- Apostolou v VA Corporation of Australia Pty Ltd

Judgment 1By application made on 10 April 2013, the Applicant, Mr Andrew Maiolo, applies for an order under s 482 of the Corporations Act 2001 (Cth) that a winding up order made on 26 July 2012 in respect of 311 Hume Highway Liverpool Fund Pty Limited (in liq) ("Company") be terminated. 2The liquidator, Mr Peter Burton, neither opposes nor consents to the orders sought by Mr Maiolo, subject to payment of his fees and expenses and resolution of all creditors' claims. In Kennards Hire Pty Ltd v RMGA Pty Ltd [2010] NSWSC 1387 at [52], Barrett J noted that the fact that a liquidator neither consents to nor opposes such an application would indicate that "the liquidator does not consider himself or herself justified in offering the Court an opinion one way or the other as to the ultimate outcome". Mr Maiolo has also given notice of this application to the Australian Securities and Investments Commission as required by rule 2.8 of the Supreme Court (Corporations) Rules 1999 (NSW), and it has advised that it considers the matter is properly left for the Court's determination and that it does not propose to intervene in the proceedings or seek leave to be heard. Applicable legal principles 3Section 482 of the Corporations Act provides that at any time during the winding up of a Company the Court may, on application, make an order, relevantly, terminating the winding up on a day specified in the order. That application may be made, inter alia, by a contributory of the Company and Mr Maiolo has standing to make this application, since he is the Company's sole shareholder. 4The factors relevant to whether a winding up should be stayed or terminated were summarised by Master Lee QC of the Supreme Court of Queensland in Re Warbler Pty Ltd (1982) 6 ACLR 526 at 533 as follows: "1. The granting of a stay is a discretionary matter, and there is a clear onus on the applicant to make out a positive case for a stay: Re: Calgary and Edmonton Land Co Ltd (in liq) (1975) 1 WLR 355 at pp 358-359 per Megarry J. See also sec 243 of the Act [ie, Companies Act 1961]. 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) 8 Eq 688; Re Bank of Queensland Ltd (1870) 2 QSCR 113. 3. The nature and extent of the creditors must be shown, and whether or not all debts have been or will be discharged: Krextile Holdings Pty Ltd v Widdows (above) [[1974] VR 689]]; Re Data Homes Pty Ltd (above) [[1971] 1 NSWLR 338], Law of Company Liquidation (above) at p 395. 4. The attitude of creditors, contributories and the liquidator is a relevant consideration: sec 243(1), Calgary and Edmonton Land Co Ltd (above). 5. The current trading position and general solvency of the company should be demonstrated. Solvency is of significance when a stay of proceedings in the winding-up is sought: In Re a Private Company (1935] NZLR 120; Re Mascot Home Furnishers Pty Ltd (1970) VR 593 at p 598. 6. If there has been non-compliance by directors with their statutory duties as to the giving of information or furnishing a statement of affairs, a full explanation of the reasons and circumstances should be given: Re Telescriptor Syndicate Ltd (above) [[1903] 2 Ch 174]. 7. The general background and circumstances which led to the winding-up order should be explained: Krextile Holdings Pty Ltd v Widdows (above). 8.` The nature of the business carried on by the company should be demonstrated, and whether or not the conduct of the company was in any way contrary to "commercial morality" or the "public interest": Krextile Holdings Pty Ltd v Widdows (above)." Master Lee noted that it that this list was not intended to be exhaustive and should not be regarded as a series of rigid principles, and that proposition was subsequently emphasised in Dubolo Pty Ltd (t/as Fender Signs) v Codrington Investment Corporation Pty Ltd (1998) 26 ACSR 723 at 725, Metledge v Bambakit Pty Ltd (in liq) [2005] NSWSC 160 at [5] and Von Riesefer v Mainfreight International Pty Ltd [2009] VSCA 129; (2009) 73 ACSR 427 at 438. 5Relevant factors to such an application were identified in Mercy & Sons Pty Ltd v Wanari Pty Ltd [2000] NSWSC 756; (2000) 157 FLR 107; (2000) 35 ACSR 70, Re Nardell Coal Corporation Pty Ltd [2004] NSWSC 281; (2004) 49 ACSR 110 and summarised by Austin J in Vero Workers Compensation (NSW) Ltd v Ferretti Pty Ltd [2006] NSWSC 292; (2006) 57 ACSR 103 at [17] as including the interests of the Company's creditors, including future creditors; the interests of the liquidator, particularly with regard to costs; the interests of contributories and the interests of "the public", including the public interest in matters of commercial morality, and the public interest that insolvent companies should be wound up. Generally, the Court will not terminate a winding up so as to restore control of a company to its shareholders and directors unless the company will have additional financial strength and stability to provide confidence that it can continue without an appreciable risk of returning to liquidation: Re Data Homes Pty Ltd (in liq) [1972] 2 NSWLR 22 at 27; Leveraged Equities Ltd v Hilldale Australia Pty Ltd [2008] NSWSC 190; (2008) 28 ACLC 182; Re SNL Group Pty Ltd (in liq) [2010] NSWSC 797. 6In Apostolou v VA Corporation of Australia Pty Ltd [2010] FCA 64; (2010) 77 ACSR 84 at [14], [58], Finkelstein J noted that there may be cases, which he characterised as exceptional, where a stay of a company's winding up would not be granted when the company was solvent, but noted that such an order would usually be made if all the creditors are paid out, the liquidator's costs and expenses are covered and the members agree; see also Re Kitchen Dimensions Pty Ltd (in liq) [2012] VSC 280 at [22]ff. I have also recently summarised the applicable legal principles to an application of this kind in Re Plaza West Pty Limited (in liq) (subject to Deed of Company Arrangement) [2013] NSWSC 168 and I have drawn upon that summary here. 7The importance of proof, preferably including accounting evidence, as to the Company's financial position was emphasised by White J in QBE Workers Compensation Pty Ltd v P Russell Enterprises Pty Ltd [2005] NSWSC 1128 at [26], where his Honour observed that the Court was unlikely to be persuaded of a company's solvency on the evidence of a single director/shareholder without external confirmation, typically obtained either from the liquidator or from the evidence of an external accountant. That observation was approved by Barrett J in Owners Strata Plan 70294 v LNL Global Enterprises Pty Ltd [2006] NSWSC 1386; (2006) 60 ACSR 646 at [4]. In Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163; (2003) 45 ACSR 711, the Court of Appeal emphasised that a party seeking to establish solvency must lead the "fullest and best" evidence of the company's financial position and, in Owners Strata Plan 70294 v LNL Global Enterprises Pty Ltd above, Barrett J observed (at [5]) that the same principle applied where an applicant sought to show that solvency would be achieved if a particular course of conduct was followed. 8In Gematech Pty Ltd v Bardi Investments Pty Ltd [2008] NSWSC 196 at [26]-[27], Hammerschlag J pointed to the need for the "fullest and best" evidence of the company's solvency in an application of this kind. In Re Pine Forests of Australia (Canberra) Pty Ltd [2010] NSWSC 1127 at [3], Barrett J formulated a central question in an application under s 482 as: "... whether the company's financial health is such that it may safely be released from the form of external administration focussed mainly on the interests of creditors and returned to the mainstream of commercial life where it may, under the control of its directors, incur new debts that have to be paid as and when they fall due. A capacity to operate in a financially sound and responsible way and to service foreseen indebtedness is central to the inquiry." In Re SNL Group Pty Ltd (in liq) above at [24], Bergin CJ in Eq similarly observed that: "it is clear that in determining whether to terminate the winding up of a company, it is usual that the most significant matter for consideration is the solvency of the Company. The other considerations, such as the extent of the creditors, the status of the debts and the nature of the company's business will be taken into account in determining whether the company has returned to, or will be returned to solvency." The structure of the proposal and the Company's future solvency 9By way of background, the Company was incorporated on 18 September 2009 and Mr Maiolo was its sole director, secretary and shareholder. By a Trust Deed dated 21 September 2009, the Company was appointed as trustee of the 311 Hume Highway Liverpool Unit Trust ("Trust") and held a property a 311 Hume Highway Liverpool ("Property"), which is presently a development site excavated to some depth, on trust. By clause 68 of the Trust Deed, the Company was entitled to indemnity out of the Trust's assets in respect of any liability incurred in connection with acting as trustee of the Trust. The unitholders of the Trust were initially interests associated with Mr Joseph Maroun, Mr Charbel Hanna and Ms Maria Kekatos, who is Mr Maiolo's sister. A dispute subsequently arose between the unitholders in the Trust, which was resolved by a Deed of Settlement dated 21 June 2012 (Settlement Deed"), shortly before the Company was wound up. 10The Company was wound up by order of this Court made on 26 July 2012, following its failure to comply with a creditor's statutory demand issued by Liverpool City Council in respect of rates owing in relation to the Property, and Mr Peter Burton was appointed as its liquidator. The Company's appointment as trustee of the Trust automatically terminated on its appointment of a liquidator, under the terms of the Trust Deed, and Mr Burton in his capacity as the Company's liquidator was subsequently appointed as trustee of the Trust by order made by the Court. 11Mr Maiolo's evidence was that, subject to the Court making orders terminating the winding up, the Company would enter a facility agreement with a lender, Steinlead Pty Limited, to provide funding up to $3.5 million, to be drawn down from time to time, with the term of that loan to 1 January 2016. Mr Maiolo's evidence was that he expects that, by that date, the property would be developed (although, as I will note below, there is no evidence as to how the development would be funded) or sold. Mr Maiolo's evidence was that the lender would enter a General Security Agreement over all of the Company's assets and take a mortgage over the Property, which were in evidence. It appears that the lender and Mr Maiolo on the Company's behalf have already executed that facility agreement and associated documents, although the liquidator has indicated that occurred without his knowledge or consent. Mr Maiolo's evidence was that the documents were executed in escrow, but there is no evidence as to the terms of that escrow. 12By the terms of the facility agreement with the lender, the lender has agreed to provide funding of up to $3.5 million for the purpose of the Company repaying debts owed by it and the development, construction and working capital requirements of the Property. Clause 4.4 of the facility agreement provides that the proposed loan and interest would also be repayable in a lump sum on an event of default, a change in control of the Company, or if the Property is sold in whole or in any material part. The lender has deposited $2,780,000 into the trust account of the solicitors for Mr Maiolo which has allowed bank cheques and trust cheques to be drawn which would, after termination of the winding up, be provided to existing creditors for specified amounts. 13Mr Maiolo properly acknowledges that, at the time those documents were executed, he did not have authority to execute them on the Company's behalf by reason of s 471A of the Corporations Act. In the course of the hearing, he made an application for the Court to approve his exercise of the power to enter into those documents on the Company's behalf, but only if it terminated the winding up so that the Company would be bound in that situation but not otherwise. There is some logic in that position, so far as the liquidator's position is that the Company should not be bound by those documents while it remains in liquidation. I would make that order if I were otherwise satisfied that the winding up should be terminated. 14Mr Maiolo's application to terminate the winding up involves a relatively complex series of steps by which the Company's present creditors would either have their debts paid or otherwise dealt with. In broad terms, debts owed to Liverpool City Council for rates, to the Office of State Revenue for land tax and to Messrs Maroun and Hanna arising from the Settlement Deed would be paid from the amounts drawn down under the facility agreement with the lender. Messrs Maroun and Hanna would then withdraw caveats over the Property and transfer units held by associated entities in the Trust to nominees of Ms Kekatos. An entity associated with Mr Maiolo, Citadel Financial Corporation Pty Limited ("CFG") would, after termination of the winding up, enter a deed of release of any claim against the Company; Ms Kekatos would enter a deed of release releasing claims as a creditor of the Company but not as a unitholder of the Trust; and Mr Maiolo would convert a debt of $300,000 which he claims to be owed by the Company to ordinary shares in the Company. The Liquidator's costs and disbursements would be paid in an agreed amount. 15Mr Maiolo's evidence is that, if the Court makes an order terminating the winding up, the Company "will be reinstated as trustee of the Trust and will likely either sell the property or alternatively seek to develop the property". Mr Newton, who appears for Mr Maiolo, acknowledged in submissions that that evidence should be read as contemplating that the Company would seek to be reinstated as trustee of the Trust, since that outcome was not a certainty. Mr Maiolo's evidence was also that: "On the assumption the Company is reinstated as trustee of the Trust, it will have funding to continue operations with respect to the Property, including any further council rates or land tax and associated expenses." 16The treatment of this matter as an assumption in Mr Maiolo's evidence recognises at least a possibility that the Company may not be reinstated as trustee, consistent with the position put by Counsel to which I have referred above that it would "seek to" be reinstated. It appears that a restoration of the Company as trustee of the Trust depends upon the entities associated with Mr Maroun and Mr Hanna executing transfers in respect of Ms Kekatos' nominated entities after they are paid the amounts contemplated by the Settlement Deed following termination of the winding up, which it seems they have indicated they will do, and Ms Kekatos and her nominated entities then resolving to reinstate the Company as the trustee. Neither Ms Kekatos nor those entities have offered any undertaking to the Court to take that course, although there is no particular reason to think that they would not do so. There is no evidence that the Company would have any ability to meet any future liabilities if the assumption that it will be restored as trustee of the Trustee was not made good, but it may be that it would not then incur such liabilities. The "associated expenses" referred to in Mr Maiolo's evidence are not identified in any detail and there is no evidence as to the Company's future cash flow or any accounting evidence to establish the basis of Mr Maiolo's expectation that the Company would have sufficient funding to continue its operations. Plainly, the level of funding that would be required for the alternative of the development of the Property in its intended form as a substantial mixed use development would not be insubstantial. 17By a further affidavit dated 19 April 2013, Mr Maiolo referred to a further contingent creditor, Maicorp Constructions Pty Limited, which was not identified in his initial affidavit, with a claim for $3.8 million in respect of the termination of an earlier contract to develop the Property. Mr Maiolo's evidence is that Maicorp does not now make any claim and his affidavit annexes a letter from a director of Maicorp addressed to "to whom it may concern" confirming that matter. There is no evidence as to any arrangement between Maicorp and the Company or Mr Maiolo which brought about that result. The Liquidator's evidence is that he has not received notification directly from Maicorp of its intention to lodge a claim or otherwise upon the Company. 18Mr Maiolo's initial affidavit indicated that, after termination of the winding up and payments to existing creditors, the Company would have funding of $700,000 available from the loan facility. By the time of the hearing, a further agreement had been reached that, if the winding up was terminated, $356,609.66 would be deposited from the funds lent to the Company into a controlled monies account of the Company's solicitor until a disputed claim by a third party, Collingwood Hotel - relating to legal fees, engineering costs and contract expenses in relation to the wall adjoining the excavation for the Property - was resolved by agreement or by proceedings. In the result, the funding available to the Company for its continued operation after termination of the winding up would be reduced to approximately $371,500. 19It appears that Mr Maiolo relies, in order to establish the Company's solvency after the winding up is terminated, on a valuation of the Property as at 3 December 2012 of approximately $4.5 million. That valuation is subject to qualifications, including that the valuer expressly reserved the right to reconsider the valuation if the site was subject to site contamination, having assumed that it was not, and the valuation assumed that the Property would be developed in an orderly fashion with construction commencing in the first quarter of 2013. The latter assumption cannot be established, both because the first quarter of 2013 has now elapsed without construction commencing and because there is no evidence that the Company, the Trust or Mr Maiolo have access to funding for construction. 20The application contemplates that the Court would accept some nine undertakings from Mr Maiolo, several of which would take effect on termination of the winding up. Other steps proposed to be taken by Ms Kekatos are not the subject of such undertakings, although documents executed by Ms Kekatos in respect of some of those steps were taken in evidence. I am prepared to accept, for the purposes of this application, that the undertakings offered by Mr Maiolo to the Court would be sufficient to bring about payment of the Company's identified existing creditors, namely the interests associated with Messrs Hanna and Maroun, Liverpool City Council and the Commissioner of State Revenue, and would bring about payment of the liquidator's fees. I have greater reservations as to whether the Court should properly accept undertakings in relation to the entry into the proposed deed of release between CFC and the Company; the deed of release between the Company, Ms Kekatos (who offers no relevant undertaking) and Mr Maiolo; and the undertaking as to implementation of an equity swap in respect of the debt which Mr Maiolo is owed by the Company. 21There are some cases in which the Courts have been prepared to accept such undertakings, for example, in respect of subordination arrangements: GIO Workers Compensation (NSW) Ltd v Advance International (Aust) Pty Ltd [2002] NSWSC 261; Brolrik Pty Ltd v Sambah Holdings Pty Ltd (2001) 40 ACSR 361. In Deputy Commissioner of Taxation, Re Directcorp Pty Ltd (in liq) v Directcorp Pty Ltd [2006] FCA 1020; (2006) 58 ACSR 398, the Court was prepared to accept undertakings given by a shareholder in respect of the capitalisation of loans and the repayment of debts in support of an application to terminate a winding up under s 482 of the Corporations Act. On the other hand, in Re SNL Group Pty Ltd (in liq) [2010] NSWSC 797, rather than accepting undertakings to subscribe to capital equivalent to the amount of a shareholder's debt, the Court made orders that steps for capitalisation of the loans should be completed prior to an order being made to terminate the winding up. In Owners Strata Plan v LNL Global Enterprises Pty Ltd above, Barrett J noted that, where some action of the company was necessary to put it into a state where termination may safely be ordered, the generally preferable alternative would be to grant leave under s 471A(1A) for directors to take the necessary action while the winding up subsists, so that the order under s 482 can be made after that action is complete. In the present case, Mr Maiolo makes clear that he does not seek to have such orders made, so far as he contemplates that the steps taken to restore the Company's solvency would only be taken if the Company had already been removed from winding up. It is possible that, if this was the only difficulty with the application, they could be addressed, as Mr Newton has noted in submissions, by making an order for termination of the winding up but staying that order until after the relevant steps were taken. 22However, it seems to me that the more fundamental difficulty with the application is that it has not been established that payment of existing creditors in the manner contemplated would in fact establish the Company's present or future solvency within the principles to which I have referred above. The liquidator's evidence indicates the possibility that other claims of creditors may not have been identified, by reason of the inadequacy of the Company's books and records provided to him and the fact that time for lodging proof of debts has not yet elapsed; the Company's ability to pay any future creditors, if debts are incurred, depends on it being appointed as trustee of the Trust, which has not been shown to be a certainty; if the Company is appointed as trustee of the Trust, there is uncertainty as to the valuation of the Property since at least one assumption of that valuation as to the commencement of construction which cannot now be made good, so the Company's ability to pay any future unsecured creditors from the sale of the Property after discharging the lender's secured loan when due is uncertain; there is no cashflow, business plan or expert evidence to allow an assessment of whether the amount remaining from the funding that the Company has secured would be sufficient to pay holding costs incurred pending a sale of the property and no evidence as to how long that sale would take or the costs associated with it; and there is every reason to think that the funds available to the Company would not be sufficient for development of the property, the other alternative contemplated by Mr Maiolo. Whether there is any public interest reason not to terminate the winding up 23Questions of commercial morality may also give rise to reason not to terminate a winding up where there is serious impropriety in the conduct of the company's affairs or significant risk to future creditors. In Gematech Pty Ltd v Bardi Investments Pty Ltd above at [26]-[27], Hammerschlag J noted that the Court will have regard, in an application to terminate a winding up under s 482 of the Corporations Act, not only to creditors' interests but also to the public interest, including whether granting the order would be detrimental to commercial morality. In Prendergast v Rolcross Pty Ltd (in liq) [2008] NSWSC 146 at [25], White J directed attention to the question: "... whether it appears that it would be, or may be, contrary to the public interest if the company were permitted to resume operations." His Honour also noted that, where shares in a company are closely held the public interest means primarily the interests of existing and future creditors. In Re R.A.N.S. Pty Ltd [2012] VSC 480 at [18], Sifris J emphasised that issues as to the previous conduct of the company's affairs were likely to arise in respect of the assessment of its future conduct, observing that: "... the critical focus of the application is on the future of the company and in particular the risk of danger to future creditors. Previous issues of non-compliance and breach by a company and its directors are relevant to the intended future operation of the company, particularly where the breach or non-compliance is sufficiently serious or persistent to the extent that the court can have no confidence that the restored company will continue to operate as a good 'corporate citizen' according to law." 24The liquidator's evidence was that, in the course of the liquidation, he had required production of the Company's books and records and that Mr Maiolo's solicitors had informed his solicitors that Mr Maiolo did not possess any of the Company's books or records; and that the liquidator had obtained limited books and records from other unitholders. The Liquidator specifically noted that Mr Maiolo had not provided any of the Company's books or records to assist in a proposed sale of the Property that the liquidator had sought to undertake and that the liquidator was currently seeking material, including the development application and related material, from Liverpool City Council to allow completion of a property valuation. 25Mr Maiolo responded, by his affidavit dated 24 April 2013, that he had told Mr Burton that he did not have any books and records of the Company and that: "I am aware that it is a requirement that companies are to maintain books and records. Should this Honourable Court make order to terminate the winding up of the Company, I undertake to ensure that the books and records of the Company are maintained and held at it [sic] registered office." 26In my view, this evidence is unsatisfactory. It is unclear whether Mr Maiolo's position, as he put it to the liquidator, was that he had never maintained books and records for the Company, notwithstanding that he was its sole director, or alternatively that he had at some point disposed of those documents so that he could not produce them when required to do so. The proposition that Mr Maiolo had not maintained books and records for the Company does not seem to be consistent with the fact that other unitholders appear to have been able to produce some corporate records to the liquidator, or with the fact that the valuation of the property obtained by Mr Maiolo (to which I have referred above) refers to a "current development approval and proposed modifications" and was presumably made by reference to at least some documentation relating to the Property and the proposed development of it, which have not been made available to the Liquidator. 27In the absence of an adequate explanation of how Mr Maiolo, as the Company's sole director, failed to maintain, or to maintain access to, or to produce to the Liquidator, any of the Company's books and records, I cannot accept the bland assertion that he will in future maintain such records or the "undertaking" to that effect contained in his affidavit. I consider that the public interest would not be served by terminating the winding up in these circumstances. Conclusion 28It follows the two important elements necessary to satisfy the Court that an order for termination of the winding up should be made - namely sufficient evidence to satisfy it that the Company has sufficient financial strength that it can continue without significant risk of returning to liquidation, and satisfaction that there is no public interest reason not to terminate the winding up - are not established. That is sufficient, in my view, to require that the application be dismissed. 29Accordingly, I order that the application made by Mr Maiolo on 10 April 2013 be dismissed. I will hear the parties as to costs.

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