Apostolou v VA Corporation of Australia Pty Ltd

Judgment 1By Originating Process dated 6 December 2013, Mr Michael Hird in his capacity as liquidator of Kimberley Securities Ltd (in liq) (rec and mgr apptd) ("Company") applies, under s 482 of the Corporations Act 2001 (Cth), for an order that the winding up of the Company be terminated and that the costs of this application be costs in the deed of company arrangement of the Company. Mr Hird has standing to bring the application under s 482(1A) of the Corporations Act. 2By way of background, the Company was incorporated in 1970 and was involved in the property development business. Voluntary administrators were appointed to the Company on 19 December 2008 and it entered into a previous deed of company arrangement in April 2009. Orders were then made by the Court setting aside that deed of company arrangement in Grocon Constructions Pty Ltd v Kimberley Securities Limited [2009] NSWSC 541; (2009) 72 ACSR 305, and the Company was wound up and Mr Hird and Mr Malanos were appointed as its liquidators. A receiver and manager was also appointed by Lohemi Pty Ltd ("Lohemi"), an entity associated with the Company or its director, Mr Lorentz, which was the secured creditor of the Company, but resigned as receiver and manager in October 2012. A dispute between the Company and another substantial creditor, which had brought the successful application to set aside the earlier deed of company arrangement in respect of the Company, has been resolved and that creditor has not proved in the Company's administration or liquidation. 3Mr Hird's evidence is that he was approached by Mr Lorentz, in late 2010, with a view to a further deed of company arrangement and the making of this application. A further meeting of creditors was ultimately convened in late 2012, and creditors voted to approve Mr Hird's appointment as voluntary administrator of the Company. On 16 April 2013, the Company's creditors resolved that it enter into a further deed of company arrangement in accordance with a proposal set out in Mr Hird's Report to Creditors dated 8 April 2013. The deed of company arrangement contemplated that this application would be made. The intent of the deed of company arrangement, and this application, is that the Company would be returned to Mr Lorentz's control. The deed of company arrangement establishes a deed fund that is to be distributed in accordance with the provisions of the deed if the application to terminate the Company's winding up is successful. The return to creditors under the proposed deed of company arrangement is small in money terms, compared with the quantum of their debt, but that return is to be compared with the position of a liquidation in which, it appears, they would receive no such return. 4The claims of creditors other than Lohemi are to be extinguished upon the payment being made under the deed of company arrangement and the claims of directors and related party creditors are also extinguished under the terms of the deed. The deed in turn contemplates an assignment of certain units owned by the Company and certain debts to Lohemi, in exchange for which Lohemi will release its right, title and interest in the securities in favour of the Company. On the other hand, if the Court does not order the termination of the winding up, the deed of company arrangement would terminate and the Company would remain in liquidation. 5Mr Lorentz's evidence is that, after the Company's liabilities are extinguished by the deed of company arrangement, it will thereafter raise capital and funds necessary to pursue opportunities on a "case by case" basis, consistent with the manner in which it had previously operated. It was initially proposed that Mr Lorentz would arrange for a company associated with him to provide a medium term loan to the Company to allow it to commence operations. That proposal was subsequently amended to provide, as I will note below, for the Company to be recapitalised. 6The applicable principles are well-established. Mr Darams, who appears for the liquidator, refers to the principles set out in Re Warbler Pty Ltd (1982) 6 ACLR 526 at 533, which should be treated as helpful guidelines although they do not restrict the Court's discretion, and refers to the many subsequent cases which have cited those principles, including Von Risefer v Main Freight International Pty Ltd [2009] VSCA 179; (2009) 73 ACSR 427 at 438; Re Modena Imports Pty Ltd (in liq) [2010] NSWSC 739 at [13]; Re SNL Group Pty Ltd (in liq) [2010] NSWSC 797 at [23] and Re 311 Hume Highway Liverpool Fund Pty Ltd (in liq) [2013] NSWSC 465; (2013) 93 ACSR 683 at [4]. The Court's power to make an order terminating a winding up under s 482 of the Corporations Act is discretionary and a person who seeks such an order must establish that the order is appropriate even when the liquidator consents to it. In Prendergast v Rolcross (in liq) [2008] NSWSC 146, White J directed attention to the question (at [25]): "... whether it appears that it would be, or may be, contrary to the public interest if the company were permitted to resume operations. In a case such as the present where all of the shares are held by the plaintiff, the public interest means primarily the interests of existing and future creditors." In Re SNL Group above at [24], Bergin CJ in Eq 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." In Apostolou v VA Corporation of Australia Pty Ltd [2010] FCA 64; (2010) 77 ACSR 84 at [58], Finkelstein J noted that there may be exceptional cases 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 [25]. 7Mr Hird gives evidence as to the Company's solvency, if the winding up is terminated, and the Court will typically give greater weight to a liquidator's evidence in an application of this kind than it would, for example, to that of a director of the company unsupported by independent evidence: QBE Workers' Compensation Pty Ltd v P Russell Enterprises Pty Ltd [2005] NSWSC 1128 at [26]; Re 311 Hume Highway Liverpool Fund above at [7]. Mr Hird's evidence deals with the Company's assets and the fact that debts owed to unsecured creditors will be dealt with under the deed of company arrangement, and expresses the view that the Company is not insolvent and would not become insolvent if the winding up were terminated. That view may have required some qualification, had the proposal not been amended to provide for a capital investment in the Company, since the proposed medium term loan to the Company would have been repayable at some point in the future, and it may have been difficult to establish the Company's solvency where there were no existing assets from which it could have been repaid. 8The proposal has now been amended in the manner set out in a further affidavit of Mr Lorentz dated 5 March 2014, by which he noted that he had arranged for Lohemi to deposit an amount of $50,000 into the trust account of his solicitors and that, if the Court makes an order that the Company's winding up be terminated, Lohemi will gift that sum to the Company as working capital to fund its operations for the foreseeable future. Mr Lorentz expresses the view that that amount will be more than sufficient to cover any administrative expenses required for the Company's day-to-day operations, where the Company is not required to pay rent on office premises or employ staff and will be funded to pursue opportunities in the manner referred to in his first affidavit. I have no reason to doubt that evidence. 9As Mr Darams points out, the effect of that modification to the proposal is that that amount will be available to the Company absolutely and will not give rise to a liability that is repayable at some time in the future. Mr Darams refers to the Court's decision in Re TMPL Pty Ltd (in liq) [2012] NSWSC 1059, where a similar approach was adopted in a successful application to terminate a winding up. This approach also avoids the need to deal with any issues of subordination, for example, as between a loan which may have been made to fund the Company and other creditors of the Company, which is an issue which may give rise to difficulty in applications of this kind: Owners Strata Plan 70294 v LNL Global Enterprise Pty Ltd [2006] NSWSC 1386; (2006) 60 ACSR 646 at [19]-[27]. Mr Darams also notes that it is open to the Court to indicate its decision but defer the making of an order in order to allow the proposed steps to recapitalise the Company to take place, the course which the Court adopted in Re Living Creatively above at [21]. 10The attitude of creditors is a relevant matter in such an application, as is whether all debts have been discharged. The inference that the majority of creditors are in favour of the application can be drawn from the fact that creditors voted for the proposal provided under the deed of company arrangement. That proposal is objectively favourable to creditors, so far as it delivers a small return to them, by contrast with Mr Hird's expectation that there would be no return to them in a winding up. The attitude of the liquidator is also relevant, and Mr Hird indicates that he supports the order being made. Where a company is subject to a deed of company arrangement, as in this case, the Court should also have regard to the objects and policy of Pt 5.3A of the Corporations Act: Re Living Creatively above at [13]-[15]. 11The general background and circumstances leading to the winding up order is a relevant matter in such an application and Mr Hird and Mr Lorentz lead evidence of that matter. Mr Hird's evidence, consistent with the views he has previously expressed in a report to creditors under s 439A of the Corporations Act, which recommended that the Company enter into a deed of company arrangement, is that the information provided to him is that the Company was significantly affected by the global financial crisis of 2008 and, in particular, a purchaser withdrew in October 2008 from a contract to purchase a substantial property of the Company due to that crisis, and that, based on Mr Hird's preliminary investigations and inquiries, he has no reason to disagree with that information. The view of the Australian Securities and Investments Commission ("ASIC") is relevant in respect of such an application. Notice of the application has been given to ASIC by letter dated 29 November 2010. It appears that ASIC has not responded to that letter and I infer that it does not oppose the application. 12Questions of commercial morality, and in particular, whether there has been serious impropriety in the conduct of the Company's affairs, are also relevant in such an application, although primarily by reference to the future of the Company and any risk to future creditors, such that an order terminating the winding up may be refused where previous misconduct or issues of solvency indicate a risk to creditors and the public if the Company is permitted to trade: Sevior v Morgan [2012] VSC 480 at [18]; Re 311 Hume Highway Liverpool Fund above at [23]. Mr Darams properly drew my attention to the decision of Barrett J in Grocon Constructions above, which set aside the previous deed of company arrangement in respect of the Company, and to his Honour's observations (at [95]-[96]) that there were lines of inquiry available to a liquidator as to "undertakings" of support given to the Company by a related company, which would have been extinguished by the then proposed deed of company arrangement, and that a liquidator would also give consideration to the status of the security held by another related company. It does not seem to me that these observations themselves indicate any misconduct on the part of the Company's former directors, although they did indicate that there were inquiries which, if made by a liquidator, were potentially of advantage to the Company's creditors. 13Mr Hird's evidence is that he has not in fact identified any misconduct in his report to ASIC under s 533 of the Corporations Act and that ASIC has advised that it does not propose to take any action in response to that report; that his investigations indicated that the Company's books and records were adequate and did not identify any transactions in the nature of unfair preferences, unfair loans, unreasonable director-related transactions or other transactions of the same kind or any breach of duty by the directors, and that he has not become aware of any offences committed which would have required a report to ASIC under s 438D of the Act. 14In the present case, it seems to me that the proposal now advanced by Mr Lorentz, and the subject of Mr Hird's application, adequately addresses the interests of future creditors of the Company by providing working capital to the Company in the manner that I have noted above; there is no suggestion that the Company's existing creditors oppose the termination of the winding up and the liquidator's interests have been addressed; and I do not consider that the issues which arose in respect of the setting aside of the previous deed of company arrangement provide any reason of corporate morality not to terminate the winding up, where the liquidator's subsequent investigations have not disclosed any evidence of misconduct. In these circumstances, I am satisfied that this is a proper case in which to make an order that the winding up of the Company be terminated. I note, however, that that order is made on the basis that additional funds will be contributed to the Company by way of working capital. It seems to me that the preferable course, analogous to that adopted in Re Living Creatively above, is to allow 7 days in which Mr Lorentz may either effect the contribution of capital to the Company, or give an undertaking to the Court to do so within a specified time and, if that occurs, I will make an order terminating the winding up on that basis. 15The liquidator also seeks an order that the costs of this application be costs in the deed of company arrangement of the Company. I note that the application was contemplated by the deed of company arrangement and I will make such an order. 16The liquidator should bring in Short Minutes of Order to give effect to this judgment within 7 days.