Australian Beverage Distributors Pty Ltd v Cranswick Premium Wines Pty Ltd

Supreme Court of NSW|2019-09-12|Before: Rees J, Parker J

Solicitors: Pure Legal (Applicant) Ziman and Ziman Solicitors (Respondent) File Number(s): 2019/199867

Judgment

HER HONOUR: In these proceedings, Budget Demolition & Excavation Pty Limited (Budget) seeks to wind up Grandview Ausbuilder Pty Limited (Grandview) on the ground of insolvency, a presumption of insolvency having arisen on Grandview's failure to comply with a statutory demand. Grandview's application to set aside that demand was the subject of a judgment of Parker J in Grandview Ausbuilder Pty Limited v Budget Demolitions Pty Limited [2018] NSWSC 1647 and the Court of Appeal in Grandview Ausbuilder Pty Limited v Budget Demolition Pty Limited (No 2) [2018] NSWCA 341 and Grandview Ausbuilder Pty Limited v Budget Demolitions Pty Limited (2019) 136 ACSR 563; [2019] NSWCA 60. It has been necessary to consider these judgments when determining the applications before the Court on this occasion, being: 1. an application under section 440A(2) of the Corporations Act 2001 (Cth) by Grandview's voluntary administrator, Liam Bailey, to adjourn the winding up until a meeting of creditors, at which consideration will be given to entry into a Deed of Company Arrangement (DOCA); 2. an application under section 467(1) of the Corporations Act to dismiss the winding up application as one of the two invoices referred to in the statutory demand was not in fact due and payable when the demand was issued; and 3. alternatively, accepting it is otherwise appropriate to appoint a liquidator, whether that liquidator should be Mr Bailey or the liquidator put forward by Budget.

Adjournment: section 440A(2)

The application to adjourn the winding up proceedings was strenuously opposed by Budget in a manner reminiscent of that described by Parker J, who commented that the evidence in the two-day hearing to set aside the demand was "nearly all peripheral": at [8]. On appeal, Sackville AJA observed at [101]: The present case is another example of the divergence between the statutory objectives and the conduct of the proceedings. The application to set aside the statutory demand was filed on 20 February 2018, but the hearing did not commence until 24 October 2018, eight months later. In the meantime, apart from the supporting affidavit accompanying the application, the parties filed a total of nine affidavits and three expert reports. … Budget's legal costs of defending Grandview's application to set aside the statutory demand, before Parker J and on appeal, were apparently $246,000.
Although the application to adjourn a winding up is an interlocutory hearing, seven affidavits were read, an attempt was made to read a further late-served affidavit, documentary exhibits comprised two lever-arch folders, there was a voir dire on the admissibility of evidence and cross-examination of three witnesses, being the administrator, Mr Bailey, the sole director of Budget, Samaan Habib, and Budget's solicitor, Derek Ziman. Budget's focus at the hearing, perhaps understandably, was directed to the hearings before Parker J and the Court of Appeal rather than to the proposed DOCA.
It is timely to set out the task before the Court on an application to adjourn a winding up proceedings. In doing so, I have drawn on my judgment in In the matter of Cresco Opus Fund (No 4) Pty Ltd (administrator appointed) [2019] NSWSC 941 and the cases there cited. Section 440A(2) 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.
The principles relevant to an application under section 440A(2) are not controversial. There must be a sufficient possibility, as distinct from a 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 of 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, or at least that any return be accelerated. Where there is a realistic possibility that a 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 Australian 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] ff where Black J conducted a review of the authorities as to relevant factors in such applications.
It is apparent from the proxies received by Mr Bailey from creditors that the proposed DOCA, if put to a meeting of creditors, will pass in a vote under rules 75-110 and 75-115 of the Insolvency Practice Rules (Corporations) 2016 (Cth), that is, a majority of the creditors by number, and a majority of the creditors by value, are likely to vote in favour of the resolution. Thus it is relevant to note, as I did in Cresco Opus Fund at [29]-[32], that where the creditors of a company in administration include both related party creditors and third party creditors, greater weight may be given to the interests of third party creditors. This is particularly so if the related party creditors wish to enter into a DOCA for the purposes of ceasing any investigations which a liquidator of the company might undertake, or claims the liquidator may bring against related party creditors. For example, in Cresco Opus, I refused to adjourn a winding up application and appointed a liquidator as there was only one third party creditor - the petitioning creditor - who adduced a large amount of affidavit and documentary evidence describing its investigations into the conduct of the company, which indicated that the company had embarked on a series of transactions to strip the company of assets in order to defraud its creditors. The petitioning creditor undertook to provide $400,000 to fund a liquidator to pursue these matters. The petitioning creditor submitted, with some basis, that there was doubt whether the contribution from the director of the company - who had left the country - would be forthcoming. There was no apparent benefit to the related party creditors in entering into the DOCA other than deflecting legal action against the company's director: at [33]. The attitude of the only third party creditor was against entry into the DOCA. That creditor had already balanced the benefit of prompt payment of the proposed distribution to creditors under the DOCA against its wish to spend more money trying to recover the assets of the company which had been stripped: at [34].
Even if the Court is not satisfied that the requirements of section 440A(2) are met, the Court 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 otherwise to adjourn the winding up proceedings.
Budget does not suggest that this is a last minute application and thus Grandview's request for an adjournment does not warrant being treated with the scepticism often reserved for such applications: In the matter of Edifice Australia Pty Limited [2019] NSWSC 1215 at [28]-[30]. These proceedings were commenced on 27 June 2019. The parties were engaged in settlement negotiations until 2 August 2019, both in respect of these proceedings and overall. On 12 August 2019, Grandview appointed Mr Bailey and, on 23 August 2019, filed its Interlocutory Process to adjourn the winding up proceedings. There are thus no considerations on this score which would warrant particular attention in determining whether I am satisfied that it is in the interests of the company's creditors to continue under administration rather than be wound up.

Witnesses

Budget was critical of Mr Bailey's reports and his approach to the proposed DOCA but I found him to be an impressive and knowledgeable witness who fairly accepted matters put to him and provided information to the Court in an open and even-handed manner. I consider him to be a reliable witness.
The credit of Mr Habib and Mr Ziman was not in issue: Mr Habib gave fervent evidence as to non-payment, and offered an explanation as to why the December 2017 invoice, although not due and payable under the subcontract, was somehow said to be due and payable nonetheless. Nothing turns on this in the application before me. Mr Ziman fairly accepted that some parts of Budget's proof of debt were referable to a claim for damages not yet made, and confirmed that the voidable transaction claim identified by Mr Bailey would be vigorously defended.

Grandview and related companies

Grandview operates a business providing design, development and construction services. It enters into contracts with a principal or developer to perform building works on a site - a head contract - and enters into subcontracts with subcontractors to perform particular stages of the work. Budget is a demolition and construction company which entered into one such subcontract.
In 2015, Grandview began developing a property in Bankstown comprising 54 residential apartments. It entered into a Design and Construct Contract with JR Investment Group Pty Ltd, a related company and the developer. At that time, the sole officeholder and shareholder of Grandview was Jie (Jason) Zhang. Jason Zhang has a Bachelor of Information Technology and a Master of Business Administration from Central Queensland University.
In 2016, Grandview began developing a property in Villawood comprising 119 apartments with retail and community spaces and entered into a Design and Construct Contract with Grandview Co Pty Limited, a related company, to undertake the development for $31.5 million. Thereafter, Grandview received funds from Grandview Co as and when required. The payments were recorded in Grandview's management accounts.
In April 2017, an Interim Occupation Certificate was issued for the Bankstown development. This development is still subject to a defects liability period and defects works are presently being undertaken. Grandview has sponsored an employee on a 457 visa, who is supervising these works.
In June 2017, Grandview's MYOB account records a credit note being raised in respect of a management fee of $550,000 apparently charged by Grand Hua Mao Co Pty Limited, a Hong Kong company owned by Grandview CN Limited of which Jason Zhang is a 50% shareholder and one of two directors. As I understand it, Budget suggests that this credit is not reflected in a proof of debt since submitted by Grand Hua Mao Co, although there is insufficient evidence to enable me to determine whether this is right or not. Since his appointment, Mr Bailey has reviewed the monies said to be owing to related companies against the management accounts of Grandview and its bank statements as well as the bank statements of the related companies. Mr Bailey concluded: … it is apparent to me that; (i) the ledgers of the loans accounts have been dealt with consistently throughout the period for which I have received the management accounts of the Company. (ii) by reference to the bank statements provided, I can identify monies being paid by creditors and received by the Company for a substantial amount of the value of the loans. However, this is by no means conclusive for the totality of the amounts claimed. (iii) on balance, I am satisfied that loan accounts maintained by the Company appear to be genuine …
The accounting records which I have seen are detailed and well kept. I have no reason to depart from Mr Bailey's assessment. As such, Grandview is part of a group of companies emanating from Hong Kong which, together, undertake developments. Funds flow between these companies. Perhaps unsurprisingly, some of the largest creditors of Grandview are these related companies.

The subcontract

In June 2017, Grandview entered into a Subcontract Agreement with Budget in respect of the Villawood development. The subcontract was subject to the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act). Under the subcontract, Budget was to perform excavation works for $2,314,581 plus GST. The completion date for the works was 12 December 2017, although Mr Habib does not admit that Budget agreed to this. Annexed to the subcontract was a Construction Program: Annexure E. Clause 30 of the General Conditions of Subcontract, which formed part of the subcontract, provided: 30 Delay to Completion a. If the Subcontractor fails to achieve Completion of the whole of the Subcontract Works by the Date for Practical Completion and or a Milestone by the Milestone Completion Date (as the case may be) the Subcontractor will be liable to pay the Builder liquidated damages as a debt due and owing at the following rates: i. In the case of the whole of the Subcontract Works at the rate stated Item 15(a) of Annexure A. ii. In the case of the Subcontract Works the subject of a Milestone at the rate(s) stated in Item 15(b) of Annexure A for each Milestone as specified in Item 12 of Annexure A to an aggregated maximum total of not more than the rate stated in Item 15(a) of Annexure A. for every day after the Contractual Completion Date to and including the Actual Completion Date. … Item 15(a) of Annexure A to the General Conditions of Subcontract provided for $4,000 plus GST per day whilst Item 15(b) was blank. The subcontract suffered from other drafting imperfections, which became apparent in the judgments referred to at the outset.
Work began. Between July and October 2017, Budget made four or five progress claims totalling some $1.2 million, which Grandview paid: Parker J at [2]-[3]: Bell P at [14]. In August 2017, Jason Zhang deposed that there was a dispute with Budget in respect of a variation which he rejected and, shortly afterwards, Budget removed its workers from the site and suspended works. In the Equity proceedings, it is pleaded that on 5 September 2017, Budget wrongfully and without proper basis suspended work at the site in breach of the subcontract. Mr Habib deposed that Budget's work was interrupted in September 2017 by a sewer line obstacle and the work of a third party on that obstacle and that Grandview directed Budget, on 11 September 2017, to stop work.
Jason Zhang deposed that, by late October 2017, Budget had still not returned to the site and, in order for work to resume, he agreed to pay part of the disputed variation claim subject to Grandview's right to a final reconciliation at the conclusion of the contract works. Only then did Budget return to the site, but failed to complete works in accordance with the Construction Program. In the Equity proceedings, Grandview contends that, from 5 September 2017 on, Budget failed to perform the works in breach of the essential terms of the contract entitling Grandview to issue a Notice to Show Cause. Mr Habib rejects Grandview's claims in this regard.
On 21 November 2017, Budget issued an invoice, a debt which formed part of the statutory demand. On 1 December 2017, Grandview issued a Subcontractor Payment Schedule under the SOP Act which, effectively, accepted the November 2017 invoice. The schedule provided for payment of the November 2017 invoice but Grandview did not pay it.
On 12 December 2017, the date for completion under the subcontract passed but the works remained incomplete. On 20 December 2017, Grandview sent an email to Budget in respect of closure of the building site for Christmas from Friday 22 December 2017 to 4 February 2018, with site work to resume on 5 February 2018. Grandview concluded its email: From all of the team at Grandview, we look forward to continue working you throughout 2018.
On 21 December 2017, Budget issued a further invoice for $526,045.26. Grandview made no response to the claim within the 10 day period allowed under the SOP Act: section 14(4). In these proceedings, Mr Zhang says that he was not in Australia when the December 2017 payment claim arrived and it was not brought to his attention until Grandview's office re-opened on 16 January 2018. By then, the time allowed under the SOP Act for a payment schedule had expired. By this time, Mr Zhang says he had become concerned that Budget had overcharged the company as Budget had claimed almost 90% of the contract price but 90% of the contract works did not appear to have been completed. In light of his concerns, Mr Zhang says that Grandview did not pay the November or December claims, which he hoped to discuss with Budget on his return to Australia.
On 3 January 2018, notwithstanding Grandview's closure of the building site, Budget resumed work. On 4 January 2018, Grandview advised Budget to stop work or the police would be called. Budget left the site and, as matters turned out, never returned other than to remove its equipment.
On 31 January 2018, Budget gave notice of suspension of works under section 15(2)(b) of the SOP Act on the ground of failure to pay the November and December progress claims. Budget also issued a statutory demand for the November and December 2017 invoices, totalling $1,024,573.36. Under the contract, the December 2017 invoice was not in fact due until 7 February 2018: General Conditions of Subcontract, clause 1(A) (definition of "Business Day"); clause 37(c) (Claims and Payments).
On 1 February 2018 the statutory demand was served and Grandview sent an email to Budget advising that the Villawood site work would not resume on 5 February 2018 until further notice. On 5 February 2018, Budget replied, reserving its rights and requesting an urgent meeting: Bell P at [22]. On 6 February 2018, Mr Zhang replied: set out by Bell P at [23]: i am in china, there is time differents [sic] and maybe Some technical issue, My australian number doesn't working [sic] properly in china. We are still working on s96 and new DA, According to council, it might take more than three months. I am aware you have one Claim overdue. but we have some issues on that claim, I need to discuss with peter, when I back to sydney. Do not waste money on your lawyer, we can fighting [sic] on the court for a year, get same result. let's sit down talk about how to pay you. That will save you a lot of legal fee. Try to call me after Lunch time, Don't too earlier, There is time difference between china and australia.
On 15 February 2018, Grandview sent a further email, "Payment proposal": 1. We will pay $150,000 per month until the full amount is paid. 2. The first payment will be made to you on Monday 19 February 2018 and thereafter on the 19th of every month until fully paid. 3. The first payment on 19 February 2018 will be made upon receipt from you written [sic] confirming that you withdraw the Creditors Demand dated 31 January 2018. The payment proposal was not accepted by Budget.

Application to set aside demand

On 20 February 2018, Grandview filed an application to set aside the demand. In an affidavit in support of the application, Mr Zhang deposed that, during September and October 2017, Budget failed to attend and perform any works at the site and, whilst work resumed, there was a continual failure to meet milestone dates: extracted by Bell P at [25].
On 2 March 2018, Grandview served Budget with a notice requiring it to show cause pursuant to the clause 40 of the subcontract as to why it should not exercise its rights and terminate the contract and, on 9 April 2018, purported to terminate the subcontract. The termination notice (set out at by Bell P at [29]) referred to Budget attending the site on 13 and 17 March 2018 and removing materials and equipment intended to be used to complete the works. Mr Habib rejects that Grandview was entitled to issue a show cause notice or terminate the subcontract. On 19 April 2019, Budget accepted Grandview repudiatory conduct and elected to consider the contract as terminated: see Bell P at [30].
By reason of the operation of the SOP Act, it was not open to Grandview to contend that there was a genuine dispute as to the existence of the debt: Parker J at [9], Bell P at [4]. Notwithstanding this constraint, Grandview complained at the hearing before Parker J that the contract price was $2.3 million, of which $2.2 million had been charged, and yet $1.1 million's worth of work was yet to be completed: Bell P at [46], [48]. In light of the constraints imposed by the SOP Act, at the hearing on 24 and 25 October 2018 Grandview advanced three offsetting claims, summarised by Bell P at [7]: (1) the Liquidated Damages Claim … said by Grandview to be valued at $330,000; (2) the Milestone Damages Claim … said by Grandview to be valued at $3.816 million; and (3) the Loss of Bargain Damages Claim … [or] "cost to complete works claim" … said by Grandview to be valued at approximately $1.1 million.
In respect of the Liquidated Damages Claim, Grandview said it had a claim under clause 30(a)(i) for $330,000. Parker J considered that Grandview was entitled to liquidated damages for Budget's failure to complete the works by 12 December 2017 at $4,400 a day but may not be entitled to liquidated damages for any period of time when it excluded Budget from the site: at [21], [23]. His Honour considered that Grandview could not recover liquidated damages after 31 January 2018 when Budget suspended work under the SOP Act: at [24]. His Honour considered that Grandview had an "at least potentially contestable" or "potentially viable" claim for liquidated damages from 13 December 2017 to 31 January 2018 inclusive but "no viable claim after that date": at [25]. Although his Honour considered that Budget had a strong case that its liability to pay damages ceased before 31 January 2018 based on steps actively taken by Grandview to exclude it from the site on 4 January 2018, his Honour considered that Grandview had nonetheless established an offsetting claim in the sum of $220,000 for the purposes of section 459H(1)(b) of the Corporations Act for the whole of the period from 13 December 2017 to 31 January 2018: at [24], [25].
In respect of the Milestone Damages Claim, Grandview relied on clause 30(a)(ii), seeking liquidated damages for Budget's failure to meet Milestones in the Construction Program. The damages sought were "a startling figure" of some $3.816 million: Parker J at [28]. His Honour considered that this offsetting claim suffered from "a more fundamental problem", being that Item 15(b) of Annexure A was blank. At [29]: When this was pointed out to counsel for Grandview, he asserted that it was a mistake and that Grandview would require the contract to be rectified. But this is not satisfactory. Mr Zhang's affidavit contained not one word about rectification; indeed, so far as I can see, it had never been mentioned until counsel put it forward, apparently on the spur of the moment, at the hearing. The principle, known as the "Graywinter principle" from Graywinter Properties Pty Ltd v Gas & Fuel Corp Superannuation Fund (1996) 70 FCR 452; [1996] FCA 822, that it is not open to a plaintiff applying to set aside a statutory demand to introduce at the hearing a new ground not supported by the affidavit filed in support of the applications, is well established. This alleged offsetting claim fails in its entirety. That is, Parker J rejected this alleged offsetting claim because it fell foul of the Graywinter principle, not because Grandview might not have a claim for rectification.
In respect of the Cost to Complete Works claim, Grandview contended that by reason of Budget's failure to complete the works, it had no option but to terminate the contract and engage another contractor to finish the works, which would likely cause Grandview to incur additional costs. Parker J noted, however, that Grandview had not purported to terminate the contract until 9 April 2018, which was after the application to set aside the statutory demand had been filed with the Court: at [31]. His Honour found that this alleged offsetting claim failed by reason of the evidence relied upon by Grandview as to the cost of completing the works, being an expert report assessing the cost of work to completion at approximately $1.1 million. His Honour did not consider that that was the correct figure to assess any damages rather, at [53]: If Grandview has validly terminated the contract, it will be entitled to damages which would put it in the position in which it would be had the contract been completed in accordance with its terms. The first integer in this calculation will be the amount required to complete the works to the contractual standard. But it is necessary to take account of what Grandview would have had to pay under the subcontract. Using Mr Brincat's figures, one adds the cost of completion of the works ($1.1 million) to the amount already paid ($1.2 million). But to complete the process, it is necessary to subtract the contract price. This is given by Mr Brincat, including variations assessed, as $2.5 million. On these figures, the figure for loss of bargain damages is negative and nothing is recoverable.
Accordingly, on 7 December 2018, Parker J found that one of the three offsetting claims had been established but for an amount significantly less than the sum in the statutory demand. His Honour was concerned that Grandview had not actually commenced proceedings against Budget to recover liquidated damages, describing it as a clear case of "a creditor being stultified": at [67]. At [68]: In my view, a company facing a statutory demand which it contests on the ground of an offsetting claim should be expected to take immediate action to bring that claim forward for determination in the proper forum. If the company does not do so, it is at risk of the Court concluding that the asserted offsetting claim is not genuine (John Shearer at 148). The Court may also exercise its discretion to refuse to set aside the statutory demand even if an offsetting claim is established, or exercise its power under s 459M to impose conditions on the grant of relief.
Whilst his Honour said that Grandview's claim for liquidated damages "cannot be characterised as nebulous or vague … its quantum is seriously contestable", particularly for the period after 4 January 2018: at [70]. According, Parker J required Grandview to undertake to pay the full amount of the alleged offsetting claim, being $220,000, into Court as a condition of relief given Grandview's delay: at [71]. Grandview did not accept these terms and his Honour dismissed the proceedings with costs, extended time for compliance with the statutory demand on condition that Grandview commence and prosecute any application for leave to appeal with all due dispatch and provide $30,000 security for Budget's costs of the appeal. The security was paid.

Payment into Court

On 19 December 2018, the Court of Appeal further extended the time for compliance with the statutory demand until seven days after judgment in the appeal but, on 24 December 2018, the orders were varied to require Grandview to pay $340,000 into Court as a condition of the stay. Generally, where a demand is not based on a judgment debt, the plaintiff is not required to pay the monies into court as a condition on the stay pending appeal as this gives a defendant a form of priority or security to which it is not obviously entitled: Australian Beverage Distributors Pty Ltd v Cranswick Premium Wines Pty Ltd (2004) 50 ACSR 544; [2004] NSWSC 877 at [16]; JEM Developments Pty Ltd v Hansen Yuncken Pty Ltd (2006) 60 ACSR 393; [2006] NSWSC 1378 at [28]; In the matter of Britten-Norman Pty Limited [2013] NSWSC 424 at [9]. In Grandview Ausbuilder Pty Limited v Budget Demolition Pty Limited (No 2) [2018] NSWCA 341, Beazley P departed from this approach given Grandview's delay in prosecuting its offsetting claim, the lengthy delay in the statutory demand process, the "seriously contestable" nature of the offsetting claim and the fact that Grandview had admitted it owed Budget some $1 million: at [16]-[17]. However, the President noted, at [17]: … In doing so, I do not seek to detract from the statements of Barrett J in Australian Beverage Distributors v Cranswick Premium Wines and of Austin J in Jem Developments v Hansen Yuncken, other than to say that a payment into Court will not necessarily give Budget any priority interest, nor would it constitute Budget a secured creditor. If, during the course of the court proceedings, Grandview is wound up, the liquidator would undoubtedly have access to the monies paid into Court for the purposes of the winding up, including for distribution amongst the creditors generally. If Grandview is wound up after the monies are paid out to Budget, the monies would fall to be dealt with in accordance with the Corporations Act, Pt 5.6.
Grandview paid the $340,000 into Court and it is these monies which were subsequently paid out to Budget after its appeal was dismissed, that Mr Bailey says are recoverable as a preference payment. Given Beazley P's unequivocal confirmation that "[i]f Grandview is wound up after the monies are paid out to Budget, the monies would fall to be dealt with in accordance with the Corporations Act, Pt 5.6", Mr Bailey would appear to stand on solid ground.
On 21 February 2019, Grandview commenced the Equity proceedings. Mr Zhang explained in these proceedings that, as Grandview was precluded from disputing the payment claims in the proceedings to set aside the statutory demand, he instructed Grandview's solicitors to commence fresh proceedings under the subcontract and section 32 of the SOP Act for a reconciliation of the contract price, recovery of amounts overpaid and for liquidated damages.

Court of Appeal

On 4 March 2019, Grandview's appeal was heard. Grandview did not appeal against Parker J's decision in respect of the Liquidated Damages Claim, that is, reducing it to $220,000, but against his Honour's rejection of the other offsetting claims. Mr Zhang says that it became known during the appeal that the December 2017 invoice was not due and payable when the demand was issued but, as it had not been relied upon before Parker J, could not be relied upon in the appeal.
In respect of the Milestone Damages Claim, Bell P (with whom Sackville AJA agreed) held that it could not be raised by reason of the Graywinter principle, whilst White JA disagreed: at [86]-[88]. But all members of the Court of Appeal agreed that the rectification claim did not meet the requirements of an offsetting claim under section 459H of the Corporations Act as, according to Bell P, there was "no evidentiary foundation whatsoever … laid to make out that there was a genuine or arguable case for rectification": at [38]-[39]. White JA agreed that no further evidence had been provided that could raise a plausible contention that the contract might be rectified: at [89].
Nor did Bell P consider that the events in the Construction Program at Annexure E to the subcontract were "Milestones" as defined in Clause 1: at [42]-[43]. White JA agreed that the construction of the subcontract advanced by Grandview - that there were multiple milestone dates - did not have any element of rational controversy to it and was a patently feeble argument: at [91]. Thus, the Milestone Damages Claim should have been rejected on this basis rather than by reference to the Graywinter principle: at [92].
In respect of the Cost to Complete Works Claim, their Honours found that this part of Parker J's reasoning was problematic as it overlooked the fact that Grandview was already liable to Budget for $1,024,573.36 for unpaid progress claims. Per Bell P at [56]: Prima facie, therefore, an offsetting claim for loss of bargain damages had been raised which exceeded in arguable value the statutory demand with the consequence that a basis for setting it aside had been made out. However, Budget was granted leave to file a Notice of Contention to the effect that Parker J should also have found that Grandview had no offsetting claim for loss of bargain damages as it was not entitled to terminate the contract on 9 April 2018, or at all: at [57] per Bell P. On this basis, Bell P considered that the Cost to Complete Works Claim was not genuine as Grandview's email of 20 December 2017 was an unequivocal statement wholly inconsistent with any intention to terminate the subcontract and "it was clear beyond argument that Grandview had affirmed the subcontract" (at [68], [69]) and thus this offsetting claim failed. White JA agreed with Bell P that Grandview had not raised a plausible contention requiring investigation that it was entitled to damages for loss of bargain arising from its termination of the contract on 9 April 2018: at [93]. White JA also agreed that the offsetting claims were "constructed in response to the service of the statutory demand" and were not genuine: at [96].
Thus, on 29 March 2019, Grandview's appeal was dismissed and an order made that the $340,000 paid into Court by Grandview be paid out to Budget, and it was. On 5 April 2019, time for compliance with the statutory demand expired.
On 17 June 2019, Grandview paid Budget the balance of the November 2017 invoice, being $158,528.10, under cover of a letter from Grandview's solicitor noting that, at the time that the demand was issued and served, the December 2017 invoice was not due and payable and thus the demand was defective insofar as it related to that invoice. Grandview suggested that it had now satisfied the demand insofar as it was valid and, if Budget sought to rely on the balance of the demand in support of an application to wind up Grandview, then it would apply to set aside the balance of the demand as being invalid on that basis and seek costs of the proceedings on an indemnity basis. On 27 June 2019, Budget commenced these proceedings seeking to wind up Grandview for failure to comply with the statutory demand.
On 28 June 2019, a general journal entry was made in the accounts of Grandview, "to accrue the revenue for FY 2019 for Villawood project", being a credit of $1,878,836.97. The balance sheet for Grandview as at 30 June 2019 recognised this as an a current asset, "Accrued Revenue", although it should probably be recognised as Work in Progress according to Mr Bailey, with whom I agree. The net assets of Grandview as at 30 June 2019 were- $2,443,233.43. Despite a substantial deficiency of assets over liabilities, the profit and loss statement for Grandview for the year ended 30 June 2019 recorded construction and renovation income totalling $2,014,700.61 and, after expenses, a net profit of $880,595.76.
On 1 July 2019, another general journal entry was made reversing the accrual of revenue for the Villawood project and, on 5 July 2019, recording a sale in that amount to Grandview Co. Mr Bailey says that the invoice converted the "Accrued Revenue" (or WIP) into a trade debt which was then offset against pre-payments made by Grandview Co. Non-current liabilities as at 30 June 2019 totalling $2,240,973 were thereby reduced to $221,983. Mr Bailey does not consider that this transaction warrants further investigation but, if the company is wound up, a liquidator may conduct further investigations into the legitimacy of this arrangement. I tend to agree: where Grandview Co was advancing monies to Grandview for use in the Villawood project, for which Grandview was entitled to be paid under the Design and Construct Contract, this transaction appears straightforward.
Grandview has since lodged a BAS return which records that Grandview owes $189,389 for the month ended 31 July 2019. The bulk of this amount owing is likely referable to the sale to Grandview Co. Although I may have mistook the position, I understood Budget to submit that, by lodging a BAS return having recorded a large sale to Grandview Co, Grandview endeavoured to 'create' a third party creditor. I do not accept that submission if it was made. It is apparent that Grandview attended to compliance with its tax obligations with promptitude, apart from one matter which I will mention later, and seems to have done so on this occasion consistent with past practices.
On 16 July 2019, Budget filed a defence in the Equity proceedings. Settlement discussions were then in train. On 24 July 2019, Grandview entered an appearance in these proceedings noting that it would contest the application on the grounds that it was solvent, that the statutory demand had been satisfied and that the proceedings were an abuse of process. Without prejudice communications continued.

Appointment of administrator

On 26 July 2019, Grandview's solicitor contacted Mr Bailey to discuss the circumstances of Grandview and the current status of litigation against it. On 1 August 2019, Jason Zhang met with Mr Bailey to discuss Grandview's financial position and the options available to deal with the potential insolvency of the company.
On 5 August 2019, directions were made in the Equity proceedings for Budget to file any motion for security for costs. On 5 August 2019, Grandview entered into: 1. a Licence Agreement for Works; and 2. a Licence Agreement for Equipment, with JR Investment Group. Jason Zhang executed the documents for both companies as sole director and sole secretary of each. Mr Bailey explained that the agreements provided for JR Investment Group to trade on the business, for the completion of defect works including the use of equipment owned by Grandview. Further, it was proposed that Grandview's employee would be subcontracted to JR Investment Group for the duration of an administration.
On 6 August 2019, Qingde Zhang replaced Jason Zhang as the director and secretary of Grandview, although Jason remains the sole shareholder. Qingde is Jason's father. Mr Bailey was told that this was because Jason Zhang would be unavoidably detained on business in China during the administration period and that his father had the capacity and background knowledge to act as director in his stead. Mr Bailey says he had no reason to doubt the veracity of the reasons provided and noted that Jason Zhang understood that he would still be answerable to Grandview in the event that the company is wound up. I am not as accepting of this explanation. Jason Zhang was not required for cross-examination.
On 8 August 2019, Mr Bailey attended a meeting with Grandview to discuss his potential appointment as an administrator of the company. Mr Bailey was provided with the books and records of the company and documents to complete his appointment as voluntary administrator. On 12 August 2019, by resolution of Qingde Zhang, Mr Bailey was appointed as an administrator pursuant to section 436A of the Corporations Act, that is, on the basis that Grandview was insolvent or likely to become insolvent. Also on 12 August 2019, Jason Zhang and Mr Bailey entered into a Deed of Guarantee and Indemnity under which Jason Zhang agreed to indemnify the administrator for $60,000 on account of his anticipated remuneration and disbursements. Mr Bailey also conducted a search of the Personal Property Securities Register (PPSR) which revealed 13 creditors holding security interests.
On 13 August 2019, Mr Bailey wrote to the creditors of Grandview convening a first meeting of creditors on 22 August 2019. Mr Bailey invited creditors to submit proof of debt forms and proxies by 21 August 2019. Mr Bailey advised creditors that Mr Zhang had agreed to make an upfront payment of $60,000 in respect of the administrator's remuneration and disbursements, with no conditions on the conduct or outcome of the administration or on the upfront payment. On 16 August 2019, Budget became aware of the appointment of Mr Bailey as administrator and stopped work on an affidavit in support of an application for security for costs in the Equity proceedings.
On 20 August 2019, Qingde Zhang completed a Report on Company Activities and Property, describing Jason Zhang as general manager of Grandview with responsibility for the day to day running of the business. The reason given as to why the business had failed was "adverse legal action". The company was said to have ceased trading on 12 August 2019 for this reason. Mr Bailey confirms that he was told by Jason Zhang and his father that the primary cause of Grandview's financial difficulty was the dispute with Budget and consequential legal expenses. Mr Bailey was told that Grandview continued to dispute Budget's claim and contended that it had good claims against Budget in the Equity proceedings.
On 22 August 2019, the first meeting of creditors took place and there was no resolution to replace Mr Bailey or appoint a committee of creditors. Also on 22 August 2019, Mr Bailey searched the ATO portal and noted that Grandview's lodgements with the ATO were up to date. He also received a proposal for a DOCA from Jason Zhang which included a contribution of $300,000 to be paid to Grandview, such contribution to be secured over real estate. Mr Bailey conducted a title search of the proposed security property, noting it had been purchased by a related company, Grandview Granville Pty Limited, in June 2018 for $1,755,000 and was subject to a mortgage with a loan balance of $1,098,915.79, that is, with equity of some $650,000. On the face of it, the equity in the Granville property is more than sufficient to secure the proposed contribution.
Also on 22 August 2019, Jason Zhang swore an affidavit in support of the application to adjourn the winding up deposing that, to date, Grandview has paid Budget some $1.7 million but there remains work costing some $1.17 million to complete. Mr Zhang deposed that the company intended to seek to transfer the Equity proceedings to the Technology and Construction List in order to progress the matter more quickly. Mr Zhang understood that, whilst the Court of Appeal had found against Grandview for reasons including that by reason of the timing and nature of the termination of the subcontract, the Court did not accept that the damages flowing from the termination constituted a valid offsetting claim as at the material date, Grandview was nonetheless entitled to seek the relief in the Equity proceedings. Mr Zhang said he understood that Grandview has good prospects in the Equity proceedings, where $1,880,693.26 is claimed from Budget. If Grandview succeeds, then this will reduce the debt claimed by Budget to nil and result in Budget owing Grandview between $500,000 and $1.3 million. For this reason, Mr Zhang has agreed to pay future legal costs of the Equity proceedings up to $100,000 "which I am informed by my solicitors is sufficient to cover the company's costs up to and including completion of the hearing. I am also prepared, if ordered to do so, to provide any security for costs that may be ordered against the company". Mr Zhang also deposed that, if the Equity proceedings are successful, then the remaining third party creditors will be paid 100 cents in the dollar.
Mr Zhang deposed that excavation at the Villawood site remains incomplete and Grandview has not been able to engage another contractor to complete the work as the money required to do so is being consumed by litigation and payments to Budget. Grandview thus has not received the income it would have if the works had been completed in accordance with the subcontract. However, Grandview has since completed a fitout in Surry Hills and been negotiating a contract to undertake building works on a property at Granville which includes partial internal demolition and construction of a three storey building. Further, Mr Zhang deposes that appointment of a liquidator will likely result in defect work ceasing on the Bankstown property.
On 23 August 2019, Mr Bailey swore an affidavit deposing that he has received a significant volume of books and records of the company including management accounts and financial statements. The company has complied with its obligations under the Corporations Act to maintain books and records, and has been complying with its taxation obligations and superannuation obligations to employees. As to the reasons for the company's insolvency, Mr Bailey explained: From my initial review of the Company, it appears to me that the Company's history was unremarkable and was supported by its director and related parties from time to time until recently. There appears to be a single dispute between the Petitioning Creditor and the Company which has resulted in significant litigation which remains ongoing. It is clear to me that there is a genuine dispute that is the subject of formal court proceedings in the Supreme Court of New South Wales. I am of the opinion that but for the dispute between the petitioning creditor which has since 2018 been the subject to protracted and ongoing litigation which is not yet finalised, the Company would have remained solvent and continued to trade. It is my preliminary view that the Company become [sic] insolvent when related party creditors supporting the Company withdrew financial support upon a failure to achieve a settlement of the disputes between the petitioning creditor and the Company shortly prior to my appointment. Mr Bailey noted that in the event of liquidation, Grandview's employee will be required to cease employment with the company and leave Australia.
On 23 August 2019, Grandview's solicitor wrote to the administrator's solicitor outlining the statutory demand proceedings before Parker J and in the Court of Appeal, and the "significant difference" between those proceedings and the Equity proceedings. In particular, it was said that Grandview was not precluded in the Equity proceedings from making a claim in respect of being overcharged or for restitution. Whilst the statement of claim required amendment in light of the Court of Appeal's judgment and subsequent events, the claims in the Equity proceedings were considered to have strong prospects for recovering overpayment for variations, restitution for overpayment and liquidated damages for failure to reach practical completion. The author noted the limited evidence before Parker J and the Court of Appeal given the nature of proceedings to set aside a statutory demand.
On 28 August 2019, Grandview's solicitor sent Mr Bailey's solicitor a proposed Amended Statement of Claim in the Equity proceedings. The parties agree that I may have regard to the proposed Amended Statement of Claim as reflecting Grandview's claims. The pleading envisages that the Equity proceedings will be transferred to the Technology and Construction List. The claim is for $1,445,093.26. The Milestone Damages Claim has been deleted, according to Grandview's solicitor, as "fraught with ambiguity and uncertainty" and in light of the judgments of the Court of Appeal, as has a claim for rectification.
In respect of the Liquidated Damages Claim, Grandview now seeks liquidated damages from 12 December 2017 to 9 April 2018 totalling $519,200, when Grandview purported to terminate the subcontract or, if Budget's date of termination of 19 April 2018 is used, $563,200. Grandview's pleading does not 'take on board' Parker J's comments that Grandview may not be entitled to liquidated damages for any period of time in which Grandview wrongfully refused access to Budget to the site, nor Budget's contention before his Honour that Grandview may only be entitled to liquidated damages for business days, not calendar days, nor any period of suspension of Grandview's right to terminate the contract whilst the November and December 2017 progress claims were unpaid. The extent of the evidence before Parker J as to whether Grandview's refusal of access to the site in January 2018 was wrongful or otherwise is not known, nor was the strength of Budget's contention that damages should only be paid for business days agitated in the hearing before me. Whilst the Court of Appeal did not consider the Liquidated Damages Claim, their Honours did opine on Grandview's entitlement to terminate the contract on 9 April 2018 and this will likely have implications for the period of time for which Grandview may be entitled to liquidated damages. It is reasonable to think that Grandview is entitled to some liquidated damages for Budget's failure to complete the works on 12 December 2017. The issue is one of quantum. The trial judge in substantive proceedings on this claim will be assessing different evidence in respect of a different legal question than that considered by judges thus far, but no doubt bearing their Honours' observations in mind. It is an unusual scenario that would benefit from the advice of experienced and senior legal practitioners.
In respect of the Cost to Complete Works Claim, it is pleaded that the contract price was adjusted up by $2,695 for agreed variations and down by $85,614.71 for a credit allowed to Grandview for the disposal of waste. Mr Habib rejects that Grandview is entitled to this credit. Grandview claims $925,893.26, being the balance of the contract price less the cost to complete the incomplete works. It was acknowledged by Grandview's solicitor to Mr Bailey's solicitor that it may have some difficulty establishing its entitlement to damages in the face of the judgment of the Court of Appeal: However, it should be remembered that the CA judges findings are based on a review of the evidence presented at first instance in s459 proceedings. Budget served some 7 extensive affidavits as against GA's 2, given the nature of the case. There was no cross-examination of witnesses, no opportunity to issue subpoenas or require the production of documents and no hearing or determination which would give rise to a res judicata on the point. Furthermore, even if GA's termination is held to be invalid, Budget's termination shortly thereafter would have effectively re-enlivened the contractual provisions and obligations between the parties, given that any suspension impediment to claim damages only exist, under the BCISPA "during the period of suspension". There is some attraction in this advice: the task undertaken by Parker J and the Court of Appeal on an application to set aside a statutory demand was different to that undertaken by a judge at a final hearing in respect of a claim for damages for breach of contract having regard to a different and more comprehensive evidentiary landscape. However, the Court of Appeal's comments having regard to the more limited material before it, albeit on a different question, indicate that this part of Grandview's claims in the Equity proceedings faces significant challenges.
A new claim is proposed to be added in the Amended Statement of Claim, being that Budget has overcharged Grandview by its progress claims by $925,893.26. Mr Habib rejects Grandview's claims of overcharging. Restitution is sought under section 32(3)(b) of the SOP Act. Alternatively, Grandview claims a set-off against the December 2017 progress claim, leaving $399,848 payable to Grandview by way of restitution. This claim is, essentially, the claim which Grandview was not entitled to make before Parker J as it had not paid the November and December 2017 progress claims. The Court of Appeal did not consider this claim. Grandview has since paid the November 2017 invoice but not the December 2017 invoice. Grandview's solicitor explained to Mr Bailey's solicitor that this claim is "completely independent" of the Cost to Complete Works Claim "and it has not yet been dealt with by any court". (emphasis added) GA's claim for restitution is an entitlement which was not sought in the s459 proceedings given that the authorities favour the position that the right is a "final right" and not a set-off against a Demand seeking recovery of an interim statutory debt issued under the provisions of SOPA. Since the Demand proceedings were heard, GA has paid further sums to Budget in full payment of the November claim. By the time the SC matter is determined it will likely, assuming GA's proposed deed is accepted by the creditors, pay further amounts to GA towards the December claim. It is important to note that payment of the December 2017 invoice is only envisaged to take place if the DOCA is accepted by the creditors, and then perhaps not in full.
Whilst Grandview's claim in the Equity proceedings has some common features to the claims considered by Parker J and the Court of Appeal, it is not correct to say that is "the same beast … which was in front of the Court of Appeal and which they said had no prospects". In particular, it includes the claim in respect of which Grandview made complaint before Parker J but was precluded from advancing by reason of the SOP Act, and which it may now be entitled to advance, at least in respect of the work for which payment has been made and can also make if and when the December 2017 invoice is paid. Beyond this, the evidence in support of Grandview's claims in the Equity proceedings was not before me and I cannot say whether the prospects of its claim are poor, reasonable or strong. Either Mr Bailey or a liquidator of Grandview would clearly benefit from the advice of an experienced construction lawyer at an appropriate time.

Budget's proof of debt

On 30 August 2019, Budget sent Mr Bailey a copy of invoices for legal fees incurred in the statutory demand proceedings and appeal totalling $246,000. On 31 August 2019, Grandview's solicitor wrote to Mr Bailey noting that the claim for costs did not remove GST, did not allow for the $30,000 security for costs which had been paid into Court nor a costs order made in Grandview's favour by Black J on 28 May 2018. Grandview's solicitor provided draft objections to Budget's costs and advised that Budget's recoverable costs on a party and party basis were some $91,000, from which should be deducted the $30,000 security for costs and Grandview's costs of $18,000 which were the subject of a costs order in its favour.
On 2 September 2019, Budget submitted a proof of debt to Mr Bailey for $846,169.58 comprising the December 2017 progress claim, estimated interest of $74,124.32 and estimated costs of $246,000. The security for costs was noted on the proof. Mr Bailey made a "just estimate" of Budget's proof of debt, revised down to $424,452. Mr Bailey did not reduce the proofs of debt submitted by other creditors, and Budget takes strong objection to this. In his report to creditors, Mr Bailey noted that the amount of Budget's December 2017 progress claim was not in dispute but he had been unable to ascertain any basis by which Budget was entitled to claim interest on that claim as there was no judgment debt nor any provision in the subcontract for the payment of interest. Rather than accepting Grandview's solicitor's objections to Budget's legal costs, he acted on the advice of his solicitor that the costs should be discounted by 34%, less the $30,000 security for costs, less 75% of the legal costs incurred by Grandview in respect of which it had a costs order in its favour. Mr Bailey thus made a "just estimate" of Budget's legal costs in the amount of $118,407. Mr Bailey also deducted $220,000 by reason of Grandview's claims against Budget. In doing so, Mr Bailey explained that he considered the proposed Amended Statement of Claim, the letter from Grandview's solicitor, the CV of Grandview's solicitor and the judgment of Parker J. Beyond that point I do know enough about the evidence or legalities of the claim to form an opinion at this time but note that the solicitor for the company aware of all evidence and facts is of the view that the remainder of the claim as amended has reasonable prospects of success. In circumstances where the interest component of Budget's proof of debt had no apparent basis, where Budget did not have the benefit of an indemnity costs order or a certificate of determination assessing its costs, and Grandview has a claim against Budget of some apparent value, a reduction was appropriate albeit that Mr Bailey may not have fully appreciated the nature of Parker J's calculation of $220,000. Budget criticises Mr Bailey's report to creditors as failing to analyse the Court of Appeal's judgment and there is something to this complaint, but as there was no appeal in respect of the Liquidated Damages Claim, it is perhaps understandable.
On 4 September 2019, Mr Bailey spoke to Budget's solicitor, Mr Ziman, suggesting that there was a preference claim against Budget for $340,000 as Budget was seeking to wind up Grandview and already had a judgment refusing to set aside the statutory demand at the time of payment. To the $340,000 should, it seems to me, be added the further payment of $158,528.10 made by Grandview in June 2019. Mr Ziman advised that the claim would be vigorously defended by Budget, and repeated that evidence in cross-examination.

Report to creditors

On 5 September 2019, Mr Bailey provided a report to creditors, recommending execution of the proposed DOCA, and gave notice of a second meeting of creditors. Mr Bailey said he was of the opinion that it is in the best interests of all creditors, including Budget, to accept the terms of the DOCA as it provides for a greater return to unrelated, unsecured creditors than is likely to be achieved in a liquidation.
As already mentioned, Mr Bailey informed creditors that he had reviewed the validity of related party creditor claims against the management accounts and bank statements of Grandview and also of the related company and concluded that he was inclined to admit these claims for voting purposes. In respect of related party transactions, Mr Bailey reviewed loan account balances for Jason Zhang which indicated that Mr Zhang's personal expenses were recorded as loans from the company and against these loans, Mr Zhang recorded offsetting journal entries to Costs of Goods Sold suggesting that he had paid expenses of the company personally and offset these amounts to the loan account. Mr Bailey did not consider this to be an issue but noted that if the company was wound up, a liquidator may conduct further investigations into the various transactions recorded in the ledger.
In respect of the loan account with JR Investment Group, Mr Bailey noted that the loan account had been progressively reduced from $963,329 on 30 June 2017 to $467,773 on 12 August 2019 and, if the company were wound up, a liquidator would be required to conduct further investigations into the repayment of the loan account after 30 June 2019 of $60,466 to determine whether it might constitute a voidable transaction.
Apart from the amounts owing to Budget and related entities, the company's creditors were less than 90 days old. Based on his analysis, Mr Bailey concluded: … it seems unlikely that the Company could be considered to be insolvent prior to the date on which the presumption of insolvency arose on 29 March 2019. In my opinion, the aforementioned indicia [of insolvency] are manifestly insufficient to support a determination of insolvency in light of the fact that the Company was substantially compliant with its statutory reporting and payment obligations. The review of the aging of the Company's unrelated or undisputed creditors also suggests that the Company was in the practice of paying its debts as and when they were due and payable. It is further relevant to consider that the Company appears to exist within a network of formally and informally related entities in both Australia and abroad. In this regard, it appears that the related entities and the common director had the capacity to provide financial support and that such support was readily provided as and when required. Both legislation and case law make it clear that the test for solvency is a cash flow test, and the Court has affirmed that the commercial reality of a company must be considered when assessing and determining solvency. Mr Bailey considered it was arguable that, having regard to commercial realities, Grandview had ready recourse to the assets of other entities within the group of companies controlled by Jason Zhang and was able to call upon those assets for payment of Grandview's debts as they fell due. Mr Bailey accepted that Grandview had been supported by related entities throughout its history and, other than the disputed debt with Budget, Grandview was paying its debts as and when due and payable until recently. The property owned by Grandview Granville and assets available for refinance by Jason Zhang were arguably available to meet the disputed debt and Grandview's liabilities. But for the ongoing dispute with Budget, Grandview had the ability to pay its debts as and when they were due and payable. Mr Bailey noted, however, that "this conclusion is by no means certain" and a liquidator would be required to undertake further enquiries to determine the date of insolvency with greater certainty.
Assuming that Grandview was insolvent when the presumption of insolvency arose, Mr Bailey considered that Jason Zhang may be liable for $51,000 in respect of insolvent trading since that date, being unpaid employee entitlements and ordinary trade creditors incurred after that date. Mr Bailey said he was aware that Jason Zhang was a man of substantial means "and would almost certainly have capacity to meet any claims brought against him" but Mr Zhang may have available defences: by reason of Grandview's ability to call upon related companies for financial support, Mr Zhang may also be able to challenge the date of insolvency. The pursuit of such a claim would likely be uncommercial. "Accordingly, I am not convinced that this is a realistic avenue for recovery to be pursued for the benefit of creditors".
In respect of voidable transactions, Mr Bailey noted the comments of Beazley P in Grandview (No 2) and advised creditors: In the event that the Company were wound up, a claim would undoubtedly by [sic] made promptly against Budget for the recovery of these monies as a preferential payment. The solicitor acting for Budget has advised that he does not agree that these monies would be recoverable as the monies were paid by the Company into court and paid to Budget by the Court and that any proceedings brought by a liquidator to recover the monies would be vigorously defended. However, in light of the clear position espoused by her Honour, that claim appears to have strong prospects of success. Of course, it would be necessary when making a claim against Budget under section 588FE(2) that Grandview was in fact insolvent when the payments of $340,000 and, later, $158,528.10, were made, rather than relying on the presumption of insolvency which arose on failure to comply with the statutory demand. I note, however, that Budget contends that Grandview was insolvent in December 2017 and, consistent with that position, would presumably be prepared to repay the monies without the liquidator having to establish this.
Mr Bailey also identified payments of $27,532 to Grandview's solicitor within the "relation back" period that may be recovered as preferential payments but said he had not otherwise identified other payments by the company that would likely be considered voidable transactions, although he noted that any liquidator may give further consideration to whether the related party transactions fulfilled this description. Mr Bailey advised that he had not identified any breaches of director's duty by Jason Zhang or any other person which would likely give rise to claims recoverable for the benefit of creditors, and was not aware of any offences or breaches of director's duty that would warrant the lodgement of a report to ASIC.

Proposed DOCA

Under the proposed DOCA, control of Grandview will be returned to its director. Jason Zhang will contribute $300,000 by four instalments of $75,000 on 30 September 2019, 31 December 2019, 30 March 2020 and 30 June 2010 together with any monies recovered in the Equity proceedings. In addition, Jason Zhang will pay Mr Bailey's costs and expenses capped to a maximum of $60,000. Mr Bailey would have authority to extend the period for the instalments to be made by up to six months or until the Equity proceedings are resolved, whichever is the earlier.
Payment of the contribution will be secured by a mortgage over property in Granville to which I have already referred. Mr Bailey has received a mortgage, caveat, waiver of financial advice, credit code declaration and authority to complete and satisfy requisitions in support of the security offered for the DOCA. There is also a proposed Deed of Payment between Mr Bailey and Grandview Granville, which he considers acceptable. Mr Bailey advised that if Jason Zhang was unable to make the required contribution, immediate action would be taken to enforce the security and, if that was not feasible for any reason, then he could convene a meeting of creditors to vary or terminate the DOCA.
During the term of the DOCA, Grandview will prosecute the Equity proceedings with the aim of applying the benefit of the proceedings to the deed fund. Jason Zhang agrees to pay Grandview's legal fees up to $100,000 to pursue the Equity proceedings and to further pay into court any sum that may be ordered to be paid for security for costs. Mr Bailey has satisfied himself that Jason Zhang has assets available from which to meet these obligations. Mr Bailey would be required to consent to any settlement of the Equity proceedings.
The deed fund will be distributed to unrelated unsecured creditors on conclusion of the Equity proceedings. Jason Zhang and any other related or associated entities will not prove in the deed fund unless and until the unsecured creditors receive 100 cents in the dollar.
In comparing the outcome for creditors under the DOCA as opposed to a winding up, Mr Bailey assumed under a DOCA that, in an optimistic scenario, Grandview would recover $919,048 in the Equity proceedings resulting in a return to creditors of 100 cents in the dollar. In a pessimistic scenario, there would be no recovery in the Equity proceedings but unsecured creditors would still receive 20.1 cents in the dollar by reason of the $300,000 contribution and the related and associated parties not participating in the dividend. Mr Bailey said that a more thorough investigation than for the purposes of a "just estimate" would be undertaken by him before the distribution process in the event that the voluntary administration proceeds through a DOCA.
In a liquidation scenario, on a pessimistic basis assuming no recoveries of voidable transactions from Budget and no recoveries in the Equity proceedings, creditors would receive nil. On a realistic scenario, assuming recovery of $340,000 from Budget as a voidable transaction but nil in the Equity proceedings, then unsecured creditors would expect to receive 6.8 cents in the dollar. In light of the costs incurred in the statutory demand proceedings and appeal, Mr Bailey considers that litigation against Budget to recover the $340,000 preference will likely be expensive and take 12 to 18 months, delaying and reducing the return to creditors. Mr Bailey estimated the costs of recovering the monies to be in the order of $150,000. But this would not result in a benefit higher than the pessimistic view under the DOCA once all costs and expenses of a liquidation and the absence of the deed contribution were taken into account. In an optimistic scenario, assuming recovery of $340,000 plus interest and $919,048 in the Equity proceedings, creditors would expect to receive 56.5 cents in the dollar. This, of course, is not realistic as the Equity proceedings would most likely not be pursued in a liquidation scenario where the petitioning creditor is Budget, being the defendant in those proceedings. Mr Bailey noted that if Grandview was placed into liquidation, Budget was likely to benefit as the proceedings would be stayed or likely not prosecuted by a liquidator.
Mr Bailey has received ten proxies from creditors, being all in favour of entry into the DOCA. Mr Bailey intends, if it is necessary, to exercise a casting vote in favour of the DOCA. Mr Bailey has advised creditors: The pessimistic return [under the DOCA] is virtually guaranteed because the DOCA provides for a contribution of up to $360,000 secured by way of a mortgage over real property. … Additionally, in my view given any claim the subject of a liquidation is likely to be contested, the return to creditors pursuant to any DOCA is likely to be accelerated to a period in the order of 9 months as opposed to 18-24 months pursuant in any liquidation whereby the outcome is uncertain and would give rise to significant additional costs and expenses.
Mr Bailey does not consider that liquidation is in the interests of any of the creditors, including Budget, The DOCA provides a better and accelerated return to creditors than a liquidation scenario with a significantly greater degree of certainty in light of the security available.
On a comparison of the DOCA and liquidation scenarios, it is somewhat unclear why Budget is opposing the adjournment. Under the DOCA, Budget does not have to repay the $340,000 and $158,528.10. In a liquidation scenario, Budget may well have to repay the monies and then be returned a dividend in liquidation, likely to be a great deal less, and it will be kept out of the monies until that process concludes.

Opposition to the adjournment

Budget opposes the adjournment for, essentially, five reasons. First, Budget says there is a strong, if not overwhelming, argument that Grandview was trading whilst insolvent in December 2017 and thus, there is a serious question as to whether Grandview's director at the time, Jason Zhang, is liable for insolvent trading. In support of this, Budget relies on: 1. The profit and loss statement for Grandview for the year ended June 2018 records a loss of - $3,324,240.06. 2. Grandview's balance sheet as of June 2018 records negative equity of - $3,323,829.19 with cash at bank of some $33,000. 3. In his second report to creditors, Mr Bailey notes that, in July 2017, the ATO garnisheed $36,690.17 from Grandview's bank account. However, I note that Mr Bailey added: I have yet to receive the company's ATO file to determine the circumstances leading to the garnish. However, I note that the company has been largely compliant with its statutory obligations until my appointment at which time it had no taxation liability. 1. At the end of January 2018, Budget served a work suspension notice and a statutory demand for $1,024,573.36 and Grandview responded by asking for time to pay. Budget submits that, in early 2018, Grandview closed the work site indefinitely.
The evidence relied upon by Budget to support a case of insolvent trading against Mr Zhang is hardly definitive. Most relates to the financial performance of the company as at June 2018, that is, 7 months after the December 2017 invoice, and is also at odds with the administrator's investigations and opinion already summarised, which I prefer. Further, there is no clear evidence that Budget has in mind to sue Mr Zhang, or fund a liquidator to do so, beyond an email from Mr Ziman to the proposed liquidator requesting an estimate of fees, advising that Budget is "interested in discovering Grandview's financial position and pursuing its sole director, if appropriate, for insolvent trading".
Second, Grandview's claim against Budget, which will continue under the DOCA funded by Mr Zhang, is hopeless as condemned by Parker J and the Court of Appeal. As already analysed, I do not think this is necessarily so.
Third, Mr Zhang will not provide the money up front but over time, potentially until December 2020. More accurately, the proposed DOCA provides for payment by 30 June 2020. On 5 September 2019, Mr Zhang's solicitors requested that term of the arrangement be reduced so that the $300,000 would be paid by four quarterly instalments and within 12 months with the administrator having discretion in the interests of creditors to extend that time to a maximum of 18 months.
Further, Budget queried the security being provided for the deed contribution, being a second mortgage over industrial property owned by a related company in Granville intended for partial internal demolition and the construction of a three storey building. Budget questioned the value of a second mortgage, where a first mortgagee already secures $1.1 million for the purchase of the property, if the security is impaired by construction. It seems to me, however, that the position taken by the administrator in this regard is reasonable, because, as already set out, his investigations have disclosed sufficient equity to support the proposed contributions.
Fourth, Budget says that of the 14 creditors of Grandview, most are related parties or "close allies" and there are "serious questions surrounding the claims (and thus the votes) of those creditors" to which Mr Bailey is said to have taken a benign attitude said to be alarming. Budget's submissions in this regard do not fairly state the investigations described and conclusion reached in Mr Bailey's report to creditors in respect of the legitimacy of the claims of related parties.
Finally, Budget submits that a liquidator needs to enquire for the benefit of creditors "into Mr Zhang's tangled and dubious treatment of company funds" and Budget is prepared to fund a liquidator, although there is no evidence of this beyond the email from Mr Ziman to the proposed liquidator already cited. Nor was there evidence of a tangled and dubious treatment of company funds. To the contrary, this seems to me a case where monies moved between related companies have been accounted for in a manner which is transparent and explicable.

Conclusion

The question is whether I am satisfied that it is in the interests of the company's creditors to continue under administration rather than be wound up. If I am so satisfied, then I am to adjourn the hearing of the application to wind up the company: this is mandatory, not discretionary.
It seems to me that there is a sufficient possibility, as distinct from a 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. Important to this conclusion is that, even if Grandview is unsuccessful in the Equity proceedings, unsecured third party creditors stand to receive a larger dividend, and more promptly, under the DOCA than in a liquidation scenario, either on a pessimistic basis assuming that no voidable transactions are recovered from Budget, or even if such recoveries are made. It is also relevant that the contribution to a deed fund is to be secured by a registered mortgage over property with sufficient equity to ensure that the contribution is made.
Against this, I note that Mr Zhang has agreed to pay future legal costs of the Equity proceedings up to $100,000 on advice that this will be sufficient to cover the company's costs to completion of a hearing. This seems too low given the legal costs incurred to date between these parties. It would be sensible to review this estimate and ensure that Mr Zhang is fully apprised of what may be involved as his funding of the litigation is an important component of the proposal being put to creditors.
Overall, it seems to me that the creditors can hope to get more by way of payment of their debts by administration than from liquidation and, where a DOCA has been proposed, all of the creditors of Grandview should be given an opportunity to decide where their best interests lie. The majority of creditors, indeed all creditors apart from Budget, appear minded to enter into the DOCA. Of the 10 proxies received by Mr Bailey, Budget says two creditors have had their debts paid (that seems to be right in respect of one of them). Three are related parties and five seem to me to be third party creditors who are entitled to have an opportunity to make a commercial decision in respect of the DOCA. The DOCA is supported by the administrator.
Grandview, whilst not trading at the moment, has business prospects. If a liquidator is appointed, defect works which are presently being undertaken on the Bankstown property may cease. Further, it appears that Grandview's books and records have been well maintained and indicate that Grandview has attended to payment of its taxation, employee and superannuation obligations in a timely manner and paid other creditors, apart from Budget, as and when those debts have fallen due.
There is no credible evidence that the related party creditors wish to enter into a DOCA for the purpose of bringing to an end any investigations which a liquidator of the company may undertake. The suggestion by Budget that Jason Zhang, by making a contribution of $300,000, seeks to avoid a claim for insolvent trading in December 2017 by Budget is based on faint evidence and at odds with the administrator's analysis of Grandview's financial position. The situation is not as in Cresco Opus where there was a considerable body of material to support the existence of a claim which the liquidator of the company could be expected to bring against the former director, funded by the petitioning creditor.
For these reasons, I am satisfied that it is in the interests of creditors to adjourn the winding up proceeding to enable the creditors to decide whether to accept the DOCA. It is not necessary, therefore, to consider the other issues raised by the Interlocutory Process or the Originating Process at this stage. I make the following orders: 1. Pursuant to section 440A(2) of the Corporations Act 2001 (Cth) adjourn the hearing of the application to wind up Grandview Ausbuilder Pty Limited to 30 September 2019 at 10.00 am before Rees J. 2. Reserve all questions of costs of the Interlocutory Process and Originating Process. 3. Grant liberty to apply on 24 hours' notice.

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: 19 September 2019

At a glance

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Judgment (16 paragraphs)

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