Australian Securities and Investments Commission v Diploma Group Limited

INTRODUCTION 1 The Australian Securities and Investments Commission (ASIC) has applied to wind up all Defendants both on the statutory grounds of insolvency and also because it is just and equitable to do so. Certain parties represented by HopgoodGanim Lawyers seek to prevent the winding up of only the First Defendant, Diploma Group Limited (at this stage). They include Cockburn Central West Pty Ltd (the Proponent) as well as FPDL Investments Pty Ltd, Dominic Di Latte, as controller of 176 Adelaide Terrace Pty Ltd, Healthy Holdings Pty Ltd, ND Properties Pty Ltd, Up Investments Pty Ltd and Wandina Holdings Pty Ltd (together, the Interested Parties). They seek an adjournment of the winding up application of Diploma so that the present provisional liquidators may be appointed (on their own application) as administrators to facilitate creditors having the opportunity to consider a further proposed deed of company arrangement (DOCA), which in its latest form (of several) was produced very shortly before the hearing of ASIC's application. The provisional liquidators have filed an application seeking Court approval for their appointment as administrators for this purpose. That application has not yet been heard, but will be heard next week. ASIC strongly oppose any adjournment. This matter has been listed for some weeks. The adjournment application at the eleventh hour does not seriously challenge any substantive aspect of the insolvency, but seeks to have the orders sought delayed pending creditors consideration of a further DOCA. Importantly, however, ordering the winding up of Diploma would not preclude the granting of the relief sought by the provisional liquidators.

BACKGROUND 2 On 12 May 2017, in Australian Securities and Investments Commission v Diploma Group Limited [2017] FCA 549 (Diploma No 1), I appointed provisional liquidators to each of the Defendants, but stayed the operation of that order until 25 May 2017 in light of negotiations which were ensuing and the possibility of a DOCA being put to creditors. On 22 May 2017, I lifted the stay of the appointment of the provisional liquidators. 3 In making the appointment, I concluded that: (a) not only were the companies under administration insolvent, but appeared to be seriously so; (b) there was strong evidence that the group as a whole was significantly insolvent; and (c) there was a sound basis on the evidence in its totality for a lack of confidence in the running of the affairs of the group. 4 I ordered that the provisional liquidators provide to the Court and ASIC a report as to the provisional liquidation of each of the Defendants (the reports), including: (a) the identification of the assets and liabilities of each of the Defendants; (b) an opinion as to the solvency of each of the Defendants; (c) the likely return to creditors in the event that each of the Defendants was wound up; (d) any other information necessary to enable the financial position of the Defendants to be assessed; (e) any suspected contravention of the Corporations Act 2001 (Cth) by any of those Defendants; and (f) any suspected contravention of the Corporations Act by directors or officers.

REPORTS FROM THE PROVISIONAL LIQUIDATORS 5 The reports were provided to the Court and ASIC on 7 July 2017 by the provisional liquidators. In their report into Diploma, dated 6 July 2017, the provisional liquidators said: … Summary or findings We provide the following summary of our findings based on the review of the available information at the date of our appointment: - The Company has an estimated deficiency of assets to liabilities totalling about $20.2m; - …; - We estimate the likely return in liquidation to be between 0 and 100 cents in the dollar for priority creditors and between 0 and 0.4 cents in the dollar for unsecured creditors. This excludes any potential return from antecedent transactions; and - We consider that the Company has contravened Section 201A(2) of the Corporations Act by failing to have three current directors of a public company; and - We have identified a number of transactions which may constitute contraventions of the Corporations Act, however, based on our review of the available information we are not in a position to express a concluded view. … 2.6.4 Below is a timeline of the formal correspondence exchanged with the directors/former directors regarding potential contraventions detailed above: - On 24 April 2017, the directors responded to ASIC and the Voluntary Administrators with explanations to the suspected contraventions in the Denis Kavanagh affidavit ... - On 10 June 2017, the Provisional Liquidators issued the directors with a request for information referencing matters raised in the initial affidavit submitted to ASIC, the directors' initial response and the Provisional Liquidators findings... - A response from the directors was received on 26 June 2017 ... - The Provisional Liquidators issued a subsequent request on 28 June 2017 seeking further clarification of matters that had not been sufficiently addressed in the response dated 26 June 2017... - A response from the directors was received on 3 July 2017 ... 2.6.5 Due to the limited time available to consider all information in the Provisional Liquidators' possession and the responses provided by the directors, we are not in a position to express a concluded view and note that further investigations are required by a Liquidator, subject to funding to do so. 2.6.6 We note that this may include private and public examinations of the directors and other relevant parties. … 6 I accept the ASIC submission that the content of the reports: (a) reinforces the findings made on appointing the provisional liquidators; and (b) supports ASIC's application to wind up each of the Defendants. 7 ASIC now relies on affidavits in support referred to in the earlier reasons as well as a further affidavit of Mr Richard Gomm, sworn on 11 August 2017, and a further affidavit of Mr Denis Kavanagh sworn on 1 September 2017.

THE PRINCIPLES 8 A company is insolvent if it is unable to pay all its debts, as and when they become due and payable: s 95A of the Corporations Act. The Court's task is to decide whether the company is suffering from a temporary lack of liquidity in which case it is not insolvent or an 'endemic shortage of working capital': Hymix Concrete Pty Ltd v Garritty (1977) 2 ACLR 559 (at 566). 9 The solvency of a company is assessed by one or other (or a combination) of two measures: the 'cash flow' test and the 'balance sheet' test. A balance sheet test can be useful but not necessarily conclusive evidence of insolvency. If a company has a deficiency of net assets, but it is in a position to pay all its debts as and when they become due and payable because of a very strong profit-making business, it is solvent: Quick v Stoland Pty Ltd (1998) 87 FCR 371 (at 380).

INSOLVENCY EVIDENCE 10 From the reports of the provisional liquidators, the Diploma Group has a cumulative deficiency of assets over liabilities in the tens of millions of dollars. There is no evidence of any strong profit-making business to enable any of the companies to pay all their debts as and when they become due and payable. 11 The provisional liquidators have formed the view that each of the Defendants, except the Eighth and Ninth Defendants, are insolvent. The provisional liquidators do not have sufficient information to form a view as to the solvency of the Eighth and Ninth Defendants. 12 There is evidence that each of the Defendants, except the Eighth and Ninth Defendants, are insolvent on both a cash flow and a balance sheet test of solvency. In particular, ASIC contends that the report from the provisional liquidators reveal (and I note that the Proponent appears to partially dispute): (a) Diploma has an estimated deficiency of assets to liabilities totalling about $20.2 million. The directors of Diploma estimate a deficiency of assets to liabilities of approximately $20.3 million. The liabilities include a trade creditors balance of approximately $937,000 as at 22 December 2016. The CHEOPS (Construction, Management and Accounting software) records indicate that, as at 31 December 2016, Diploma had an income of $3.69 and expenses of $1,822,166.18. A number of parties have commenced proceedings against the company, its director (Mr Nicola Di Latte) and other parties to recover their investments; (b) the Second Defendant has an estimated deficiency of assets to liabilities of at least approximately $34 million and up to approximately $47 million. The liabilities include a trade creditors balance of approximately $26.3 million as at 22 December 2016 and statutory obligations of approximately $1.2 million in relation to GST, PAYG and payroll tax. The CHEOPS records indicate that, as at 31 December 2016, the Second Defendant had an income of $10,871,597.51 and expenses of $12,491,525.82. A significant number of rectification/defect claims have been made against the Second Defendant; (c) the Third Defendant has an estimated deficiency of assets to liabilities totalling approximately $4.6 million. The director of the Third Defendant estimates a deficiency of assets to liabilities of approximately $4.6 million. The liabilities include a trade creditors balance of approximately $2.4m as at 22 December 2016. The CHEOPS records indicate that, as at 31 December 2016, the Third Defendant had an income of $804,608.97 and expenses of $2,236,678.40. (d) the Fourth Defendant has had a surplus of assets to liabilities since at least 30 June 2016, totalling approximately $3.6 million as at 22 December 2016. However, the key asset is represented by intercompany loans totalling approximately $17.8 million from eight related entities within the Diploma Group. The provisional liquidators estimate the realisable value of these assets as nil. The directors of the Fourth Defendant estimate a deficiency of assets to liabilities of approximately $4.2 million. The liabilities of the Fourth Defendant include a trade creditor's balance of approximately $988,000 as at 22 December 2016. A number of parties have commenced proceedings against the company, its director (Mr Nicola Di Latte) and other parties to recover their investments; (e) the Fifth Defendant has an estimated deficiency of assets to liabilities of at least approximately $3,000 to approximately $3.3 million. The company's primary asset consists of its investments in subsidiaries with a book value of $4,000. The provisional liquidators estimate the realisable value of the asset as nil. According to the provisional liquidators' review, the company's only liability is an intercompany loan with Diploma totalling approximately $3,000. The directors of the Fifth Defendant estimate a deficiency of assets to liabilities of approximately $3.3 million, said to comprise an amount owed to FPDL; (f) the Sixth Defendant has an estimated deficiency of assets to liabilities of up to approximately $13,700. The company has no assets. According to the provisional liquidators' review, the company's only liability is an intercompany loan with the Second Defendant totalling to approximately $13,700, which was written off in October 2016; (g) the Seventh Defendant has an estimated deficiency of assets to liabilities of approximately $244,000. The company has not traded since 2012, and is the holding company for the Twentieth Defendant. The company's only asset consists of its investment in the Twentieth Defendant with a book value of $50,000. The company's only liability is an intercompany loan with Diploma totalling approximately $243,000; (h) the Tenth Defendant has an estimated deficiency of assets to liabilities totalling between approximately $721,000 and approximately $6 million. The company has not traded since 2013. The company does not have any assets other than an investment in a fund of $500,000, which was written off in the 2016 financial year. According to the provisional liquidators' review, the company's only liability is an intercompany loan with the Fourth Defendant totalling approximately $722,000. The directors of the Fifth Defendant estimate a deficiency of assets to liabilities of approximately $6 million, said to include a contingent liability owed to Swiss Re International SE relating to a guarantee; (i) the Eleventh Defendant is the trustee for the Rockingham Unit Trust and has an estimated deficiency of assets to liabilities in excess of approximately $10 million. The company does not trade in its own right and acts solely as the trustee of the trust. The company undertook the development of Capri Apartments, which achieved practical completion on 6 May 2016. All the apartments have been sold except for six apartments, which are in the possession of a secured creditor ("PMFM") pursuant to registered mortgages. The assets of the Eleventh Defendant comprise intercompany loans (the provisional liquidators estimate the realisable value of these loans as nil) and capitalised development costs of approximately $4 million (the extent to which this is recoverable is dependent upon the sale of the remaining six apartments by PMFM). The Eleventh Defendant's liabilities include statutory liabilities to the Australian Taxation Office (ATO) of approximately $2.3 million, unpaid loans to the PMFM of approximately $1.4 million, and investor loans of approximately $8.4 million. On or about 24 October 2016, certain investors issued proceedings against the Eleventh Defendant and others in the Supreme Court of Western Australia proceeding CIV 2838 of 2016 seeking restitution of funds raised by an information memorandum prepared by the Twentieth Defendant. On 18 April 2017, Le Miere J appointed Kim Wallman of HLB Mann Judd as Receiver and Manager of the trust; (j) the Twelfth Defendant is the trustee for the 176 Adelaide Terrace Unit Trust and has an estimated deficiency of assets to liabilities in excess of approximately $490,000. The company traded in its own right for intercompany borrowings and as the trustee of the trust. The company undertook the development of Quest Apartments, which achieved practical completion on 21 October 2016 and settled on 15 December 2016. The balance sheets of the trust have not been updated to reflect the sale of Quest Apartments and the provisional liquidators believe that the RATA provides a more accurate position of the company. The RATA indicates an estimated deficiency of assets to liabilities of $3.8 million. The liabilities include amounts owing to unsecured creditors of $2.6 million, the largest being owed to the Fourth Defendant. The company's assets are subject to a charge in favour of FPDL. On 23 May 2017, FPDL appointed Giovanni Maurizio Carrello of BRI Ferrier's as Receiver and Manager of the company. The receivership was terminated on 13 July 2017; (k) the Thirteenth Defendant has an estimated deficiency of assets to liabilities totalling approximately $61,000. The company undertook the development of Quest Rockingham, which achieved practical completion on 28 July 2015 and sale proceeds of approximately $22 million were received on 23 September 2015. The company's key asset is an intercompany loan of approximately $4.7 million to the Fourth Defendant. The provisional liquidators estimate the realisable value of the asset as nil. The company's key liability is an intercompany loan of approximately $4.7 million to the Eleventh Defendant, which was not repaid on settlement of Quest Rockingham; (l) the Fourteenth Defendant's only asset was a 50% interest in the former Fifteenth Defendant, a joint venture company which was the proposed developer for the Chemlabs Project, valued at approximately $36 million. On 9 May 2017, Emporium 101 Pty Ltd took control of all the shares of the former Fifteenth Defendant in circumstances detailed in Diploma No 1 (at [13]-[19]). The provisional liquidators have been unable to locate any management accounting records for the Fourteenth Defendant. The directors of Fourteenth Defendant estimate a deficiency of assets to liabilities of approximately $3.3 million, said to comprise an amount owed to FPDL; (m) the Sixteenth Defendant is the trustee for the 300 Lord Street Unit Trust and has an estimated deficiency of assets to liabilities in excess of approximately $5.3 million. The directors of the Sixteenth Defendant estimate a deficiency of assets to liabilities of approximately $2.3 million. The company traded in its own right for intercompany borrowings and as the trustee of the trust. The company undertook a joint venture to develop '288' Lord Apartments, which achieved practical completion on 2 July 2015. All apartments have been sold. The company's key assets include capitalised development costs of approximately $1.9 million (which the provisional liquidators do not consider to be recoverable) and intercompany loans of approximately $355,000 (the provisional liquidators estimate the realisable value of the assets as nil). The key liabilities include intercompany loans of approximately $802,000 to the Fourth Defendant, loans to unitholders of approximately $1 million, loans to joint venture creditors of approximately $1.4 million, and a loan to La Trobe Financial of approximately $1.6 million. The directors of the Sixteenth Defendant estimate an amount owing to the ATO of $2.3 million, although the balance sheet records the liability as approximately $108,000; (n) the Seventeenth Defendant is the trustee for the 303 Campbell St Unit Trust and has an estimated deficiency of assets to liabilities totalling approximately $2.3 million. The directors of the Seventeenth Defendant estimate a deficiency of assets to liabilities of approximately $2.3 million. The company does not trade in its own right and acts solely as the trustee of the trust. The company undertook the development of Abode Apartments, which achieved practical completion on 5 June 2016, and all apartments have been sold. The trust's key assets include capitalised development costs of approximately $531,000 (which the provisional liquidators do not consider to be recoverable) and intercompany loans of approximately $20,000 (the provisional liquidators estimate the realisable value of the assets as nil). The trust's liabilities include trade creditors of approximately $88,000. The directors of the Seventeenth Defendant list the amounts owing to unsecured creditors at $2.3 million, although these amounts were removed from the balance sheets on 31 August 2015 and transferred to the West Coast Hwy Unit Trust (see below); (o) the Eighteenth Defendant is the trustee for the West Coast Hwy Unit Trust and has an estimated deficiency of assets to liabilities totalling approximately $2.3 million. The directors of the Eighteenth Defendant estimate a deficiency of assets to liabilities of approximately $3.8 million. The company does not trade in its own right and acts solely as the trustee of the trust. The company undertook the development of Horizon Apartments. The project has reached practical completion and has been sold. The balance sheet of the trust reveals a surplus of approximately $2.1 million as at 22 December 2016. However, the key asset of the trust is capitalised development costs of approximately $5.3 million, which the provisional liquidators do not consider to be recoverable. The directors of the Eighteenth Defendant list liabilities of amounts owing to FPDL in the amount of $3.3 million (which is not listed in the management accounts of the trust) and an amount owing to the ATO of $480,000. The balance sheets record liabilities to the Fourth Defendant for intercompany loans totalling approximately $1.8 million, which includes the approximately $2.3 million owed to unsecured creditors from the development of Abode Apartments (see above), which was subsequently transferred to the Fourth Defendant in June 2016; (p) the Nineteenth Defendant is the trustee for the Subiaco Residential Apartments Unit Trust and has an estimated deficiency of assets to liabilities between approximately $950,000 and $3.3 million. The directors of the Nineteenth Defendant estimate a deficiency of assets to liabilities of approximately $3.3 million. The company does not trade in its own right and acts solely as the trustee of the trust. The company undertook the development of the Carter Lane Precinct. The project only reached initial stages and has been terminated. The trust assets include capitalised development costs of approximately $40,000 (which the provisional liquidators do not consider to be recoverable) and intercompany loans of approximately $400,000 to the Fourth Defendant (the provisional liquidators estimate the realisable value of the asset as nil). The trust liabilities include drawdowns of approximately $1.2 million on a facility with Wingate in April 2016. The directors of the Nineteenth Defendant list liabilities owing to FPDL in the amount of $3.3m, which is not listed in the management accounts of the trust; (q) the Twentieth Defendant operated as a special purpose vehicle for raising funds. It prepared an information memorandum to raise up to $4.2 million for the development of Capri Apartments. It is a defendant in litigation in the Supreme Court of Western Australia. The directors of the Twentieth Defendant estimate a deficiency of assets to liabilities of approximately $1.1 million, being contingent litigation liabilities. The Twentieth Defendant's only assets are intercompany loans of approximately $50,000. The provisional liquidators estimate the realisable value of the asset as nil; and (r) the Twenty First Defendant has an estimated deficiency of assets to liabilities of approximately $1 million. The company acted as the selling agent for various projects including the Abode Apartments and '288' Lord Apartments. The company's key assets are intercompany loans of approximately $171,000 to the Fourth Defendant and amounts owing by trade debtors in provisional liquidation of approximately $194,000. The provisional liquidators estimate the realisable value of these assets as nil. The company's key liability is an intercompany loan to Diploma of approximately $890,000. 13 Many of the Defendants are or were special purpose vehicles for projects which have been completed or terminated. These companies have estimated deficiencies of assets to liabilities running into the millions of dollars.

APPLICABLE PRINCIPLES FOR WINDING UP ON JUST AND EQUITABLE GROUNDS 14 ASIC has standing to bring a winding up application on just and equitable grounds pursuant to ss 461(1)(k), 462(2) and 464 of the Corporations Act. The Court may order the winding up of a company if the Court is of the opinion that it is just and equitable that the company be wound up: s 461(k) of the Corporations Act; Australian Securities and Investments Commission v CME Capital Australia Pty Ltd (No 2) [2016] FCA 544 (at [13]-[26]). The classes of conduct which justify the winding up of a company on just and equitable grounds are not closed and each application will depend upon the circumstances of the particular case: Australian Securities and Investments Commission v Kingsley Brown Properties Pty Ltd [2005] VSC 506 (at [96]-[97]). 15 A company may be wound up on the just and equitable ground where there is a justifiable lack of confidence in the conduct and management of the company's affairs and thus a risk to the public interest that warrants protection: Australian Securities and Investments Commission v Bilkurra Investments Pty Ltd [2016] FCA 371 (at [55]). A lack of confidence may arise where, after examining the entire conduct of the affairs of the company, the Court cannot have confidence in 'the propensity of the controllers to comply with obligations, including the keeping of books, records and documents, and looking after the affairs of the company…': Galanopoulos v Moustata [2010] VSC 380 (at [32]). 16 If a company is solvent that may point against a winding up on just and equitable grounds, but it does not preclude it: CME Capital Australia (at [19]).

Lack of confidence in running the affairs of the group 17 The evidence supports the proposition that the Defendants operated as an integrated group. It follows that a lack of confidence in the conduct and management of one company within the group affects the conduct and management of the affairs of the whole group: Kingsley Brown Properties (at [98]-[102]). 18 In addition to the matters relied on by ASIC in the application to appoint the provisional liquidators, ASIC relies on the following additional matters: the provisional liquidators consider that each of the Defendants, other than the Fourth, Twelfth and Fourteenth Defendants, have contravened s 201A of the Corporations Act by failing to have the requisite number of directors; the ASIC's registers indicate that the Fourth, Twelfth and Fourteenth Defendants, have contravened s 201A of the Corporations Act by failing to have the requisite number of directors; the provisional liquidators suspect that the directors and officers of the First, Second, Third, Fourth, Eleventh, Thirteenth, Fourteenth, Sixteenth, Eighteenth and Twentieth Defendants may have contravened the Corporations Act, in particular s 588FB (Uncommercial Transactions), s 588FDA (Unreasonable Director Related Transactions), 588FD (Unfair Loans), and s 588G (Insolvent Trading); with respect to the Eighth and the Ninth Defendants, the former directors have not provided a written response to the provisional liquidators' request to complete a director's questionnaire with regard to the affairs and activities of those companies. The provisional liquidators are unaware that those companies kept any management accounting records. The fact that the provisional liquidators are unable even to comment on the true and fair financial position of these companies speaks volumes about the lack of care and management of the affairs of these companies, particularly as it pertains to keeping proper books, records and documents; and the books and records of the First, Second and Third Defendants contain a number of unusual accounting entries. These entries raise serious questions about the conduct of the directors and officers of these companies in breach of provisions of the Corporations Act. 19 On the application to appoint provisional liquidators, the Fourth, Twelfth and Fourteenth Defendants stressed that there is an answer to any and all such concerns. Mr Nicola Di Latte (for himself and on behalf of others) has now had an opportunity to answer the concerns but I accept the contention for ASIC that in substantial measure he has been unable to do so. His answers essentially reduce to the following: (a) the finance department of Diploma undertook all data entry and reconciliation; (b) Mr Nicola Di Latte cannot explain the accounting treatment of entries identified by the provisional liquidators because he is not an accountant, has never been involved in that aspect of the business, did not have any day-to-day involvement with how any of the transactions of any kind were posted in CHEOPS as that was the responsibility of the chief financial officer (CFO) and finance team upon whom he relied to undertake that task; (c) with respect to profit line adjustments, Mr Nicola Di Latte: (i) does not know the rationale behind the profit line adjustments as this was a matter handled by the CFO and finance team; (ii) cannot provide any clarity as to the methods employed by the finance team in relation to allocation of project costs and the utilisation of profit line adjustments as this is a specific accounting related question and he relied on the CFO and finance team to undertake these tasks; (d) with respect to the construction work of private residences, Mr Nicola Di Latte: (i) is unsure how the debtor/loan relationship was dealt with from an accounting perspective as this was handled by the CFO and finance team; (ii) is unable to provide an explanation as to why the loan repayment made to Precast was coded as a Project expense as that is a matter that would have been undertaken by the CFO and the finance team; (iii) does not have working papers for the amounts set-off against the Precast loans; (e) with respect to officer and related party loans, Mr Nicola Di Latte does not have relevant documentation and he cannot explain certain entries and says it was most likely inadvertent oversight by the CFO and finance team; and (f) the directors had no involvement in the day-to-day accounting treatment of the entries identified by the provisional liquidators and relied on the CFO, finance team as well as the company auditors to satisfy themselves that the accounting treatment of transactions were being accurately recorded. 20 ASIC argues that Mr Nicola Di Latte's 'deflection of responsibility' to the CFO, finance team, and company auditors should be considered in circumstances where: (a) Diploma, a publicly listed entity, failed to prepare and lodge financial statements with the Australian Securities Exchange (ASX) and ASIC by 30 September 2016 and to have an audit undertaken on the financial statements for the year ended 30 June 2016; and (b) coinciding with such failure, the First and Second Defendant may have made excessive remuneration payments to Mr Nicola Di Latte, Mr Domenic Di Latte, Mr Francesco Di Latte and Ms Natalina De Felice. 21 Mr Nicola Di Latte's answers do not alleviate ASIC's concern that the current officers of the Diploma Group cannot be trusted to manage the group's affairs effectively and in accordance with the Corporations Act. If anything, they reinforce those concerns.

SHOULD THERE BE AN ADJOURNMENT? - REVISED DOCA PROPOSALS 22 On 3 August 2017 the provisional liquidators were provided with a copy of a revised DOCA proposal (First August Proposal). On 30 August 2017, ASIC was provided with a further revised DOCA proposal dated 29 August 2017 (which modified the First August Proposal) (Second August Proposal). It was stated to have been provided to the provisional liquidators. The success of the Second August Proposal was dependent on various other matters at that stage. The degree of support or lack of support from various parties, including the Proponent, secured creditors and provisional liquidators has changed from time to time depending upon the content of the proposed DOCA. ASIC, for its part, has made it quite clear that it does not support the First or Second August Proposals and considers the benefit to creditors to be minimal or elusive. By an affidavit affirmed by Mr Kavanagh, for ASIC, Mr Kavanagh observed that the Second August Proposal was very similar to the First August Proposal. It is a proposal for Diploma only and has as its central consideration the right of unsecured creditors of Diploma, with provable claims to share in 65 million shares in an unidentified entity, which he assumed to be Diploma. Mr Kavanagh observes that the Second August Proposal stated the value of the shares may be calculated by reference to the closing price on the day of the appointment of administrators, as referred to in the Administrators' Report of 27 April 2017, but no price was provided in respect of the value of the shares after the implementation of the Second August Proposal. No provision was made in the Second August Proposal for creditors of the other Defendants, unlike the First August Proposal. 23 ASIC makes the following points through Mr Kavanagh regarding the Second August Proposal and, once again, the Proponent and Interested Parties take issue with some points, but in my view, the substantive analysis is correct: 12. Like the First August Proposal, [ASIC] has a number of concerns regarding the Second August Proposal, including that: 12.1. the success of the Second August Proposal is dependent on the discontinuance/dismissal of [ASIC's] application to wind up and appoint liquidators to [Diploma] … paragraphs l(c)(iv) and l(g)(iii) [this has now been amended in a third proposal]; 12.2. it is not explained how the proponent (Cockburn) will cause: 12.2.1. the securities of [Diploma] to be reinstated to trading on the Australian Securities Exchange (ASX) by 30 June 2018. … paragraph 5(a); and 12.2.2. [Diploma] to have a market capitalisation of no less than $5 million on or before 30 June 2018. … paragraph 5(b); 12.3. the proponent (Cockburn) is to "cause, the retirement" of the Receivers and Managers appointed by Swiss Re. ... I note that on 18 August 2017 Swiss Re advised the Court that it did not support the First August Proposal. On 30 August 2017, following further discussions, Swiss Re advised the Court that it did support the Second August Proposal. The 'discussions' and terms of any agreement reached between Cockburn and Swiss Re following the First August Proposal and prior to the Second August Proposal is not stated: 12.3.1. … an email from [a solicitor for ASIC] forwarding an email from … DLA Piper dated 18 August 2017 on behalf of Swiss Re attaching a letter stating that Swiss Re does not support the First August Proposal; and 12.3.2. … an email from … [DLA Piper] dated 30 August 2017 on behalf of Swiss Re … stating that Swiss Re does support the Second August Proposal; 12.4. the consideration for the Second August Proposal is …: 12.4.1. 65,000,000 shares to be transferred by Cockburn, which are intended to discharge any claims held by the unsecured creditors of [Diploma]. ... paragraphs l(a) and l(b). I also refer to paragraph 10 above; 12.4.2. funds from, or on behalf of, Cockburn, all of which (except the amount set out in paragraph 8 of the Second August Proposal) are guaranteed by FPDL: 12.4.2.1. $51,000 for employee entitlements. ... paragraph 2; 12.4.2.2. $150,000 for the lodgement of [Diploma's] Financial Statements and reports with the ASX. ... paragraph 5(b); 12.4.2.3. $5,000 to meet the costs and disbursements of the Provisional Liquidators' application to be appointed as administrators for the purposes of the Second August Proposal (PL Application). ... paragraph 8; 12.4.2.4. $40,000 to the administrator if the PL Application is successful to meet the costs of convening the Creditor's meeting of [Diploma]. ... paragraph 9; and 12.4.2.5. $275,000 plus GST to meet the costs of the Provisional Liquidators, Administrators and Deed Administrator. ... paragraph 11. Paragraph 11, however, refers to two amounts $160,000 and $95,000, together they total $255,000; 12.4.3. the forbearance to prove for a dividend under the Second August Proposal, by the below mentioned parties, relate to amounts that are not currently known to [ASIC]: 12.4.3.1. Swiss Re; 12.4.3.2. members of the Di Latte family; and 12.4.3.3. companies related to the Di Latte family, including Swanhill Enterprises, Precast Pty Ltd, ATD Developments, 155 Adelaide Tce Pty Ltd and Flag Holdings Pty Ltd. ... paragraph l(f); (Forbearing Party); 12.5. it is unclear whether FPDL, which is a secured creditor of [Diploma] in the amount of about $2,700,000, according to the report as to company affairs completed by the former directors of [Diploma] (RATA) attached to the Provisional Liquidators' report dated 6 July 2017 (First Defendant Report), is a Forbearing Party; 12.6. it is not explained why or how Cockburn will cause FPDL to make, or why FPDL needs to guarantee "... the payment of the amounts referred to in clause 2, 5, 9 and 11", on behalf of Cockburn, the proponent; 12.7. the RATA completed by the former directors of [Diploma] estimated a deficiency of $20,231,000. [ASIC] is unable to determine the impact of the Second August Proposal on the solvency of [Diploma] or the likely return to creditors; 12.8. it is unclear exactly what activities [Diploma] will engage in if relisted, given that the entities which undertook the construction activities are currently in provisional liquidation; 12.9. it is unclear how [Diploma] will operate given that only independent non-executive directors are to be appointed; 12.10. the Second August Proposal does not contemplate how the interests of creditors of the Second Defendant to the Twenty-First Defendant will be affected. Notably, the various reports completed by the Provisional Liquidators on 6 July 2017 suggest that in trade creditors alone: 12.10.l. the Second Defendant is indebted to about $26,332,000; 12.10.2. the Third Defendant is indebted to about $2,440,000; 12.10.3. the Fourth Defendant is indebted to about $988,000; 12.10.4. the Eleventh Defendant is indebted to about $121,000; 12.10.5. the trust of Twelfth Defendant is indebted to about $201,000; 12.10.6. the trust of Sixteenth Defendant is indebted to about $19,000; 12.10.7. the Seventeenth Defendant is indebted to about $88,000; 12.10.8. the Eighteenth Defendant is indebted to about $554,000; and 12.10.9. the Nineteenth Defendant is indebted to about $73,000. 13. ... 14. The First August Proposal and the Second August Proposal appear to be substantially the same. Variations to the Second August Proposal include: 14.l. payments referred to in paragraphs 2 and 11 are to be paid into a trust account held by Norton Rose Fulbright Australia (Norton Rose); 14.2. the period for the corporate restructure of [Diploma] referred to in paragraphs 5(a) and 5(b) has been extended to 30 June 2018 or such later date as agreed by the Administrators; 14.3. the board of directors of [Diploma] will not comprise of members of the Di Latte family. ... paragraph 5(c); 14.4. additional payments to the Provisional Liquidators for the purposes of being administrator, namely: 14.4.1. $40,000 for costs associated with convening the creditors meeting of [Diploma], should the Provisional Liquidator be successful in its PL Application. ... paragraph 9; and 14.4.2. $95,000 for costs and expenses, available on or before the reinstatement of [Diploma]. ... paragraph 11. 15. The Second August Proposal does not provide a clearly quantifiable additional financial benefits to creditors of [Diploma], and provides no financial benefit to creditors of the Second Defendant to Twenty-First Defendant. 24 A further proposal was received on 31 August 2017 (31 August Proposal), which was similar to the Second August Proposal, but contained some amendments.

CONTENTIONS OF THE PROPONENT AND INTERESTED PARTIES 25 The Proponent and Interested Parties rely upon an affidavit of Mr Dominic Di Latte sworn on 1 September 2017 to the effect that he is a director of the Proponent. 26 Mr Dominic Di Latte records that: (a) on 28 August 2017, the ASX issued a delisting notice which included Diploma because Diploma had not paid its outstanding annual listing fee for the year ending 30 June 2018; (b) on 29 August 2017, he caused the sum of $27,500 to be paid to the ASX in respect of Diploma's outstanding annual listing fee; (c) later, on 29 August 2017, the ASX released a notice of the companies that had been removed from the official list, Diploma was not listed on that notice; and (d) on 31 August 2017, he executed the 31 August Proposal in respect of Diploma. He produced it. 27 Under the 31 August Proposal, the board of directors of Diploma will comprise of at least three persons, all of whom will be independent non-executive directors and will not be a member of the Di Latte family. 28 Mr Di Latte said that on 30 August 2017, Swiss Re confirmed to the Proponent and FPDL its agreement to the proposed DOCA and in particular, Swiss Re has agreed (as set out in the proposed DOCA) that: (a) Swiss Re will support the DOCA Proposal of Diploma; (b) Swiss Re will cause the retirement of the Receivers and Managers of Diploma upon execution of the DOCA; (c) Swiss Re will not prove for a dividend in any DOCA of Diploma; and (d) if the DOCA Proposal is accepted by creditors and a DOCA executed, Swiss Re will release its security which will allow the Proponent to take steps to have Diploma recapitalised and reinstated to trade on the ASX. 29 In addition, Mr Di Latte also confirms that the 31 August Proposal also provides for: (a) unpaid employee entitlements, totalling $51,000, to be paid in full pursuant to para 2 of the 31 August Proposal; and (b) secured creditors claims of approximately $9 million, not proving for a dividend in any DOCA; (c) unsecured creditor claims in Diploma totalling $9,076,000, of which $449,155 are related parties and will not prove for a dividend, resulting in creditor claims of $8,626,845; and (d) under the 31 August Proposal, none of the past directors are intended to be directors of Diploma upon Diploma's relisting on the ASX. 30 Finally, Mr Di Latte says: (a) an earlier DOCA proposal originally assessed by the administrators provided for unsecured creditors of Diploma to receive 28,000,000 shares in Diploma; (b) under the 31 August Proposal, unsecured creditors of Diploma will receive 65,000,000 shares in Diploma; (c) the DOCA proposal provides a 130% increase in the number of shares being offered to the unsecured creditors. Based on a market capitalisation of $5 million in accordance with the DOCA proposal and the increase in the number of shares available to the unsecured creditors (65,000,000), the return to unsecured creditors is in the order of 8 cents in the dollar; (d) in their report to the Court dated 7 July 2017, the provisional liquidators have assessed that the return to unsecured creditors in liquidation would be between zero and 0.4 of a cent in the dollar; (e) without taking into account the 'potential upside' to unsecured creditors upon reinstatement of Diploma on the ASX, the DOCA proposal provides a substantially better outcome than liquidation for unsecured creditors and employees (as they will be paid 100 cents in the dollar); and (f) it is the intention of the Proponent that once the DOCA for Diploma is effectuated, that it may propose a DOCA for Second and Third Defendants.

PROVISIONAL LIQUIDATORS LEND SOME SUPPORT TO A DOCA 31 The most significant development, apart from ASIC's dim view of the benefits of any proposed DOCA, is the fact that the provisional liquidators have lent some guarded support to the 31 August Proposal. 32 Notably, the provisional liquidators have not sought to be heard on this application. 33 What is said in para 17 and para 18 of an affidavit of one of the provisional liquidators, Mr David Mark Hodgson, of 1 September 2017, is the following: 17 Based upon our review of the 31 August Revised DOCA Proposal, Mr Hewitt and I believe that there is potential for a better outcome for creditors of the Company to be achieved under this proposal than in a liquidation of the Company. However, the estimated returns under the 31 August Revised DOCA Proposal are conditional upon a number of events occurring. Mr Hewitt and I are unable to determine with certainty whether these conditions will be satisfied based upon the information provided to date and are not able to conclude that a better outcome for creditors will be achieved. 18 Conversely, whilst Mr Hewitt and I have identified potential voidable transactions and other claims which may be brought by the Company, we are at this stage unable to quantify the likely returns to creditors of the Company in a liquidation scenario. (emphasis added) 34 Nonetheless, with funding from the Proponent, the provisional liquidators filed an application on 1 September 2017, by which they will seek to be appointed as administrators in order to put the DOCA before the creditors of the company. I infer from all the submissions and affidavit material that this course is proposed, not so much by reason of a conviction that any proposed DOCA will necessarily produce a better result for creditors, but that there is at best some prospect that it may do so and that creditors should have the opportunity to consider it. The contents of Mr Hodgson's affidavit referred to above lend qualified support only to such a DOCA. Given the contents of the provisional liquidators' report referred to above, ASIC strongly submits that first principles dictate that the companies should be wound up.

LIQUIDATION MAY NOT PRECLUDE A DOCA 35 There is a further consideration. If it be the case that any DOCA can be convincingly demonstrated as a possible means of providing better outcomes for creditors of the company, then the possibility of achieving that course will not be shut out by winding up orders. It is unusual that ASIC seeks the appointment of the provisional liquidators as liquidators, but the provisional liquidators themselves seek their own appointment as administrators of Diploma (a course not supported by ASIC). However, if a convincing case can be made for appointment of the provisional liquidators as administrators, then such relief is capable of being granted in the right circumstances, even if the liquidators are appointed now pursuant to this winding up application.

CONCLUSION 36 I do not consider there is sufficient material to satisfy me that I should adjourn the winding up of Diploma. The business affairs of this group have been under close scrutiny for a considerable time. In the clear insolvency of Diploma along with other Defendants, and the reservations about the manner in which Diploma has been conducted in the past, there is no good reason to depart from the starting point that the winding up of Diploma, together with all the other Defendants, should be ordered and proceed. 37 There is still a shortage of rigorous support for any proposed very recent DOCA. The fact that there is some possibility that creditors might be better off, is not sufficient in the present circumstances to displace the present prima face position that the winding up should be ordered. 38 The only real prejudice that could be pointed to by the Proponent in this course occurring was the possibility (only) that before such an application could be considered and resolved, Diploma may lose its listing on the ASX. There was no clear evidence about this. In all of the circumstances, this possibility only without evidence as to the nature and extent of the risk is not a sufficiently powerful consideration to displace the need for orders to be made now. There are obvious potential benefits for creditors that the appointment of liquidators may achieve in the winding up of a company. In my view the winding up should proceed without further delay. 39 In those circumstances, I make orders in terms of the ASIC's minute of proposed orders received on 1 September 2017 and dismiss the application by those parties represented by Mr Dundo to adjourn ASIC's application. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher.

SCHEDULE OF PARTIES WAD 177 of 2017 Defendants Fourth Defendant: DIPLOMA PROPERTIES PTY LTD (ACN 127 493 252) Fifth Defendant: DIPLOMA TCO HOLDINGS PTY LTD (ACN 147 094 880) Sixth Defendant: DIPLOMA CONSTRUCTION (NSW) ACN 134 488 067) Seventh Defendant: DIPLOMA CAPITAL PTY LTD (ACN 147 094 344) Eighth Defendant: ALLEGRO REALTY HOLDINGS PTY LTD (ACN 147 095 109) Ninth Defendant: DIPLOMA DEVELOPMENT MANAGEMENT PTY LTD (ACN 610 257 219) Tenth Defendant: WESTSTRUCTURE PTY LTD (ACN 136 917 774) Eleventh Defendant: 24 FLINDERS LANE PTY LTD (ACN 130 756 535) Twelfth Defendant: 176 ADELAIDE TCE PTY LTD (ACN 142 882 513) Thirteenth Defendant: ROCKINGHAM SERVICED APARTMENTS PTY LTD (ACN 147 094 871) Fourteenth Defendant: CHEMLABS EMPORIUM PTY LD (ACN 610 256 954) Sixteenth Defendant: 300 LORD ST PTY LTD (ACN 147 769 908) Seventeenth Defendant: 303 CAMPBELL ST PTY LTD (ACN 147 280 233) Eighteenth Defendant: 254 WEST COAST HWY PTY LTD (ACN 147 113 773) Nineteenth Defendant: SUBIACO RESIDENTIAL APARTMENTS PTY LTD (ACN 147 113 791) Twentieth Defendant: DIPLOMA CAPITAL SECURITIES PTY LTD (ACN 147 094 862) Twenty-First Defendant ALLEGRO REALTY PTY LTD (ACN 132 727 158)