Dean-Willcocks v Yeshiva Properties No 1 Pty Ltd

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1243 of 2013

IN THE MATTER OF CORRIMAL LEAGUES CLUB LIMITED (IN LIQ) TRAJAN JOHN KUKULOVSKI IN HIS CAPACITY AS LIQUIDATOR OF CORRIMAL LEAGUES CLUB LIMITED (IN LIQUIDATION) ACN 001 035 267

JUDGE: FARRELL J DATE: 3 July 2013 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 This is an application filed on 1 July 2013 under which the plaintiff, Mr Kukulovski, in his capacity as liquidator of Corrimal Leagues Club Limited (in liquidation) ACN 001 035 267 (Company) seeks an order pursuant to s 436B(2) of the Corporations Act 2001 (Cth) (Act) that Roderick Mackay Sutherland (Mr Sutherland) be appointed as administrator of the Company. Mr Kukulovski and Mr Sutherland are both partners in the firm Jirsch Sutherland. 2 Mr Kukulovski is also seeking an order pursuant to s 447A of the Act that the first meeting of creditors required to be held pursuant to s 436E of the Act be dispensed with. 3 The application is supported by the affidavit of Mr Kukulovski, which was filed and read in these proceedings (Affidavit).

Background 4 This background derives from the Affidavit. On 19 February 2009, Mr Kukulovski was appointed voluntary administrator of the Company together with two of his former partners. On 20 May 2009, the Company entered into a deed of company arrangement, and Mr Kukulovski became the deed administrator; the deed was varied on 19 July 2010. On 8 November 2012, the deed of company arrangement was terminated and Mr Kukulovski was appointed as liquidator. 5 Since his appointment as liquidator, Mr Kukulovski and his staff have conducted investigations in relation to the Company's business, property, affairs and financial circumstances. The Company operates as Corrimal Leagues Club in Corrimal, New South Wales (Club). The Club operates out of leased premises under a short term tenancy by informal agreement with the owner (Premises). It is an entertainment, function and recreation venue, incorporating restaurant, gaming and sports and live entertainment facilities. The Company's main assets are a small amount of plant and equipment, and 50 poker machine entitlements which it holds pursuant to the provisions of the Gaming Machines Act 2001 (NSW). 6 The Company is insolvent. Since his appointment, Mr Kukulovski has continued the trading operations of the Club with a view to either offering the assets of the Club for sale or amalgamating the Club with another registered club. However, the Club has traded at minimal to no profit; at best its operations have been break-even, before accounting for the costs and expenses of the liquidation. In the absence of arrangements for amalgamation with another registered club, the Company must cease trading in the next few weeks. Mr Kukulovksi advertised for expressions of interest from other registered clubs in the area and an information package has been provided to interested parties. On 31 May 2013, Mr Kukulovski received an expression of interest from a registered club (the Amalgamation Partner) to amalgamate the Company pursuant to the provisions of the Registered Clubs Act 1976 (NSW). 7 Based on Mr Kukulovski's discussions with the Amalgamation Partner and the board of directors of the Company, a deed of company arrangement may be proposed for consideration by the creditors (Proposal). While the Proposal has yet to be finalised, it is expected that the Proposal will include provision for: incorporation of key terms of an amalgamation proposal; a six month period for the amalgamation process to be approved by members of both clubs and in accordance with the requirements of the Registered Clubs Act; a deed fund to be established by payment of deed contributions totalling $350,000; the Company and the Amalgamation Partner to continue the employment of all current employees and take over existing employee entitlements; the Club to continue to trade from the Premises (subject to agreement with the landlord); members of the Club to become members of the Amalgamation Partner; and the inclusion of an option for sale to enable the administrator to sell the Company's remaining assets to the Amalgamation Partner in the event that the amalgamation does not proceed or is not approved. 8 If the Proposal proceeds in these terms, Mr Kukulovski would recommend it to the Company's creditors because it advances the objects of Part 5.3A of the Act: it would allow the Company and its creditors the greatest opportunity to continue the business of the Club or provide a better return to the Company's creditors (who would have the opportunity to continue trading with the amalgamated businesses in the future) than would result from winding up the Company. It will also be in the interest of the Club's members who will lose the benefit of their membership if the Club closes. 9 If the Company's assets are sold, instead of completing the Proposal, the creditors may receive approximately the same amount or perhaps slightly more than under the Proposal. However, the creditors will not have the benefit of continuing to trade with the Company and the Amalgamation Partner and the Company's employees will not have continued employment.

Relevant law 10 Section 436B of the Act relevantly provides: Liquidator may appoint administrator (1) A liquidator or provisional liquidator of a company may by writing appoint an administrator of the company if he or she thinks that the company is insolvent, or is likely to become insolvent at some future time. (2) A liquidator or provisional liquidator of a company must not appoint any of the following persons under subsection (1): (a) himself or herself; (b) if he or she is a partner of a partnership - a partner or employee of the partnership; … unless: (f) at a meeting of the company's creditors, the company's creditors pass a resolution approving the appointment; or (g) the appointment is made with the leave of the Court. 11 The authorities on the exercise of the Court's power under this section deal primarily with the position where the liquidator seeks to appoint himself or herself as the administrator and leave is sought under s 436B(2)(a). The main question in this type of application is whether the liquidator (subject to being appropriately qualified) is an appropriate person to act as the company's administrator. Although the Court is not unduly constrained in the way it exercises the discretion under s 436B(2), the most important consideration of the Court is to ensure that there is no conflict of duty or interest if the liquidator is appointed as administrator. If, for any reason, it is preferable for a completely independent person to be appointed instead, then the application must be refused. The Court need not be concerned with whether the winding up should be stayed, although it is arguable that the effect of s 437C(1) is to suspend the liquidator's powers. See Taylor, in the matter of Origin Internet Solutions Pty Ltd (in liq) [2004] FCA 382 per Finklestein J at [5]-[6]; Deputy Commissioner of Taxation v Foodcorp Pty Ltd (1994) 13 ACSR 796; Re Nardell Coal Corp Pty Ltd (recs and mgrs apptd) (in liq) (2003) 47 ACSR 122; Smith, in the matter of Actively Zoned Pty Ltd (in liq) [2012] FCA 605. Matters of commercial morality may also be relevant; see Re Data Homes Pty Ltd (in Liq) [1972] 2 NSWLR 22; Re Depsun Pty Ltd (1994) 13 ACSR 644; Deputy Commissioner of Taxation v Foodcorp Pty Limited (1994) 13 ACSR 796; Sims, in the matter of Destra Corporation Limited [2009] FCA 1199. 12 The remarks of Bryson J in Re Cobar Mines Pty Ltd (rec & mgr apptd) (in liq) (1998) 30 ACSR 125 at 126 are also relevant: The test for leave is not a high one, and an important part of its context is that the court does not control the decision whether or not there is to be an administrator, and is asked for leave only on the subsidiary question who that is to be. 13 This is a case where s 436B(2)(b) applies as the liquidator is seeking to appoint as the administrator one of his partners. No application was made in the originating process for leave under s 448C for Mr Sutherland to consent to act as administrator. That section relevantly provides: Disqualification of person connected with company (1) Subject to this section, a person must not, except with the leave of the Court, seek or consent to be appointed as, or act as, administrator of a company or of a deed of company arrangement if: … (g) the person is a partner, employer or employee of an officer of the company; or … 14 Section 9 of the Act defines "officer" to include at paragraph (f) a liquidator of the corporation. 15 Accordingly, Mr Kukulovski is an officer of the Company and leave is required under s 448C(1) for Mr Sutherland as his partner to consent to be appointed as administrator of the Company and to act as administrator of a deed of company arrangement. When it comes to consideration of whether to grant this leave, the focus is clearly on issues of conflict of interest, for instance, incompatible allegiances or interests: see Dean-Willcocks v Yeshiva Properties No 1 Pty Ltd (prov liq apptd) (2003) 48 ACSR 525 per Barrett J at [15] and [22]. The conflict must be real and not theoretical, and it is generally desirable that the external administration of a group should be in the hands of one administrator: see Re Chilia Properties Pty Ltd (1997) 73 FCR 171. See also Skafcorp Ltd (admin apptd) v Jarol Pty Ltd (2002) 44 ACSR 138.

Consideration 16 Mr Kukulovski submits that he and his partners and the staff of his firm have been involved in the external administration of the Company for over 4 years, and possess a substantial body of knowledge regarding the Company's affairs. He further submits that there are no grounds or circumstances that suggest any real potential conflict of interest or considerations of commercial morality which would preclude Mr Sutherland from being appointed. Prior to his first appointment as voluntary administrator in 2009, neither he, any of his partners nor his firm was engaged by the Company to provide any accounting advice or services to it. Mr Kukulovski's representative also advised the Court that Jirsch Sutherland has no relationships with the possible Amalgamation Partner or any of the other possible purchasers of the assets of the Company which are currently known to them. 17 Although the main consideration upon an application such as the present one is the suitability of the appointee as administrator, the Court is nevertheless interested in a general sense to see that there is some point in the move from winding up to voluntary administration: see Rupert Co Ltd v Chameleon Mining NL [2005] NSWSC 719 at [5]. 18 In this case, the Proposal which may be incorporated in the deed of company arrangement favours amalgamation of the Club over a sale of the assets of the Company notwithstanding the possibility that a sale of the assets of the Company may achieve a higher return to creditors. The Proposal advances the interests of members in their continued membership. Mr Kukulovski's representative indicated that employees would likely be paid all their entitlements if the assets were sold but they would have the benefit of continued employment if the Proposal proceeds as currently envisaged. 19 Mr Kukulovski has been an administrator or liquidator of the Company for 4 years. He has consulted with the board of the Company concerning the Proposal, but not with creditors and is seeking an order that the first meeting of creditors required under s 436E be dispensed with. For these reasons I had a concern whether Mr Kukulovski's support of the Proposal reflected an inclination towards the continuity of the Club despite the possibility that the creditors would get a better return on the sale of the Company's assets. I was concerned that the creditors not be locked out of alternatives which would give them a better return in light of the proposed option incorporated into the Proposal to sell the assets to the Amalgamation Partner if the Proposal was not approved by members of both clubs. 20 Mr Kukulovski's representative advised the Court that Mr Kukulovski was pursuing both the Proposal and indications of interest in the Company's assets (particularly the poker machine entitlements) from a number of parties. He indicated that at the meeting of creditors under s 439A (which would be convened to consider whether to enter into a deed of company arrangement), both the Proposal and the alternative of the sale of the assets would be open to creditors. I am therefore satisfied that my concern has been addressed and that creditors will have before them true alternatives. 21 Other discretionary factors in favour of Mr Sutherland's appointment are: The work in relation to the liquidation of the Company is primarily conducted from the Sydney office of Jirsch Sutherland. As Mr Kukulovski has moved to Melbourne, Mr Sutherland has assisted Mr Kukulovski with performing and supervising that work. The familiarity of Mr Sutherland and the staff at Jirsch Sutherland with the Company's affairs will avoid duplication of work which would be occasioned by the appointment of an administrator independent of that firm. It will allow faster turn around time on a deed of company arrangement. Thus the appointment will save both time and expense of the administration. The Australian Securities & Investments Commission has been advised of the application. It has notified the solicitors for Mr Kukulovski that it considers this matter properly left to the determination of the Court and confirms that it does not propose to intervene in the proceedings or seek leave to appear at the hearing. 22 Mr Kukulovski tendered a copy of a written consent by Mr Sutherland to act as administrator and he is a registered liquidator. 23 I am satisfied that leave should be granted to Mr Sutherland's appointment as an administrator and to Mr Sutherland giving his consent to act as administrator of the Company and to administer the deed of company arrangement, should the deed of company arrangement be proposed and agreed to by creditors.

application to dispense with first meeting of creditors 24 The application also seeks an order of the Court pursuant to s 447A of the Act to dispense with the requirement for the administrator to call a first meeting of creditors pursuant to s 436E of the Act. Under s 436E, the administrator must convene a meeting of the Company's creditors in order to determine whether to appoint a committee of creditors and whether the creditors wish to replace the administrator. This meeting must be held within 8 days of the appointment of the administrator: s 436E(2). 25 Section 447A(1) of the Act enables the Court to make "such order as it thinks appropriate about how this Part is to operate in relation to a particular company". I am satisfied that Mr Kukulovski is an "interested person" with sufficient standing to make an application under this section: see s 447A(4)(f). This provision has been widely used by the Court to facilitate the operation of Part 5.3A and orders were made by Lindgren J in Sims, in the matter of Destra Corporation Limited to dispense with the operation of s 436E in analogous circumstances to this case. 26 Mr Kukulovski seeks this relief because the costs of such a meeting would exceed $20,000, a significant amount to the Company which is barely breaking even. As in Sims, I consider that it would be wasteful where, as here, the debtors remain substantially the same as those who lodged proofs of debt in 2009 and Mr Kukulovski has been either the administrator or liquidator throughout that time. Acknowledging that it is Mr Sutherland who is to be appointed as the administrator, not Mr Kukulovski, the creditors will have the opportunity to consider any change to the administrator at the meeting of creditors to be convened pursuant to s 439A of the Act. I am satisfied that to make the order would advance the purposes of Part 5.3A of the Act. 27 However, I do consider that it is important that creditors be consulted at the earliest opportunity that it can usefully be done. Accordingly I will also order, pursuant to s 447A, that notwithstanding s 439A(2) of the Act, the meeting of creditors required under s 439A(1) may be held at any time during or within 5 business days after the end of the convening period, subject to compliance with s 439A(3). A similar order was also made in Sims. 28 I will also order that the plaintiff give notice of these orders to creditors of the Company within 7 days by a circular to creditors and by notice placed on the website of the plaintiff's firm. 29 I will also order that the plaintiff's costs of these proceedings be costs in the administration of the Company. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell.