notice of the application for a stay on all creditors and contributories, and proof of this: Re South Barrule Slate Quarry Co (1869) LR 8 Eq 688; Re Bank of Queensland Ltd (1870) 2 QSCR 113.
29See also Metledge v Bambakit Pty Ltd (in liq) [2005] NSWSC 160, [5]].
30That has not been done in this case, on the basis that the creditors' views have been ascertained by the creditors' meeting which voted in favour of the DoCA, and similarly the views of the shareholders may be inferred from their support of the proposals that were put to the shareholders' meeting. But while I am satisfied that notice of the creditors' meeting was duly given to all known creditors (except a now-deregistered company), my reservations about the s 439A report, and the somewhat farcical nature of the creditors meeting (at least insofar as is evidenced by the minutes), do not enable me to accept that as sufficient notice of the application.