Correa v The Spanish Club Ltd & ors

(CTH) Corporations Act 2001 s 444A(5), s 447E, s 449B LEGISLATION CITED : (NSW) Registered Clubs Act 1976 s 41J, s 44A (NSW) Registered Clubs Regulation 2009 reg 19, reg 19(1)(h)

Delores Correa (plaintiff) PARTIES : The Spanish Club Limited (first defendant) Kenneth Michael Whittingham (second defendant) G & J Drivas Pty Ltd (third defendant)

Ms J Shepard (plaintiff) COUNSEL : Mr S Robb QC (first & second defendants) Mr P Silver (third defendant) Mr A Lo Surdo (Perpetual Nominee)

Somerset Ryckmans (plaintiff) SOLICITORS : Deacons (first & second defendants) HWL Ebsworth (third defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

4777/09 Delores Correa v The Spanish Club Limited & Ors JUDGMENT (ex tempore) 1 HIS HONOUR: This morning, I made the following orders: 1. Upon the undertaking of Marc Ryckmans to pay the appropriate filing fee, grant leave to the plaintiff Dolores Correa to file in court an originating process in the form initialled by me, dated this day and placed with the papers. Direct that the originating process be returnable instanter and dispense with further service of the originating process.

2. Note the undertakings of the first defendant and second defendant by their Counsel and the third defendant by its solicitor to file notices of appearance.

3. Pursuant to (CTH) Corporations Act 2001 s 444C(2) and s 444E(3), grant leave to the plaintiff to begin and proceed with the within proceedings.

4. Order that upon the plaintiff by her counsel giving an undertaking as to damages, until further order, the first, second and third defendants be restrained by themselves, their servants or agents from carrying into completion the contract for sale dated 1 July 2009 between the first defendant and the third defendant insofar as it relates to the property situate at and known as 86 Liverpool Street Sydney, folio identifier 1/67498. 2 The plaintiff Delores Correa is a member of the first defendant The Spanish Club Limited which, at all material times, has carried on business under that name as a registered club under the (NSW) Registered Clubs Act 1976.

3 The second defendant Kenneth Michael Whittingham is the deed administrator under a deed of company arrangement entered into between him and the club on 16 March 2009. Although the corporation is insolvent in the sense it is unable to pay its current debts as and when they fall due, it is asset rich. Its assets must exceed $10,000,000 (given the contract price for the property, to which I shall come), and its liabilities appear to total about $4,000,000 - of which one, Australian Unity (for which Perpetual Nominees Limited is trustee), is the overwhelming creditor, being owed about $3.67 million. 4 Relevantly, the deed of company arrangement includes the following provisions. Clause 1.1(7) the defines "core property" in the following terms: (7) "Core Property" means the real property located at 88 Liverpool Street, Sydney NSW 2000 being the land described in Certificate of Title Folio Identifier Lot 1 in Deposited Plan 67498 5 Clause 1.1(14) defines "non-core property" as follows: (14) "Non-Core Property" means the real property located at 86 Liverpool Street, Sydney NSW 2000 being the land described in Certificate of Title Folio Identifier Lot 1 in Deposited Plan 185797; 6 Clause 4.1, describes the property available to pay creditors' claims under the deed as including the core property, the non-core property, and property other than real property of the company, as follows: 4.1 The property that is available to pay Creditors' Claims under this Deed, and forms the Available Property, is the whole of the Company's assets and undertakings and the proceeds of realising the Company's assets and undertaking including: (1) the Core Property; (2) the Non-Core Property; (3) the property (other than the real property) of the Company; (4) the Company's cash; (5) its trade debtors; (6) amounts owing to the Company on loan accounts; and (7) proceeds from the sale of the assets and business of Company as a going concern or otherwise (if any), including proceeds from the sale of: (a) the poker machines; (b) the poker machine entitlements; (c) the liquor license; (d) the stock; and (e) the plant and equipment. 7 Clauses 5.1 and 5.2 regulate the sale of core property and non-core property: 5.1 A Sale of the Company's Core Property will be subject to the approval of members as required by the Registered Clubs Act 1976 (NSW) of the Company's Constitution.

5.2 A sale of the Company's Non-Core Property will not be subject to the approval of members under the Registered Clubs Act 1976 (NSW). However, prior to selling the Company's Non-Core Property, the Deed Administrator will seek member approval to sell the Company's Non-Core Property (but will not be bound by the failure of that resolution or even a resolution to the contrary). 8 Clause 8 provides that the deed binds the secured creditor and provides that, until the deed terminates, the secured creditor (Perpetual Nominees) must not enforce, realise or otherwise deal with the secured creditor's security: 8. Secured Creditor

8.2 The Secured Creditor acknowledges that it attended the second meeting of creditors and voted in favour of the Deed.

8.3 Until this Deed terminates, the Secured Creditor must not enforce, realise or otherwise deal with the Secured Creditor's Security.

8.4 In the event the Secured Creditor's debt is paid out by another financial institution or a third party, the rights of the Secured Creditor would be subrogated to the party who has paid out the Secured Creditor's debt. 9 Clause 13 provides for the deed administrator to convene a meeting of creditors and consider a resolution under the (CTH) Corporations Act 2001 terminating the deed if he considers it no longer practical or desirable to implement the administration of the deed, including if the members of the company do not approve the sale of the company's core property and the deed administrator considers it essential to sell the property in order to implement the terms of the deed: 13. Meeting to consider termination

13.1 Without limiting the operation of section 445C, section 445E or section 445F of the Corporations Act 2001 , if the Deed Administrator considers that it is no longer practicable or desirable to carry on the business of the Company or to implement the administration of this Deed, the Deed Administrator: (1) may cease to carry on the business of the Company except so far as is necessary for the beneficial winding up of the Company; (2) may convene a meeting of the Company's Creditors to consider a resolution under s 445C(b) of the Corporations Act 2001 terminating the Deed; and (3) at the same time as giving the Company's Creditors notice in writing of that meeting, must give the Company's Creditors: (a) a current report of the position of the Company accompanied by such financial statements as the Deed Administrator considers fit; and (b) a statement that the Deed Administrator considers that it is no longer practicable or desirable to carry on the business of the Company or to continue this Deed and that the Deed will be terminated if the Company's Creditors so resolve.

13.2 Without limiting the operation of clause 13.1, the Deed Administrator may consider that it is no longer practicable to implement the administration of the Deed if the members of the Company do not approve the sale of the Company's Core Property and the Deed Administrator considers it essential to sell this property in order to implement the terms of this Deed.

13.3 In the circumstances of clause 13.2, the Deed Administrator may apply to the Court with all the powers set out in Division 13 of Part 5.3A of the Corporations Act 2001.

10 It will be observed that Clauses 5.1 and 5.2, set out above, refer to provisions of the (NSW) Registered Clubs Act. Relevantly s 41J of that Act provides as follows: 41J Disposal by registered club of real property (1) In this section: "core property" of a registered club means any real property owned or occupied by the club that comprises: (a) the defined premises of the club, or (b) any facility provided by the club for the use of its members and their guests, or (c) any other property declared, by a resolution passed by a majority of the members present at a general meeting of the ordinary members of the club, to be core property of the club, but does not include any property referred to in paragraphs (a)-(c) that is declared, by a resolution passed by a majority of the members present at a general meeting of the ordinary members of the club, not to be core property of the club. "dispose" of property means to sell, lease or licence the property or to otherwise deal with the property in such manner as may be prescribed by the regulations. "non-core property" of a registered club means any real property owned or occupied by the club that is not core property. …

(3) A registered club must not dispose of any core property of the club unless: (a) the property has been valued by a registered valuer within the meaning of the Valuers Act 2003 , and (b) the disposal has been approved at a general meeting of the ordinary members of the club at which a majority of the votes cast supported the approval, and (c) any sale is by way of public auction or open tender conducted by an independent real estate agent or auctioneer.

11 The (NSW) Registered Clubs Regulation 2009 provides as follows:

19 Exceptions relating to disposal of core property (1) Section 41J (3) of the Act does not apply in relation to the disposal of any core property of a registered club in any of the following circumstances: … (h) the Director-General has, on application by the registered club, approved of the property being disposed of otherwise than in accordance with section 41J (3) of the Act. 12 The third defendant, G & J Drivas Pty Limited, is the purchaser under contract with the deed administrator, dated 1 July 2009, of the core and non core property of the company described in the deed of company arrangement, that is to say 86 and 88 Liverpool Street, for a price of $9,250,000. On 31 July 2009 a meeting of members of the company was convened for the purpose of obtaining members' approval of the contract. The meeting resolved overwhelmingly not to approve the sale. 13 On 11 August 2009, the delegate of the Director-General of Communities New South Wales, being the Director-General referred to in the Registered Clubs Regulation 2009, reg 19, wrote to the solicitors for the deed administrator relevantly as follows: It is my view, that where an administrator of a company that is s registered club is acting in that company, that the administrator is not required to comply with the requirements of s.41J of sale pursuant to the Corporations Act. Accordingly, neither the administrator nor the registered club is contravening the provisions of the Registered Clubs Act should a sale not comply with the requirements of s.41J. As I consider s.41J has no application to the disposal of land in this matter, there is no requirement to consider any exemption.

14 The Director-General's opinion that Section 41J has no application to the disposal of land of a registered club by an administrator exercising a power of sale pursuant to the Corporations Act is apparently founded on the view that the administrator being given that power by the Corporations Act, it prevails over any restriction imposed by State legislation. So far as is relevant, Schedule 8 to the Corporations Regulations confers on a deed administrator power to sell assets and property of the corporation. By Corporations Act, s 444A(5), the deed is taken to include that provision "except so far as it provides otherwise." In this case, the deed included a provision which specifically incorporated reference to and compliance with the Registered Clubs Act, s 44A. Thus, in the circumstances of this case, prima facie there would be no inconsistency between the deed and the State law and, in those circumstances, it is at least doubtful that the administrator would have power to sell without complying with s 41J. But ultimately, my decision does not depend on that provisional view. 15 By originating process filed in court by leave today, but on notice to the defendants to whom I have referred, and on notice also to Perpetual Nominees who, with the defendants, appeared to oppose the application, the plaintiff seeks, in substance, relief under Corporations Act, s 447E, which provides as follows: Supervision of administrator of company or deed (1) Where the Court is satisfied that the administrator of a company under administration, or of a deed of company arrangement: (a) has managed, or is managing, the company's business, property or affairs in a way that is prejudicial to the interests of some or all of the company's creditors or members; or (b) has done an act, or made an omission, or proposes to do an act, or to make an omission, that is or would be prejudicial to such interests; the Court may make such order as it thinks just. 16 In particular, the plaintiff seeks an injunction restraining the defendants from completing the contract for sale. It is not at this stage entirely clear what final relief, other than a permanent injunction, the plaintiff might seek, and that will require further consideration in due course. In addition the plaintiff seeks, pursuant to s 449B, the removal and replacement of the administrator; that aspect of the plaintiff's application has not been argued on this occasion and will have to be determined at a later date. In essence, the plaintiff's case is that, by entering or purporting to enter into and proposing to complete the contract for sale in the absence of approval of members of the club, the administrator was acting to the prejudice of those members within the meaning of s 447E. 17 I have concluded that the plaintiff's case is at least a seriously arguable one, on the following bases. 18 The purposes of this deed of company arrangement were not limited to advancing the interests of creditors, but extended also to preserving the ability of the company, and the club, to remain in existence, to return to profitability and to carry on business and thus to promote the interests of the members as well as the creditors. That is evidenced by reference to those concepts in the reports of the administrator which preceded the approval of the deed, and in observations made at meetings prior to the approval of the deed. It is reflected by the inclusion in the deed of a provision that the members would have a right of veto over a proposed sale of the core property, albeit subject to the administrator's entitlement to form the view this would make continuation of the deed impractical or undesirable and thus entitle him to convene a meeting to consider termination of the deed. That this was the purpose of clause 5.1, and not merely to reflect an assumption that s 41J applied so as to require compliance with it were it applicable, is supported by the following matters. 19 First, if it be the case that s 41J does not apply to a sale by an administrator (because of the primacy of the Commonwealth legislation giving the administrator powers of sale), then its inclusion in the deed of company arrangement served no purpose at all. The provision has work to do if, and only if, it applies regardless of whether s 41J applies also of its own force. 20 Secondly, in answer to the proposition that it is unlikely that the creditors intended to place themselves at the mercy of the members in respect of a sale of the property of the corporation, it is clear enough from the context of clause 5.2 that, in respect of non-core property (as to sale of which, on no view, could the Registered Clubs Act have required the approval of members), nonetheless a stipulation was included that the administrator would place any proposed sale of non-core property before members, although he would not be bound by their refusal to approve it; which stands in contradistinction to clause 5.1, where there is no equivalent provision to the effect that the administrator would not be bound by non approval. 21 Moreover, clause 13.2 plainly envisages that there might be a conflict between the administrator's desire to sell the core property and the members' refusal to approve a sale. 22 Those matters tell very strongly against the proposition that the creditors could not have intended to subject their interests to those of the members in this way. Ultimately the power remains in the hands of the creditors: in any event, if the administrator decides that his ability to sell has been impeded, he could convene a creditors' meeting and the creditors can resolve to terminate the deed if so minded. 23 In my view, therefore, it is at least seriously arguable that the application of clause 5.1 is not limited to circumstances in which the law requires prior compliance with s 41J. On that view, any "dispensation" on the part of the Director-General under reg 19(1)(h) is beside the point. 24 In any event, at least so far as the evidence presently goes, what the Director-General has done is not an "approval" under reg 19(1)(h) but an expression of an opinion that s 41J does not apply in the circumstances. 25 In those circumstances, it seems to me that it is at least seriously arguable that the sale of the core property, without the approval of the members as envisaged by clause 5.1, would be an act prejudicial to the interests of some or all of the company's members. 26 It also seems to me at least seriously arguable that such a sale is beyond the authority and capacity of the deed administrator, since clause 5.1 imposes limitations on the administrator's powers of sale, and it is at least seriously arguable that the purchaser would be on notice of any such want of authority - since it is plain on the face of the contract, that the company was subject to a company arrangement, so that the purchaser would be on notice of the contents of the deed of company arrangement and the restrictions it places on the administrator's powers. 27 I conclude, therefore, that the plaintiff has made out a seriously arguable case that the sale, or proposed completion of the sale, would be an act prejudicial to the interests of some or all of the company's members, and/or unauthorised and beyond authority of the deed administrator, of which lack of authority the purchaser had notice. On either of those bases, it is at least conceivable that the court might ultimately avoid the contract or at least permanently restrain the administrator from completing it. If that were to leave the company liable under the contract in circumstances where it had been entered into by the administrator outside and beyond the scope of his proper authority it would be possible to grant a remedy which would indemnify the company from the consequences. None of this is to suggest that such would necessarily, or even probably, be the outcome; but it is an answer to the suggestion that granting the relief sought would be futile. 28 It was suggested also that relief would be futile, because the secured creditor Perpetual Nominees wants the sale to proceed, and is in a position to control any creditors' meeting. However, there are several problems with this argument also. 29 The first is that it assumes that the secured creditor would want the sale to proceed and exercise its power to that effect at any meeting, regardless of what argument or what alternatives might be advanced at the meeting. The provision for a meeting in such circumstances is of itself an important right of the members. 30 Secondly, and perhaps even more importantly, the secured creditor agreed to be bound by the deed of company arrangement. That deed imposes certain limitations on what sales can take place and how they are to take place. It is at least seriously arguable that the terms the secured creditor agreed to included a provision that the core property was not to be sold without the approval of the members. In those circumstances, I fail to see why the secured creditor's desire that the sale should proceed, in the face of that limitation, should be any ground at all for dispensing with the limitations contained in that respect in the deed, to which the secured creditor had previously agreed. 31 As to the balance of convenience, relevant considerations include the apparent strength of the plaintiff's case. In my view this is not a case in which the plaintiff's seriously arguable case is one which only just reaches that threshold. To the contrary, as presently advised, it seems a strongly arguable case. 32 Next, the company has ample assets to satisfy all the creditors in due course, if necessary with interest. Even the purchaser under the contract did not press any claim of prejudice arising from delay in completion. Indeed, the court was informed that the purchaser did not at this stage wish to complete this afternoon (as had originally be envisaged), because it was concerned with the implications of Registered Clubs Act, s 41. 33 Moreover, the plaintiff offers an undertaking as to damages and it is evident has an ability to satisfy that undertaking. 34 It seems to me, therefore, that the balance of convenience is all one way, there being no indication of prejudice to any party arising from a delay in completion. Of course, if that position changes between now and the final hearing, it is open to the parties to approach the court again to reconsider the interlocutory position. 35 It is for those reasons that I concluded that the plaintiff had established a seriously arguable case for final relief - namely, to place a permanent injunction restraining completion of the contract, and potentially also avoiding the contract - and that the balance of convenience plainly favours the grant, rather than the withholding, of interlocutory relief. Accordingly, I made the orders previously announced.

36 When the matter returns to court for directions on 6 October, it will be necessary to consider what directions should be made for the expeditious final hearing of the claim under s 447E, and the associated claim. It will be necessary for the plaintiff to consider whether, and if so on what basis, the plaintiff seeks to avoid the contract and whether, for that purpose, the originating process should be amended. It would be highly desirable that any draft originating process be served before the end of this week, and be brought into court by Tuesday when the matter returns for directions. Subject to that it seems likely, though not certain, that most of the evidence is already on, and it might be possible to make provision for final hearing of that part of the case on an expedited basis. It will be necessary also to consider whether, and if so how, the claim for the removal of the administrator should proceed. It raises additional and different questions, which may not be capable of resolution on the same expeditious basis. 37 In addition to the orders already made I will reserve liberty to both parties to reply. In the meantime, it is conceivable that events might demonstrate that an alternative sale is possible and acceptable, or that the existing proposed sale should be allowed to proceed. Matters may emerge which impact upon the balance of convenience. 38 Accordingly, I:

5. Reserve leave to all parties to apply on three days notice by arrangement with my associate to vary or discharge the injunction previously granted today. 6. Direct that the orders made today be entered forthwith. 7. Costs of the interlocutory application will be the plaintiff's costs in the proceedings. **********

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