Erskine v 72-74 Gordon Crescent Lane Cove Pty Ltd, in the matter of North Shore Property Developments Pty Ltd - [2018] FCA 1094 - FCA 2018 case summary — Zoe

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Erskine v 72-74 Gordon Crescent Lane Cove Pty Ltd, in the matter of North Shore Property Developments Pty Ltd

[2018] FCA 1094

Federal Court of Australia|2018-07-25|Before: Yates J

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Court

Federal Court of Australia

Decision date

2018-07-25

Before

Yates J

Source

Original judgment source is linked above.

Judgment (13 paragraphs)

[1]

Pursuant to s 588FF(3)(b) of the Corporations Act 2001 (Cth) (the Act), the time for making an application or applications in respect of North Shore Property Developments Pty Ltd (in liquidation) (the company) under s 588FF(1) of the Act be extended for a period expiring six months after the date of making this order, other than the transactions concerning the claims notified by letter dated 21 February 2017 from Veritas Advisory to Mr Eddy Samuel Haddad (Mr Haddad) in relation to alleged unreasonable director-related transactions, and by letter dated 18 April 2017 from Veritas Advisory to Mr Haddad in relation to alleged uncommercial transactions, being claims the subject of a Deed of Release and Settlement entered into between Mr Haddad, the first defendant, the company and David Iannuzzi (as then liquidator of the company).
The plaintiff pay the first defendant's costs of this application.
The plaintiff's costs of the application be costs in the liquidation of the company. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

[2]

Introduction 1 The plaintiff is the liquidator of North Shore Property Developments Pty Ltd (in liquidation) (the company). She seeks an extension of time under s 588FF(3)(b) of the Corporations Act 2001 (Cth) (the Act) to bring proceedings in respect of possible voidable transactions. 2 The relation back day is 24 December 2014. The present proceeding was commenced on 12 December 2017, before the expiration of the limitation period on 28 December 2017. 3 The company carried on a property development business. Mr John Haddad is its director, secretary and sole shareholder. On 11 February 2015, a winding up order was made against the company: In the matter of North Shore Property Developments Pty Ltd; Banq Accountants and Advisors Pty Ltd v North Shore Property Developments Pty Ltd NSD1389/2014. Mr Godfrey and Mr Iannuzzi (both of Veritas Advisory) were appointed as joint and several liquidators. Mr Godfrey died on 10 June 2015. The company was in administration for a period of time (30 November 2016 to 10 January 2017) but was returned to liquidation. Mr Iannuzzi remained as the sole liquidator. 4 On 25 August 2017, the Commissioner of Taxation filed an application seeking orders that Mr Iannuzzi cease to be liquidator of the company and that the plaintiff be appointed in his place: Commissioner of Taxation v David Nicholas Iannuzzi NSD1510/2017 (the Commissioner's proceeding). The Commissioner also sought an inquiry into Mr Iannuzzi's conduct as liquidator of the company and of other companies. On 14 September 2017, Mr Iannuzzi indicated, without admissions, that he proposed to resign as liquidator of the company. An order was thereupon made in the Commissioner's proceeding that the plaintiff be appointed as liquidator of the company pursuant to s 473A of the Act. 5 The present proceeding came before me as Commercial and Corporations Duty Judge on the day of its commencement. The plaintiff moved ex parte for various procedural orders in relation to the s 588FF(3)(b) application. At that time, I made orders joining the first, second and third defendants as parties to the proceeding. The matter came before me again on 19 December 2017 for a case management hearing, at which time I made an order joining the fourth defendant as a party to the proceeding. 6 As a consequence of the Commissioner's proceeding, the plaintiff's attention has been drawn to certain possible voidable transactions into which the company may have entered, including the sale of various apartments in a development at 72-74 Gordon Crescent, Lane Cove (the Lane Cove development or the development) to the defendants (other than the second defendant), individually. 7 Although having been joined as parties and served with, amongst other things, the originating process and the plaintiff's first affidavit in support of the 588FF(3)(b) application, the second, third and fourth defendants have not appeared and have played no active role in the proceeding. The first defendant appeared at the case management hearing on 19 December 2017 and signified its intention to oppose time being extended. At that time, I made an order that evidence in the proceeding be given by affidavits. I also ordered that, by 2 February 2018, the defendants file and serve all affidavits on which they or any of them proposed to rely. On 7 February 2018, the first defendant filed an affidavit sworn that day by Mr Eddy Haddad, its director, secretary and sole shareholder. No objection was taken to the late filing and service of that affidavit. Mr Eddy Haddad is Mr John Haddad's brother.

[3]

The Reason for the application 8 The following facts emerge from an affidavit made by the plaintiff on 12 December 2017 (the plaintiff's first affidavit). 9 The plaintiff has received very little information concerning investigations undertaken with respect to potential voidable transactions since the date of her appointment. She has become aware of possible voidable transactions because of the allegations made in the Commissioner's proceeding. She has only had access to Mr Iannuzzi's liquidation files since 3 October 2017. Her preliminary review of those files has led her to conclude that Mr Iannuzzi's investigations into potential voidable transactions had not extended beyond preliminary steps. (As I will come to explain, the evidence now available shows an apparent investigation into, and the subsequent resolution of, potential claims involving the first defendant.) Further, the books and records of the company, within the liquidation files, appear to be incomplete. There are no funds in the company and she has only secured a limited indemnity for her remuneration and reasonable expenses in relation to certain preliminary steps. On the basis of the limited information provided to her to date, she has formed the opinion that there is a real and not merely speculative prospect that transactions in relation to the Lane Cove development are voidable transactions. Further, she is concerned that there may be other transactions which have not yet been identified and which might also be voidable transactions under the Act. 10 In short, the plaintiff's application for an extension of time is based on her recent appointment and her inability to properly investigate the affairs of the company in the limited time available, on the limited information she has, and with the limited financial resources available to her, in circumstances where serious allegations have been made about the conduct of the former liquidator in the liquidation, and where there is some information (which I will discuss below) which gives rise for concern that voidable transactions have been entered into. 11 The plaintiff acknowledges that, prior to determining whether to bring any application under s 588FF(1) of the Act, she would need to obtain funding; identify, obtain and review further books and records of the company; conduct a more detailed investigation into the identified potential voidable transactions, including by conducting public examinations and obtaining valuations in relation to the properties in question; and identify any other potentially voidable transactions.

[4]

Relevant principles 12 Section 588FF(1) of the Act provides that where, on the application of a company's liquidator, a court is satisfied that a transaction is voidable because of s 588FE of the Act, the court can make certain orders. However, under s 588FF(3), the application may only be made during the period beginning on the relation-back day, and ending three years after the relation-back day or 12 months after the first appointment of a liquidator in relation to the winding up of the company, whichever is later. This period may be extended by the Court, provided the extension application is made by the liquidator during the aforementioned period: s 588FF(3)(b). 13 The approach to exercising the discretion to extend time under s 588FF(3)(b) is not in contest. It has been formulated in the case law. The relevant factors to be considered include the explanation for the delay in bringing the proceedings; the merits of such proceedings; and whether the likely actual prejudice resulting from an extension of time is sufficiently substantial to outweigh the case for the extension. 14 As to the second of these factors, the Court is only required to form a preliminary view of the merits of the proposed proceedings to gain an appreciation as to whether they are so devoid of prospects that it would be unfair, by granting an extension, to expose the prospective defendant(s) to the continuing prospect of suit. Where, however, the liquidator's purpose in seeking an extension is to put himself or herself into a position where he or she can properly decide whether or not to bring proceedings, a preliminary enquiry into the merits of any consequent proceeding may not always be necessary: Green v Chiswell Furniture Pty Ltd (in liq) [1999] NSWSC 608 (Green) at [15]. In Green Austin J remarked (at [16]) that there is a risk in some cases that a preliminary enquiry into the merits of a prospective proceeding may impose an unnecessary burden on both the liquidator and the Court, especially in a case where the circumstances appear to give rise to complex or disputed questions of fact and law and the evidence before the Court is manifestly incomplete. 15 Generally speaking, where the liquidator has made a deliberate commercial decision not to progress investigations at an earlier stage, any inability to pursue a claim outside the limitation period will be considered to have been "self-inflicted", and a significant factor counting against extending time: Re Clarecastle Pty Ltd (in liq) [2011] NSWSC 857; (2011) 255 FLR 435 at [23] and [141]; Arthur Andersen v Buzzle Operations Pty Ltd [2009] NSWSC 104 at [93]. 16 Normally, an extension will be granted in terms which identify the impugned transaction(s). However, because of lack of information, this is not always possible. It is now not in doubt that the Court can make a so-called "shelf order", namely an order for an extension in blanket terms which does not identify the relevant defendants and/or transactions. In Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2015] HCA 10; (2015) 254 CLR 489 at [24], the Court said: [24] The function of s 588FF(3)(b), which reflects its immediate purpose, is to confer a discretion on the court to mitigate, in an appropriate case, the rigours of the time limits imposed by para (a). That is a discretion to be exercised having regard to the scope and purposes of Pt 5.7B, characterised in the Harmer Report as the continuing "policy" which underpinned its recommendations. That policy included the avoidance of transactions by which an insolvent company has disposed of property in circumstances that are regarded by the legislature as unfair to the general body of unsecured creditors. It is, however, a policy qualified in its application by the requirement that liquidators be placed under a reasonable time limitation for taking action under the voidable transaction provisions. A purpose of that qualification, expressed in "clear and emphatic" terms, is to favour certainty for those who have entered into transactions with the company during the periods in respect of which designated transactions may be voidable. There is, however, no independent basis for the assertion that any extension of time which does not identify a particular transaction or transactions must be an unreasonable prolongation of uncertainty militating against a construction which would allow such an order to be made. The section provides for the exercise of discretion by the court. Questions of what is a reasonable or an unreasonable prolongation of uncertainty and the scope of such uncertainty are more appropriately considered case-by-case in the exercise of judicial discretion than globally in judicial interpretation of the provision. (footnote omitted)

[5]

The evidence 17 As I have noted, Mr Eddy Haddad (who is the director, secretary and sole shareholder of the first defendant) and Mr John Haddad (who is the director, secretary and sole shareholder of the company) are brothers. Up to 10 July 2016, the registered office of the first defendant was provided by the second defendant, who acted as accountant for the company. 18 Based substantially on allegations made in the Commissioner's proceeding, and certain documents available to her, the plaintiff is concerned that four apartments in the Lane Cove development were sold to the first defendant at below market value. 19 In his affidavit sworn on 7 February 2018 (Mr Haddad's first affidavit), Mr Eddy Haddad gave an account of the sale of the four apartments to the first defendant, as well as of the sale of four garage spaces in the development. His evidence is as follows. 20 In early 2012, the Haddad brothers had a conversation in which Mr Eddy Haddad told Mr John Haddad that because the apartments on the top floor of the Lane Cove development had defects and the works were incomplete, "they won't sell". He offered to buy them for $400,000 each. Also, at around that time, Mr John Haddad told Mr Eddy Haddad that he was under financial stress and "needed to sell off the apartments to meet the bank's deadlines". 21 On 3 May 2012, the company and Mr Eddy Haddad entered into a Deed of Call Option under which, for the option fee of $320,000, Mr Haddad acquired the option to purchase four apartments on levels 2, 5, 7 and 9 of the development. The units on levels 5, 7 and 9 were on the top floors of their respective blocks in the development. 22 On 4 March 2014, the first defendant was incorporated for the purpose of holding assets. In about April 2014, Mr Eddy Haddad "nominated" the first defendant to exercise the option he had been granted. 23 On about 17 April 2014, the company and the first defendant entered into contracts for the sale of each apartment for the purchase price of $400,000 each. Further, on 1 May 2014, the company and the first defendant entered into a contract for the sale of four car spaces in the development for the total purchase price of $20,000. 24 In about June 2014, settlement of the contracts took place and title to the apartments and car spaces were transferred to the first defendant. After the transfer, Mr Eddy Haddad undertook rectification work to fix internal leaks in the apartments. There were other defects which he did not rectify. The apartments and three of the car spaces were subsequently sold by the first defendant: On 21 September 2015, one of the car spaces was sold for $10,000. On 2 October 2015, another car space was sold for $10,000. On 18 February 2017, the apartment on Level 2 was sold for $940,000. On 1 April 2017, the apartment on Level 5 was sold for $1,149,000. On 18 October 2017, the apartment on Level 9 was sold for $900,000. On 18 November 2017, the apartment on Level 7 was sold for $1,060,000. 25 Details of the sale of the third car space were not given in Mr Haddad's first affidavit. 26 On 21 February 2017, Mr Eddy Haddad received a letter from Mr Iannuzzi demanding payment of $322,508, said to have been received by Mr Haddad as an unreasonable director -related transaction. Mr Haddad disputed the claim but, through his lawyers, expressed his preparedness to consider a resolution of the matter without litigation. 27 On 18 April 2017, Mr Eddy Haddad received a letter from Mr Iannuzzi demanding payment of the sum of $7,550,000 said to have been the value of uncommercial transactions entered into between the company and the first defendant in relation to the sale of the four apartments and their related car spaces (these are not the four car spaces acquired under the 1 May 2014 contract). Mr Haddad disputed the claim but, once again, through his lawyers expressed his preparedness to consider a resolution of the matter without litigation. 28 In responding to this claim, Mr Haddad's lawyers pointed out that Mr Iannuzzi had incorrectly treated the car spaces related to the four apartments as apartments in their own right and attributed values to them accordingly. They also said that Mr Iannuzzi had not taken into account the fact that Mr Haddad had been required to undertake rectification work of the apartments at his own cost. The lawyers also said that the Owners' Corporation at the Lane Cove development had made a claim for approximately $2 million in relation to defective building works. The implication of that statement is not made clear in the letter. In any event, Mr Haddad's lawyers argued that the four apartments had been purchased by the first defendant at fair value at the time. 29 Following settlement negotiations, Mr Eddy Haddad and the first defendant entered into a Deed of Release and Settlement with the company and Mr Iannuzzi as liquidator. In consideration of the payment of $32,500, the company and Mr Iannuzzi, as liquidator, unconditionally released Mr Eddy Haddad and the first defendant from the claims that had been made. 30 It is convenient to point out at this stage that the propriety of Mr Iannuzzi entering into the settlement, and in granting the releases in relation to the claims made against Mr Eddy Haddad and the first defendant, have not been called into question in the Commissioner's proceeding. Further, the fact that there had been a settlement of the claims was not known by the plaintiff at the time she commenced the present proceeding. She only became aware of that fact from Mr Haddad's first affidavit. A copy of Veritas Advisory's File Note - Decision Sheet of the settlement discussions with Mr Haddad's and the first defendant's lawyers is in evidence. It contains a summary of the reasons for compromising the claims that had been made. 31 Also in evidence is a copy of a bundle of documents provided to Veritas Advisory on 22 June 2017 to advance settlement discussions and to demonstrate the true value of the apartments at the time they were sold to the first defendant. I note for later reference that one of these documents is a complimentary "off the plan" sales appraisal by a real estate agent expressing a view as to the then current sale value of the four apartments referred to in the Deed of Call Option dated 3 May 2012. The appraisal states: These prices reflect the current market condition within the next 60 days based on the option agreement supplied by Eddy Haddad. 32 Curiously, however, the appraisal bears the date 6 February 2012, approximately three months before the option was purportedly entered into. 33 So far as relevant to the present matter, the Veritas Advisory File Note - Decision Sheet records that a conclusion had been reached within Veritas Advisory that, following discussions with Mr Haddad's and the first defendant's lawyers, it was unlikely that there was an uncommercial transaction claim against the first defendant in respect of the sale of the four apartments at an alleged undervalue. 34 The plaintiff inquired into Mr Haddad's version of events and, in a second affidavit made on 8 March 2018 (the plaintiff's second affidavit), questioned its correctness in a number of respects. Principally, the plaintiff's inquiries indicated to her that the construction at the Lane Cove development had not occurred in early 2012, when Mr Haddad said that he had discussed purchase of the apartments with his brother, or before the call option was entered into on 3 May 2012. 35 The plaintiff also produced a valuation report dated 10 September 2014 (approximately three months after the transfer of the properties to the first defendant) which valued: the apartment on Level 2 at $970,000; the apartment on Level 5 at $970,000; the apartment on Level 7 at $990,000; and the apartment on Level 9 at $850,000. 36 This valuation report was admitted on a limited basis as evidence of the fact that a valuation had been made, but not as evidence of the underlying value of the properties at the time. In other words, it was treated as part of the information now known by the plaintiff. 37 Mr Haddad sought to respond to the plaintiff's second affidavit by filing and serving another affidavit (Mr Haddad's second affidavit). I did not allow the first defendant to rely on this affidavit because it was filed without leave and well outside the time that had been ordered for filing affidavit evidence in support of the opposition to the present application. However, at the hearing, the plaintiff tendered various paragraphs of Mr Haddad's second affidavit, with a view to establishing inconsistencies in the account of events previously given by him. 38 In Mr Haddad's second affidavit he said that, in his original account, he had confused two conversations and treated them as one. He said that, in early April 2012, he had a conversation with his brother in which he agreed to advance $320,000 towards the Lane Cove development. This sum was to be treated as both an option fee in respect of an option to purchase four apartments in the Lane Cove development and as part payment of the purchase price for the four apartments. This arrangement was documented in Heads of Agreement signed by the brothers on 17 April 2012. Mr Haddad said that, on 3 May 2012, he obtained $425,000 from the Bank of Queensland which was paid to the company as the option fee ($320,000) and as a loan ($105,000). It seems that other loans to the company were made by Mr Haddad (for example, $135,000 on 11 June 2012). 39 Mr Haddad said that in late February/early March 2014 he had another conversation with his brother regarding apartments on the top floors of the development, where the building works were incomplete and defective. These were the top floor apartments being offered to the first defendant. This seems to have been a matter of contention at the time because Mr John Haddad expressed the view that, despite their present condition, the apartments would be worth more than $400,000 each, whereas, at the time, Mr Eddy Haddad expressed the view that the apartments being offered were "completely defective and uninhabitable" and not worth more than $400,000. Mr John Haddad would not give a further reduction in the purchase price (it seems, from $400,000 for each apartment) and told Mr Eddy Haddad that he could "take it or leave it".

[6]

The plaintiff's submissions 40 Given the circumstances in which this application is brought, the plaintiff has made clear that she is not in a position to do more than point to allegations made in the Commissioner's proceeding, point to arguably conflicting evidence given by Mr Eddy Haddad, and refer to the limited valuation evidence she has available to her, to argue that the transactions involving the first defendant would appear to warrant further investigation. 41 The plaintiff points to the fact that, although the four apartments were transferred to the first defendant for a total consideration of $1.6 million, a subsequent but nevertheless relatively contemporaneous valuation opined that their total value was $3.78 million. The plaintiff also draws attention to the fact that Mr Eddy Haddad's explanation of why the total consideration for the sale was $1.6 million as given in his first affidavit does not appear to stand up because, on her enquiries, the Lane Cove Development had not even commenced when, according to Mr Haddad, the relevant conversation with his brother took place: see [20] above. Mr Haddad sought to repair this incongruity in his second affidavit: see [38]-[39] above. 42 The plaintiff submits that, on the present evidence, there is a question whether the four apartments were sold at an undervalue and that the conflicting versions of events given by Mr Haddad as to the circumstances in which the apartments were acquired for $1.6 million highlights why further investigation of a potential claim by the plaintiff is desirable. The plaintiff submits that it cannot be said that a potential claim under s 588FF(1) is so devoid of merit that it could not succeed and that she, as liquidator, ought not be granted further time to carry out investigations into the transactions. 43 Having said that, the plaintiff acknowledges that the first defendant has been released from claims which the company or its liquidator might have against it and that this release stands as a bar to her commencing any s 588FF(1) proceeding she might wish to bring in relation to the four apartments, unless the Deed of Release and Settlement can be set aside. In her submissions, the plaintiff identifies the theoretical bases on which a deed of release might be set aside. However, she does not identify a specific basis on which this might be done in the present case. The plaintiff has not commenced proceedings, or even foreshadowed that she will bring proceedings, to set aside the Deed of Release and Settlement. All that she can say is that, after further investigation, such proceedings might be a possibility but that, at the present time, "it is inappropriate to speculate" on what grounds might exist to so move. 44 The plaintiff also submits that, beyond the transactions involving the four apartments, there might be other transactions involving the first defendant which emerge and give rise to potential claims that, presently, are not known to her. The plaintiff submits that it is not inconceivable that such claims might exist, given the fraternal relationship of the principals behind the two companies. 45 The plaintiff submits that, given the unusual circumstances in which she came to be appointed as liquidator, and given the limited time and financial resources available to her, it would be highly prejudicial to creditors of the company to (in effect) foreclose the opportunity for her to pursue claims which, potentially, the former liquidator could have pursued, but failed to do so. The plaintiff accepts that, by its nature, an extension under s 588FF(3)(b) will prejudicially affect the first defendant. She submits, however, that this prejudice does not significantly outweigh the prejudice to the creditors in not affording her additional time to carry out her investigations with a view to possibly commencing a s 588FF(1) proceeding. She advances two reasons. First, the extension of time she seeks is relatively brief (six months). Secondly, she submits that the sale transactions involving the first defendant are highly questionable, and involve comparatively large sums of money.

[7]

The first defendant's submissions 46 The first defendant submits that the Deed of Release and Settlement stands as an insurmountable obstacle to the plaintiff succeeding in the present application. The first defendant submits that although the plaintiff, in reliance on the Commissioner's proceeding, calls into question aspects of Mr Iannuzzi's conduct as liquidator, one matter that is not queried is the propriety of Mr Iannuzzi and the company entering into the Deed of Release and Settlement. The first defendant submits that the evidence presently before the Court shows that Mr Iannuzzi did raise and consider whether the first defendant had acquired the four apartments at an undervalue. However, after an investigation, in which Mr Iannuzzi was assisted by various employees of Veritas Advisory, and provided with documentation by the first defendant's solicitors, it was concluded that this was not the case and that the claim that had been advanced in that regard should be compromised. The first defendant submits that it does not matter that the plaintiff might have arrived at a different commercial judgment. The first defendant notes the plaintiff's acceptance that she would need to set aside the Deed of Release and Settlement in order to bring a claim under s 588FF(1), but submits that no grounds for doing so have been advanced or demonstrated on the evidence now before the Court. Thus, the first defendant submits, the possible claim foreshadowed by the plaintiff is devoid of any prospects of success. 47 The first defendant also submits that the plaintiff's concerns about the transactions are, in any event, "vague or constructed from minor discrepancies and irrelevancies". It submits that even absent the obstacle of the Deed of Release and Settlement, the plaintiff's claims are without merit. 48 On the question of prejudice, the first defendant submits that the prejudice it would suffer if an extension of time were to be granted is real and significant. First, it has already acted to its detriment by compromising the claim brought by Mr Iannuzzi and paying the settlement sum of $32,500. Relatedly, it has also incurred legal costs in reaching that compromise. 49 Secondly, given the period of time that has elapsed, it would now be difficult for it to prove the fact and fair value of the rectification work it undertook on the apartments, which are now owned by third parties and not accessible for inspection. 50 Thirdly, given the period of time that has elapsed, the reasonableness of the consideration it paid for the four apartments, in their state and condition in 2014, would be difficult to establish now. 51 Fourthly, the first defendant submits that these aspects of prejudice must be balanced against the fact that the plaintiff has no present funding either to bring a s 588FF(1) claim or to set aside the Deed of Release and Settlement. 52 On the question of delay, the first defendant submits that, even though the plaintiff was only appointed as liquidator on 18 September 2017, some three months before the end of the expiration period, she has not moved with alacrity. Further, the first defendant submits that the Court should not confine its attention to the first plaintiff's conduct alone. It directs attention to the fact that Mr Iannuzzi had commenced and concluded his investigations, considered the merits of a claim against the first defendant with all the relevant information available to him, and compromised that claim by entering into the Deed of Release and Settlement. The first defendant also directs attention to the fact that documents subpoenaed by the plaintiff reveal the investigations and communications that ultimately led to that compromise. The first defendant submits that the issue of delay needs to be considered from an "overview perspective" and that, considered from that perspective, the delay in making the present application has been substantial and prejudicial. The first defendant submits that this delay can only be explained by the fact that the prior liquidator properly formed the view that any claim against the first defendant ought to be settled.

Erskine v 72-74 Gordon Crescent Lane Cove Pty Ltd, in the matter of North Shore Property Developments Pty Ltd

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