Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd

The applicable principles and determination

1. Section 440A(2) of the Act relevantly provides that: "The Court is to adjourn the hearing of an application for an order to windup 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."
2. I reviewed the authorities dealing with applications under that section in Re Brew Still Pty Ltd (admin apptd) [2023] NSWSC 256 ("Brew Still") and I adopt, without repeating, that review of the authorities. The Court recognises, in dealing with applications of this kind, the possibility that a voluntary administration may be embarked upon as a "last resort" in response to a winding up proceeding, and the Court should exercise a degree of caution where, as here, an application to adjourn a winding up is brought at the very last moment. I also bear in mind, as the legal representatives fairly recognised here, that Rio, or the Administrator, carries the onus of persuading the Court that it should be satisfied of the matter specified in s 440(2) of the Act, that it is in the interests of Rio's creditors for Rio to continue under administration rather than be wound up, and that question is closely related to the financial benefit to be obtained from a voluntary administration as opposed to a winding up. In some cases, particularly where an application to adjourn a winding up is brought at an early point in a voluntary administration, which is not the case here, then the administrator may have very limited information about the company, but it is likely that an adjournment will only then be given for a relatively short period. Here, the Administrator has undertaken at least some investigations, and has found himself able to express views as to the prospects of a voluntary administration and a liquidation, although it will emerge below that I largely do not share the views which he has expressed. In those circumstances, the application here is not put on the basis that the Administrator needs further time to form a view, but rather that he has formed such a view.

Affidavit evidence

1. Turning now to the affidavit evidence which is read in support of the application, the Administrator notes that he was appointed voluntary administrator of Rio on 23 October 2023, although I pointed above, and the documents exhibited to his affidavit fairly disclose, that he had been in discussion with Rio and its directors as to a potential appointment for about two months before that appointment. The Administrator notes that Rio's principal asset is its shareholding in two wholly owned subsidiary companies incorporated in Ecuador, which in turn have an involvement in a gold mining enterprise in Ecuador. The evidence indicates that a difficulty has arisen, which the Administrator is addressing but has not to date resolved, as to the question whether Rio has control of the entities of which it is the holding equity in Ecuador or the assets of those entities.
2. The Administrator notes that, shortly before his appointment, a proposed joint venture partner with Rio terminated the proposed joint venture. It appears that the principal of that joint venture partner, Mr Nicholas (as trustee of a discretionary trust) ("Purchaser") is now the purchaser under a Share Sale Agreement which largely provides the foundation for a suggested Deed of Company Arrangement ("DOCA") and the proposition that the continuance of the administration, to the point that creditors would have the opportunity to consider that proposed DOCA, is in the interests of Rio's creditors. The Administrator also notes that, on the same day as he was appointed as voluntary administrator and immediately before the powers of Rio's directors' powers were suspended by that appointment, Rio executed and exchanged the Share Sale Agreement to sell its shares in an Ecuadorian subsidiary to the Purchaser, and a copy of the Share Sale Agreement is exhibited to the Administrator's affidavit. I pause there to note that there is no suggestion that the transaction was exposed to any other purchasers, before that Share Sale Agreement was executed immediately prior to the appointment of the Administrator.
3. The Administrator then turns to the terms of the Share Sale Agreement, which include payment of a non-refundable deposit of $100,000, which the Administrator fairly notes was in fact refundable, and has not been paid. He notes that completion of the Share Sale Agreement is subject to the Purchaser completing due diligence within twenty one days. The due diligence has not yet been completed but the Purchaser has already raised concerns as to matters that have arisen in it. The Administrator also notes that the completion of the Share Sale Agreement will not occur if Rio enters into liquidation and points to the fact that the purchase price under the Share Sale Agreement is expressed to be $10 million. As will emerge below, the Administrator has not been able to verify, and it is not apparent that Rio's directors had previously sought to verify, that the Purchaser has $10 million available to pay the purchase price, or would be able to raise that amount, and the Administrator fairly recognises the uncertainty as to that matter.
4. The Administrator in turn refers to discussions with the Purchaser as to the progress of due diligence, and notes the issues which have arisen as to control of Rio's Ecuador subsidiaries, which have not yet been resolved. It seems to me that the prospect of completion of the Share Sale Agreement, which is subject to satisfactory due diligence, is at least put at risk by those issues. The Administrator also notes that the Purchaser has indicated that he is reluctant to provide evidence of his capacity to pay the purchase price under the Share Sale Agreement, a matter which one might have thought would give rise to concern, particularly where the Purchaser's ability to complete the Share Sale Agreement is in turn critical to the ability to complete the proposed DOCA and the result of the deed administration.
5. The Administrator, fairly, recognises that these matters are of concern to him and that he is unable to presently state if the Purchaser will in fact complete the Share Sale Agreement. I pause to note that the Administrator's concern is likely warranted. Ordinarily, one might think there is a high degree of uncertainty as to whether a purchaser will in fact complete a sale contract, where he does not comply with an obligation to pay a deposit; is only required to complete if due diligence is satisfactory and raises concerns as to the matters emerging from due diligence; and does not feel inclined to demonstrate his or her ability to pay the purchase price.
6. The Administrator also refers to the source of the deed fund which is only the proceeds from the Share Sale Agreement and certain of Rio's existing assets. Importantly, the proposed DOCA does not involve any injection of external funds, beyond funds to which Rio is already entitled under the Share Sale Agreement or from its own assets and, in particular, does not involve any injection of funds from the deed proponents, who include some of Rio's directors. The Administrator also refers to the waterfall provision in respect of the deed fund, which is in a relatively standard form other than for an adjustment of creditors' claims in respect of Series 2 noteholders, which involve issues which I address below. Mr Rosenblatt, who appears for the Administrator, and Mr Lipp, who appears for several of Rio's directors, emphasise that the proposed DOCA would allow a recovery to Rio's unsecured creditors, other than Series 2 noteholders, of 100 cents in the dollar. That proposition, however, requires a qualification. That is how the deed fund will be distributed, if a deed fund exists, but that largely depends on whether the Share Sale Agreement is completed, and I pointed above to the difficulties in that respect. The Administrator also points to a CGT liability that may arise in respect of the sale of Rio's assets under the Share Sale Agreement, and fairly acknowledged in cross-examination that at this stage that liability cannot be quantified.
7. The Administrator also refers to the circumstances in respect of Rio's entry into the Series 2 Note Agreement. I recognise that one of the noteholders under the Series 2 Note Agreement has brought the winding up application, and I also recognise that no attempt was made to set aside the relevant creditor's statutory demand. There are peculiarities of the Series 2 Note Agreement, including the fact that at least one of Rio's directors appears to have participated in the arrangements, and that they provided for interest at a rate of a flat twenty percent for each thirty day period of the loan to Rio. There is a suggestion that that arrangement was originally intended to apply for a short-term loan, of only thirty days, but it continued for some twenty months, so that the interest liabilities which have accrued are now multiples of the principal that was borrowed by Rio. Obviously enough, these arrangements might, in the ordinary course, warrant investigation as to whether they give rise to contraventions of ss 180-181 of the Act or relief under the voidable transaction provisions of the Act.
8. The Administrator in turn notes that, assuming the Purchaser completes the Share Purchase Agreement in accordance with its terms, then all creditors, other than claims for interest by the Series 2 noteholders, will be paid in full. That proposition is, however, wholly dependent on the assumption which underpins it. The Administrator notes that, in his view, the proposed DOCA would result in a better return to creditors than would result from an immediate winding up of Rio. I am not persuaded of the cogency of that view. So far as the proposed DOCA is concerned, whether it will result in any return, still less a better return, to creditors than a liquidation, depends on matters which the Administrator is unable to assess, most obviously whether the Share Sale Agreement will complete and whether any funds will be available from it for the deed fund. The Administrator does not seem to have made any real attempt to assess the potential recoveries in a winding up, and, in particular, does not appear to have investigated the extent of any claims which may be available against Rio's directors in a winding up, whether for breach of directors' duties or under the voidable transaction provisions to which I have referred above. Without a reliable assessment of the two components of the relevant comparison, namely the return to creditors in a proposed DOCA and the return in a winding up, it is not possible to reach any reliable view as to which of them will lead to a better return to creditors.
9. Several directors of Rio, Mr Cuthbertson, Mr Lindsay and Mr Mares, have also led evidence in support of the adjournment application. By an affidavit dated 9 November 2023, Mr Cuthbertson refers to Rio's history, the circumstances in which the statutory demand was served, and to the circumstances in which the failed joint venture, which was being negotiated with the Purchaser who has now agreed to acquire Rio's Ecuadorian subsidiary, did not proceed. Mr Cuthbertson expresses the view that the proposed share price under the Share Sale Agreement of $10 million provided a realistic assessment of the value of the shares and seemed fair and reasonable. Much of the evidence on which he relied for that proposition was not read, given the lateness of his affidavit and the fact that that would not have allowed sufficient time to other parties to respond to that evidence. Other interested persons, whose evidence could also largely not be read because of its lateness, contest whether that share price under the Share Sale Agreement is a reasonable price. I do not need to decide that question, because the issues to which I have referred above mean that the Court could not have any satisfaction as to any likelihood that the Share Sale Agreement would complete, or that the share sale price would be received, and whether it is a reasonable price is of little significance given the risk that it will never be received. Mr Cuthbertson also expresses the view that the share sale price provides a better return than a winding up of Rio but that, also, depends wholly on an assumption that the share sale price will be received, which has the difficulties to which I have referred above.
10. By his affidavit, Mr Lindsay, also a director of Rio, expresses a positive view of the qualifications of the persons associated with the Purchaser under the Share Sale Agreement, and says that he and other directors have formed the view that the share sale price appears to be fair and reasonable, and indicates his support for Rio's entry into the Share Sale Agreement. I have noted above that that issue is contested, so far as the reasonableness of the share price is concerned, and I need not resolve it.
11. By an affidavit dated 9 November 2023, Mr Mares, also a director of Rio, refers to the circumstances of Rio's entry into the Series 2 Note Agreement, and emphasises that those notes were only ever intended to be issued for thirty days, which would have had the result that less interest was payable on them than has been the case where they have remained in place for an extended period. That, so far as it is a matter of history, may be of real concern to a liquidator who is investigating Rio's affairs and potential recoveries against its directors, but is of limited significance in this application. It is perhaps a contributor to Rio's present state of insolvency or likely insolvency, acknowledged by the appointment of a voluntary administrator, but does not assist in determining the prospects of the DOCA or a winding up. Mr Mares again expressed a view that the Share Sale Agreement provides a better return than a winding up of Rio, but that is also wholly dependent on the assumption that a share sale will complete.
12. The directors also rely on an affidavit dated 9 November 2023 of Ms Thornton, who is one of the holders of the Series 2 convertible notes. She gives evidence, admitted with a limiting order under s 136 of the Evidence Act 1995 (NSW), as to her understanding that the Series 2 convertible notes were only meant to be on issue for a thirty day period, and that she did not expect that interest of twenty per cent per month compounding monthly would continue to accrue since she expected to be repaid her principal within thirty days. She refers to the DOCA proposal and indicates that she is content with the reduction in interest that would arise from a compromise as to the Series 2 convertible notes under the DOCA proposal. I do not need to reach any assessment as to the fairness of the DOCA proposal, whether to the extent that it allows any return to any director who holds the Series 2 convertible notes, or to the extent that it allows a discounted return to other Series 2 noteholders, where that would be a matter for creditors at the second meeting of creditors, subject to any later application to the Court to set aside any DOCA which may be adopted at that meeting. The question for the Court, at this point, is instead whether it is in the interests of Rio's creditors for Rio to continue under administration, and that does not turn upon the fairness, or otherwise, of the terms of the proposed DOCA.

The parties' submissions and determination

1. Turning now to the parties' submissions in respect of the adjournment, there was largely common ground as to the relevant case law, consistent with the summary of the case law which I have set out above. Mr Rosenblatt pointed to cases where adjournments have been granted, where there is a real, tangible and detailed proposal for a deed of company arrangement and there is a significant prospect of a better return for creditors under a deed of company arrangement than a liquidation. I do not doubt the correctness of that approach. Here, I might readily have granted the adjournment which was sought, if the position was one where the purchaser under the Share Sale Agreement had paid the deposit when due; had indicated that due diligence was proceeding in a satisfactory way and that he expected to be satisfied as to the outcome of due diligence, so as to satisfy the condition precedent to completion of that agreement; and had been prepared to show its capacity to complete, when the Administrator reasonably sought to satisfy himself of that matter. Of course, none of those factors are present here, so it is not to the point that there exists a detailed proposal for a DOCA, which would provide for the distribution of funds which the Court cannot be satisfied will ever be received.
2. Mr Rosenblatt submits that the best interests of creditors would be served by granting the adjournment application due to the prospect that creditors would see a substantially greater return if the Share Sale Agreement and DOCA had the chance to proceed. Again, the difficulty with that proposition that it seems to me to depend wholly on its premise, namely the likelihood that there would be a receipt of the sale proceeds under the Share Sale Agreement.
3. In oral submissions, Mr Rosenblatt fairly recognised that there were uncertainties as to the completion of the Share Sale Agreement and the prospect of funding being received from the deed fund, and submitted that, instead, it was in the interests of Rio's creditors for Rio to continue under administration because it was possible that the Share Sale Agreement would complete, and the funds would be received and the deed fund would be funded, and it had not been established that that would not occur. However, the case law to which I have referred requires that the Court form an affirmative state of satisfaction that it is in the interests of Rio's creditors for the company to continue under administration, and that seems to me to require at least that the prospects of an administration, discounted to the extent that they are uncertain, have the capacity to lead to a better result than a winding up. Here, the Court cannot form that affirmative view, both because of the level of uncertainty as to the prospects of the deed administration to which I have referred, and because of the Administrator's limited investigation of the prospects of a liquidation and, in particular, the recoveries under a liquidation, including by way of any actions that may be available against Rio's directors. Mr Rosenblatt also submits that the DOCA proposal is a "generous one", although assessments of generosity are no doubt to some extent in the eye of the beholder. Here, as I noted above, the DOCA proposal distributes moneys which are Rio's monies, as matters stand; it does not involve any contribution by Rio's directors or the deed proponents; and the prospect that even those monies, to the extent that they depend on the sale proceeds under the Share Sale Agreement, will be received is highly uncertain.
4. Mr Lipp, who as I have noted above appears for three of Rio's directors, advances much the same proposition as Mr Rosenblatt, supporting the adjournment of the winding up, so as to permit the proposed DOCA to be considered by creditors at the second creditors' meeting. Mr Lipp recognises that Rio does not trade, because it is the holding company of relevant subsidiaries, and that is a significant matter, because a liquidation will normally be more effective, in respect of an asset holding company, than it would be in respect of a trading business. Mr Lipp identifies a number of reasons why, he contends, Rio's creditors would be better off under the proposed DOCA than if Rio were wound up. This turns upon the prospect that creditors other than Series 2 noteholders would be repaid in full under a DOCA but that depends, as I have noted above, upon the receipt of payment under the Share Sale Agreement. Mr Lipp submits that it is implausible that a liquidator's investigations will reveal any claims under s 558G of the Act, for insolvent trading, where Rio does not undertake a trading business. That proposition can be accepted, but says nothing as to the prospects of claims for breach of directors' duties, particularly in respect of the arrangements relating to Series 2 convertible notes, against Rio's directors or corresponding claims under the voidable transaction or unreasonable director related transaction provisions of the Act.
5. Mr Lipp submits, robustly, that the Purchaser has been conducting due diligence for a significant period of time and is likely to complete the Share Sale Agreement. As I have noted above, it seems to me that one could have had more confidence about that proposition if the Purchaser had found it necessary to pay the deposit which he was bound to pay, or had expressed satisfaction rather than dissatisfaction as to what was emerging from the due diligence process. Mr Lipp submits that the timing of a distribution to creditors will be quicker and easier within a deed administration, and that proposition can be accepted, but again only subject to the assumption that the Share Sale Agreement completes to allow such a distribution to be made. Mr Lipp also submits that there is no need for the scrutiny of a liquidator in this case, because the nature of Rio's business and assets make its books and records simple and reliable. With respect, I do not accept that submission, where it seems to me that the circumstances relating to entry into the Series 2 Note Agreement are matters which may well warrant a liquidator's investigation.
6. For all these reasons, I am not satisfied of the matter specified in s 440A(2) of the Act, namely that it is in the interests of Rio's creditors for Rio to continue under administration rather than be wound up. For these reasons, I will dismiss the Interlocutory Process filed 9 November 2023, so far as it continued to seek an order under s 440A(2) of the Act.

Winding up application

1. I now turn to the determination of the winding up application in respect of Rio. By Originating Process filed on 25 July 2023, Featherstone Enterprises Pty Ltd as trustee for the Rutherford Harris Family Trust ("Featherstone") applies for the winding up of Rio, in reliance on a presumption of insolvency arising from an unsatisfied creditor's statutory demand ("Demand").
2. Featherstone reads the affidavit dated 25 July 2023 of Ms Rutherford, its sole director, which refers to the debt owed to Featherstone in an amount of not less than $713,813.19 for moneys owing on convertible notes issued by Rio to Featherstone, and confirms the service of the Demand and accompanying affidavit and the truth of matters stated in the Originating Process concerning the Demand. She also confirms that the sum demanded remains due and payable by Rio to Featherstone. The amount claimed in the Demand included the principal and interest in respect of Series 2 notes, and I referred above to the issues in respect of those notes. Nonetheless, no application was made to set aside the Demand served by Featherstone; Rio did not take advantage of the opportunity made available to it to bring a further application under s 459S of the Act to rely, in these proceedings, on matters on which it had not relied in respect of any application to set aside the Demand; Rio, rightly, did not press an application for a determination that the Demand was null and void; and, irrespective of any claim which might have been raised by Rio, but was not, in respect of the status of any interest on the Series 2 notes claimed in the Demand, it is clear enough that the principal amount was advanced by Featherstone to Rio and has not been repaid when due.
3. Featherstone also relies on the affidavit dated 25 July 2023 of Ms Rutherford, which deals with service of the Demand and the accompanying affidavit on Rio, both by postal service and by personal service. There is no suggestion of any deficiency in respect of service, and Rio has been represented, initially by solicitors acting for it, and subsequently by solicitors acting on the instruction of its voluntary administrators, in the winding up application. By a further affidavit dated 22 August 2023, Ms Rutherford proves service of the Originating Process in respect of the winding up application and supporting affidavits and a consent of liquidator upon Rio. Mr Pham, a solicitor acting for Rio, in turn provides overlapping evidence of that matter in his affidavit dated 22 August 2023, and also addresses the giving of notice of the winding up application to the Australian Securities and Investments Commission and publication of the application. Several supporting creditors are present, although I have not called upon them in respect of the winding up application, where ordinarily a supporting creditor's role in such an application will arise only if the primary creditor does not pursue the application. A consent to act as liquidator is in evidence, and I will return shortly to the question of the identity of the liquidator to be appointed to Rio. By her affidavit dated 9 November 2023, Ms Rutherford confirms that the debt claimed against Rio remains outstanding as at the time of this application, and annexes a current company search for Rio which indicates that no previous winding up order has been made.
4. The principles that arise in an application of this kind are addressed in submissions made by Mr Rose, who appears for Featherstone, and may be dealt with briefly. The application to wind up Rio relies on a presumption of insolvency resulting from non-compliance with a creditor's statutory demand. The effect of that presumption was described by the High Court of Australia in Australian Securities and Investments Commission v Lanepoint Enterprises Pty Ltd (2011) 244 CLR 1; [2011] HCA 18 at [28], where the Court observed that: "where a demand has not been complied with, the statutory presumption of insolvency applies unless the demand is set aside in proceedings brought for that purpose prior to the hearing of the application for an order to wind up. Unless the demand is rendered ineffective by an order sought setting it aside, the company is required to prove to the contrary of the presumption."
5. Rio has not established the contrary of the presumption of insolvency, either before or after the appointment of the voluntary administrator, and that is perhaps not surprising when a voluntary administrator has now been appointed. The presumption of insolvency has not been displaced. In these circumstances, I am satisfied that I should make an order for the winding up of Rio.

Identity of liquidator

1. There is a question as to the identity of the liquidator to be appointed, where the Plaintiff seeks the appointment of Mr Niccol as liquidator of Rio, but the Administrator indicates his willingness to be appointed as liquidator if a winding up order is made. I summarised the applicable principles in Brew Still at [36] where I noted that the Court's usual practice is to appoint the liquidator nominated by the applicant for a winding up order to the company that is to be wound up, and it will depart from that usual practice only where there is good reason to do so. Both Mr Rose and Mr Rosenblatt point to the potential relevance of informational advantage available to the voluntary administrator in that respect. Mr Rosenblatt submits that the Administrator has an informational advantage, where he has been in office for at least two and a half weeks, and there would be costs incurred by another person appointed as liquidator in recreating the work that he has done. Mr Rose, on the other hand, points to the Court's usual practice and submits that there is no reason to displace it here.
2. Here, I accept that the Administrator has some informational advantage over a newly appointed liquidator, although it seems to me that that advantage is significantly limited by the fact that his focus has primarily been on a potential Share Sale Agreement, to which I referred above, and the possibility of the DOCA, and it is apparent that he has made very limited, if any, inquiries in identifying the claims which may be available to a liquidator in a liquidation. Here, as in Brew Still, it also seems to me that there is reason to think that, where the Administrator had engaged with Rio's directors, in the period prior to his appointment, over a period of about two months; where he appears to have had at least some engagement with the Share Sale Agreement, which was executed on the day of his appointment; and where issues as to the status of that Share Sale Agreement may now need to be addressed by a liquidator, and investigations of potential claims against Rio's directors will almost certainly have to be undertaken by a liquidator, then the Administrator's previous engagement with Rio and its directors is more likely a disadvantage, rather than an advantage. I emphasise, in that regard, that I do not form any view that is adverse to the Administrator in respect of his actual impartiality, but this is an area where the appearance of impartiality is also important, and it is preferable that the Administrator not be exposed to any difficulties which may arise in respect of inquiries into the steps taken concerning the entry into the Share Sale Agreement at about the same time as his appointment.
3. For these reasons, it seems to me preferable that, consistent with the Court's usual practice, and in order to preserve not only the reality, but also the appearance of impartiality, a liquidator who does not have a previous engagement with Rio's directors and the purchaser under the Share Sale Agreement or the directors be appointed. For these reasons, I will appoint the Featherstone's nominee as liquidator.

Orders

1. Accordingly, I make the following orders:
2. Order under s 459A of the Corporations Act 2001 (Cth) that the Defendant, Rio Dorado Ltd (admin apptd), be wound up in insolvency.
3. Mr Ian Niccol be appointed as liquidator of the Defendant.
4. The Plaintiff's costs of this application be costs in the winding up.

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: 22 November 2023