FAI General Insurance Co Ltd v FAI Car Owners Mutual Insurance Co Pty Ltd

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1799 of 2013

IN THE MATTER OF HENRY WALKER ELTIN GROUP LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT) AND THE CORPORATIONS ACT

HENRY WALKER ELTIN GROUP LIMITED (ACN 007 710 483) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

BULUMBA PTY LIMITED (ACN 008 060 240) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

SIMON ENGINEERING (AUSTRALIA) HOLDINGS PTY LTD (ACN 000 142 165) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

SIMON ENGINEERING (AUSTRALIA) PTY LIMITED (ACN 000 117 000) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

JUDGE: YATES J DATE: 27 SEPTEMBER 2013 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 In this proceeding, the plaintiffs seek orders that concern the termination of deeds of company arrangement and the return of surplus funds to shareholders of a listed public company. 2 The first, second and third plaintiffs (the deed administrators) are the administrators of two deeds of company arrangement of particular relevance in this proceeding. The first is a deed of company arrangement made on 22 March 2006 to which the fourth plaintiff (HWE) and other related companies are parties (the Mining Pool deed). The second is a deed of company arrangement made on 23 November 2005 to which the seventh plaintiff (Bulumba), the eighth plaintiff (SEA Holdings) and the ninth plaintiff (SEA) and other related companies are parties (the Non-Core deed). 3 The fifth plaintiff, Hamish Gidley-Baird, and the sixth plaintiff, Anthony Haraldson, are the remaining directors of HWE.

Background 4 HWE was placed into voluntary administration by resolution of its directors on 31 January 2005. At the time, HWE had five directors, including Mr Gidley-Baird and Mr Haraldson. The other directors ceased holding office in 2005. 5 HWE is listed on the Australian Securities Exchange (the ASX). Its listing was suspended on the commencement of its external administration. Its listing remains in suspension. Nevertheless, the deed administrators have continued to make disclosures to HWE's shareholders through the ASX. 6 HWE's share register discloses that it has 218,317,156 issued shares. All shares are fully paid. There are 11,062 shareholders. The top 20 shareholders include corporate investors and custodians who hold 60,543,099 shares comprising 27.73% of the issued shares. The current directors, and the former directors of HWE and related parties, together own or control 11.8% of the issued shares. 7 At the time of commencement of its external administration, HWE's main business was mining. It had several other, non-core businesses. 8 HWE is the ultimate holding company of a large number of subsidiary companies. Many of these subsidiary companies, also parties to one of the two deeds the subject of this proceeding or to other deeds of company arrangement, have been deregistered or are in the process of being deregistered. The remaining subsidiary companies, whose deregistration has not been sought, are Bulumba, SEA Holdings and SEA. 9 The administrations of HWE and its subsidiary companies, which culminated in the various deeds of company arrangement, have occupied some eight years. The administrations have been complex. Substantial business assets and operations have been realised across multiple jurisdictions within and outside Australia, with considerable success. The deed administrators: have paid approximately $298.75 million to admitted creditors; have paid approximately $36.95 million on account of all statutory interest entitlements, to all admitted creditors; have paid $461,690.57 in full payment of contractual interest in accordance with the Mining Pool deed, to the creditors so entitled; hold approximately $34.097 million, before costs, in relation to the Mining Pool deed (the Mining Pool fund); and hold approximately $4.218 million, before costs, in relation to the Non-Core deed (the Non-Core fund). The sale of the SEA business and the collection of its debtors represented not substantially less than one-third of the contribution to the pooled funds referable to the Non-Core deed. 10 The position with respect to each corporate plaintiff is as follows: Since the sale of its business assets and operations, HWE has not traded and has no management or infrastructure. It is solvent. All claims of creditors have been satisfied. The deed administrators hold substantial surplus funds (represented by the Mining Pool fund) to be returned to HWE's shareholders. Bulumba has no creditors, no directors and no employees. It is solvent. Its sole remaining asset is an interest in a claim against the City of Belmont, Western Australia, relating to the development of certain property. The claim is being prosecuted by others. On present indications, Bulumba may receive by way of settlement approximately $100,000. However, that claim may not be resolved until 2014. SEA Holdings has no assets other than the issued shares in SEA. It has no creditors, no directors and no employees. It is solvent. SEA has no assets, no directors and no employees. It is solvent. Recently, a claim has been made against SEA for indemnity under the Law Reform (Contributory Negligence & Tortfeasors' Contribution) Act 1947 (WA). The claim concerns a former employee of SEA who was injured on 16 January 2004. SEA, through its insurer, Allianz Australia Limited (Allianz), settled a claim by this employee in 2007. The employee has now made a claim against Newcrest Mining Ltd (Newcrest) in respect of the same incident. Newcrest has sought indemnity against SEA and joined it as a party to the proceeding. Allianz has confirmed through its solicitors that, in the event that Newcrest is found liable to pay damages to the employee, and SEA is found to be a joint tortfeasor and liable to indemnify Newcrest, then Allianz will indemnify SEA for that liability. Further, Allianz has instructed its solicitors to conduct the proceeding on behalf of SEA, and has stated that it will meet the associated legal costs. 11 The Non-Core deed provides that, once all claims thereunder have been finalised, any balance is to be applied in respect of the Mining Pool deed. Thereafter, all creditors of the Mining Pool deed and the Non-Core deed are entitled to participate in any further distributions on the terms of the Mining Pool deed. However, as events have transpired, all admitted claims against HWE and the remaining subsidiaries have been paid in full, save for the late contingent claim for indemnity asserted against SEA. As I have noted, the only relevant remaining asset to be collected is Bulumba's expected successful claim against the City of Belmont. 12 The remaining directors do not constitute a board of directors in conformity with HWE's Constitution or s 201A(2) of the Corporations Act 2001 (Cth) (the Act). Nevertheless, they have canvassed potential opportunities for HWE, including a possible recapitalisation, the investment of the surplus funds represented by the Mining Pool fund and the Non-Core fund and a potential relisting of HWE. While a recapitalisation of HWE and the acquisition of a new business may, in certain circumstances, have been a commercial option for HWE, Mr Gidley-Baird and Mr Haraldson, as the remaining directors, have concluded that this option should not be recommended to HWE's shareholders. Their reasons include the following. 13 First, HWE has no staff, management, resources or infrastructure to administer and operate any business, let alone a new venture. It does not even have a properly-constituted board of directors. 14 Secondly, on the basis of a number of informal meetings he has had with some of HWE's shareholders, Mr Gidley-Baird has concluded that, in general, the attitude of shareholders and related parties is against recapitalisation in any event. 15 A significant proportion of HWE's shareholders live in the Northern Territory, including Frazer Henry, one of HWE's directors at the time it entered external administration. Mr Henry is a significant shareholder in HWE. He holds or controls 7,885,492 shares, representing approximately 3.6% of HWE's issued shares. In about August 2012 and again in about October 2012, Mr Gidley-Baird held meetings in Darwin and by telephone with Mr Henry and other shareholders. Mr Henry and these shareholders hold over 26 million shares representing approximately 11.9% of HWE's issued capital. Mr Gidley-Baird said that the preference of these shareholders was for a return of funds by way of HWE's liquidation. 16 In addition, Mr Gidley-Baird made direct inquiries with other substantial shareholders, representing approximately 7.6% of HWE's issued shares. His evidence was that he has been informed by the representatives of these shareholders that none would be a long-term investor in HWE should there be any recapitalisation. It was Mr Gidley-Baird's understanding that these shareholders would prefer a return of funds by way of HWE's liquidation. 17 Thirdly, HWE is subject to the requirements of Pt 2M.3 of the Act in relation to the preparation and lodgment of audited financial reports. Largely as a consequence of its external administration, HWE has not prepared or lodged these reports since 2004. The deed administrators were successful in obtaining, on HWE's behalf, exemptions from compliance with Pt 2M.3 from the Australian Securities and Investments Commission (ASIC) for some financial years early in the administrations. More recently, the deed administrators sought exemptions for the financial years ended 30 June 2009, 30 June 2010, 30 June 2011 and 30 June 2012. ASIC has declined to grant the relief principally, it would seem, because it was sought retrospectively. ASIC is of the view that it does not have the power to grant retrospective exemptions. Therefore, at the present time, and certainly upon the effectuation of the Mining Pool deed, it would be necessary for HWE to prepare and lodge all outstanding audited financial reports, as required by Pt 2M.3 of the Act. The evidence indicates that the cost involved in preparing such reports would be approximately $961,350 including GST. The remaining directors are of the opinion that these costs far outweigh any benefit that could be gained by selling HWE as a listed shell or seeking to recapitalise it. 18 As a company in liquidation is not required to comply with Pt 2M.3 (see ASIC Class Order CO 03/392), the remaining directors turned to consider whether HWE should be wound up in a members' voluntary winding up. The deed administrators have investigated the costs associated with convening and holding a meeting of HWE's 11,062 shareholders. The estimated cost of such a meeting would be approximately $40,000. This cost can be avoided if HWE is wound up by the Court. 19 It is convenient to note at this juncture that the deed administrators have caused income tax returns to be lodged in respect of HWE on a consolidated basis since the commencement of HWE's external administration, up to and including the 2012 tax year. Instructions have also been given to accountants to prepare the tax return for the 2013 tax year. The Australian Taxation Office has conducted a review of HWE's tax affairs, and those of its related entities, for the 2009 to 2011 tax years. That review did not identify any material tax risks that would require the Australian Taxation Office to look further into the group's tax affairs. 20 Mr Gidley-Baird and Mr Haraldson are of the view that HWE should be wound up. Given the costs of convening and holding meetings of HWE's shareholders, it is their strong desire that HWE be wound up by the Court and that the deed administrators be appointed as liquidators. In this latter regard, Mr Gidley-Baird pointed to the fact that the deed administrators have intimate knowledge of HWE's history, prior businesses and operations, structure and share register. They already hold the Mining Pool fund and the Non-Core fund. 21 The deed administrators have prepared an estimate of the return to HWE's shareholders in a winding up. Subject to remaining costs and expenses, and the claim made against SEA, HWE's shareholders could expect to receive by way of distribution 15 to 17 cents per share.

The plaintiffs' proposals 22 In all these circumstances, the plaintiffs propose that: pursuant to s 445D(1)(g) of the Act, the Mining Pool deed and the Non-Core deed be terminated, without affecting their prior operation; pursuant to s 461(1)(k) of the Act, the fourth, seventh, eighth and ninth plaintiffs be wound up; pursuant to s 532 of the Act, leave be granted to the first and second plaintiffs to be appointed as liquidators of the fourth, seventh, eighth and ninth plaintiffs; and pursuant to s 488(2) of the Act, special leave be granted to distribute the surplus funds to shareholders.

Procedural matters 23 The following procedural matters should be noted: Notice in accordance with r 5.6 of the Federal Court (Corporations) Rules 2000 (the Rules) has been published, giving notice of the application for winding up of the corporate plaintiffs. Notice substantially in accordance with r 7.9 of the Rules has been published, giving notice of the application for leave to distribute the surplus funds in relation to each corporate plaintiff. Notice of the application for a winding up order in respect of each corporate plaintiff and notice of the application for leave to distribute a surplus for each corporate plaintiff has been lodged with ASIC. The first and second plaintiffs have consented in writing to act as the liquidators of the fourth, seventh, eighth and ninth plaintiffs. On 3 September 2013, the solicitors for the deed administrators wrote to ASIC giving notice of the proceeding and serving the originating process and then supporting affidavits. On 9 September 2013, notice was distributed to HWE's shareholders informing them of the application to wind up HWE and to seek leave to distribute a surplus. On 16 September 2013, the solicitors for the deed administrators wrote to the solicitors acting for Newcrest in respect of the claim made against SEA, giving notice of the proceeding. 24 As a result of these steps: ASIC advised that it did not propose to intervene in the proceeding. It has expressed the view that the matter is one properly left for the determination of the Court. As at 17 September 2013, no shareholder of HWE had contacted the deed administrators or otherwise responded to the notification given to them of the proceeding. At the time of the hearing on 20 September 2013, no advice had been received from the solicitors for Newcrest as to its attitude to the proceeding.

Consideration 25 Subject to one matter discussed below, I am satisfied that it is appropriate to grant relief giving effect to the plaintiffs' proposal. 26 HWE has an incompletely-constituted board of directors, no staff and no management, resources or infrastructure to administer and operate its affairs, beyond that presently provided by the deed administrators. Importantly, it has no business. All creditors of HWE, Bulumba, SEA Holdings and SEA have been paid in full, save in relation to the recent claim made against SEA. Even then, the evidence before me is that its insurer, Allianz, has taken over the defence of that claim and has signified that it will provide indemnity should any liability in SEA in respect of that claim be established. 27 There are substantial surplus funds, represented by the Mining Pool fund and the Non-Core fund, which should be returned to HWE's shareholders. I am satisfied that the implementation of the plaintiffs' proposal is the most cost-effective and efficient means of achieving that outcome. A seamless transition from the administration of the Mining Pool deed and the Non-Core deed to the distribution of the Mining Pool fund and the Non-Core fund is desirable and can be achieved by terminating each deed under s 445D(1)(g) of the Act rather than under its terms, and proceeding immediately to a court-ordered winding up. 28 I am satisfied that, in the circumstances in which the corporate plaintiffs find themselves, it is just and equitable that each be wound up. In my view, it is plainly desirable that the first and second plaintiffs, as two of the deed administrators, be appointed as liquidators. I am unable to see, in the present case, any conflict between the interests of the first and second plaintiffs as deed administrators and their duties as liquidators to administer the winding up of the corporate plaintiffs. The substantial task in each winding up will be the distribution of the surplus. I am satisfied, therefore, that leave under s 532(2) of the Act should be granted. 29 I am fortified in these views by the fact that no interested person has come forward to oppose that outcome. The evidence, although somewhat sketchy, indicates that shareholders holding a not insubstantial percentage of HWE's issued shares appear to support that course. ASIC does not oppose it. 30 I turn to consider the question of whether special leave should be granted to the first and second plaintiffs, in the capacity of liquidators, to distribute the surplus available to each corporate plaintiff on a winding up. 31 In a court-ordered winding up, the Court must adjust the rights of the contributories among themselves and distribute the surplus among the persons entitled to it: s 485(2) of the Act. However, a liquidator may distribute the surplus with the Court's special leave: s 488(2). In the present context, "special leave" simply means that a special application must be made to the Court rather than the matter being dealt with as part and parcel of some other administrative procedure: Re D S Millard & Son Pty Ltd (1997) 24 ACSR 71 at 72. In FAI General Insurance Co Ltd v FAI Car Owners Mutual Insurance Co Pty Ltd (2009) 262 ALR 552 at [26], Barrett J observed: Section 488(2) aims to instil in a liquidator a sense of care to ensure that all steps necessary to verify that a surplus in truth exists have been duly taken and that members' entitlements have been ascertained. It is for this reason that the liquidator must approach the court, by way of application specially made, to obtain permission to distribute … 32 There is no doubt that, in the present case, a surplus will exist. There is also no doubt about members' entitlements. The surplus in relation to each of the remaining subsidiaries will be distributed to HWE. The surplus in relation to HWE will be distributed to each of its shareholders according to the numbers of shares held by the particular shareholder. HWE's issued shares are all of the same class and are fully paid. The distribution will be in the form of cash. 33 There is a question whether special leave should be granted to distribute the surplus in relation to SEA given the recent claim made against it. The fact that Allianz has taken over the defence of the claim and signified that it will indemnify SEA suggests that there should be no real impediment in granting that leave. I have been informed, however, that, as a practical matter, it is envisaged that there will be at least two distributions to HWE's shareholders. That being the case, the more prudent course is to decline special leave in respect of SEA at the present time. That application can be renewed at a later time. The only real consequence of declining special leave now is one of timing: shareholders will receive a somewhat smaller distribution in the short term. 34 Given the possibility that special leave might not be granted in respect of SEA, a direction under s 479(3) of the Act has been sought. In light of the fact that the sale of the SEA business and the collection of its debtors represented a sum not substantially less than one-third of the contributions to the pooled funds referable to the Non-Core deed, I am satisfied that it is appropriate to direct that the liquidators would be justified in treating the Non-Core fund on the basis that each of Bulumba, SEA Holdings and SEA is entitled to no more than one-third of those funds. 35 Otherwise, I am satisfied that special leave should be granted to the first and second plaintiffs, as liquidators of HWE, to distribute the surplus to contributories of HWE and, as liquidators of Bulumba and SEA Holdings, to distribute the surplus in respect of those companies to HWE or to contributories of HWE. 36 Regulation 5.6.71(1) of the Corporation Regulations 2001 (Cth) requires that a schedule in accordance with Form 551 be annexed to an order in a winding up by the Court authorising the liquidator to distribute any surplus to a person entitled to it, unless the Court otherwise directs. As I have noted, the distribution of the surplus in relation to Bulumba and SEA Holdings will go to HWE. That is a simple and straightforward matter. No useful purpose would be served by requiring compliance with reg 5.6.71(1) in that regard. As I have noted, the distribution in relation to HWE will be to its shareholders based on the number of issued shares held. HWE's shareholders are numerous. Compliance with reg 5.6.71(1) would, in its case, result in a form that is, to say the least, unwieldy. It would comprise some hundreds of pages with no useful purpose. I am satisfied, therefore, that it is appropriate to dispense with compliance with reg 5.6.71(1).

Disposition 37 Subject to the observations I have made above, orders should be made, substantially as sought by the plaintiffs. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.