Downey as liquidator of Complete Print Solutions Pty Ltd (in liq) v Stewart [2014] FCA 792 | Case summary

REASONS FOR JUDGMENT (REVISED FROM TRANSCRIPT) 1 The Court's approval is sought under s 477(2B) of Corporations Act 2001 (Cth) ("the Act") for Mr Downey, the liquidator of Complete Print Solutions Pty Ltd (in liquidation) ("CPS") to enter into a Deed of Settlement with Wiljamelis Pty Ltd ("Wiljamelis") and Mr Stewart ("the Deed of Settlement"). Court approval is required because the term of the agreement made by the Deed of Settlement may end, and the obligations of the parties may be discharged, more than three months after the Deed of Settlement was entered into. For the reasons that follow, approval should be granted. 2 The parties have reached agreement to settle this proceeding, without admission, on the terms set out in the Deed of Settlement. In this proceeding, Mr Downey, in his capacity as the liquidator of CPS has sought relief against Mr Stewart a former director of CPS, in respect of the registration by him of an alleged security interest against CPS on the Personal Properties Securities Register. Mr Stewart and Wiljamelis have, by cross-claim, claimed to be entitled to be subrogated to the rights of the National Australia Bank as secured creditors of CPS as a result of paying, as guarantors, the sum of $1,161,780.00 to the National Australia Bank in discharge of half of CPS's debts to the National Australia Bank. If the cross-claim by Mr Stewart and Wiljamelis were successful in its entirety, their claim would make them secured creditors for the amount of $1,161,780.00, which exceeds the liquidator's most recent estimates of the total returns available to creditors. The Deed of Settlement compromises the claim by Mr Stewart and Wiljamelis in the following ways: (a) by recognising a limited priority on their claims in the manner prescribed in the Deed of Settlement; (b) by providing for the appointment of special purpose liquidators to investigate, including by public investigations, whether CPS may have any cause of action arising out of the sale of its business and to pursue any actionable claim; (c) Mr Stewart and Wiljamelis are to fund the activities of the special purpose liquidators out of an interim dividend of $80,000 to be paid to them in respect of their unsecured debts; (d) any recoveries out of the activities of the special purpose liquidators are to be applied in the manner prescribed in the Deed of Settlement, which includes making provision for certain of the proceeds to be made available to unsecured creditors generally; (e) Mr Stewart and Wiljamelis are to be assigned a debt owed to CPS by the interests of Mr Mark Freeman, the director of CPS. The evidence before the Court from the liquidator is that this debt, in the liquidator's view, is not recoverable. 3 The principles relevant to the exercise of the Court's power under s 477(2B) were set out succinctly by Gordon J in Stewart, Re Newtronics [2007] FCA 1375 ("Re Newtronics") at [26] as follows: (1) the court does not simply "rubber stamp" whatever is put forward by a liquidator. As Giles J said in Re Spedley Securities Ltd (In liq) (1992) 10 ACLC 1,742 at 1,745 in relation to the powers of a liquidator to compromise claims: [T]he 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 in law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct. The same restraint must apply when the question is whether the liquidator should be authorised to enter into a particular transaction the benefits and burdens of which require assessment on a commercial basis. Of course, the compromise of claims will involve assessment on a legal basis, and a liquidator will be expected (as was made plain in Re Chase Corporation (Australia) Equities Ltd) to obtain advice and, as a prudent person would in the conduct of his own affairs, advice from practitioners appropriate to the nature and value of the claims. But in all but the simplest case, and demonstrably in the present case, commercial considerations play a significant part in whether a compromise will be for the benefit of creditors. (2) a court will not approve an agreement if its terms are unclear: Re United Medical Protection (No 4) (2002) 20 ACLC 1,647; (3) the role of the Court is to grant or deny approval to the liquidator's proposal. Its role is not to develop some alternative proposal which might seem preferable: Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 16 ACLC 1,642; (4) 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] … 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. See ASC Timber at 1,650; see also Re Gate Gourmet Australia Pty Ltd (in liq) (2005) 23 ACLC 834 at [10] and Warne v GDK Financial Solutions; Peridon Village Nominees (2006) 24 ACLC 1,019 at [60]. The Court's approval is not an endorsement of the proposed agreement but is merely a permission for the liquidator to exercise his or her own commercial judgment in the matter; (5) further, in judging whether or not a liquidator should be given permission to enter into a funding agreement (whether retrospective or not), it is important to ensure, inter alia, that the entity or person providing the funding is not given a benefit disproportionate to the risk undertaken in light of the funding that is promised or a "grossly excessive profit": Anstella Nominees Pty Ltd v St George Motor Finance Ltd (2003) 21 ACLC 1,347 at [11] and Re ACN 076 673 875 Ltd (2002) 20 ACLC 1,551 at [28]; (6) generally, the Court grants approval under s 477(2B) of the Act only where the transaction is the proper realisation of the assets of the company or otherwise assists in the winding up of the company: GDK Financial Solutions at [58] and the cases cited therein. Re Newtronics was cited recently with approval in Re Ascot Vale Self-Storage Centre Pty Ltd (in liq) (2014) 98 ACSR 243; [2014] VSC 75 at [96] per Robson J. 4 Having considered the affidavit of Mr Downey and the affidavit of Mr Stewart and the Deed of Settlement, I am satisfied that the Deed of Settlement is of benefit for the proper realisation of the assets and winding up of CPS. The Deed of Settlement benefits the winding up by eliminating costs, uncertainty and delay of the current litigation and the possible adverse consequences to unsecured creditors, depending upon the outcome of the litigation. In addition, the appointment of special purpose liquidators will deliver the advantage that further investigations into the CPS sale, including public examinations, will take place without any cost or risk to the general unsecured creditors, and in circumstances where it is unlikely on the evidence that such investigations would take place if the Deed of Settlement is not approved. 5 There is no basis for concluding that the settlement involves any bad faith, impropriety, bad error of law or real imprudence on the part of the liquidator. Further, having regard to the fact that the costs of the investigations by the special purpose liquidators are to be borne by Mr Stewart and Wiljamelis, the recovery proposed for them is not disproportionate. Finally, the Court has the power to appoint special purpose liquidators under s 511 of the Act, and I am satisfied that it is appropriate to make those appointments in the circumstances: Lo v Nielsen & Moller (Autoglass)(NSW) Pty Ltd [2008] NSWSC 407 at [29]-[31] per Barrett J and the cases cited therein. 6 For those reasons this is an appropriate matter for the Court to exercise its powers under ss 477(2B) and 511 of the Act. I note that Mr Jess and Mr Burness, the special purpose liquidators, have both consented to be appointed as joint and several special purposes liquidators of CPS, and have given an undertaking not to claim against or assert any entitlement to the funds of CPS, whether its own capacity or as trustee of the Complete Business Essentials Unit Trust, except funds recovered by or as a result of their activities as special purpose liquidator. The Court has also received undertakings from the defendants, Mr Stewart and Wiljamelis, through their counsel, such undertakings being given by Wiljamelis in its own capacity and its capacity as trustee of the Jamelis Unit Trust, to comply with the funding arrangements set out in the Deed of Settlement referred to in order 1. 7 The orders of the Court will be: 1. The compromise of these proceedings constituted by the Deed of Settlement, as compromised in annexure 2 to the affidavit of Mr Stewart affirmed 14 July 2014 (Deed of Settlement) be approved pursuant to s 477(2B) of the Corporations Act 2001 (Cth) (the Act). 2. Pursuant to s 511 of the Act, Messrs Jess and Burness be appointed as additional liquidators of CPS in its own capacity and as trustee of the Complete Business Essentials Unit Trust for the following special purposes: 2.1 to investigate what, if any, causes of action (Causes of Action) CPS in its own capacity and as trustee of the Complete Business Essentials Unit Trust may have arising out of the sale by CPS of its business and assets of OfficeMax Australia Limited (ACN 064 777 224) on or about 15 February 2013; and 2.2 to pursue any of the Causes of Action. 3. The claim by the plaintiffs and the cross-claim by the cross-claimants be dismissed with no order as to costs. I certify that the preceding seven (7) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies.

Downey as liquidator of Complete Print Solutions Pty Ltd (in liq) v Stewart

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