Carter v New Tel

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

1577/03 PHILLIP PATRICK CARTER AND GREGORY WINFIELD HALL IN THEIR CAPACITY AS LIQUIDATORS OF NEW TEL LTD (IN LIQUIDATION) JUDGMENT 1 HIS HONOUR: New Tel Limited was a listed Australian public company. It went into liquidation after a period of voluntary administration. The plaintiffs, Mr Carter and Mr Hall, were appointed administrators on 10 December 2002. They reported to creditors under s 439A on 2 January 2003. They recommended, in their report, that as no viable proposal for a deed of company arrangement had come forward, the company should be placed into liquidation without delay. When a broad proposal for a deed of company arrangement was received shortly before the meeting, they issued a supplementary report affirming their opinion. The creditors followed the plaintiffs' recommendation, resolving on 13 February 2003 that the company be wound up. A winding up in these circumstances is deemed to be a creditors' voluntary winding up by reason of s 446A(2). 2 On 3 March 2003 Mr Carter and Mr Hall made an application in the Corporations List for an order of the Court that New Tel be wound up in insolvency. They advanced three reasons for the Court to make this order. I was persuaded by those reasons and made the order, reserving my reasons for judgment. 3 Before explaining the three reasons that persuaded me to convert the voluntary winding up into a Court-ordered winding up in insolvency, I should comment briefly on some aspects of the winding up order that I made on 3 March 2003. The Corporations Act distinguishes between winding up by the Court (dealt with in Parts 5.4, 5.4A and 5.4B), and voluntary winding up (dealt with in Part 5.5). Winding up by the Court is further subdivided into winding up in insolvency (Part 5.4) and winding up by the Court on other grounds (Part 5.4A). In the present case my order was made under Part 5.4. 4 The plaintiffs had standing to seek an order that New Tel be wound up in insolvency, because they were the liquidators of the company: s 459P(1)(e). There was ample evidence before me that the company has been insolvent for some time. In their report to creditors dated 2 January 2003, Mr Carter and Mr Hall reached the interim conclusion that by 30 June 2002 the company was unable to pay its debts as and when they fell due. They issued a further report, entitled "Additional Information for Creditors" on 13 January 2003. In it, they estimated asset realisations in liquidation to be between $13 million (worst case) and $46 million (best case). The assets available to unsecured creditors would be between $0 (worst case) and $34 million (best case). Liabilities to secured creditors were estimated at approximately $8 million, and liabilities to unsecured creditors were estimated at between $40 million and $44 million. In his affidavit made on 18 February 2003, Mr Hall said that these estimates were still applicable, and that his best estimate of the shortfall, by the time of his affidavit, was a deficiency of assets to liabilities of $15 million. He said it was certain that unsecured creditors would receive a dividend of less than 100 cents in the dollar. I was satisfied that the company was insolvent, in the sense defined in the Corporations Act. 5 It is clear that the Court may make an order for the winding up of a company in insolvency, or upon other grounds, if the company is already in voluntary winding up. The Corporations Act assumes the point in various sections. For example, ss 459P(1)(e) and 462(2)(d) give standing to a liquidator to seek a winding up order. Section 513A explains when a winding up by order of the Court is taken to have begun or commenced in circumstances where, inter alia, a winding up of the company was already in progress. Obviously, however, there must be good reasons for the Court to intervene by making a winding up order in the case where the company is already in liquidation. 6 If the Court orders that the company be wound up in insolvency under s 459A, the winding up is taken to have commenced at the time specified by s 513A. Section 513A(a) has the effect that if a winding up is already in progress when the winding up order is made, the winding up is taken to have commenced according to the rules governing the time of commencement of that earlier winding up. Section 513B and 513C have the effect that, if a company resolves by special resolution that it be wound up voluntarily and immediately before the resolution was passed, the company was under administration, then the winding up is taken to have commenced on the day on which the administration began. It appears that these provisions apply when the company has not resolved by special resolution that it be wound up voluntarily, but the creditors have passed a resolution for winding up under s 439C(c) after voluntary administration and therefore the company is taken, by force of s 446A, to have passed a special resolution for voluntary winding up. That being so, it appears that the winding up pursuant to my order made on 3 March 2003 is taken to have commenced on the day of appointment of the plaintiffs as voluntary administrators, namely 10 December 2002. 7 I turn now to the three reasons advanced by the plaintiffs, successfully, to persuade me to make an order winding the company up in insolvency even though it was already in voluntary winding up. 8 The first reason relates to s 588FJ of the Corporations Act. The plaintiffs wish to use that section to attack the validity of a fixed and floating charge granted by New Tel, on about 7 November 2002, over its assets and undertaking. Mr Hall gave evidence that the charge was granted to Optus Mobile Pty Ltd and RSL Com Mobile Pty Ltd and was provisionally registered on 8 November 2002. The charge was expressed to be security for the performance of certain obligations and the payment of certain monies, including obligations of New Tel under certain agreements defined in the charge as the "Optus Agreements". In this way, according to Mr Hall, the charge purported to secure an existing indebtedness of New Tel which at that time was approximately $11 million. 9 There is another charge over the property of New Tel, being a fixed and floating charge over the assets and undertaking of the company granted to RSL Com Partners Ltd on about 4 November 2002. That charge obtained provisional registration on 5 November 2002. It purports to secure various debts and monetary liabilities, including some obligations of New Tel under certain agreements with RSL Com. The evidence before me is to the effect that this charge may secure only "new advances" and therefore may fall outside s 588FJ, although Mr Hall has not yet formed a concluded view on this point. 10 According to s 588FJ, a charge created on property of a company during a stated period before the beginning of the company's winding up is void against the liquidator except insofar as it secures certain advances and other payments made after the time of the charge and as consideration for it. Section 588FJ(1)(a) says that the section applies if the company is being wound up in insolvency. The plaintiffs have taken the view, on advice, that a company that is being wound up pursuant to a resolution of creditors after a process of voluntary administration is not a company that is being "wound up in insolvency". 11 On the face of the legislation, there is some room for debate on this point. When a company moves from voluntary administration to winding up by virtue of a creditors' resolution under s 439C(c), it is likely to be insolvent in fact (though not necessarily so), and s 446A(2)(b) deems there to have been no declaration of solvency under s 494, and therefore the winding up is taken to be a creditors' voluntary winding up. It is arguable, therefore, that the winding up flowing from the creditors' resolution is a winding up "in insolvency" in a factual sense. On the other hand, the structure of the Corporations Act, to which I have referred, treats "winding up in insolvency" as a form of Court-ordered winding up, by order made under s 459A, rather than as any form of voluntary winding up. 12 There is surprisingly little authority on the question, though such authority as there is points to the conclusion that there is no "winding up in insolvency" for the purposes of s 588FJ unless the winding up is by Court order under s 459A. Counsel's research has been able to identify only two cases. 13 In Re Wilkcorp Pty Ltd (Supreme Court of Queensland, Derrington J, 30 June 1997, unreported) an application was made to wind up a company under the Corporations Law on the ground stated in s 461(a) (which is identical with the same subsection in the Corporations Act), namely on the ground that the company had by special resolution resolved that it be wound up by the Court. The Registrar of the Court made a winding up order that did not specify that the company was to be wound up in insolvency. Derrington J declared, on an application by secured creditors, that the company was not being wound up in insolvency, and that the security given in favour of the applicants was not void as against the liquidators under s 588FJ. 14 In ERS Engines Pty Ltd v Wilson (1994) 35 NSWLR 193 a liquidator applied for an order under s 486A of the Corporations Law (identical with the same section of the Corporations Act) requiring an officer of a company to surrender his passport to the Court. Subsection 486A(2)(a) states that the order may be made only if "the company is being wound up in insolvency or by the Court". The company in question was being wound up because, as in the present case, the creditors at a meeting convened under s 439A had resolved under s 439C(c) that the company be wound up, and consequently s 446A deemed the company to have passed a special resolution under s 491 that the company be wound up voluntarily. Young J held (at 201) that there was no viable argument for the proposition that s 486A applied to the winding up in question. 15 In light of those cases, and the structure of the Corporations Act, I have formed the view that s 588FJ is available only where the company is being wound up by virtue of an order under s 459A. By making an order under that section, I made it possible for the liquidator whom I appointed (Mr Hall) to attack the validity of the charges under s 588FJ. On the evidence before me, there seemed to me to be a plausible case for such a challenge to be made, and a probability that if the challenge was successful, the unsecured creditors would receive a substantial benefit. 16 The second point relates to s 468 of the Corporations Act. Under that section, certain dispositions of property of a company, as well as transfers of shares or alterations in the status of members of the company, made after the commencement of the winding up of the company by the Court are void, unless the Court otherwise orders. There is no equivalent provision where a company is in voluntary winding up, although s 493 (2) is a more limited provision dealing with transfers of shares and the alterations and alteration in the status of members. 17 The plaintiffs are concerned that under an agreement made between New Tel and Optus Mobile Pty Ltd in 1999, New Tel may be under an obligation to provide Optus with certain customer details and Optus may be able to "step in" and commence providing services to those customers. Mr Hall has expressed the view that if New Tel provides Optus with customer details under this agreement, it may thereby make a disposition of its mobile customer base, which is property of New Tel and has considerable value. The plaintiffs wish to have a winding up order made by the Court so as to attract s 468 in those circumstances. It is plain on the face of s 468 that the making of a winding up order by the Court, whether in insolvency or on other grounds, gives the liquidator a ground to challenge the validity of a disposition of property that would not otherwise be available. 18 The third point relates to directors and officers liability insurance. New Tel held a D&O policy for the period from January 2002 to January 2003, a period during which the directors of New Tel may have allowed it to trade whilst insolvent and may have breached their duty to the company in other respects, according to Mr Hall. The policy contains the following provision: "The Company shall not be liable for Loss of any Claim made against any Insured Person: … (c) brought or maintained by or on behalf of any Insured .…"

The policy defines "Insured Persons" to include: "… any natural person who is or was a past, present or future: … (d) liquidator of the Insured Organisation; … but does not include: … (iii) a liquidator appointed by a court." 19 Mr Hall has expressed concern that the policy underwriter may contend that the policy does not respond to claims against directors of New Tel for insolvent trading in the context of a creditors' voluntary winding up. He wishes to ensure that the claim is successfully made, for the benefit of the unsecured creditors of the company. Without expressing any concluded view as to whether a claim under the policy is more likely to succeed if a winding up order is made by the Court than if the company is left in a deemed creditors voluntary winding up, I have decided that the wording of the D&O policy provides a plausible reason for making the order. 20 It was necessary for me to consider, before making the winding up order, whether adequate notice of the application for the order had been given. I was persuaded that the application was in the interests of unsecured creditors generally, and would not prejudice them. Copies of the originating process and affidavits and the consent of Mr Hall to be appointed as liquidator were served on Optus Mobile Pty Ltd, RSL Com Mobile Pty Ltd and RSL Com Partners Pty Ltd, the chargees whose securities may be challenged in consequence of the winding up order. The first two of those companies were represented at the hearing. 21 At one stage during the hearing I was concerned that the plaintiffs had not written to the Australian Securities and Investments Commission, in terms informing it of the present application. However, they have lodged a "Notification of Court Action in relation to Winding Up" (Form 519) in compliance with s 470(1)(a). 22 In circumstances where the entities most directly affected, namely the secured creditors whose security may be under challenge if the orders are made, have been notified and two of them were represented at the hearing, and there is a reasonable prospect that creditors generally will benefit from the making of the order, and will not be prejudiced, it seems to me unnecessary to insist on specific notification to ASIC. 23 I have made orders under s 467(3)(b) and Rule 5.6(1) of the Corporations Rules dispensing with the requirement to advertise or publish notice of the application under s 465A and Rule 5.6, and the requirement that the application be served on the company under s 465A. I have dispensed with the requirement to serve a copy of the order on the company under s 470(2)(b) and the requirement to deliver to the liquidator an office copy of the order and a statement that the order has been served under s 470(2)(c). I did so because I took the view that no substantive purpose could be achieved by compliance with these requirements, and that there would be an unnecessary cost associated with them. However, I declined to dispense with the requirement to publish notice of the winding up order and the liquidator's appointment under Rule 5.11(3). It seemed to me that, in the usual way, the making of the orders should be given appropriate publicity. **********

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