Commissioner of Taxation v McDermott, in the matter of Lonnex Pty Ltd

The facts 3 Lonnex was associated with the late Dr Geoffrey Edelsten. It operated two medical clinics in Melbourne, which it sold in February 2011. It was wound up by members' resolution and the first defendant, Mr Ross McDermott, was appointed as its liquidator, in October 2012. 4 Four years later, in proceedings brought by the Australian Securities and Investments Commission, Moshinsky J ordered that there be an inquiry into Mr McDermott's conduct as the liquidator, voluntary administrator or deed administrator of a number of companies. This order was conditional upon Mr McDermott (by his counsel) undertaking to the court to arrange a peer review of 10 administrations selected from a possible 15, which potentially included the administration of Lonnex. See Australian Securities and Investments Commission v McDermott, Re Conalpin Pty Ltd (in liq) [2016] FCA 1186. His Honour also made orders limiting Mr McDermott's ability to accept (except on certain conditions) new appointments as a controller, liquidator or administrator of companies, removing him as the liquidator of several companies (including Lonnex), and appointing him and the second defendant, Mr John Potts, as their joint and several liquidators. 5 On 29 March 2019, Lonnex's creditors resolved to remove Mr McDermott and Mr Potts as its liquidators, and to appoint Mr Yeo instead. 6 Five creditors have submitted proofs of debt or claim in Lonnex's liquidation, as follows: Creditor Amount Deputy Commissioner of Taxation (Deputy Commissioner) $8,117,503.20 Geoffrey Walter Edelsten (deceased), for which Soneet R Kapila, Chapter 7 Trustee of the Bankrupt Estate of Geoffrey Walter Edelsten, appointed by the United States Bankruptcy Court, has asserted full rights (US Trustee) $3,641,065.34 Commissioner of State Revenue (Vic) $430,066.64 Tax Affair Pty Ltd $5,000.00 Department of Human Services $5,000.00 TOTAL $12,198,635.18

7 The Deputy Commissioner is self-evidently Lonnex's largest creditor, representing at least 65.5% of the total claims against it. Mr Yeo deposed that he is not satisfied with the claim by the late Dr Edelsten or his US Trustee. He has asked for further evidence to support it, but has not yet received any. Mr Yeo deposed that he will likely reject the proof, in which case the Deputy Commissioner will represent 95% of the total claims. 8 A year before Moshinsky J made the orders referred to in [4] above, Lonnex had brought proceedings in the Supreme Court of Victoria, seeking to set aside the release of a debt that was owed after the sale of the medical clinics. Following mediation, Mr Potts and Mr McDermott applied under ss 477(2B) and 511 of the Act for orders that they were justified in compromising the proceeding and approving their entry into terms of settlement. An associate judge refused their application. Mr Potts and Mr McDermott then sought leave to appeal to the Court of Appeal. 9 The Court of Appeal granted leave to appeal, but dismissed the appeal. See McDermott and Potts in their capacities as joint and several liquidators of Lonnex Pty Ltd (in liquidation) [2019] VSCA 23. 10 Mr McDermott and Mr Potts then accepted a different offer to settle the proceeding. 11 In this proceeding, the Commissioner of Taxation sought an inquiry into the conduct of Mr McDermott and Mr Potts as liquidators of Lonnex. 12 The conduct about which the Commissioner complained, and into which the inquiry was sought, included Mr McDermott and Mr Potts': (1) failure to convene a creditors' meeting to consider a resolution to remove them as Lonnex's liquidators, despite several requests from the Deputy Commissioner that they do so; (2) pursuit of the application for approval of the settlement offer in the Supreme Court, despite the Deputy Commissioner's objections and the requests to convene a creditors' meeting; (3) persistence with efforts to settle Lonnex's claims in the Supreme Court, contrary to the wishes of the Deputy Commissioner; (4) acceptance of the further offer to settle, after the Supreme Court had refused to approve a similar settlement and where Lonnex's creditors (including the Deputy Commissioner) did not support the further offer; and (5) incurring substantial legal fees and disbursements in the liquidation, without obtaining regular updates or bills from their lawyers. 13 This proceeding has been mediated three times. The third mediation took place on 13 December 2021, and an in-principle settlement was reached. 14 On 28 February 2022, the parties executed a settlement deed, which provides that it is conditional upon obtaining approval under s 477(2B) of the Act for Lonnex's entry into the deed. 15 Pursuant to the settlement deed, Mr McDermott also agreed to undertake to the Court that: … until 31 January 2023 any new appointment of him to act as a liquidator, provisional liquidator, voluntary administrator, administrator of a deed of company arrangement, or as a receiver or other controller of property of any corporation (as that term is defined in s 57A of the Corporations Act) is to be on, and must remain on, a joint and several basis with another officeholder who is a registered liquidator of at least 10 years' standing. 16 The undertaking is also included as a note in the consent order that the parties have agreed to sign to dismiss the proceeding. The consent order also notes that Mr Potts has undertaken to the court that he will not apply to renew his registration as a liquidator. 17 The settlement deed also provides that, within 30 days, Mr McDermott and Mr Potts will each pay Lonnex $125,000 and instruct WMB Lawyers (their former solicitors) to release any excess funds in their trust account to Lonnex, after paying their remuneration fixed at $237,364.53 (plus GST). Because WMB Lawyers are holding $501,047.62, plus any interest, about $239,946 will be returned to Lonnex.

Applicable legal principles 18 Section 477(2B) of the Act provides that, except with the approval of the court, a committee of inspection or a resolution of creditors, a liquidator must not enter into an agreement on the company's behalf if: (a) the term of the agreement may end; or (b) the obligations of a party to the agreement may be discharged by performance, more than three months after the agreement is entered into. 19 The principles on which the court acts when considering applications under s 477(2B) are clear and well established. 20 The court will not interfere with a proposed agreement unless there seems to be some lack of good faith, some error of law or principle, or a real or substantial ground for doubting the prudence of the liquidator's conduct. See Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher and Barnet (2015) 89 NSWLR 110 at 129 [125] (Bathurst CJ; Beazley P, Macfarlan, Meagher and Barrett JJA agreeing). 21 In Stewart, Re Newtronics Pty Ltd [2007] FCA 1375 at [26], Gordon J summarised the applicable principles as follows: (1) The court does not simply "rubber stamp" whatever is put forward by a liquidator. (2) The court will not approve an agreement if its terms are unclear. (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. (4) In reviewing the liquidator's proposal, the task of the court is not to reconsider all of the issues weighed by the liquidator in developing the proposal, and substitute its determination in a hearing de novo, but to pay due regard to the liquidator's commercial judgment and knowledge of all the circumstances of the liquidation, satisfying itself there is no error of law or grounds 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. A court's approval is not an endorsement of the proposed agreement, but merely permission for the liquidator to exercise their own commercial judgment in the matter. (5) Where the agreement is a funding agreement, it is important to ensure, among other things, that the funder is not given a benefit disproportionate to the risk undertaken in light of the funding that is promised or a "grossly excessive profit". (6) Generally, the court grants approval under s 477(2B) only where the transaction is the proper realisation of the company's assets or otherwise assists in its winding up. 22 Although s 477(2B) contemplates that approval will be obtained before an agreement is entered into, retroactive approval may be granted. See Re Newtronics at [25]; Tonks, Re Ambient Rail Pty Ltd (in liq) [2019] FCA 1556 at [9] (Yates J); Boardman (Liquidator) v Australian Boutique Spirits Pty Ltd, Re Europa International Pty Ltd (in liq) [2021] FCA 1520 at [41] (Halley J) and the cases there cited.

Consideration 23 I am satisfied that an order approving entry into the settlement deed should be made, for the reasons set out in Mr Moller's helpful written submissions. 24 First, as Mr Yeo explained in his affidavit, the settlement deed is in the best interests of Lonnex's creditors. The Deputy Commissioner is the largest creditor in Lonnex's liquidation, and the Commissioner of Taxation has agreed to, and is a party to, the settlement deed. 25 Secondly, the settlement deed provides that Mr McDermott and Mr Potts will each pay $125,000 to Lonnex, which will increase the funds available in the liquidation, to the creditors' benefit. 26 Thirdly, the deed provides for excess funds (about $239,946), currently held in the trust account of WMB Lawyers, to be paid to Lonnex. This will also increase available funds for creditors. 27 Fourthly, settlement of this proceeding will mean that Lonnex will no longer incur legal costs in respect of it. 28 Finally, other than the determination of the claim by Dr Edelsten's US Trustee, and the potential receipt of a dividend from a related company, this proceeding is the only matter outstanding in Lonnex's liquidation. Upon completion of the settlement deed, Mr Yeo will be able to declare a dividend to unsecured creditors and finalise the liquidation. 29 Accordingly, approval of the settlement deed is not only in the interests of creditors, but also relates to the proper realisation of Lonnex's assets and will assist in finalising the winding up.

Disposition 30 Accordingly, I will make the orders in the form sought. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Callaghan.

Associate: Dated: 24 March 2022 SCHEDULE OF PARTIES VID 331 of 2019 Defendants Fifth Defendant: ANDREW REGINALD YEO IN HIS CAPACITY AS LIQUIDATOR OF LONNEX PTY LTD (IN LIQUIDATION) (ACN 097 786 751)