Deputy Commissioner of Taxation, in the matter of ACN 154 520 199 Pty Ltd (in liq) v ACN 154 520 199 Pty Ltd - [2019] FCA 1 - FCA 2019 case summary — Zoe

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Deputy Commissioner of Taxation, in the matter of ACN 154 520 199 Pty Ltd (in liq) v ACN 154 520 199 Pty Ltd

[2019] FCA 1

Federal Court of Australia|2019-01-07|Before: Griffiths J

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At a glance

Source facts

Court

Federal Court of Australia

Decision date

2019-01-07

Before

Griffiths J

Source

Original judgment source is linked above.

Judgment (5 paragraphs)

[1]

The Renovator's Warehouse Gunnedah Pty Ltd (ACN 122 074 873) (in liquidation) (the Company) and the plaintiff as liquidator of the Company be authorized, nunc pro tune, to enter into the Deed of Settlement and Release in the form exhibited to the affidavit of Christopher Mel Chamberlain affirmed on 2 November 2018.
The Company and the plaintiff as liquidator of the Company be authorised to enter into a retainer with Stacks/Southern Highlands Pty Ltd trading as Stacks Law Firm in the form exhibited to the affidavit of Christopher Mel Chamberlain affirmed on 2 November 2018.
Costs of and incidental to the originating process dated 2 November 2018 be costs in the winding up. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

[2]

GRIFFITHS J: 1 The plaintiff, who is the liquidator of The Renovator's Warehouse Gunnedah Pty Ltd (ACN 122 074 873) (in liquidation) (the Company), seeks the following relief pursuant to s 477(2B) of the Corporations Act 2001 (Cth) (the Act): (a) That the Company and the plaintiff as liquidator of the company be authorised, nunc pro tunc, to enter into a Deed of Settlement and Release (the Deed). (b) That the Company and the plaintiff as liquidator of the company be authorised to enter into a retainer with Stacks/Southern Highlands Pty Ltd trading as Stacks Law Firm (the Retainer). (c) Cost of and incidental to the originating process dated 2 November 2018 be costs in the winding up. 2 On 27 November 2018, the Court ordered that the matter be determined on the papers and without an oral hearing, after the plaintiff had an opportunity to file an outline of written submissions in support of its application.

[3]

Summary of background facts 3 The liquidator was appointed pursuant to the Court's order dated 23 October 2013, on an application by the Deputy Commissioner of Taxation. Mr William King and Mrs Katrina King have been directors of the Company since its incorporation on 6 October 2006. They hold all the issued share capital in the Company. 4 The liquidator explained why he formed the view that he has not received all the books and records of the company and that he and/or the Company have potential recovery actions, including against Mr and Mrs King, for insolvent trading and a claim either in debt, or for breach of statutory or fiduciary duty, as well as in equity. 5 The liquidator also explained why he considered that the Company was insolvent at all material times and was likely to have been insolvent since its incorporation up until 23 October 2013. 6 An examination proceeding was conducted following an order made by the Court under s 596A of the Act. Its purpose included investigating potential claims against Mr and Mrs King. The examination proceeding was listed for the examination of Mr and Mrs King on 2 May 2018. On that day, Mr and Mrs King and the liquidator, in his capacity as both liquidator of the Company and on behalf of the Company, entered into the Deed in full and final settlement of all claims that the liquidator and/or the Company may have had against Mr and Mrs King. 7 On 10 May 2018, the liquidator informed the Company's creditors that he had entered into a Deed with Mr and Mrs King that was subject to creditors' approval. He advised that he would be seeking approval of the Deed at a meeting of creditors scheduled for 29 May 2018. 8 Meetings of the Company's creditors were convened on 29 May 2018 and 12 June 2018, but the liquidator failed to obtain a quorum of creditors at either meeting. 9 I accept the liquidator's evidence that no creditors attended the first meeting and the Deputy Commissioner of Taxation was the only attendee at the second meeting. I also accept the liquidator's evidence that at no time has any creditor contacted him in relation to his request for creditors' approval of the Deed. 10 The liquidator gave evidence, which I accept, that he entered into the Deed on the basis of his understanding that it was subject to creditors' approval and that his execution of the Deed was not inconsistent with s 477(2B) of the Act. Given his present concern that he may have inadvertently breached s 477(2B) of the Act by executing the Deed, the liquidator now seeks authorisation to enter into the Deed retrospectively. 11 The Deed relevantly provides at cl 5.1 that it is subject to the Company's creditors' or the Court's approval. The liquidator has given evidence, which I accept, that as at 2 November 2018, the prospective dividend to any class of creditors of the Company was expected to be nil but that if entry into the Deed is approved, the prospect of a return to creditors will improve significantly. I accept the liquidator's opinion that entry into the Deed is in the interest of creditors, on the basis that if the amounts claimed under the Deed can be recovered, the liquidator believes that there is a high likelihood that there will be a return to creditors, which would not be the case without the Deed. 12 The liquidator has also given evidence, which I accept, that he intends to instruct Stacks Law Firm to act for him to enforce the Deed and seek to recover the amounts pursuant to it, including possibly by pursuing claims against Mr and Mrs King. I also accept the liquidator's evidence that the proposed terms of the Retainer are appropriate, are not unusual and are generally in the interests of creditors.

[4]

Relevant legal principles summarised 13 The relevant legal framework was helpfully summarised by Gleeson J in Deputy Commissioner of Taxation, in the matter of ACN 154 520 199 Pty Ltd (in liq) v ACN 154 520 199 Pty Ltd (in liq) (No 2) [2017] FCA 755 (ACN 154 520 199 Pty Ltd) at [21]-[26], with which I respectfully agree: 21. Section 477(2B) of the Act provides: Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not enter into … an agreement on the company's behalf (for example, but without limitation, a lease or an agreement under which a security interest arises or is created) if: (a) without limiting paragraph (b), the term of the agreement may end; or (b) obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance; more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months. 22. The Court's role in considering an application under s 477(2B) is to determine whether it is a proper or bona fide exercise of the liquidator's powers. In Re 7 Steel Distribution Pty Ltd (in liq) (recs and mgrs apptd) [2013] NSWSC 669; (2013) 31 ACLC 13-021 at [17], Black J said: The Court is not concerned, in granting an approval under s 477(2B) of the Corporations Act, with matters of commercial judgment but is concerned to be satisfied that the entry into the agreement is a proper exercise of power and not ill-advised or improper on the part of the liquidator ... In Pascoe; Re Matrix Group Limited (in liq) [2011] FCA 1117 at [14], Jacobsen J [sic] noted that the question for the Court in such an application was whether the liquidator's judgment had been infected by a lack of good faith, or an error of law or principle, and whether there was a real or substantial ground for doubting the prudence of the Liquidator's conduct in seeking to enter into the funding arrangement. That question arises, in the context of s 477(2B), in the context of entry into a longer term agreement, the performance of which might otherwise delay the completion of the winding-up. 23. In Stewart, re Newtronics Pty Ltd [2007] FCA 1375 ("Newtronics"), Gordon J, at [26(4)], cited with approval Austin J's statement in Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 29 ACSR 109 at 118 that, in reviewing the liquidator's proposal, the task of the Court is not "to reconsider all of the issues which have been weighed up by the liquidator in developing the proposal, and to substitute its determination for his in....a hearing de novo", but rather the task of the Court is: … simply to review the liquidator's proposal, paying due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, satisfying itself there is no error of law or ground 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 … 24. The standard imposed under s 477(2B) concerns an assessment by the Court as to whether entry into the agreement is a proper exercise of power and not ill-advised or improper on the part of the liquidator, rather than involving the exercise of commercial judgment: Re Gerard Cassegrain & Co Pty Ltd (in liq) [2013] NSWSC 257 at [11] per Black J citing McGrath re HIH Insurance Ltd [2010] NSWSC 404; (2010) 266 ALR 642. 25. In Pascoe; re Matrix Group Ltd (in liq) [2011] FCA 1117 at [7], Jacobson J cited with approval the following statement by Austin J of the relevant test in Leigh re King Bros [2006] NSWSC 315 at [23]: Although the court has the statutory task [under s 477(2B)] of giving "approval" to a liquidator's agreement that may end more than three months after it is entered into, the case law shows that the court undertakes something less than a complete "merits review". As Giles J said in Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85-6: "... the court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error of law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct." 26. In Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89; (2011) 85 ACSR 38 at [24], the Full Court endorsed the following list of factors (identified by Austin J in Leigh re King Bros at [25] and Re ACN 076 673 875 Ltd [2002] NSWSC 578; (2002) 42 ACSR 296 at [17]-[34]) relevant to the Court's assessment of a litigation funding agreement: (1) the prospects of success of the proposed litigation; (2) the interests of creditors other than the proposed defendant; (3) possible oppression; (4) the nature and complexity of the cause of action; (5) the extent to which the liquidator has canvassed other funding options; (6) the level of the funder's premium; (7) consultations with creditors; and (8) the risks involved in the claim. 14 It is also well settled that, while a liquidator should seek the Court's approval before entering into a long term agreement, the Court has power to give retrospective approval to an agreement under s 477(2B) in appropriate circumstances: see Re Kevin Jacobsen Pty Ltd (in liq) [2016] NSWSC 538; 113 ACSR 277 at [74]-[75] and the cases referred to by Gleeson J in ACN 154 520 199 Pty Ltd at [27]. 15 I am satisfied that the liquidator has adequately explained that the departure from compliance with s 477(2B) was both inadvertent and unintended. I accept the liquidator's submission that it is appropriate in the circumstances to grant retrospective approval to enter into the Deed. In reaching these conclusions, I have taken into account the liquidator's evidence and submissions, as well as my review of the Deed and Retainer. 16 In respect of the Deed, I accept the liquidator's submission that: (a) it is his commercial judgment that it is in the interest of creditors for the liquidator and the Company to enter into the Deed; (b) the absence of creditors' approval is not significant where the absence is because the liquidator failed to obtain a quorum of creditors at two properly called meetings of creditors of the Company; (c) there is no reason to conclude the liquidator's proposed entry to the Deed is other than a proper exercise of his power, or to conclude that it is an ill-advised or improper act on his part; (d) it is accordingly appropriate to approve the entry into the Deed on behalf of the Company; and (e) it is further appropriate to make the order retrospectively where the liquidator's failure to seek approval prior to entering into the Deed was inadvertent and there is no reason to believe that there is any prejudice if an order was made with that effect. 17 As to the Retainer, I accept the liquidator's submissions that: (a) the commercial terms of the Retainer are appropriate, not unusual and are generally in the interests of creditors; (b) there is no reason to conclude that the liquidator's proposed entry into the costs agreement with Stacks Law Firm is other than a proper exercise of the liquidator's power, or to conclude that it is an ill-advised or improper act on his part; and (c) it is accordingly appropriate to approve the liquidator's entry into the proposed costs agreement with Stacks Law Firm on behalf of the Company.