Australian Securities and Investments Commission v Diploma Group Limited [2017] FCA 549 | Case summary

MCKERRACHER J: 1 In this winding up application, the Australian Securities and Investments Commission (ASIC) seeks the interlocutory appointment of provisional liquidators because it has no confidence that the affairs of the remaining defendant companies have been or are being properly managed. (ASIC has discontinued those applications as against the Fifteenth Defendant.) ASIC, which has already used its statutory powers to conduct its own partial investigation, contends that the appointment of provisional liquidators will enable those officers of the court to investigate and advise the Court as to the true financial position of each of the defendants and to regularise corporate governance and exert appropriate management control in the public interest. 2 These are slightly expanded reasons for the oral reasons I gave on 12 May 2017 on ASIC's urgent application for interlocutory relief. 3 The Diploma Group consists of: (1) Diploma Group Limited (Receivers and Managers appointed) (Administrators appointed) (ACN 127 462 686) (First Defendant); (2) Diploma Construction (WA) Pty Ltd (Receivers and Managers appointed) (Administrators appointed) (ACN 113 950 100) (Second Defendant); (3) DGX Construction Pty Ltd (Receivers and Managers appointed) (Administrators appointed) (ACN 147 094 335) (Third Defendant); and (4) 18 subsidiary companies (Subsidiary Companies) (being the Fourth to Twenty-First Defendants). 4 As at 10 April 2017, the members of the Diploma Group shared a registered office and there were common office holders for each member of the Diploma Group. The available financial records for each of the defendant companies traces a complex web of inter-company loans between members. 5 In November 2016, the auditor of the First Defendant lodged with ASIC an Auditor's Notification of Breach of Law reporting concerns that the First Defendant had contravened several provisions of the Corporations Act 2001 (Cth). On 21 December 2016, Receivers and Managers were appointed by a secured creditor of Diploma, Swiss Re International SE, to the First, Second and Third Defendants. The following day, Administrators were appointed to the First, Second and Third Defendants. 6 On 2 February 2017, ASIC commenced an investigation under s 13 of the Australian Securities and Investments Commission Act 2001 (Cth) into suspected contraventions of ss 180, 181, 182, 184 and 588G of the Act in relation to the First, Second and Third Defendants during the period 1 July 2015 to 22 December 2016. On 7 April 2017 the investigation was extended to include the Subsidiary Companies. 7 In an affidavit of a senior ASIC investigator supported by hundreds of pages of annexures and relied upon by ASIC, it is stated that although the investigation is ongoing, to date it has revealed that, inter alia: (1) a number of the companies within the Diploma Group appear to be insolvent; (2) the officers of the companies within the Diploma Group may have breached provisions of the Act; and (3) the First Defendant and Second Defendant have failed to lodge end of financial year 2016 accounts and the Second Defendant has failed to lodge end of financial year 2015 accounts. 8 Consequently, ASIC argues, it may not be in the interests of creditors for the defendants to continue under administration. Rather, it says, a provisional liquidator should be appointed, because: (1) any deed of company arrangement (DOCA) based on the proposal as currently drafted is unlikely to be recommended to and/or accepted by the creditors of the First Defendant, Second Defendant and Third Defendant; (2) even if the DOCA is accepted by the creditors of the First Defendant, Second Defendant and Third Defendant, it may be susceptible to termination because its operation is likely to be oppressive or unfairly prejudicial to, or unfairly discriminatory against one or more creditors; or contrary to the interests of the creditors as a whole; and unjust to creditors of the Subsidiary Companies, (except for the Seventeenth Defendant, who is not directly affected); and (3) the appointment of a provisional liquidator to the companies within the Diploma Group will facilitate the further investigation of some of the unusual accounting entries revealed in the financial records of the First Defendant, Second Defendant and Third Defendant. 9 ASIC argues that the appointment of a provisional liquidator to all of the defendants, pending the final hearing of ASIC's application to wind up the defendants, will: (1) determine the solvency of the defendants; (2) advise the Court of the financial position of the defendants; (3) identify any assets potentially available to creditors of the Subsidiary Companies; (4) prevent the possible dissipation of assets of the defendants; (5) prevent the writing off of director or related party loans existing in the Subsidiary Companies and identify voidable transactions; (6) protect the interests of creditors and potential creditors of the defendants, particularly the Subsidiary Companies' creditors; and (7) protect the public interest. 10 As discussed above, the First, Second and Third Defendants are under administration and ASIC seeks to appoint those administrators as provisional liquidators. The administrators have consented to such appointment but otherwise in effect, save for one matter, have been content to abide by the outcome of this interlocutory application. 11 The applications are opposed by the Fourth, Twelfth and Fourteenth Defendants. The other defendants are effectively dormant but as ASIC says, in practical terms, they are still under the potential control at least of the same persons in the same family who control the first three defendant companies and the Fourth, Twelfth and Fourteenth Defendants. ASIC is concerned that there is no proper control in relation to those companies which are not under administration. 12 The First, Second and Third Defendants, being the companies under administration, and the Fourth, Twelfth and Fourteenth Defendants sought an adjournment of this interlocutory proceeding until a date after 1 June 2017 because of an imminent possible transaction relating to a property development project referred to as the Chemlabs Project. 13 The details of this project are not particularly relevant to the reasons for the decision at which I have arrived. Of significance is the circumstance that most creditors and the administrators favoured a limited (only) opportunity to attempt to understand the intricacies and benefits (if any) of the transaction. The details of it were only outlined in a slightly skeletal manner. But I am told (but make no findings) that in late 2015, the Fourteenth Defendant and a third party joint venture partner, Emporium 101 Pty Ltd formed a joint venture through the former Fifteenth Defendant, which I will refer to as Lot 101. By an affidavit sworn by the Director for Lot 101, it is stated that Lot 101 only operates in its capacity as trustee of the Lot 101 Hay Street East Perth Unit Trust (Lot 101 Trust) and that its sole purpose is to act as the development company for the joint venture. The object of the joint venture is to acquire the land at 101 Hay Street, East Perth (the Chemlabs property) and develop the Chemlabs Project. Lot 101 has entered into a Project Development Agreement with the Metropolitan Redevelopment Authority (MRA) who is the current registered proprietor of the Chemlabs property. The MRA has required acquisition of the Chemlabs property to be settled by 19 May 2017 or shortly after (the Chemlabs transaction). If the Chemlabs transaction is settled, the Fourth, Twelfth and Fourteenth Defendants contend that the Chemlabs Project will remain alive and has a prospect of enhancing the asset position of some of the companies for the benefit of the creditors. 14 In an affidavit relied on by the Fourth, Twelfth and Fourteenth Defendants, it is said that the underlying value of the Chemlabs Project is $36 million and the First Defendant's share (50% of the project), valued at $18 million, is held through the Fourth Defendant and the Fourteenth Defendant as trustee for the Chemlabs Unit Trust. In addition, the Fourth Defendant will derive a project management fee of $6 million, taking the First Defendant's total value in the Chemlabs project to $24 million. The Chemlabs Project itself is an underlying asset of a DOCA proposal currently before the creditors, although the DOCA proposal discounts the value of the Chemlabs Project to $18 million to take into account secured creditors including Swiss Re. 15 In a further affidavit relied on by the Fourth, Twelfth and Fourteenth Defendants, it is stated that prior to 23 November 2016, the First Defendant and Emporium worked together to progress the Chemlabs Project. During this time the First Defendant was experiencing significant adverse publicity regarding its construction business and was involved in numerous disputes with sub-contractors. The First Defendant needed to use its resources, including financial resources, to focus on its business, other than the Chemlabs Project. In the period leading up until 23 November 2016, it is further stated that Emporium had funded over 90% of the costs associated with the Chemlabs Project. Emporium became increasingly concerned about the publicity surrounding the First Defendant, the impact that publicity may have on its interest in the Chemlabs Project and the ability of Lot 101 to raise finance for the acquisition of the Chemlabs property. Consequently, an Option Agreement was entered into to enable the Chemlabs Project to proceed to secure finance, protect the interest of Emporium and to provide time for the First Defendant to resolve its affairs. 16 I am informed by affidavit that Emporium held 49% of the issued shares in Lot 101 and is the beneficial owner of an additional 1% of the issued shares in Lot 101 which were held on trust by the Fourteenth Defendant. In relation to the unit holding of the Lot 101 Trust, Emporium held 490 of the units in the Trust and is the beneficial owner of an additional 1% of the units in the Trust. By cl 2.1 of the Option Agreement, Emporium held an option to acquire the remaining units and shares and, as a consequence, could take over the Chemlabs Project at any time after 23 November 2016. However, by cl 2.5 of the Option Agreement, if Emporium chose to exercise an option under the Option Agreement it would be required to provide for the grant of a project management agreement in favour of a Diploma company. Consequently, if Emporium formed the view that it could only secure the Chemlabs Project without the First Defendant as a shareholder and unitholder, it has the option to do so but the First Defendant retains the benefit of the project management fee, which is valued in the order of $6 million (plus GST). 17 Following the adjournment of the creditors' meeting for the First Defendant on 8 May 2017 and the issue of a default notice by the MRA, on 9 May 2017 Emporium exercised its rights under the Option Agreement. Emporium is now in control of all the shares and units in Lot 101. 18 On 9 May 2017, solicitors for the Fourth and Twelfth Defendants wrote to Emporium requesting Emporium to grant an option back to the Fourth Defendant and Lot 101 to acquire 50% of the shares and units in Lot 101 (New Option Agreement). The Fourth, Twelfth and Fourteenth Defendants argue that the New Option Agreement, if agreed to by Emporium, will preserve the Chemlabs Project as provided for in the DOCA proposal currently before creditors and maintain the expected return to creditors of the First, Second and Third Defendants from the DOCA proposal. Therefore, the Fourth, Twelfth and Fourteenth Defendants argue that if those matters can be resolved over the coming weeks and if they resolve their position in relation to an agreement with Swiss Re, which they are confident will occur, then much of the conditionality in relation to the DOCA proposal will be satisfied. 19 ASIC is sceptical about the Chemlabs transaction, its genesis and its history. I refused the defendants' adjournment application as I considered that it is important in the interests of justice and particularly in the interests of the creditors and the public to address this application without further delay. 20 As to the appointment of provisional liquidators, there is power under s 472(2) of the Act to appoint a provisional liquidator at any time after the filing of the winding up application and before the making of the winding up order. However, as the First, Second and Third Defendants are under administration, it is necessary for the Court to have regard to s 440A(3) of the Act which provides that: The Court is not to appoint a provisional liquidator of 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 have a provisional liquidator appointed. 21 Considerations relevant to the appointment of a provisional liquidator were summarised by Tamberlin J in Australian Securities Commission v Solomon (1996) 19 ACSR 73 (at 80) and include: (a) whether there is a valid and duly authorised winding up application with a reasonable prospect that a winding up order will be made (see also Debelle J in Re J N Taylor Holdings Ltd; Zempilas v J N Taylor Holdings Ltd (1991) 3 ACSR 600 (at 614)); (b) whether the assets of the corporation may be at risk; (c) whether a provisional liquidator is required in order to preserve the status quo until the Court can decide, after a further examination, whether the company should be wound up (see Re Carapark Industries Pty Ltd (in liq) (1966) 9 FLR 297 (at [303])); (d) whether there is a degree of urgency (see Re Club Mediterranean Pty Ltd (1975) 11 SASR 481 (at 484)); (e) whether it is in the public interest for there to be an independent examination of the accounts of the corporation by someone other than just the directors (Tickle v Crest Insurance Co of Australia Ltd (1984) 2 ACLC 493 (at 497)); and (f) whether the affairs of the company have been carried on casually and without due regard to legal requirements (Montgomery Windsor (NSW) Pty Ltd v Ilopa Pty Ltd (1984) 2 ACLC 224 (at 228)) . 22 It should be remembered that such an order is exceptional, albeit that the discretion for the making of such an order is wide (Re Huntford Pty Ltd (1993) 12 ACSR 274 (at 277)). 23 In my view, for the following reasons, in this instance there is a reasonable prospect that the winding up order would be made on the ultimate application. Not only are the companies under administration insolvent but they appear to be seriously so. The report of the affairs for the First Defendant reveals an estimated deficiency exceeding $18 million, the Second Defendant exceeding $30 million and the Third Defendant exceeding $4 million. There is also strong evidence that the group as a whole is significantly insolvent. There are complexities concerning intercompany loans which require detailed investigation and reporting. ASIC contends, following its own investigations, that the total deficiency of the group may be in the order of $36 million even though some members of the group may have a surplus. 24 A further relevant concern is that the First Defendant has failed to prepare and lodge financial statements with the Australian Securities Exchange, on which it is listed, and with ASIC and has failed to have an audit on its financial statements for the year ended 30 June 2016. 25 There is also prima face evidence (but I put it no higher than that) of various breaches of the Act. These breaches have involved activities and transactions of considerable magnitude. If the events concerned do indeed constitute breaches, a matter on which I certainly express no final view, then it is arguable that creditors have suffered as a result. 26 In the evidence in support of the application, ASIC has also pointed to several unusual accounting entries which may require investigation and/or explanation as to their content. These entries raise serious prima facie arguments about conduct in breach of provisions of the Act, including the possibility of insolvent trading. 27 ASIC's own investigation reveals that certain directors may possibly have engaged in conduct contravening the Act which it is not presently necessary at the moment to detail. The Fourth, Twelfth and Fourteenth Defendants stress that there is an answer to any and all such concerns which may well be the case - but the issue at present is whether there appears to be a foundation for such concerns. 28 While the risk of mismanagement or dissipation of assets would seem to be considerably less in the case of the First, Second and Third Defendants, I am satisfied on the evidence that there is at least prima facie a potential risk in relation to the other companies in the group. 29 I am told that some of the defendants are not active and were simply single transaction vehicles, but the totality of the evidence is sufficient to give rise to a concern about dealings with the assets of the group as a whole given that the same family do control, or in the past have controlled, all the companies in the group out of the same offices. I accept that those defendants not represented appear to be dormant at present. They have not appeared to oppose the application nor can they do so. 30 There is, in my view, a sound basis on the evidence in its totality for a lack of confidence in the running of the affairs of the group. 31 The only substantial argument against the appointment of provisional liquidators to the defendants has been the fact that this week the creditors voted to adjourn a decision on whether or not to approve the proposed DOCA which is now before the first three defendant companies. Indeed and significantly, the administrators have in one instance actually recommended that consideration be deferred pending the administrators having an opportunity (for 45 days) to consider, amongst other things, the Chemlabs transaction, discussed above, that is relevant to the DOCA. 32 In order to enable the creditors to consider the DOCA, while it was not the preferred position of ASIC, I did adjourn the first hearing on 4 May 2017 until 11 May 2017 to enable such consideration. As I have just indicated, however, at each of the three meetings, it was resolved to defer consideration of either approving the DOCA or alternatively winding up the First, Second and Third Defendants. 33 As discussed above, the settlement of the Chemlabs transaction is required to occur by 19 May 2017. The preferred position of the administrators themselves is that consideration of appointment of them as provisional liquidators be deferred until a date shortly after 1 June 2017. That is also certainly the position taken by the Fourth, Twelfth and Fourteenth Defendants. 34 However, at this stage, as it appears that no date has been fixed for the next creditors meetings and as I consider that ASIC has established an entitlement to the relief it seeks but for the question of the DOCA, I am not prepared to adjourn the ASIC's application further or indefinitely pending the outcome of further creditors meetings as would be the preferred position of the defendants, including the administrators. 35 As it will be known by 19 May 2017, or shortly thereafter, whether the settlement of the Chemlabs transaction which is necessary for the DOCA to proceed has occurred, I propose to allow that course to run so that if the settlement falls through, so will the DOCA and the automatic effect of the orders I will make will be the relief sought by ASIC. 36 On the other hand, if the Chemlabs transaction does proceed and an application is made to vary or vacate these orders, it should be possible to allow the creditors to take advice from the administrators if they wish and to determine whether they wish to vote in favour of the DOCA or winding up. 37 I consider that it is important that the creditors of the companies have some degree of certainty sooner rather than later as to their position and that of the companies and if the settlement does not proceed then, absent some compelling reason, the provisional liquidators will be appointed automatically on 25 May 2017. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher.

Australian Securities and Investments Commission v Diploma Group Limited

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