Creevey v Deputy Commissioner of Taxation [2020] NSWSC 1116 | Case summary

Creevey v Deputy Commissioner of Taxation [2020] NSWSC 1116 | Case summary | Zoe

HER HONOUR: This is an application pursuant to section 440A(2) of the Corporations Act 2001 (Cth) by Jeremy Nips, Alan Walker and Barry Wight, the administrators recently appointed to the defendant company, i-Prosperity Capital Pty Ltd, to adjourn the hearing of a winding up application. The defendant is part of the i-Prosperity Capital Group, a group of companies which specialise in raising funds from Chinese investors to complete commercial and residential developments, manage hotels and invest in other business activities in Australia. These funds are typically raised through the use of i-Prosperity Group branded unit trusts in which the defendant often acts as the trustee or investment manager for the trusts.
The application to adjourn the winding up is slightly unusual for three reasons. First, the administrators were only appointed to the company very recently, being five days ago on 15 July 2020. Second, the defendant company is one of a group of 14 companies of which the administrators have been appointed as administrators to 12 of the companies. The benefits which the administrators say may derive if the adjournment is granted pertain not to the defendant company particularly but to the group of companies as a whole. Third, the benefit to creditors which the administrators say may result if the adjournment is granted is not suggested to be a greater return to creditors by entry into a deed of company arrangement (DOCA) which may be forthcoming but that the administrators may be better able to identify and preserve the assets of the group of companies as a whole and therefore the assets of the defendant company if additional time is given before the application to appoint a liquidator is heard.
The application is opposed by the plaintiff, Liyun Liu. The plaintiff is a Chinese national who resides in Shanghai in the People's Republic of China. In 2017, the plaintiff lent $35 million to a company in the i-Prosperity Group to amalgamate and develop a series of residential lots in Rhodes. The bulk of these monies were repaid in 2019 when the loan was refinanced but, in the course of the refinance, the defendant (not the original borrower) agreed to pay the plaintiff $1 million by 18 December 2019. The money was not paid and a statutory demand was issued.
The defendant did not apply to have the statutory demand set aside nor comply with the demand and, in May 2020, the plaintiff commenced these proceedings seeking orders that a liquidator be appointed to the defendant. On 2 June 2020, the defendant filed a notice of appearance and an interlocutory process seeking leave under section 459S of the Corporations Act 2001 (Cth) to rely on the ground that the debt the subject of the statutory demand was not due and payable and was the subject of a genuine dispute. The proceedings were first returnable on 9 June 2020, when consent orders were made that the defendant serve any evidence in support of its grounds of opposition by 30 June 2020. The defendant did not serve any evidence because the parties had agreed a settlement regime which dealt, amongst other things, with these proceedings. However, the defendant failed to make the first payment under that regime, which also included an undertaking by the defendant in such circumstances not to oppose the appointment of a liquidator.
On 13 July 2020, these proceedings were adjourned for a week and listed in the Corporations List Motions List today with a view to being heard. However, on 15 July 2020, the directors of the defendant appointed the administrators pursuant to section 436A of the Act. As mentioned, the administrators were in fact appointed as administrators of twelve companies in the i-Prosperity Group. The administrators now seek that the winding up proceedings be adjourned for two weeks to allow the administrators to further investigate the company's affairs and those of the i-Prosperity Group, so they can adopt an informed approach to this application on the next return date. If this application is not successful, the company does not otherwise oppose the making of a winding up order, nor Ms Liu's preferred nomination of Barry Kogan and Katherine Sozou of McGrathNicol as joint and several liquidators of the company. The administrators relied on the affidavit of Mr Wight, setting out the results of his investigations thus far. The plaintiff relied on the affidavit of her solicitor, David Greenberg.
The results of the administrators' investigations, in the short period of time available to them, are impressive. The administrators, their staff, and their external lawyers, comprising a team of at least six people, have worked over the weekend to identify and preserve assets for the benefit of creditors. It appears that the companies over which they have been appointed as administrators may not have maintained separate and distinct books and records and may have intermingled their affairs. The fact that the deed of settlement upon which the plaintiff's claim is based involves the defendant company assuming the liability of another company in the i-Prosperity Group and an indication of its affairs being intertwined.
The flow of funds between entities in the i-Prosperity Group, and elsewhere, have been described by Mr Wight as unusual. Two transactions in particular have come to the administrators' attention. The first transaction involves $15 million, which has been paid out of the i-Prosperity Group and is now the subject of proceedings in the Commercial List in this Court. The administrators have attempted to trace these funds, with no success to date. The second matter concerns a claim by three companies to be secured creditors of certain companies in the group, including potentially, the defendant, in the amount of some $128 million. These transactions have prompted the administrators to take the unusual step, at such an early stage in an external administration, of notifying a senior officer of the Australian Securities and Investments Commission (ASIC) in respect of these transactions.

[3]

Submissions

The principles were not in issue. Both parties relied on In the matter of Cresco Opus Fund No 4 Pty Limited (Administrator Appointed) [2019] NSWSC 941: at [23]-[24]. See also Weriton Finance Pty Ltd v PNR Pty Ltd (in administration); Australian Residential and Commercial Finance Pty Ltd v PNR Pty Ltd (in administration) (2012) 92 ACSR 88; [2012] NSWSC 1402 at [15] ff where Black J conducted a review of the authorities as to relevant factors in such applications.
The administrator submitted that I should not approach this application with the scepticism usually reserved for last-minute appointments of an administrator (Re Plutus Payroll Australia Pty Limited [2017] NSWSC 1041 at [16] per Brereton J; In the Matter of Offshore & Ocean Engineering Pty Ltd [2012] NSWSC 1296 at [15]) given that the entire group of companies has been placed in voluntary administration; it would defy commercial rationality to take this course in order to avoid the winding up over what was, in the context of the broader group, a relatively modest claim. I accept the administrators' submission that, in the circumstances, scepticism arising from their last-minute appointment should be eschewed.
The administrators submitted that there were good reasons why it was in the interests of this company's creditors that the winding up be adjourned for a short period. Whilst the administrators' counsel acknowledged that this matter had the flavour of a group that would collapse into liquidation, if the administrators could continue to act as administrators of the group with all the resources, information and tools available to them across that group, they would be able to investigate the affairs of the defendant company in a holistic manner with the remainder of the group and this was said to be in the interests of creditors of the defendant company. There were efficiencies in all of the companies in that group continuing, at least in the short term, under the same form of external administration. Given that the affairs of the i-Prosperity Group are interconnected, the serious allegations made in the $15 million proceedings and by the $128 million creditors, the need to investigate a number of payments and transfers, and the potential for those investigations to affect all companies in the i-Prosperity Group including the defendant company, it was submitted that it was in interests of creditors of the defendant company to adjourn the winding up today. The adjournment would not be without purpose. The administrators propose to bring order to the intermingled and complex affairs of a group of companies and to investigate potentially serious claims which may involve claims extending beyond the i-Prosperity Group.
Further, the administrators submitted that there was no identifiable prejudice to the plaintiff, nor any other person, in granting the adjournment sought. Whilst no proposal for a DOCA has been made, this was not surprising where the administrators were appointed less than three business days ago. Any adjournment would allow the potential for any DOCA proposal to be made, although the administrators acknowledged that, given what the administrators had discovered thus far, there may be good reasons why it was appropriate that a liquidator be appointed in due course to scrutinise the affairs of the company.
The plaintiff submitted that whether the Court should exercise a discretion to grant an adjournment depends upon whether there is any utility in continuing with a voluntary administration. Such utility will be present where there is a sufficient possibility, as opposed to mere optimistic speculation, of a salvage plan being proposed which if implemented (for example by a DOCA) may create a better outcome for creditors than if a company is immediately wound up: Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456 at 457; Deputy Commissioner of Taxation v Choice Design Homes Pty Limited [1999] NSWSC 589; Waste Recycling and Processing Services of New South Wales v Local Government Recycling Co-operative Ltd (1999) 32 ACSR 194 at 195. The onus was on the company and its administrators to explain why an adjournment should be ordered under section 440A(2).
The plaintiff submitted that Mr Wight's evidence fell a long way short of satisfying the Court that it was in the interest of creditors as a whole for the administration to continue rather than to order the winding up of the company. Whilst Mr Wight's investigations were clearly at an early stage, at no point did he mention discussions with the directors about a DOCA being proposed, a sale of assets or any other salvage plan which could realistically be explored through an administration process. Indeed, his affidavit dwelt on a number of questionable transactions that called out for investigation by a liquidator rather than an administrator.
As to whether there was any particular advantage to be gained by having the same external administrator as the i-Prosperity Group, the plaintiff accepted that some efficiencies could arise from having one insolvency practitioner appointed over a whole group, but inefficiencies could also arise where the affairs of other members of the group take up the majority of their time. Difficulties can also arise where there has been an intermingling of funds and the potential for an administrator to be controlling companies who appear on both sides of the ledger. The appointment of Mr Kogan and Ms Sozou would ensure that there were liquidators appointed who were solely focused on pursuing recoveries available to the defendant and are not distracted or influenced by what is occurring across the broader i-Prosperity Group.
The plaintiff submitted that there was no reason why insolvency practitioners appointed from separate firms could not cooperate with each other and share information that resulted in a common recovery for all parties. Further, in circumstances where there were a number of questionable transactions where assets from some members of the corporate group had been dealt with inappropriately or to benefit others, then conflicts of interest could arise resulting in the need to appoint a special purpose liquidator. This could be avoided in circumstances where there were separate appointees to individual companies.
Allowing the administration to continue was said to have the potential to cause prejudice to Ms Liu and the other creditors of company as an administration which had no prospects of achieving the purposes prescribed in section 435A, lacked utility and only served to delay the inevitable winding up of the company and the incurring of additional costs in calling a creditors' meeting and preparing reports to creditors. If the company was heading into liquidation in any event, creditors should be spared such costs. The plaintiff submitted that nothing was going to change in two weeks other than obtaining more information about the position to explain to creditors why the company should go into liquidation.
In addition, the plaintiff was unable to pursue her claim against the guarantors of the company whilst it remains in voluntary administration: section 440J, Corporations Act. In accordance with acknowledgments signed by the directors on 1 June 2020, Ms Liu has had judgment entered against them in her favour for the sum of $1,100,000. The continuation of the administration may prevent Ms Liu from applying for a writ of levy of property to be issued against them or taking other enforcement action against them under Part 39 of the Uniform Civil Procedure Rules. The plaintiff should be able to pursue all available remedies without further delay, particularly in circumstances where it appeared that the financial affairs of the defendant company and the group as a whole were perilous and time was of the essence. The administrators agreed that Ms Liu could not enforce the guarantees but submitted that a two week adjournment was not real prejudice in the context of enforcing a debt over a prolonged period of time.
Finally, the plaintiff submitted that the administration should not be allowed to continue because the company undertook to Ms Liu that it would not oppose the winding up should it fail to pay the first instalment on 10 July 2020. The appointment of the administrators and the application for an adjournment was in breach of this undertaking and said to be an abuse of process.
The plaintiff submits that she is otherwise entitled to have a liquidator appointed to the defendant company today and that, in the ordinary course, the plaintiff would have her choice of liquidator: In the Matter of El Zorro Transport Pty Ltd [2013] NSWSC 1082 at [5] per Brereton J; Unifor Office Systems Aust. Pty Ltd v Brewer Partnership Pty Ltd (1999) 17 ACLC 642, Hodgson CJ in Eq at [6] and [7]; Deputy Commissioner of Taxation v Barroleg Pty Ltd (1997) 25 ACSR 167, Young J at 174. The plaintiff was concerned that the administrators had been appointed at the instigation of the directors of the defendant company and that the plaintiff would not necessarily have confidence in those appointees nor should be required to submit to the director's choice. As the plaintiff was the largest creditor of the company - albeit Ms Liu was not initially listed by the administrator as a creditor of the company at all - some credence should be given to her wishes. Further, as the administrators were only appointed on 15 July 2020, the administrators had not been in the role for long enough to affect the outcome of an application such as this.
The administrators did not suggest that Ms Liu was not entitled to her chosen liquidator if the adjournment application failed. The administrators pointed to the fact that they had contacted ASIC shortly after their appointment and this tended to suggest that they were entirely independent notwithstanding that they had been appointed by the directors of the defendant company. The administrators submitted that they would not, in the intervening two week period, have gained sufficient status quo to warrant them being appointed as liquidators beyond by reason of the efficiencies inherent in having the same liquidator across the group. Further, if the company was wound up in two weeks' time by the Court, the administrators submitted that there was no prejudice suffered by the plaintiff who, if her nominees were appointed, would have the benefit of the work done on a group level by the administrators.

[4]

Consideration

I have ultimately decided this application by reference to the language in sections 435A and 440A(2) of the Corporations Act. The objects of Part 5.3A of the Corporations Act are set out in section 435A: Part 5.3A - Administration of a company's affairs with a view to executing a deed of company arrangement 435A Object of Part The object of this Part, and Schedule 2 to the extent that it relates to this Part, is to provide for the business, property and affairs of an insolvent company to be administered in a way that: (a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or (b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company.
Consistently with this, section 440A(2) provides: 440A Winding up company …. (2) The Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. ….
These sections, read together, point towards adjourning a winding up to enable an administration to proceed if it is in the interests of the company's creditors to do so in the sense that it is likely to result in a better return to creditors than appointment of a liquidator. I note that Hamilton J observed in TCS Management Pty Limited v CTTI Solutions Pty Limited [2001] NSWSC 830 at [18]: (emphasis added) ... it is dangerous, as in so many cases, to place any gloss upon the statute. The sole consideration posited as the criterion for the Court's decision in s 440A(2) is the interests of the company's creditors. It is clear that the onus is on the person seeking the adjournment to establish to the satisfaction of the Court that the adjournment is in the interests of those creditors. In general terms, that will be difficult to do unless there is a good case that there will be a greater or more accelerated return from the course contended for. But considerations beyond mere quantum may be relevant to take into account in determining what is in the interests of the creditors and whether it is established that an adjournment may be said to be in the creditors' interests…
The suggested benefit to creditors here is of a more intangible and unquantifiable nature, being that the administrators of the group of companies may be able to better identify and secure assets of the group of companies including the defendant, and therefore preserve those assets for the benefit of creditors as a whole. It does not seem to me that I should place much weight on such a speculative benefit as many of the investigations or protective steps which the administrators may wish to take can be undertaken just as well, or perhaps better, by a liquidator. Such suggested benefits do not justify an adjournment unless there is some basis to conclude that creditors and members of a company stand to enjoy a better return as a consequence, than if a liquidator is appointed now.
It may well be more efficient for the administrators to continue to investigate the affairs of the defendant company in the context of the group as a whole rather than have different forms of external administration underway and different external administrators. Having the administrators investigate the affairs of the company group may avoid the cost of duplication. However, as matters presently stand, there is an air of inevitability about a liquidator being appointed in the short term future and, in the meantime, there may well be costs incurred in the course of an administrator attending to their obligations under the Corporations Act which may be unnecessary if a liquidator was appointed without further ado. There is no real prospect, given the administrators' investigations thus far, that a DOCA is going to be forthcoming, indeed, there are transactions of significant quantum and apparent irregularity that the regulator has been notified.
Further, the plaintiff has pursued her claim to have a liquidator appointed to the company following all the appropriate procedures of the Court and, it seems to me that she should be granted that relief today, unless it is in the interests of creditors, including her, to delay the appointment of a liquidator. An adjournment does not seem to me to be in the interests of creditors of the defendant, in particular, the largest creditor, and is potentially against their interests in circumstances where days may count in pursuing her remedies against the guarantors of the defendant.
On the basis of the evidence before the Court, the onus on the administrators to persuade me that it is in the interests of creditors to adjourn the proceedings has not been discharged. This is not to criticise the administrators. The extent to which they have been able to investigate the affairs of the defendant and the group of companies which it forms part are impressive, given the short time that they have had. Nonetheless, I am not prepared to accede to the application for an adjournment. Nor am I minded to make a costs order against the administrators in respect of their application in the circumstances. The plaintiff has otherwise established that she is entitled a winding up order. For these reasons, I make the following orders and directions: 1. Order that the defendant, i-Prosperity Capital Pty Ltd, ACN 605 317 360, be wound up in insolvency. 2. Order that Barry Kogan and Katherine Sozou of McGrathNicol be appointed as liquidators to conduct the winding up of the defendant. 3. Order that the Liquidators reimburse the plaintiff out of the property of the defendant for the taxed costs incurred by the plaintiff in these proceedings.

Creevey v Deputy Commissioner of Taxation

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