Brealey v Shields

Relief sought

1. The orders sought by Mr Woodgate were: 1. That the Plaintiff be released as Liquidator of the Company and that ASIC deregister the Company pursuant to section 480(d) of the Act, 60 days after the making of this order; 2. Pursuant to section 488(2) of the Act, that the Liquidator have special leave to distribute the whole of the surplus funds of the Company, as follows: (a) the amount of $470.873.27 to be paid in cash to Mr Joseph Cummins or such further or other amount as determined by the court: 3. An order that the Liquidator's costs and expenses of this application are to be paid out of the assets of the Company; and 4. That the Liquidator have leave to destroy the books of the Company pursuant to section 542(3)(a) of the Act, six months after the deregistration of the Company. 5. Pursuant to Corporations Regulations 2001, regulation 5.6.71, the requirement that there be annexed to order 2 a schedule in Form 551 be dispensed with. 6. Further or alternatively, and to the extent necessary, an order pursuant to s 479(3) of the Act, further, or alternatively, all enabling powers that the liquidator would be justified in calculating the distribution to be made to Mr Joseph Cummins by making adjustments in the manner specified. 7. Such further or other order as the Court deems fit.
2. At the completion of the hearing, I informed Mr Woodgate's legal representatives that I would make orders in accordance with the further amended interlocutory process, and invited counsel for Mr Woodgate to submit appropriate short minutes of order to my Associate.
3. I informed Mr Woodgate's legal representatives that I would provide short reasons for making the orders sought by him. These are those reasons.

Applicable statutory provision

1. After some initial doubt, counsel for Mr Woodgate correctly submitted that all of the provisions of the Corporations Act 2001 (Cth) (the Act) relied upon by Mr Woodgate in his further amended interlocutory process remain in effect. Two of those provisions, ss 479 and 542, will be repealed by the operation of the Insolvency Law Reform Act 2016 (Cth) (the Reform Act), but the repeal will not become effective until 1 September 2017. Those provisions will in broad terms be replaced by ss 90-15 and 70-35 of the Insolvency Practice Schedule (Corporations).
2. It is appropriate to say something about why the two sections still remain in force. It is necessary for the reader of the two Acts and the relevant regulations to go to some lengths to find out what the present position is concerning the operation of relevant parts of the Act.
3. Section 2(1) of the Reform Act relevantly provides: (1) Each provision of this Act specified in column 1 of the table commences, or is taken to have commenced, in accordance with column 2 of the table. Any other statement in column 2 has effect according to its terms.
4. The relevant parts of the table set out below sub-s (1) are items 2 and 5, which provide: Commencement information Column 1 Column 2 Column 3 Provisions Commencement Date/Details … … …
5. Schedule 1 A single day to be fixed by Proclamation. 1 March 2017 However, if the provisions do not commence within the period of 12 months beginning on the day this Act receives the Royal Assent, they commence on the day after the end of that period. … … …
6. Schedule 2, items 95 to 302 At the same time as the provisions covered by table item 2. 1 March 2017

1. Item 5 is relevant because item 151 of sch 2 to the Reform Act provides for the repeal of s 479 of the Act and item 177 of sch 2 provides for the repeal of a number of sections of the Act, including s 542.
2. A person reading item 5 of the table under s 2(1) of the Reform Act together with items 151 and 177 of sch 2 of the Reform Act, as well as the information in column 3 of the table, would reasonably think that ss 479 and 542 of the Act had been repealed on 1 March 2017. They would be wrong, but not for the reasons that they might think they could be wrong.
3. The information in column 2 of the table relevant to item 5 provides that items 95 to 302 of sch 2 of the Reform Act are to commence at the same time as the provisions covered by table item 2. Item 2 provides that sch 1 is to commence on a single day to be fixed by proclamation. An appropriate search would discover that there was no relevant proclamation. Item 2 in this circumstance provided that sch 1, and thus by reason of item 5, items 95 to 302 of sch 2, were to commence on the day after the end of the period of 12 months beginning on the day the Reform Act received the Royal Assent, if it had not commenced within that 12 month period. A suitable search would discover that the Reform Act ss 1 to 3 commenced on 29 February 2016, when the Royal Assent was received, so the provisions referred to in items 2 and 5 of the table would commence on 1 March 2017.
4. Section 2(2) of the Reform Act provides: Any information in column 3 of the table is not part of this Act. Information may be inserted in this column, or information in it may be edited, in any published version of this Act.
5. Accordingly, the inclusion in column 3 of the table against item 5 of the expression "1 March 2017" is not part of the Reform Act, and does not have the effect that items 95 to 302 of sch 2 commenced on that date. The Reform Act provided that those provisions would commence on 1 March 2017, because that was the day after the end of the period of 12 months after the Reform Act received the Royal Assent. The information in column 3 is simply information that is authorised to be inserted in that column by s 2(1) in any published version of the Reform Act, and the information in that column may be edited.
6. The information is still wrong, but not for any reason connected with the strange operation of s 2(2) of the Reform Act.
7. Section 3 of the Reform Act provides that "legislation that is specified in a Schedule to the Reform Act is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Act has effect according to its terms".
8. Section 1634 of the Act provides: (1) The Governor-General may make regulations prescribing matters of a transitional nature (including prescribing any saving or application provisions) relating to the amendments and repeals made by Schedule 2 to the Insolvency Law Reform Act 2016. (2) The regulations may provide that certain provisions of Schedule 2 to the Insolvency Law Reform Act 2016 are taken to be modified as set out in the regulations. Those provisions then have effect as if they were so modified. (3) The provisions of Schedule 2 to the Insolvency Law Reform Act 2016 that provide for regulations to deal with matters do not limit each other.
9. Part 10.25 of the Corporations Regulations 2001 (Cth) (the Regulations) was inserted by reg 4 and sch 11 of the Corporations and Other Legislation Amendment (Insolvency Law Reform) Regulation 2016 (Cth). Part 10.25 contains transitional provisions relating to the Insolvency Practice Schedule (Corporations). The Insolvency Practice Schedule (Corporations) contains provisions that will govern various aspects of the insolvency of corporations when inserted by sch 2 of the Reform Act as a new sch 2 of the Act: see sch 2 of the Reform Act item 2.
10. The items in sch 2 of the Reform Act referred to in item 5 of the table to s 2(1) of the Reform Act, being items 95 to 302, which include the items that refer to the repeal of ss 479 and 542 of the Act, fall within a part of the Reform Act which has the heading "Amendments consequential on the introduction of the Insolvency Practice Schedule (Corporations)".
11. The newly inserted reg 10.25.02 of the Regulations is titled "Application of certain amendments relating to the enactment of the Insolvency Practice Schedule (Corporations)" and relevantly provides: (1) This section is made for the purposes of subsection 1634(1) of the Act. … (3) The amendments made by the following items of Part 2 of Schedule 2 to the Insolvency Law Reform Act 2016 apply in relation to external administrations on and after 1 September 2017: … (h) items 143 to 172; (i) items 177 to 208; …
12. Thus, items 151 and 177 apply on and after 1 September 2017, and accordingly ss 479 and 542 of the Act will remain in effect until that date.
13. This series of statutory and regulatory provisions effects in my view and with all due respect an exceptionally opaque process in changing important aspects of company law. The complexity of these provisions is explained in a note by Mr Thomas Gardner, Tipstaff to Black J, in Butterworths Corporation Law Bulletin 11.
14. On what basis can it rationally be expected that competent company lawyers, let alone members of the public, will readily understand how these and many other significant changes to company law will take effect?
15. If one looks now for ss 479 and 542, and no doubt other sections of the Act that are to be repealed, in the online compilation of the Corporations Act included in the Federal Register of Legislation, or the consolidated legislation of the Commonwealth published by the Australasian and Legal Information Institute, those sections will not be found. They have been deleted in a manner consistent with their having been repealed. That is evidently a result of the sections having been apparently repealed by the Reform Act, but the effect of the repeal having been delayed by the operation of a regulation authorised by a section of the Act.
16. As I have mentioned, there was some initial doubt in the present case, and in another case that I have recently dealt with the originating process that sought relief under existing sections of the Act was amended to claim the same relief under relevant provisions of the Insolvency Practice Schedule (Corporations), before it was appreciated that the amendment was premature and unnecessary. In Re Keystone Group Holdings Pty Ltd (Receivers & Managers Appointed) (Administrators Appointed) [2017] NSWSC 454, Gleeson JA dealt at [5] with an incorrect submission made by the administrators that s 437B of the Act had been repealed with effect from 1 March 2017. The confusion in these cases was not suffered by practitioners who lacked competence in company law.

Background

1. Mr Woodgate supported his application with comprehensive evidence that consisted of four affidavits sworn by Mr Woodgate together with two substantial exhibits, an affidavit of Mr Richard James Rowley, who is a partner of Mr Woodgate and a registered liquidator who has assisted Mr Woodgate in the liquidation, as well as affidavits sworn or affirmed by a number of solicitors who have acted for Mr Woodgate for the purposes of his administration and the present application.
2. The Court was greatly assisted by detailed written submissions prepared by Mr Assaf of counsel for Mr Woodgate, together with detailed annexures that established the evidence of service of relevant documents on all of the creditors who had submitted proofs of debt as well as the contributories of the Company. Another annexure assisted the court in verifying that all of the formal requirements of Supreme Court (Corporations) Rules 1999 (the Rules) r 7.5 have been satisfied by the evidence in this case.
3. Importantly, an annexure to Mr Assaf's submissions also set out in detail the basis upon which Mr Woodgate determined that the two contributories in the Company, Mr Joseph and Mr Ivan Cummins, were indebted to the Company in amounts of $459,539 and $1,420,734 respectively. The existence of these debts is significant to the orders sought by Mr Woodgate in his application, because Mr Woodgate has determined that the whole of the remaining surplus should be paid to Joseph Cummins. I will return to this issue below.
4. Mr Assaf's submissions and the supporting annexures will be retained with the file, as they set out comprehensively the matters that the Court is required to address, the basis for the findings sought by Mr Woodgate, and the evidence that supports the making of those findings. I have cross referenced the information in the annexures to be evidence that was identified, and satisfied myself that the annexures are accurate and justify the findings that Mr Woodgate asks the Court to make.
5. I am satisfied that all creditors and contributories have been notified of this application as required by r 7.5 (6) of the Rules.
6. Both the evidence and the Court's records record that on 20 March 2017, when Mr Woodgate's application was before Black J for directions, the matter was called outside court and no appearances were made by any creditors or contributories. Black J ordered that any objection to the release of Mr Woodgate be filed and served by 3 April 2017, and that any creditors or contributories were to file and serve any evidence upon which they intended to rely by 3 April 2017. The matter was listed for further directions on Monday, 24 April 2017 with a view to the matter being allocated a date for hearing.
7. No objection to the release of Mr Woodgate was filed by any party, and no creditor or contributory filed any evidence.
8. On 15 June 2017, at the commencement of the hearing, the matter was called outside court and no party appeared.
9. The evidence establishes that all parties who claim to be creditors of the Company and its two contributories have been fully apprised of the nature of Mr Woodgate's application, and the basis upon which he seeks the relief that he seeks. It is proper for the Court to conclude that no party who claims to be a creditor and no contributory considers themselves to have a basis to challenge Mr Woodgate's claim for relief.
10. I should note in addition that in the case of Mr Joseph Cummins, there is specific evidence in the form of an acknowledgement by his solicitor that he did not oppose the granting of the relief sought by Mr Woodgate.

Order under s 480 of the Act

1. The first order sought by Mr Woodgate is that he be released as liquidator of the Company and that ASIC deregister the Company pursuant to s 480(d) of the Corporations Act 2001 (Cth) (the Act) 60 days after the making of the order.
2. Section 480 of the Act provides: When the liquidator: (a) has realised all the property of the company or so much of that property as can in his or her opinion be realised without needlessly protracting the winding up, and has distributed a final dividend (if any) to the creditors and adjusted the rights of the contributories among themselves and made a final return (if any) to the contributories; or (b) has resigned or has been removed from office; he or she may apply to the Court: (c) for an order that he or she be released; or (d) for an order that he or she be released and that ASIC deregister the company.
3. The evidence satisfies me that Mr Woodgate has realised all the property of the Company, or so much of that property as can in his opinion be realised without needlessly protracting the winding up, as required by s 480(a). I am satisfied that it would needlessly protract the winding up for Mr Woodgate to initiate proceedings to recover the debts that he has determined are owed to the Company by its contributories. While it is true that the shareholders did not appear at the hearing to contest Mr Woodgate's determination, it might well have been otherwise if Mr Woodgate had instituted proceedings. Although Mr Woodgate carried out reasonably comprehensive investigations, some aspects of the debts that he determined are inherently contentious, and it is reasonable for Mr Woodgate to have formed the view that he should not risk the remaining assets of the Company in pursuing those loans. Even if some monies were recovered, the amounts recovered after allowing for the costs of recovery would be distributed to the shareholders, albeit perhaps in a different way than is now contemplated by the orders sought by Mr Woodgate.
4. As to the second matter required by s 480(a), it is clear on the evidence that in this case Mr Woodgate has paid the whole of the debts owed by the Company to the admitted creditors, plus interest, and the creditors whose proofs of debt were rejected have not challenged Mr Woodgate's determinations.
5. Of greater significance is the third matter required by s 480(a), that Mr Woodgate has "adjusted the rights of the contributories amongst themselves and made a final return (if any) to the contributories".
6. As I have noted above, Mr Woodgate's position is that the proper way for him to adjust the rights of the contributories is for him to pay the whole of the $470,873.27 surplus to Mr Joseph Cummins. He has taken that position on the basis that Mr Joseph Cummins owes $459,539 to the Company, while Mr Ivan Cummins owes the sum of $1,420,734. Mr Woodgate relies upon the proposition that, although as equal shareholders each contributory is prima face entitled to 50% of the surplus, the application of the rule in Cherry v Boultbee (1839) 4 Myl & Cr 442; 41 ER 171, as explained by Palmer J in Otis Elevator Co Pty Ltd v Guide Rails Pty Ltd (in liq) [2004] NSWSC 383; (2004) 49 ACSR 531 at [33]-[47], and by Black J in Re Anne Lewis Pty Limited [2016] NSWSC 1860 at [16], to the effect that a person who is both the claimant in, and the debtor to, a fund, cannot obtain payment of his or her claim until he or she has first paid his or her debt into the fund.
7. In the present case, neither Mr Joseph nor Mr Ivan Cummins is bankrupt, so the principle discussed by Palmer J as to the effect of the application of the rule when a contributory has been the subject of an insolvency administration is not relevant. Further, as only one of the contributories has signified his consent to the making of the orders sought by Mr Woodgate, it will be preferable in this case to apply the rule in Cherry v Boultbee (while noting Palmer J's observation that it perhaps should be called the rule in Jeffs v Wood (1723) 2 P Wms 26; 24 ER 663), rather than the "pragmatic" course adopted by Black J in the circumstances of Re Anne Lewis Pty Limited.
8. For this course to constitute a proper adjustment of the rights of the contributories among themselves, it must be established that Mr Woodgate has correctly determined the amounts of the debts owed by the two contributories to the Company.
9. As I have noted above, there are aspects of the determination by Mr Woodgate of the debts owed by each of the contributories that are inherently contentious on the evidence. As an annexure to Mr Assaf's submissions shows, the amount owed by Mr Joseph Cummins has four components, while the amount owed by Mr Ivan Cummins has seven components.
10. I am satisfied that Mr Woodgate has established that he made his determination following a detailed investigation, and it appears from the evidence that he has adopted a proper approach to his duties in making the determinations. It does not follow that Mr Woodgate is necessarily correct in relation to the individual components of the debts that he determined, but in my view the Court is entitled to accept his determinations as being sufficient, given that the contributories have taken no steps to challenge them either before or during the present application.
11. Furthermore, as I have noted, Mr Joseph Cummins has indicated through his solicitor that he will not oppose the making of the orders sought by Mr Woodgate.
12. So far as Mr Ivan Cummins is concerned, on 22 January 2017 his former solicitor advised Mr Woodgate's solicitors that he disputed part of the loan in the sum of $510,320. That amount relates to loans of $298,500 and $211,660 that Mr Woodgate determined were owed to the Company by Mr Ivan Cummins that arose from the hire of two Komatsu excavators. (I have ignored the small difference between the sum of the two individual debts and the total of $510,320).
13. If one adds to the debt of $459,539 owed by Mr Joseph Cummins the full amount of the surplus of $470,873.27, the total is $930,412.27. If one deducts from the $1,420,734 debt that Mr Woodgate determined was owed to the Company by Mr Ivan Cummins the full amount of $510,320, the result is $910,414.
14. The point of this calculation is that, even if the debt determined to be owed to the Company by Mr Ivan Cummins is reduced by the contested amount, the result is within about $20,000 of the total of the amount owed by Mr Joseph Cummins and the amount of the surplus. That suggests that the amount in dispute, even if it had been contested by Mr Ivan Cummins, would have been relatively immaterial.
15. Another way of looking at the issue is as follows. If Mr Woodgate had recovered the two debts owed by the contributories, the amount available when added to the existing surplus would be $2,351,146.27. Half of that amount would then be distributed to each of the contributories, being a sum of $1,175,573.13. If the whole of the surplus is distributed to Mr Joseph Cummins, and added to the amount of the debt that he owes that he will not be required to repay to the Company, the total is $930,412.27. Thus, the course that Mr Woodgate proposes to follow gives Mr Joseph Cummins a result that is notionally less advantageous to him than if the two debts were repaid and the total surplus then distributed equally to the two contributories. I say notionally, because the calculation that I have done leaves out of account the additional costs of administration and recovery that Mr Woodgate would probably incur.
16. I accept that the requirements of s 480(a) of the Act have been satisfied and that it is appropriate for an order under s 480(d) to be made as sought by Mr Woodgate. As proper notification of Mr Woodgate's application has been made, as mentioned above, his application for release should be made as a matter of course: see In the matter of RR Impex Pty Ltd (in liq) [2013] NSWSC 1667 at [3] per Black J.

Order under s 488 of the Act

1. The next order sought by Mr Woodgate is an order under s 488(2) of the Act that he have special leave to distribute the whole of the surplus funds of the Company in the manner set out in order 2 of the further amended interlocutory process. That subsection provides: (2) Despite anything in rules or regulations made for the purposes of subsection (1), a liquidator may distribute a surplus only with the Court's special leave.
2. The purpose of the provision is to ensure that there is in reality a surplus, in that the creditors' claims have been recognised and met in full, and also to ensure that the correct relativities among contributories have been observed: see CGU Workers Compensation (NSW) Ltd v Ascom Service Automation Australia Pty Ltd [2005] NSWSC 747 at [4] per Barrett J (as his Honour then was) and Re Allseal Floor Preparations Pty Ltd (in liq) [2015] NSWSC 1990 at [4] per Black J. For the reasons given above, I am satisfied of these matters in the present case.
3. The reference to "special leave" in the provision only requires that a specific application for leave must be made: see Re Trussted Frames and Trusses Pty Ltd [2012] NSWSC 787 at [4] per Brereton J.
4. I am therefore satisfied that the order sought by Mr Woodgate should be made.

Costs order

1. The third order sought by Mr Woodgate is an order that his costs and the expenses of the application be paid out of the assets of the Company.
2. The making of that order is uncontroversial and is the form of order typically made in this kind of application: Re RH Trevan Pty Ltd (in liq); Trevan Auto Service Pty Ltd (in liq); Trevan Car Sales Pty Ltd (in liq) [2013] NSWSC 1445 at [5] per Black J.

Order under s 542 of the Act

1. Next, Mr Woodgate seeks an order that he have leave to destroy the books of the Company pursuant to s 542(3)(a) of the Act, six months after the deregistration of the Company.
2. Sections 542(3) and 542(4) of the Act provide: (3) Despite subsection (2) but subject to subsection (4), when a company has been wound up, the books referred to in subsection (1) may be destroyed within a period of 5 years after the deregistration of the company: (a) in the case of a winding up by the Court - in accordance with the directions of the Court given pursuant to an application of which at least 14 days' notice has been given to asset… (4) The liquidator is not entitled to destroy books as mentioned in paragraph (3)(b) or (c) unless ASIC consents to the destruction of those books.
3. On 20 May 2015, the creditors resolved that subject to the consent of ASIC, Mr Woodgate may destroy the books and records of the Company. ASIC has granted consent to the destruction of the books and records. On 30 January 2017, Mr Joseph Cummins' solicitors advised Mr Woodgate's solicitors that the Company's records may be relevant to certain litigation in which Mr Cummins was involved. Mr Woodgate's solicitors provided to Mr Cummins' solicitors an inventory of the books and records, and asked whether their request for the preservation of the records was maintained. There has been no further request in relation to the preservation of the books and records of the Company.
4. In these circumstances, in my view, leave should be given to Mr Woodgate to destroy the books and records of the Company in the terms sought in order 4 of the further amended interlocutory process.

Dispensation with Form 551

1. In the present case, the distribution of the surplus assets of the Company to its contributories is a very simple exercise that has already been explained by Mr Woodgate to those contributories. The Court has typically been prepared to make an order dispensing with the requirement of the liquidator to comply with Regulation 5.6.71 of the Corporations Regulations where the formality of Form 551 is considered unnecessary: see Brealey v Shields [2009] NSWSC 1148 per Barrett J (as his Honour then was); and Re Allseal Floor Preparations Pty Ltd (in liq) [2015] NSWSC 1990 at [10] per Black J. This is an appropriate matter for the Court to dispense with the formality of complying with Form 551.

Authorisation under s 479 of the Act

1. The draft short minutes of order submitted by Mr Assaf in response to the Court's invitation contains directions pursuant to s 479 of the Act that Mr Woodgate would be justified in distributing the surplus assets of the Company, in the amount of $470,873.27, by way of cash payment to Mr Joseph Cummins, and also a direction that Mr Woodgate would be justified in calculating the distribution to be made to Mr Cummins in the manner specified in Mr Woodgate's 14 June 2017 affidavit. Section 479 will also remain in effect until 1 September 2017. I have set out above my reasons for concluding that Mr Woodgate is justified in distributing the surplus to Mr Joseph Cummins in the manner proposed, and will accordingly make the directions sought.
2. It is also appropriate that the costs and expenses of the application be paid out of the assets of the Company.

Orders

1. I make the following orders: 1. Order pursuant to s 480(d) of the Corporations Act that the plaintiff be released as liquidator of the defendant, Glengrant Civil Pty Limited (in liquidation) ('the Company'), and that ASIC deregister the Company 60 days after the making of this order. 2. Grant special leave to the plaintiff pursuant to s 488(2) of the Corporations Act to distribute the whole of the surplus funds of the Company in the amount of $470,873.27 to Mr Joseph Cummins of 15 Bruce Crescent, Warnervale, New South Wales 2259 in the manner specified in Order 5. 3. Direct pursuant to s 479 of the Corporations Act that the plaintiff would be justified in distributing the surplus funds of the Company in the amount of $470,873.27 by way of cash payment to Mr Joseph Cummins. 4. Direct pursuant to s 479 of the Corporations Act that the liquidator would be justified in calculating the distribution to be made to Mr Joseph Cummins in the manner specified in the affidavit of Giles Geoffrey Woodgate sworn 14 June 2017. 5. Direct pursuant to r 5.6.71 of the Corporations Regulations that the order authorising the distribution of surplus of the Company need not have annexed to it a schedule in accordance with Form 551. 6. Grant leave to the plaintiff pursuant to s 542(3)(a) of the Corporations Act to destroy the books of the Company six months after the deregistration of the Company. 7. Order that the costs and expenses of this application are to be paid out of the assets of the Company.

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: 26 June 2017