Equititrust Ltd (in liq) (recs apptd) (recs and mgrs apptd) v Equititrust Ltd

Nature of the application

1. By Originating Process filed on 2 April 2019, the Plaintiff, Mr Paul Weston in his capacity as liquidator of Go Energy Group Ltd ("GEG") and several other companies in the Go Energy Group ("Companies") and those Companies seek directions under s 90-15 of the Insolvency Practice Schedule (Corporations) and ss 63 and 81 of the Trustee Act 1925 (NSW) that he will be acting properly in his capacity as liquidator of several of the Companies in admitting several proofs of debt in the liquidation of the Companies.
2. By way of background, GEG has several wholly owned subsidiaries, including several of the Companies. GoEnergy Pty Ltd ("GEPL") was a licensed energy retailer for gas and electricity; Go Markets Environmental Trading Pty Ltd ("GME") was a "Small-scale Technology Certificate" aggregator; the Third Plaintiff, GoEnergy Installations Pty Ltd ("GEI"), installed solar systems; the Fourth Plaintiff, GoEnergy Shared Services Pty Ltd ("GESS"), was a service company that employed staff for the Go Energy Group; and the Fifth Plaintiff, Solco Solar Products Pty Ltd ("SSP"), was the former operating company of the Go Energy Group.
3. Mr Weston seeks, first, a declaration that he would be acting properly in admitting a formal proof of debt dated 1 April 2019 in the amount of $4,086,800.70 by SSP in the liquidation of GEG. Second, Mr Weston seeks a declaration that he would be acting properly in admitting the formal proof of debt dated 29 January 2018 in the amount of $2,086,166.53 in the liquidation of GEI by GEPL (which is not party to the proceedings). Third, Mr Weston seeks a declaration that he would be acting properly in admitting several proofs of debt in the liquidation of GESS, namely a formal proof of debt dated 17 August 2016 in the amount of $3,344.12 by GEG; a formal proof of debt dated 17 August 2016 in the amount of $412,299.89 by GME; and a formal proof of debt dated 29 January 2018 in the amount of $434,282.71 by GEPL. Fourth, Mr Weston initially sought declarations that he would be justified in admitting two proofs of debt in the liquidation of SSP, namely GME's informal, undated proof of debt in the amount of $112,125.05 and GESS's informal, undated proof of debt in the amount of $11,125.40. The orders that he ultimately sought were updated to reflect the lodgement of formal proofs of debt by those companies.

Affidavit evidence

1. Mr Weston relies on several affidavits in support of the application. By his affidavit dated 1 April 2019, he sets out the circumstances of his appointment, on various dates, as voluntary administrator of relevant Companies, and subsequently as liquidator of GESS, SSP and GEI. He also refers to steps which were taken to recapitalise GEG, GEPL and GME pursuant to deeds of company arrangement ("DOCA"), which were varied on multiple occasions. Ultimately, creditors of GEG passed a special resolution for it to be voluntarily wound up on 6 March 2019 and the DOCAs in respect of GEPL and GME were fully effectuated on that date and separate creditors' trusts were established in respect of those two DOCAs under a single creditors' trust deed also dated 6 March 2019. Mr Weston also refers to the amounts of unpaid remuneration which he claims in respect of the Companies and GEPL and GME, parts of which have been approved and parts of which have been paid.
2. By that affidavit, Mr Weston also refers to steps which have been taken to review the books and records of the Companies, and GEPL and GME, and to investigation of inter-company loans between the Companies and GEPL and GME. Mr Weston sets out the process which was adopted to calculate proofs of debt in relation to those inter-company loans by reference to available documents. Mr Weston also notes that he has formed the view, rightly, that he is conflicted where he has both caused proofs of debt to be lodged in respect of the Companies, and GEPL and GME, and would also be required to adjudicate on those proofs of debt, and that he also has a financial interest in the outcome of the adjudication where he has unpaid remuneration in the Companies, and GEPL and GME. Mr Weston's evidence is that he retained Mr Anthony Elkerton, an experienced registered liquidator, to consider the several proofs of debt and express a view as to whether they are properly debts of and should be admitted in the liquidations of the Companies and the creditors' trusts.
3. Mr Weston also leads evidence of the very substantial amounts of external creditors in respect of GEG and GEPL, and the lesser, but still substantial, amounts of creditors in respect of GME, GEI, GESS and SSP. Mr Weston's evidence is that he anticipates that there will be no return to creditors of GME and GESS after the estimated costs of the liquidation; a potential return of 2 cents in the dollar to creditors of GOE, 22 cents in the dollar to creditors of GEPL, 11 cents in the dollar to creditors of GEI and between 4 and 10 cents in the dollar to creditors of SSP (Weston 1.4.19 [30]).
4. Mr Weston also refers to the difficulties which have arisen because the management accounts of the Companies and GEPL and GME were maintained using particular software, and the underlying data was hosted in the "cloud" by a third party service provider, which deleted that data without his consent after his appointment as external administrator to the Companies, and GEPL and GME. For that reason, Mr Weston has not been able to obtain a copy of the documents comprising management accounts of the Companies. That difficulty is, of course, not a consequence of the conflict which he faces, and would also be faced by any other liquidator of the Companies or trustee of the creditors' trusts for GEPL and GME. In that situation, Mr Weston must plainly do the best he can with the information that is available to him in dealing with the proofs of debt. Mr Weston also identifies the sources of information which have been available to him, including electronic copies of bank statements, balance sheets dated March 2016 and trial balances dated March 2016 for the Companies, and GEPL and GME, and additional documents relating to general ledger movements for specified periods located by keyword searches of data held on local computer servers of the Companies, and GEPL and GME, and a MYOB file for GESS containing a loan account ledger, which was held on local computer servers.
5. By a further affidavit dated 29 April 2019, Mr Weston, at my invitation, indicated the view that he would form in respect of the several relevant proofs of debt, subject to the conflicts of interest that he has recognised. He indicates that he would, as liquidator of the relevant Companies and trustee of the relevant creditors' trusts, admit each of the proofs of debt in the amounts determined by Mr Elkerton as set out in his report on inter-company loans, to which I refer below. In the result, he would admit SSP's proof of debt dated 1 April 2019 in the amount of $4,086,800.70 in the liquidation of GEG; he would admit GEPL's proof of debt dated 29 January 2018 in the amount of $2,086,166.53 in the liquidation of GEI; he would admit the proofs of debt of GEG, GME and GEPL in the liquidation of GESS in the amounts of $3,334.12, $412,299.89 and $434,282.71 respectively; he would admit GME's and GESS's proofs of debt in the liquidation of SSP in the amounts of $112,125.05 and $11,125.40 respectively; he would admit SSP's and GEG's proofs of debt in the GEPL creditors' trust in the amounts of $265,138.63 and $2,557,189.17 respectively; and he would admit GEG's and GEPL's proofs of debt in the GME creditors' trust in the amounts of $1,687,982.80 and $184,540.48 respectively. It seems to me that such evidence was necessary, notwithstanding the existence of the conflicts of interest that Mr Weston has identified, because the Court's role in an application of this kind is not itself to make a decision in substitution for the liquidator or trustee making a decision, but instead to form a view as to whether the liquidator or trustee would be justified in acting upon a decision that he or she has in fact made, albeit in this case in circumstances of a disclosed conflict of duty and interest.
6. Mr Weston also relies on an affidavit dated 11 April 2019 of Mr Elkerton, which exhibits Mr Elkerton's expert report of the same date and the documents which he has reviewed in respect of each of the relevant Companies and GEPL and GME. Mr Elkerton's report addressed the questions whether inter-company loans between the relevant Companies and GEPL and GME were true and proper debts and were properly admissible debts in the various external administrations of the Companies and GEPL and GME.
7. Mr Elkerton's expert report properly recognises the legal principles applicable to the assessment of a formal proof of debt. Section 553 of the Corporations Act 2001 (Cth) provides that: "Subject to this Division [6] and Division 8, in every winding up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company." The purpose of this section is to achieve a pari passu distribution of available assets among those who are creditors of the company: Re Jay-O-Bees Pty Ltd (in liq) [2004] NSWSC 818; (2004) 50 ACSR 565. A liquidator may require that a debt be proved formally under s 553D of the Act and requirements for a formal proof of debt are set out in regs 5.6.49 - 5.6.50 of the Corporations Regulations 2001 (Cth), which require such a proof to contain particulars of the debt or claim and a statement of account in the case of a debt. A liquidator may admit or reject all or part of a formal proof of debt, or require further evidence in support of that proof of debt. In adjudicating on a proof of debt, a liquidator acts in a quasi-judicial capacity, according to standards no less than that of a court or judge and must act impartially, when seeking to discover who are the company's creditors: Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332; Re Graf Holdings Pty Ltd [1999] NSWSC 217.
8. Mr Elkerton's report refers to the documents to which he had access; to additional documents to which he had sought access, which were not available in the circumstances to which I have referred above; and to the conclusions which he has reached having regard to the documents available to him. Mr Glasson, who appears for the Plaintiffs, rightly recognises that the limitations in the documents available to Mr Elkerton, which prevent confirmation of all underlying transactions on the recorded loan accounts, mean that he has placed increased reliance on the assumptions that he has made, but rightly points out that Mr Weston or any other liquidator would be in no better position than Mr Elkerton in that respect.
9. Mr Elkerton assumed that the balances of all inter-company loan accounts were independently verified at 30 June 2015, because the Companies, and GEPL and GME were audited as at that date. While that may be common practice of auditors, it cannot be assumed that it would always be followed, since audit failures occur from time to time. That assumption could have been proved by, for example, leading evidence from the relevant Companies' and GEPL's and GME's auditors which addressed whether that issue had been appropriately reviewed in the audit, but has not been established by the evidence. Even if inter-company loan accounts had not been independently verified as at that date, Mr Weston and Mr Elkerton have no reasonable alternative other than to proceed on the recorded balances at that date, where there is no alternative source of the relevant information. Mr Elkerton also made an assumption, which seems to me to have been reasonable in the circumstances, that transactions recorded in the loan accounts between the various Companies and GEPL and GME were properly classified and attributable to the loan account. There also seems to me to be little alternative to Mr Weston and Mr Elkerton other than to proceed on that basis in the relevant circumstances.
10. Mr Elkerton, in assessing the relevant proofs of debt, had regard to the status of a company's books as prima facie evidence of matters stated or recorded in them under s 1305 of the Corporations Act, and to the extension of that presumption to books that are maintained by electronic means under s 1306 of the Act. While those provisions are applicable, in their terms, to the conduct of Court proceedings, a liquidator might well give weight to accounts prepared in the ordinary course of a company's business in assessing a proof of debt, unless he has reason to doubt the accuracy of those records.
11. Mr Elkerton indicates that he has taken the steps that would ordinarily be necessary to determine whether the inter-company loans between the Companies and GEPL and GME are true and proper debts and admissible debts, including reviewing each proof of debt; considering whether each of the claims was properly admissible under the legal framework for the admission of proofs of debt, to which I have referred above; assessing the evidence supporting the relevant claims, by reference to the balance of any loan at 30 June 2015 and movements of the loan account from ledger accounts, where available, after that date; and reviewing other documentary evidence to support and verify loan movements. He has also had regard to the statutory presumptions to which I have referred above and I have noted above that, whether or not those statutory presumptions are strictly applicable, a liquidator would in any event properly give weight to a company's accounting records prepared in the ordinary course of business in assessing proofs of debt, unless he has reason to doubt the accuracy of those records. Mr Elkerton in turn provides a detailed assessment of each of the inter-company loans, and I have been taken by Mr Glasson through Mr Elkerton's reasoning, at least by way of example, in his oral submissions. Mr Elkerton expressed the view (paragraph 11.4 of his expert report) that the proofs of debt should be admitted in specified amounts, largely in full, but with a reduction in the proofs lodged by SSP in the GEPL creditors' trust and by GEPL in the GME creditors' trust. By a further affidavit dated 29 April 2019, Mr Elkerton corrected the position in respect of two documents exhibited to his original report.

The applicable legal principles and determination

1. Mr Weston rightly recognises that it would have been inappropriate for him, as liquidator of one of the Companies and GEPL and GME, to lodge a proof of debt and then to decide whether or not to accept the same proof of debt lodged by him in his capacity as the liquidator of another of the Companies and GEPL and GME: Re Kal Assay Southern Cross Pty Ltd (in liq) (1992) 9 ACSR 245 at 261-262. Mr Glasson submits that the Court has an inherent power to authorise a liquidator to perform an act that would otherwise involve a conflict, although he accepts that power will only be exercised rarely: McGrath; Re HIH Insurance Ltd [2005] NSWSC 787 at [35], published as Appendix 1 to Re McGrath; HIH Insurance Ltd [2010] NSWSC 404; (2010) 266 ALR 642; Re Bell Group Ltd (in liq); Ex parte Woodings [2013] WASC 409; (2013) 97 ACSR 117 at [41]. In Re McGrath above at [37], Barrett J observed that the Court might, in the exercise of an inherent jurisdiction, grant authorisation for conduct that would otherwise involve a conflict, on an application which explicitly sought dispensation from fiduciary duties, with appropriate evidence showing how and why the circumstances existed warranting such dispensation. His Honour also observed that the task of explanation inherent in a request to be excused from a fiduciary requirement was an onerous and exacting one. It seems to me that Mr Weston and those representing him have appreciated and have properly recognised that matter in the way they have approached this application. Mr Weston's approach in retaining Mr Elkerton, to which I referred above, reflects the possibility raised by Barrett J in Re McGrath above at [38] that a qualified person could reach a "fully informed and independent conclusion" as to the issues involved in support of an application of this kind.
2. Mr Weston relies on the Court's power to give directions under s 90-15 of the Insolvency Practice Schedule (Corporations). The Court's power to give a direction under that section is the same as, or is likely wider than, its powers under ss 479(3) and 511 of the Act: Walley; Re Poles & Underground Pty Ltd (admins apptd) [2017] FCA 486 at [41]; Warner (liquidator), Re Sakr Bros Pty Ltd (in liq) [2019] FCA 547 at [18]. In Warner above at [18], Griffiths J referred to my summary of the applicable principles in Re Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556 at [7]-[9] as follows: "I summarised the scope of the Court's power to give directions under s 479(3) of the Corporations Act in Re MF Global Australia Ltd (in liq) [2012] NSWSC 994; (2012) 267 FLR 27 at [7] as follows: Section 479(3) of the Corporations Act allows a liquidator to apply to the court for directions in relation to a matter arising under a winding up. The function of a liquidator's application for directions under this section is to give the liquidator advice as to the proper course of action for him or her to take in the liquidation … The court may give directions that provide guidance on matters of law and the reasonableness of a contemplated exercise of discretion but will typically not do so where a matter relates to the making and implementation of a business or commercial decision, where no particular legal issue is raised and there is no attack on the propriety or reasonableness of the decision … I also referred to the scope of the Court's powers under s 511 of the Corporations Act in that decision and observed (at [8]) that: Section 511 of the Corporations Act provides an alternative source of power to give such a direction and the Liquidators also rely on that section. … Applications made under this section in a voluntary winding up are determined in a similar manner to applications in a court ordered winding up under s 479(3) of the Corporations Act notwithstanding that section does not expressly require that it be 'just and beneficial' to give the relevant direction. The court may give such a direction where it will be 'of advantage in the liquidation': … The effect of a determination under the section is to sanction a course of conduct on the part of the liquidator so that he or she may adopt that course free from the risk of personal liability for breach of duty …" [citations omitted]. I also recognise that the Court's powers to give judicial advice and give directions under these sections are intended to facilitate the performance of a liquidator's functions and should be interpreted widely to give effect to that intention, and the Court may give such advice or give such a direction where it is advantageous to the liquidation to do so …"
3. In Warner above, the Court gave a direction under s 90-15 of the Insolvency Practice Schedule (Corporations) to a liquidator of two companies who faced a conflict of duty or interest, where one company was creditor of the other and the Court was satisfied that the appointment of a special purpose liquidator to address that conflict would have been an unwarranted additional burden on creditors.
4. Section 63 of the Trustee Act, on which Mr Weston relies in respect of two creditors' trusts that are in issue in this application, authorises the Court to give an "opinion advice or direction on any question respecting the management or administration of the trust property" and permits relief aimed at resolving legitimate doubts held by a trustee as to the proper course of action and protecting the trust and those entitled to it. In Re Australian Pipeline Ltd [2006] NSWSC 1316; (2006) 60 ACSR 625 at [17], Barrett J noted the role of such advice in providing guidance for the future and referred to Marley v Mutual Security Merchant Bank and Trust Co Ltd [1991] 3 All ER 198 at 201 where Lord Oliver of Aylmerton observed that: "A trustee who is in genuine doubt about the propriety of any contemplated course of action in the exercise of his fiduciary duties and discretions is always entitled to seek proper professional advice and, if so advised, to protect his position by seeking the guidance of the court."
5. In Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66 at [56]-[59], the majority of the High Court observed that there were no implied limitations on the power to give advice or on the discretionary factors relevant to the giving of advice, and the power is confined only by the subject matter, scope and purpose of the legislation, and may be exercised whenever a question arises as to "the management or administration of the trust property" or "the interpretation of the trust instrument". The majority also noted (at [64]) that the procedure operates as "an exception to the Court's ordinary function of deciding disputes between competing litigants" and affords a facility for providing "private advice" to trustees although the Court is not bound to give such advice. The function of the Court in a judicial advice application is to determine what should be done in the best interests of the trust: Macedonian Orthodox Community Church St Petka Inc above; Re Estate Late Chow Cho-Poon; Application for judicial advice [2013] NSWSC 844 at [45].
6. In Equititrust Ltd (in liq) (recs apptd) (recs and mgrs apptd) v Equititrust Ltd (in liq) (recs apptd) (recs and mgrs apptd) (No 4) [2017] FCA 1133 at [7], Jagot J summarised the applicable principles as including, inter alia, that (1) the jurisdiction or power to give judicial advice is not constrained by any implications or limitations not found in the express words of the section; (2) the Court's discretion is confined only by the subject matter, scope and purpose of the legislation, and there are no implied limitations on the discretionary factors that may arise or rules governing the relative importance of such factors; (3) the judicial advice procedure is intended to be summary in character; (4) a judicial advice application is in the nature of 'private advice' and a departure from usual Court proceedings in which there are multiple, adversarial parties and a person served with documents in respect of a judicial advice application is not thereby a 'party' to the application; (5) the right to obtain judicial advice protects the trustee, but it thereby also protects the interests of the trust, by enabling the trustee to act in the interests of the trust without fear of being personally liable for costs; (6) the function of the Court in a judicial advice application is to determine what should be done in the best interests of the trust; and (7) the usual form of order is that the trustee "would be justified" in taking the relevant course of action.
7. It seems to me that Mr Weston has properly sought the relevant directions given the conflicts of duty and interest that would affect his decision whether to allow the proofs of debt. Mr Glasson also points out that, under the terms of the relevant creditors' trusts, Mr Weston, as trustee has an absolute discretion to admit claims by creditors of GEPL and GME. It seems to me, however, that Mr Weston is correct to proceed on the basis that his exercise of that discretion may also be subject to fiduciary obligations, and to seek advice from the Court in respect of the exercise of that discretion where he faces conflicts of duty and interest in that respect.
8. In determining whether to give these directions, it is not the Court's role to undertake that assessment for itself, as though it were the liquidator, or to reach the determination as to how each of the debts should be treated. In determining whether to give these directions, I have regard to the evidence of the steps taken by Mr Weston and his staff in preparing the relevant proofs of debt and the detailed analysis undertaken by Mr Elkerton in respect of the relevant proofs of debt and the documents underlying that analysis, and I am satisfied that that review process was comprehensive. I am satisfied that Mr Weston would be justified in allowing the proofs of debt in the amounts originally claimed, with the modifications indicated by Mr Elkerton that he has indicated he proposes to adopt, having regard to the process adopted in preparation of the proofs of debt; the documentary underpinning those proofs of debt, which appear to reflect the available financial information, albeit with the deficiencies that I have noted above; and the analysis undertaken by Mr Elkerton. I am satisfied that the directions sought should be made, with an amendment as to their terms. Although Mr Weston sought a declaration that he would be acting "properly" in admitting the proofs of debt in the liquidations of the relevant Companies, that direction should only be given in the common and appropriate language that Mr Weston would be justified in taking that course.
9. Mr Weston also seeks an order that the costs of this application be paid out of the liquidation of the Companies, the GEPL creditors' trust and the GME creditors' trust, as appropriate. I am satisfied that this application was properly brought to advance the interests of the winding up and in administering the relevant creditors' trusts and that the costs of this application should be costs of the liquidation of the companies and paid out of the creditors' trusts. Mr Weston will need to form a view as to how those costs are properly apportioned between the several funds from which they are paid.

Orders

1. For these reasons, I make orders in accordance with the short minutes of order initialled by me and placed in the file, in which I have amended paragraphs 1 and 2 to delete the words "will be acting properly" so that the directions are as to Mr Weston's justification in taking the specified acts.

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