CORPORATIONS - liquidation - special leave to distribute surplus - s 488(2), Corporations Act 2001 (Cth) - creditors paid - $8.7 million surplus - shareholder owes $1.8 million to company - shareholder later became bankrupt - application of rule in Cherry v Boultbee

ex tempore Judgment

1. HER HONOUR: This is an application by Steven Nichols, the liquidator of D & D Corak Investments Pty Ltd (in liquidation), under section 488(2) of the Corporations Act 2001 (Cth) for special leave to distribute a surplus. Mr Nichols also seeks ancillary orders to dispense with various formal requirements under the Corporations Regulations 2001 (Cth) and to enable the liquidation to be concluded. By these orders, it is hoped that a difficult chapter in the history of the Corak family will close.
2. Dane Corak established D & D Corak Investments in the 1940s. Mr Corak was the sole director and secretary of the company. He held 2,302 ordinary shares and each of his three daughters - Marie Ellersdorfer, Lynette Boyd and Judy Feeney - held 766 ordinary shares. The daughters are the second, third and fourth defendants respectively. Mr Ellersdorfer is also the first defendant in her capacity as administrator of her father's Estate.
3. By his last Will made on 2 March 2010, Mr Corak left his shares in D & D Corak Investments equally to his three daughters. Mr Corak also forgave his loans to the company "with the money to remain in the Company as a gift until such time that the Company is dissolved and such money shall then be divided to the shareholders of the Company".
4. Mr Corak passed away in 2015 and, following a grant of probate in 2016, the company's main asset, being a commercial property in Smithfield, was sold. Another asset of the company was a loan to Ms Feeney standing at some $2 million.
5. Since then, by my count, four sets of legal proceedings were brought in relation to Mr Corak's Estate, being proceedings in the Corporations List which led to the appointment of Mr Nicols, proceedings the Probate List and two family provision proceedings (one commenced by Ms Feeney and the other by her children, Dane and Izabella).
6. On 27 October 2017, the probate and family provision proceedings were resolved by way of a Deed of Settlement and Release and consent orders made by Slattery J. One of the matters dealt with by the deed and orders was repayment of Ms Feeney's loan. In the family provision proceedings brought by Ms Feeney, Order 7(b) provided: (7) Note that in consideration of the [Executor] agreeing to consent to these orders and the orders in the related proceedings: … (b) [Ms Feeney] acknowledges she owes a debt due and owing to D&D Corak Investments … in the principal sum of $1,994,618 as at 30 June 2016 plus interest calculated at the Australian Taxation Office benchmark interest rate (as applicable from time to time) ("the Repayment Amount"). The parties record that this debt is to be repaid in accordance with a Deed of Settlement and Release that has been entered into by the parties and is annexed hereto as Annexure "A" …
7. In the family provision proceedings brought by Dane and Izabella, Orders 9, 13 and 14 provided: (9) Order that further provision be made for [Dane and Izabella] …: (a) [Dane and Izabella] are to receive … as tenants in common any provision otherwise payable from the Estate to their mother, Judy Anne Feeney, with the effect that each of [Dane and Izabella] are to receive the provision in the entire Will left to Judy Anne Feeney subject to the following: (i) The repayment of the sum owing by Judy Anne Feeney as set out in order 13 below … … (13) Order that from the further provision referred to in clause 9 above made for [Dane and Izabella] or their Trustees are to pay to D&D Corak Investments … an amount equivalent to the debt that Judy Anne Feeney owes to the Company, in the principal sum of $1,994,618 as at 30 June 2016 plus interest calculated at the Australian Taxation Office benchmark interest rate (as applicable from time to time) (together, "the Repayment Amount"). (14) The court notes that [Dane and Izabella] and their Trustees agree that [the Executor] is entitled to: (a) withhold a sum the equivalent of the Repayment Amount from the payment of any provision to [Dane and Izabella]; and (b) pay on [Dane and Izabella's] behalf the Repayment Amount to the Company.
8. Clause 2.2 of the Deed of Settlement and Release provided: (emphasis in original) 2.2 Repayment of Company loan (1) Judy, the children and/or the Trustees must repay to the Company the aggregate of: (a) the Company Loan Repayment Amount; plus (b) the Company Loan Repayment Interest, (together, the Company Loan Amount) in accordance with this deed; (2) The Company Loan Repayment Interest will be determined by the Company's usual accountant in the event the parties are in dispute as to the amount of the Company Loan Amount; and (3) So long as the Company Loan Amount remains due and owing, it will be set-off against any amount payable to Judy or the Children pursuant to: (a) the Will; (b) as a result of her shareholding of the Company; and/or (c) anything else referred to in this deed. (4) The Company Loan Amount will be repaid as contemplated in clause 3.
9. Clause 3(1) of the Deed of Settlement and Release provided: 3 Repayment of Company Loan Account (1) Judy, the Children and the Trustees hereby irrevocably directs Marie (in her capacity as executor of the Estate, representative of the Estate, administrator of the Estate, agent of the Company, officer of the Company and/or attorney of the Company (as may be applicable from time to time)) and the Executor to: (a) Calculate all amounts that would be due to Judy on a distribution in respect of her shares in the Company with the Company Loan Amount included as if it had been already repaid (Nominal Entitlement); (b) To the extent to which the Nominal Entitlement is less than the Company Loan Amount the shortfall may be set off against any amount of money to which Judy or the Children entitled to from the Estate, to the intent that no resort may be had to the Children's entitlement from the Estate unless the Company Loan Amount exceeds the Nominal Entitlement; (c) To the extent to which the Nominal Entitlement exceeds the Company Loan Amount it is to be paid to the Trustees within 7 days of the date of this Deed; and (d) otherwise pay to the Trustees or any other person any amount ordered by the Court in either Judy's Proceedings or the Children's Proceedings. (2) Any payment made by Marie, the Company and/or the Executor in accordance with paragraph 3(1) will be deemed to be a payment made to Judy, the Children and/or the Trustee pursuant to any order of the Court. (3) Nothing in this clause is intended to affect Judy's entitlement attributable to her shares in the Company in respect of any distribution of Company assets after the payment made in paragraph 3(1)(c).
10. In December 2017, Black J made orders in the Corporations List proceedings, appointing Mr Nicols as liquidator of D & D Corak Investments. On Mr Nicols' appointment, the assets of the company were monies in various bank accounts being, as far as I can tell, the proceeds of sale of the Smithfield property, and the loan account owed by Ms Feeney to the company, the balance of which then stood at $2,165,663.
11. The liquidator proceeded to retain accountants to prepare financial statements and tax returns for the company for financial years 2017, 2018 and 2019 and to identify and pay any creditors. Various meetings of creditors were held and, from time to time, the liquidator's remuneration was approved. The liquidator has now paid all creditors in full.
12. In October 2018, Ms Feeney became bankrupt and the fifth defendant, Joshua Taylor, was appointed as the trustee to her estate. Ms Feeney's debts were substantial and are presently estimated to exceed $10 million.
13. In January 2020, the liquidator's solicitors sent a letter of demand to the executor of the Estate of Mr Corak, requesting all funds held for the benefit of Ms Feeney or her children to be applied towards Ms Feeney's loan account with the company. This accorded with the Deed of Settlement and Release and the orders made in the family provision proceedings to which I have already referred. In March 2020, the Estate paid $577,239.23 to the liquidator's solicitor, which was applied to reduce the balance of Ms Feeney's loan account with the company to $1,815,292.35.
14. In May 2020, these proceedings were commenced, supported by an affidavit by Mr Nicols setting out the steps he has taken in the liquidation, in particular, that all known creditors had been paid in full and the balance of the company's bank accounts is $8,760,059. Mr Nicols proposed to distribute the monies in the bank account in three rounds, such that the monies were distributed according to the shareholdings of the company but taking into account Ms Feeney's loan. I will consider the proposed distribution in more detail shortly. Mr Nicols also proposed to retain some funds to complete the remaining steps in the liquidation and deregister the company.
15. Initially, the liquidator's proposed method of distribution was opposed by Ms Feeney's trustee in bankruptcy, who put forward a different methodology. However, that alternate methodology was not pressed today. I have had the benefit of detailed written submissions from Mr Young on behalf of the liquidator and Mr Notley on behalf of Mr Taylor, supplemented by submissions from Mr Bennett and Mr O'Connor for the first, second and third defendants. There was ultimately no disagreement between the parties as to the appropriate method to distribute the surplus.

Special leave to distribute surplus

1. Section 488(2) of the Corporations Act provides, "a liquidator may distribute a surplus only with the Court's special leave." Section 488(2) is intended to ensure that there is in reality a surplus, in that creditors' claims have been recognised and met in full, and also to ensure that the correct relativities amongst contributories have been observed: CGU Workers Compensation (NSW) Ltd v Ascom Service Automation Australia) Pty Ltd [2005] NSWSC 747 at [4] per Barrett J. The phrase "special leave" merely requires that a special application be made to the Court, rather than the matter being dealt with as part and parcel of some other administrative procedure: In the matter of Klaus Maertin Pty Ltd (in liq); Maertin v Klaus Maertin Pty Ltd [2009] NSWSC 618; (2009) 232 FLR 239 at [37]-[40] per Austin J citing Re DS Millard & Son Pty Ltd (1997) 24 ACSR 71 at 72 per Young J.
2. Further, in the case of a winding up by the Court, subsection 485(2) provides that, after adjustment of the rights of contributories among themselves, any surplus is to be distributed "among the persons entitled to it". As Barrett J said in Lombe as liquidator of Ulicorp Pty Ltd [2009] NSWSC 536; (2009) 74 NSWLR 669, "The relevant entitlements are fixed by the numbers of shares held, subject to any contrary or adjusting provision of the constitution: at [9], see also [16]-[18].
3. The principle in Cherry v Boultbee (1839) 4 My & Cr 442 applies where a shareholder entitled to a share of the surplus is also a debtor of the company. The principle and the historical development of the rule is conveniently summarised by Gleeson JA in In the matter of Hawden Property Group Pty Ltd (in liq) (ACN 003 528 345) [2018] NSWSC 481 at [36]-[50]. Drawing on his Honour's review: 1. It is not a complex rule, being a simple netting off of monetary obligations: In Re Kaupthing Singer & Friedlander Ltd (In Administration) [2011] UKSC 48; [2012] 1 AC 804 at [8], [13]-[20]. 2. It is a rule in equity whereby if a person entitled to participate in a fund is also bound to contribute to it, the person cannot participate unless and until the person has fulfilled the duty to contribute to it: Re Peruvian Railway Construction Company Ltd [1915] 2 Ch 144 at 150 per Sargant J. 3. It is an illustration of the fundamental principle in equity that a person who seeks equity must first do equity: Gray v Gray [2004] NSWCA 408 per Young CJ in Eq (Sheller and Bryson JJA agreeing) at [90]-[91]. 4. However, it is a rule whereby the court in effect says to the person seeking payment "you have in your own hands that which is applicable to the payment - pay yourself out of that": Re Rhodesia Goldfields Ltd; Partridge v Rhodesia Goldfields Ltd [1910] 1 Ch 239 at 246-247. 5. The rule is best described as a right to appropriate a particular asset as payment, as opposed to a right of set-off or a right of retainer: Derham on the Law of Set-Off (4th ed, 2010, Oxford University Press), at [14.03], followed in Hawden Property at [43]. 6. Where (as occurred here) the shareholder became bankrupt after the event precipitating the establishment of the fund, the principle in Cherry v Boultbee prevents a person who at the commencement of the liquidation was both a debtor and a shareholder, from receiving a rateable proportion of the surplus without contributing to the assets of the company, the amount of her debt owed to the company: Re Peruvian Railway at 151, followed in Hawden Property at [45].
4. It is not necessary to rely on the rule in Cherry v Boultbee, although it would be consistent with it, where an equalising adjustment can be made: In the matter of Anne Lewis Pty Limited [2016] NSWSC 1860 per Black J at [16] to [17].

Proposed distribution

1. The liquidator proposes to make a first round of distribution payments by apportioning the $8,760,059 held in the company's bank accounts to shareholders in accordance with their proportionate shareholdings as follows: Shareholder Estate of the late Mr Corak Ms Ellersdorfer Ms Boyd Ms Feeney's trustee in bankruptcy Shareholding 50% 16.65% 16.65% 16.65% First round $4,383,838 $1,458,740 $1,458,740 $1,458,740 (but applied to loan account)

1. After the first round, the company will have $1,458,740, being the amount effectively paid by Ms Feeney off her loan, and Ms Feeney's loan account balance will have reduced to $356,552. Applying the same method, a second round distribution would be made as follows: Shareholder Estate of the late Mr Corak Ms Ellersdorfer Ms Boyd Ms Feeney's trustee in bankruptcy Shareholding 50% 16.65% 16.65% 16.65% Second round $730,004 $242,912 $242,912 $242,912 (but applied to loan account)

1. After the second round of distributions, the company will have $242,912, being the amount effectively paid by Ms Feeney off her loan, and Ms Feeney's loan account balance will have reduced to $113,640. At this stage, the Estate of the late Mr Corak will have received $5,113,843. Mr Nichols proposes to then demand that the Estate repay the remaining balance of Ms Feeney's loan in accordance with the orders on 27 October 2017 and, on receipt of these monies, Ms Feeney's loan will be fully repaid and the company will have $356,552. The liquidator then proposes to make a third and final distribution as follows: Shareholder Estate of the late Mr Corak Ms Ellersdorfer Ms Boyd Ms Feeney's trustee in bankruptcy Shareholding 50% 16.65% 16.65% 16.65% Third round $178,431 $59,374 $59,374 $59,374

1. The proposed method of distribution accords with the rule in Cherry v Boultbee by ensuring that a debtor is not paid prior to discharging a debt which it owes to the company in liquidation. There are probably other ways of adhering to this rule in this case, but the method proposed by Mr Nichols appears sounds and financially responsible as it ensures that Ms Feeney's debt to the company is repaid before her trustee is paid monies otherwise payable to her from the surplus. For these reasons, I make orders in accordance with prayers 1, 3, 4, 5, 6 and 7 of the originating process filed on 28 May 2020.

Costs

1. Ms Boyd seeks an order that her costs of the proceedings be paid by Mr Taylor from 13 July 2020. Under the methods of distribution proposed by the liquidator and Mr Taylor, both Ms Ellersdorfer and Ms Boyd stood to receive the same amount, being $1.76 million. For some time, Ms Boyd has been seeking an interim distribution of $1 million. On 23 March 2020, the liquidator's solicitors wrote to Ms Boyd's solicitors as follows: Our client has no objection in principle to an early distribution. However, as you are aware, he will need the leave of the Court before making any distributions. We are presently working on a fresh application to the Court. We hope to be able to make an application for leave to distribute on an interim basis as soon as the fresh proceedings are filed. At that time, we will also seek the consent of all relevant parties before making any interim distribution
2. On 28 May 2020, these proceedings commenced. On 5 June 2020, Ms Boyd's solicitors enquired of the liquidator's solicitors whether the liquidator would seek the Court's leave to make an interim distribution to Ms Boyd in the event that the Court refused to grant special leave to distribute the surplus and, if so, whether the liquidator would amend the Originating Process accordingly.
3. On 11 June 2020, the liquidator's solicitors wrote to Mr Taylor's solicitors, apparently in response to proposed short minutes of order extending the time for Mr Taylor to file evidence, stating: Our client is conscious of the fact that Ms Ellersdorfer (in her personal capacity) and Ms Boyd have been caught up in a dispute which does not materially concern them, save for the fact that fees are reducing the size of the surplus and further time is being expended with no apparent justification. In the circumstances, we invite the parties to provide us with their views on obtaining the leave of the Court to an interim distribution to these two parties. We look forward to receiving proposals from the parties about how such a distribution could work.
4. On 13 July 2020, Black J ordered Ms Feeney and Mr Taylor to advise the plaintiff's solicitor in writing by 17 July 2020 whether they consented to the Court granting leave to the liquidator to make an interim distribution to Ms Boyd in that amount. On 17 July 2020, Mr Taylor's solicitors advised: Our client does not consent to order proposed as he prefers for there to be finality. We will write to you shortly with our alternative proposal regarding the distribution.
5. Ms Boyd's counsel submitted that, as a consequence of Mr Taylor's lack of consent, the liquidator did not amend the originating process to seek an interim distribution to Ms Boyd in circumstances where Ms Boyd was not participating in the proceedings in any way other than to seek such an order. Ms Boyd's counsel attended Court for the purpose of seeking an interim distribution even though the liquidator had not formally made such an application as, if the dispute as to methodology was fully heard today and possibly went on appeal, Ms Boyd would be delayed in receiving funds that she was entitled to receive on any view of the matter.
6. Mr Taylor's counsel submitted that the Court was being asked to consider making a costs order in respect of an application never made by the liquidator. The application for costs required the Court to determine whether such an application would have been successful, which the Court would be reluctant to do, relying on Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622. Further, Mr Taylor's counsel submitted that the matter was listed today for hearing in respect of a final distribution and, as the different methodologies proposed by the liquidator and to the trustee in bankruptcy had the same result for Ms Boyd, there was no need for Ms Boyd's counsel to appear. Ms Boyd's counsel replied that, if the trustee in bankruptcy had consented to an interim distribution, then the liquidator would have made the application without Ms Boyd needing to be further involved in the proceedings.
7. The correspondence on which Ms Boyd relies is not particularly clear as to how these proceedings have unfolded or, more importantly, would have unfolded if the trustee in bankruptcy had consented to an interim distribution. There is no evidence as to what the liquidator would have done if the trustee's consent had been forthcoming. Nor is it entirely clear the basis on which Ms Boyd would have sought an interim distribution today in the absence of an interlocutory process, nor what the result of such an application would have been. The correspondence relied upon does not suggest that Mr Taylor's attitude was unreasonable.
8. It was necessary for the liquidator to seek approval from the court in any event. This morning, the trustee in bankruptcy informed the parties and my Associate that he no longer pressed the alternate method of distribution. That has had two advantages. First, the costs of the hearing today are much less by reason of that concession, albeit lately made. Second, and perhaps most importantly, the concession has had the result that orders for a final distribution could be made rather than, possibly, an interim distribution, a reserve judgment handed down following consideration of the arguments advanced by the liquidator and trustee and, potentially, an appeal. Whatever costs Ms Boyd has incurred since 13 July 2020 appear to have been more than compensated by what has been gained by the ability to quickly achieve finality today. Thus, I am not prepared to make the costs order sought.

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