Australian Securities and Investments Commission v Ludgates Corporate and Advisory Services Pty Ltd

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using eSearch on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA

IN THE MATTER OF PURCOM NO 34 PTY LIMITED (IN LIQ) (ACN 006 794 672) BETWEEN: GREGORY JAY PARKER

PURCOM NO 34 PTY LIMITED (IN LIQUIDATION) (ACN 006 794 672)

PURCOM NO 34 ADMIN PTY LIMITED (RECEIVER AND MANAGER APPOINTED) (ACN 134 158 508)

REASONS FOR JUDGMENT 1 On 2 September 2009, the Court appointed Peter Ngan (the Receiver) as receiver and manager of the Third Defendant, Purcom No 34 Admin Pty Limited (Receiver and Manager Appointed) (ACN 134 158 508) (the Company). Paragraph 2(a) of the Orders made on that date empowered the Receiverto: Carry on the business of the Third Defendant and be given such powers in relation to the said business as are given to a liquidator pursuant to s 477 of the Corporations Act 2001 (Cth). 2 By an application filed on 13 November 2009, the Receiver applies to the Court for the following: 1. A direction pursuant to [ss] 420, 420C, 424 and 477 of the Corporations Act … that the Applicant is justified in entering into a Supply Deed with Jax Quickfit Franchising Systems Pty Limited (ACN 112 050 058) in the form annexed hereto and marked "A" ("Supply Deed"). 2. An order approving the entry into the Supply Deed by the Applicant. 3. An order that the Applicant's costs of this application be paid on a full indemnity basis from property held by the First Applicant pursuant to the orders of the Court on 2 and 7 September 2009 or the assets of the Third Defendant. 4. Such further or other order as the Court deems fit. 3 The Receiver relies on the affidavit of Peter Ngan sworn 12 November 2009 in support of the application.

FACTUAL BACKGROUND 4 The Company operates a tyre servicing centre that sells and fits wheels and tyres and related parts and accessories to the public (the Business). The Company operates from premises at 386 High Street, Prahran (the Premises) under the name "Prahran Tyre Centre" (the Business Name). 5 On the appointment of the Receiver, the Company was not trading. On 11 September 2009, the Receiver began to trade from the Premises under the Business Name. On the same day, the Fifth Defendant, Prahran Tyre Centre Pty Ltd (PTC), demanded that the Receiver remove the signage at the Premises containing the Business Name on the basis that it belonged to PTC. As a result, the signage was removed. 6 Following that event, the Receiver formed the view that the quickest, most practical and cost-effective way to begin trading was to utilise the services and branding of Jax Quickfit Franchising Systems Pty Limited (ACN 112 050 058) (Jax), as the Premises had previously been operated as a Jax franchise. The Receiver informed the Court that he believes the Jax brand has a good reputation and market recognition and can be expected to generate solid and stable income. Without a recognisable brand name the Receiver informed the Court that he further believes he would have difficulty maintaining the revenue of the Company. 7 The Receiver currently has an ad hoc agreement with Jax that entitles him to utilise the Jax brand without charge and access the services of an experienced Jax manager and trading stock from major wheel and tyre manufacturers. The Receiver seeks to enter into a more formal arrangement. To that end, Jax has offered to enter into a Supply Deed with the Receiver that grants a licence to the Receiver to use the "Jax" and "Jax Quickfit" names and provide trading stock (on credit) necessary to operate the Business at the Premises (the Deed). The Deed commences on the date it is executed and continues until terminated by notice in writing. Notice is immediate in the case of the Receiver. However, Jax must give seven days written notice to the Receiver to terminate the Deed. 8 Moreover, under the Deed, in consideration of the Receiver agreeing to trade the Business and for other good and valuable consideration, Jax indemnifies the Receiver in respect of any claim (a defined term in the Deed) made against the Receiver which is referable to trading the Business (to the extent that the property of the Company is insufficient) and in respect of the costs of this application. In those circumstances, the Receiver applies to the Court under s 424 of the Corporations Act 2001 (Cth) (the Corporations Act), or alternatively, O 26 r 7 of the Federal Court Rules (the Rules),for approval or authorisation to enter into the Deed on behalf of the Company. The operation of the operative clauses of the Deed is conditional upon the Court approving the Receiver entering into the Deed.

STATUTORY PROVISIONS AND RELEVANT PRINCIPLES 9 As noted earlier, (see [1]), the Receiver has been given such powers as are given to a liquidator pursuant to s 477 of the Corporations Act. Section 477(2B) of the Corporations Act imposes a restraint on the liquidator's power in the following terms: Except with the approval of the Court, … a liquidator of a company must not enter into an agreement on the company's behalf (for example, but without limitation, a lease or a charge) if: (a) without limiting paragraph (b), the term of the agreement may end; or (b) obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance; more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months. 10 Accordingly, if a liquidator, or in this case the Receiver, wishes to enter into a longer term agreement on behalf of a company, they must seek the Court's approval before entering into such an agreement: Empire (Aust) Nominees Pty Ltd v Vince (2000) 18 ACLC 738 at 741. 11 There are a number of principles relevant to the exercise of the Court's power under s 477(2B). These principles were set out in Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375 as follows (at [26]): (1) the court does not simply "rubber stamp" whatever is put forward by a liquidator. As Giles J said in Re Spedley Securities Ltd (In liq) (1992) 10 ACLC 1,742 at 1,745 in relation to the powers of a liquidator to compromise claims: "[T]he Court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct. The same restraint must apply when the question is whether the liquidator should be authorised to enter into a particular transaction the benefits and burdens of which require assessment on a commercial basis. Of course, the compromise of claims will involve assessment on a legal basis, and a liquidator will be expected (as was made plain in Re Chase Corporation (Australia) Equities Ltd) to obtain advice and, as a prudent person would in the conduct of his own affairs, advice from practitioners appropriate to the nature and value of the claims. But in all but the simplest case, and demonstrably in the present case, commercial considerations play a significant part in whether a compromise will be for the benefit of creditors." (2) a court will not approve an agreement if its terms are unclear: Re United Medical Protection (No 4) (2002) 20 ACLC 1,647; (3) the role of the Court is to grant or deny approval to the liquidator's proposal. Its role is not to develop some alternative proposal which might seem preferable: Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 16 ACLC 1,642; (4) in reviewing the liquidator's proposal, the task of the Court is: "[not] to reconsider all of the issues which have been weighed up by the liquidator in developing the proposal, and to substitute its determination for his in … a hearing de novo [but] … simply to review the liquidator's proposal, paying due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, satisfying itself there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene in terms of the "expeditious and beneficial administration" of the winding up." See ASC Timber at 1,650; see also Re Gate Gourmet Australia Pty Ltd (in liq) (2005) 23 ACLC 834 at [10] and Warne v GDK Financial Solutions; Peridon Village Nominees (2006) 24 ACLC 1,019 at [60]. The Court's approval is not an endorsement of the proposed agreement but is merely a permission for the liquidator to exercise his or her own commercial judgment in the matter; (5) further, in judging whether or not a liquidator should be given permission to enter into a funding agreement (whether retrospective or not), it is important to ensure, inter alia, that the entity or person providing the funding is not given a benefit disproportionate to the risk undertaken in light of the funding that is promised or a "grossly excessive profit": Anstella Nominees Pty Ltd v St George Motor Finance Ltd (2003) 21 ACLC 1,347 at [11] and Re ACN 076 673 875 Ltd (2002) 20 ACLC 1,551 at [28]; (6) generally, the Court grants approval under s 477(2B) of the Act only where the transaction is the proper realisation of the assets of the company or otherwise assists in the winding up of the company: GDK Financial Solutions at [58] and the cases cited therein. 12 Insofar as the application by the Receiver is made under s 424 of the Corporations Act, the relevant principles are not in dispute: see Re One.Tel Networks Holdings Pty Ltd (Hall as rec and mgr) (2001) 40 ACSR 83 at 90. Moreover, in so far as the Receiver makes the application under O 26 r 7 of the Rules, the Court has power to approve the Receiver entering into the Deed: University of Western Australia v Gray (No 6) [2006] FCA 1825 at [66]; Australian Securities and Investments Commission v Ludgates Corporate and Advisory Services Pty Ltd [2003] FCA 1368 at [23].

CONSIDERATION 13 The Receiver has exercised his own commercial judgment in deciding whether to enter into the Deed. The Receiver does not seek, and the Court will not provide, advice on the question of his own commercial judgment: Re Mineral Securities Australia Ltd (in liq) [1973] 2 NSWLR 207 at 231-2; Re One.Tel Networks Holdings Pty Ltd (Hall as rec and mgr) (2001) 40 ACSR 83 at 91. 14 As noted earlier, without a commercial arrangement with Jax, the Receiver may find it difficult to preserve the value of the goodwill of the Company. By entering into the Deed, the Receiver will be able to continue to operate the Business and will be able to access a greater volume and variety of stock from and through Jax at Jax's buying price. There is no evidence to suggest that Jax will receive a benefit disproportionate to the risk they undertake, namely the indemnity described earlier (see [8] above). 15 By reason of the issues raised in the underlying substantive proceedings, I accept the submission of the Receiver that it was appropriate for him to bring the matter before the Court: Re Bell Group Ltd (in liq) [2009] WASC 235. First, the Receiver trading the Business at the Premises itself is contentious. However, the approval does not determine the disputed issues in the underlying substantive proceedings, which primarily relate to the entitlement to the assets and undertaking of the Company: cf MTM Funds Management Ltd v Cavalane Holdings Pty Ltd (2000) 158 FLR 121 at [17]; Re Bell Group Ltd (in liq) [2009] WASC 235; Re Mento Developments (Aust) Pty Ltd (ACN 005 862 457) (in liq) (2009) 73 ACSR 622 at [49]. As the Receiver submitted, if the Receiver is permitted to trade and does so successfully, the assets and undertaking of the Company will be protected or preserved and possibly enhanced: s 57 of the Federal Court of Australia Act 1976 (Cth) and Martyniuk v King [2000] VSC 319 at [15]. 16 Secondly, notice of this application was served on each party to the underlying substantive proceedings except the First, Third and Seventh Defendants. None of these parties appeared to object to the Court granting the approval sought by the Receiver. The Seventh Defendant, Ms June Danks, has notified the Court that she does not intend to participate in the substantive proceedings. However, the First and Third Defendants should have been put on notice of the Orders sought by the Receiver. 17 In light of the principles as set out above in relation to ss 424 and 477(2B) of the Corporations Act and O 26 r 7 of the Rules and in the circumstances of this case, I consider it appropriate that the Court grant approval to the Receiver to enter into the Deed. The Orders giving effect to that approval will be stayed until the Receiver has served a copy of the Orders and these reasons for judgment on the First and Third Defendants and has filed an affidavit of service with the Court. The First and Third Defendants will be given until 4:00pm on 26 November 2009 to object to the making of the orders. I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.

Associate: Dated: 19 November 2009 Counsel for the Receiver: Mr C Wood