First Plaintiff v Second Plaintiff

2 By Originating Process dated 5 September 2018 Crisp seeks declaratory and other relief, including judicial advice to the effect that as liquidator of MCP he is justified in accepting a proof of debt submitted by DPA of which he is liquidator. The proof of debt submitted by DPA is itself based on a number of proofs of debt submitted by creditors of DPA. In view of the arrangements between DPA and MCP (and others), which are not in dispute, Crisp, as liquidator of DPA, submits that each proof of debt submitted to him as liquidator of DPA is a valid debt and he has, or proposes to accept them. This is the basis of his proof of debt submitted to MCP.

3 The Trimble interested parties do not challenge the ability on the part of DPA to submit a proper proof of debt to MCP. However, they challenge various claims and in particular the amounts of the claims as accepted by Crisp as liquidator of DPA.

4 In appointing Crisp as liquidator of DPA, on the same day that he was appointed liquidator of MCP, Randall AsJ said that if Crisp perceived any conflict of interest in acting as liquidator of both MCP and DPA he should either resign from one or other appointment or apply to court for directions. Although Crisp does not consider that he is in any conflict of interest position, he has made this application under s 90-15 of the Insolvency Practice Schedule (Corporations) being Schedule 2 to the Corporations Act 2001 (Cth).

5 In addition to disputing some of the claims, the interested parties, associated with John Trimble (the Trimble interested parties) contend that for various reasons, including a conflict of interest and issues of independence and other conduct issues (including in relation to the acceptance by DPA of the proofs of debt the subject of this application), Crisp should be removed as liquidator of both MCP and DPA and an inquiry held into his remuneration. The summons issued by the Trimble interested parties on 18 February 2019 seeking this relief has been referred to an Associate Judge of the Court. For reasons given on 19 March 2019 I declined to deal with this summons as part of the plaintiffs' application, which is of short compass and has been ready for hearing for some time.

6 It is necessary to deal with each of the contested proofs of debt submitted to DPA by its creditors. Before dealing with each of the proofs it is necessary to refer to some of the relevant background.

7 MCP and DPA were each a member of the Planet Platinum Group of companies, which operated within the sex services industry. The relevant entities are as follows:

(i) was a public listed company;

(ii) owned the properties from which the business operated (Brothel Properties);

(iii) had a provisional liquidator appointed by the Court on 12 June 2015 and was wound up on 1 December 2015;

(i) owned and operated the businesses that operated from the Brothel Properties (Brothel Business);

(ii) was the trustee of the John Trimble Family Trust (JTFT) (its removal as trustee is an issue the subject of the Supreme Court proceeding S ECI 2016 01264);

(iii) conducted its business solely as trustee of JTFT; and

(iv) holds 100 per cent of the units in the Cameron Lane Unit Trust (CLUT);

(c) DPA entered into an agreement with MCP under which it agreed to undertake the management of the Brothel Business and payment of expenses, and MCP undertook to pay DPA a management fee equal to these expenses;

(d) Cameron Lane Pty Ltd (in liq) (CL):

(i) was the trustee of CLUT (its removal as trustee is an issue the subject of the Supreme Court proceedings referred to above);

(ii) is the legal holder of 79.7 per cent of the shares in PPL;

(iii) only conducted its business as trustee of CLUT.

8 On 27 November 2002, DPA entered into a lease with PPL (then known as Daily Planet Limited) in relation to the Brothel Properties (Lease). The term of the Lease was varied on 1 July 2004.

9 On 27 November 2002, prior to the floating of shares of PPL, the group was restructured in preparation for the float by way of a deed between the group companies (Deed).

10 The PPL Prospectus summarised the role of DPA and its arrangement with MCP following the restructure. Under the terms of the Deed:

(a) DPA had undertaken the management and payment of all expenses in relation to the Brothel Business;

(b) the Brothel Business was operated through DPA pursuant to a management agreement with MCP, pursuant to which DPA entered into all contracts with third parties concerning the operation of the Brothel Business;

(c) MCP agreed to cover all expenses of DPA in relation to the Brothel Business including rent payable under the Lease;

(d) MCP and Trimble have undertaken to ensure that the expenses and liabilities of DPA were met when they fall due (limited to applying the income of the Brothel Business to such expenses).

(a) During the term, John Trimble and MCP agreed to apply the revenue generated by the Brothel Business towards the Expenses of DPA, including expenses incurred in connection with the operation of the Business, and that such revenue would not be applied or used in relation to any other activities undertaken by John Trimble or MCP, or otherwise distributed, unless all current Expenses of DPA had been paid. [Clause 3.2][3]

(b) John Trimble and MCP agreed to apply the revenue generated by the Brothel Business towards the expenses of DPA, including expenses incurred in connection with the operation of the Brothel Business, and that such revenue would not be applied or used in relation to any other activities undertaken by John Trimble or MCP, or otherwise distributed, unless all current expenses of DPA had been paid. [Clause 3.3]

(c) For the avoidance of doubt, the obligations of John Trimble and MCP under this Deed were limited to applying the revenue generated by the Brothel Business towards the expenses of DPA, including expenses incurred in connection with the operation of the Brothel Business, and did not constitute a general guarantee of the solvency of DPA or the Brothel Business. [Clause 3.5]

(d) 'Expenses' was defined in clause 1.1 (11) as 'any expense, charge, cost, outgoing, payment, operating expense, capital expenditure or other expenditure of any nature, whether accrued or accruing, actual or contingent and, where applicable, includes fees and disbursements payable to contractors, consultants and legal advisors'.

12 On 22 August 2018 Crisp as the Liquidator called for formal proof of debts in relation to DPA.

13 The following creditors have lodged proof of debts with the Liquidator:

(a) PPL in relation to the Lease in the amount of $1,882,763.20;

(b) Asahi Premium Beverages in relation to product supplied in the amount of $2,783.47;

(c) Deputy Commissioner of Taxation in relation to the running balance account in the amount of $238,896.15;

(d) Bryantcraft Pty Ltd (Bryantcraft) in relation to accounting services in the amount of $27,163.75;

(e) Dekes Supplies in relation to product supplied in the amount of $1,880.35;

(f) Energy Australia in relation to utilities in the amount of $52,709.15;

(g) Gabriella Rosa in relation to a judgment debt in the amount of $160,829.26;

(h) Lennon Mazzeo Lawyers in relation to legal services in the amount of $58,005.02; and

(i) Room 4 Solutions in relation to computer services in the amount of $820.

14 In the opinion of the Liquidator, the above expenses were incurred by DPA in relation to the operation of the Brothel Business and are payable by MCP to DPA pursuant to the terms of the Deed. However, the Liquidator has only partially accepted the proof of debt of Gabriella Rosa in the quantum of the original judgment debt, being $98,129.26.

15 Accordingly, the Liquidator has prepared and lodged the DPA proof of debt on behalf of DPA in the liquidation of MCP in the amount of $2,363,150.35, being the total of the above debts after accounting for the adjustment to the proof of debt of Gabriella Rosa. The proof of debt will need to be reduced following the withdrawal of the claims of Room 4 Solutions ($840) and Bryantcraft ($27,163.75). The amount is $2,335,146.60.

16 The Trimble interested parties have disputed some of these debts or quantum. Each is addressed below.

17 The Trimble interested parties have not disputed the proof of debt or the quantum of the debts in relation to the following creditors:

(a) Asahi Premium Beverages;

(b) Dekes Supplies;

(c) Gabriella Rosa; and

(d) Deputy Commissioner of Taxation.[4]

18 At a meeting of MCP creditors held 1 December 2017, creditors voted in favour of the DPA proof of debt being admitted in the liquidation of MCP.

19 Although the Liquidator of MCP is in effect seeking judicial advice, as to whether he is acting properly in accepting the DPA proof of debts, the Trimble interested parties have acted as contradictor. Given the nature and context of the dispute, it is probably best approached on the basis of an appeal from a decision of a Liquidator in relation to proofs of debt. The relevant proofs have been accepted and interested parties are persons aggrieved and wish to contest and in effect appeal against such acceptance thereby preventing the Liquidator from accepting a proof of debt (based on acceptance of the proofs lodged with DPA) in the liquidation of MCP. This is the context in which the Liquidator, Crisp, seeks judicial advice. What is he to do? Can he act on the basis of his decision to accept the relevant proofs? Because the Trimble interested parties suggest not, the application is akin to an appeal. It should be approached in this way following which suitable advice will follow.

20 In De Bortoli Wines Pty Ltd v HIH Insurance Ltd & Ors, Stone J said:[5]

[10] In Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332 at 338-40; 91 ALR 180 at 184-5; 1 ACSR 510 at 514, Brennan and Dawson JJ outlined the principles that should govern a liquidator in relation to proofs of debt:

In determining whether to admit or reject a proof of debt, a liquidator has been said to act in a quasi-judicial capacity ... according to standards no less than the standards of a court or judge ... This description of the liquidator's function reflects his duty to distribute the assets in his hands or under his control among the persons truly entitled. That duty was stated by Viscount Simonds in Government of India v Taylor [1955] AC 491 at 509; [1955] 2 WLR 303 at 310:

'I conceive that it is the duty of the liquidator to discharge out of the assets in his hands those claims which are legally enforceable, and to hand over any surplus to the contributories. I find no words which vest in him a discretion to meet claims which are not legally enforceable. It will be remembered that, so far as is relevant for this purpose, the law is the same whether the winding up is voluntary or by the court, whether the company is solvent or insolvent, and that an additional purpose of a winding up is to secure that creditors who have enforceable claims shall be treated equally, subject only to the priorities for which the statute provides.'

...

[11] Brennan and Dawson JJ, at CLR 340-1; ALR 185-6; ACSR 515, also outlined the approach that the court takes on an appeal from a liquidator's rejection of a proof of debt:

The proceedings thus instituted, though often referred to as an 'appeal' from the liquidator's decision to reject, are originating proceedings which the court hears de novo ... In such a proceeding a liquidator who defends his decision to reject a proof of debt is no longer acting in a quasi-judicial capacity; he is cast in the role of an adversary defending the assets available for distribution against a liability which, according to the view he formed when acting quasi-judicially, is not legally enforceable. The liquidator may defend those assets against the creditor's claim on any ground on which the company might have defended the claim had it been sued by the creditor. ... The issue in the proceeding is whether the liability referred to in the proof of debt is a true liability of the company enforceable against it. The issue is contested between the putative creditor on the one hand and the liquidator on the other; the liquidator a party litigant. And none the less so though the liquidator is required to act fairly in conducting the litigation.

[12] In Re Jay-O-Bees Pty Ltd (in liq); Rousseau Pty Ltd (in liq) v Jay-O-Bees Pty Ltd (in liq) (2004) 50 ASCR 565; [2004] NSWSC 818 (Jay-O-Bees) Campbell J, in discussing procedural aspects of an appeal from rejection of a proof of debt, expressed the opinion that such an appeal is an interlocutory application. His Honour explained (at [54]):

When the court makes an order that a company be wound up in insolvency it appoints an official liquidator to be the liquidator of the company (s 472(1) Corporations Act) whose powers are subject to the control of the court (s 477(6) Corporations Act). The order that the company be wound up in insolvency is an order that a process be gone through, under the supervision of a court-appointed officer, all of whose powers are subject to the control of the court. The process is, in the broadest terms, that the assets of the company be ascertained and got in, its liabilities ascertained, its contributories ascertained, any uncertainties about the respective entitlements of particular creditors or contributories decided, the assets distributed among those creditors and contributories entitled to them, and the company then dissolved. An appeal against rejection of a proof of debt is one matter which the court decides, as an incident of the carrying through of the process which the court has ordered, for the winding up of the company. That is why such an application is one which is made 'in a proceeding already commenced in the Court', namely the winding up proceedings.

21 The liquidator of PPL, John Ross Lindholm, (PPL Liquidator or Lindholm) has lodged a proof of debt in the amount of $1,852,805.78 in relation to rent and outgoings owing under the terms of the Lease.

22 The PPL Liquidator has filed an affidavit in this proceeding explaining the calculation of the outstanding rent:[6]

(a) The debt comprises nine separate invoices issued by PPL to DPA in relation to rent and outgoings under the terms of the Lease.[7]

(b) Between 2003 and 2014, rent was paid by DPA to PPL in varying amounts, and then almost immediately distributed by PPL to MCP regarding payment for executive management services, in what the PPL Liquidator refers to as a 'round robin' payment.

(c) For a short period between March 2014 and September 2014, no payment was made by DPA and instead a contra journal entry was made whereby the rent obligations of DPA were set off against PPL's obligations to pay MCP the management fee.

(d) Between September 2014 and the date of the appointment of Mr Rathner to PPL, no rent was paid by DPA whether by payment or contra entry.

(e) Following the appointment of Mr Rathner, DPA recommenced payments of rent in the amount of $9,935 per week.

(f) Under the terms of the Lease, DPA is liable for outgoings. The PPL Liquidator has been informed of the unpaid outgoings since his appointment and included them in the debt.

(g) Since his appointment, the PPL Liquidator has also learned that PPL had failed to charge DPA the prescribed increase in rent (per the CPI index) since the commencement of the Lease. The PPL Liquidator has made those calculations and adjustments, being an underpayment by DPA to PPL of $1,097,793.

23 The Trimble interested parties dispute the proof of debt on the following basis:

(a) it is unclear how the retrospective rent owing has been calculated; and

(b) there was allegedly an agreement in place between PPL and MCP that services provided by Trimble would be set off against rent owing by DPA to PPL and no account has been made for this set off, which is allegedly at least $495,000.

24 The proof of debt submitted by PPL is dated 21 August 2017. It is signed by Lindholm and refers to rent and outgoings under the Lease. The amount is $1,882,763.20. The supporting documentation is attached to the proof of debt.[8]

(a) The first document is a summary of outstanding invoices payable by DPA. The summary refers to 9 tax invoices, with a total of $1,882,763.20, as follows:

(i) Tax invoice 1004 - Rent commencement to 11 June 2015 - $1,207,572.30

(ii) Tax invoice 1005 - Rent 12 June 2015 to 31 August 2015 - $152,326.90

(iii) Tax invoice 1006 - Council rates due 30 September 2015 - $24,453

(iv) Tax invoice 1007 - Land tax outstanding - $25,658.01

(v) Tax invoice 1008 - Rent 1 September 2015 to 31 October 2015 - $115,691.58

(vi) Tax invoice 1009 - Rent 1 November to 31 December 2015 and council rates due 30 November 2015 - $120,684.92

(vii) Tax invoice 1010 - Rent 1 November 2016 to 29 February 2016 - $115,691.58

(viii) Tax invoice 1011 - Rent 1 March 2016 to 31 March 2016 and council rates due 28 February 2016 - $62,839.13

(ix) Tax invoice 1012 - Rent 1 April 2016 to 31 April 2016 - $57,845.78

(b) It appears that only the first item is challenged. The other eight tax invoices are all in the court book and were attached to the proof of debt.[9] I have perused these tax invoices and supporting documentation and have read the Lindholm affidavit. I am satisfied that the amounts stated therein are owing.

(c) Regarding tax invoice 1004, being the recalculation of rent based on annual CPI increases, pursuant to the Lease, Lindholm has prepared a calculation in the form of a chart or spreadsheet setting out the adjusted rent for each year based on CPI figures.[10] At page 701 of the court book, the amounts are tabulated. The Lease provides for the yearly increase and the documentation and calculations are clear as to how the amount was calculated. Accordingly, the challenge must fail.[11]

25 In relation to any set off for management fees payable to Trimble, Crisp has assumed that Trimble is referring to the Executive Services Agreement between MCP and PPL dated 1 September 2016. Crisp submitted that:

(a) under the terms of that agreement, the fee is payable by PPL to MCP;

(b) according to the books of MCP, the fee ceased being paid around September 2014; and

(c) any unpaid management fees would be an asset of MCP and claimable by MCP in the liquidation of PPL. This would, it was submitted, be the proper process of pursuing such unpaid fees - not by way of set off by DPA. However, the PPL Liquidator disputes that there is any amount owing by PPL to MCP under the Executive Services Agreement.

26 There is, it was submitted, no evidence of any side agreement or variation to the above agreement whereby unpaid management fees may be set off against rent payable by DPA to PPL.

27 I accept the submissions made by Crisp for the reasons given. There is simply no evidence to support a set-off or reduction of rent, whether in the sum of $495,000 or any other amount. In particular, the executed and uncontested written documents must be given their full force and effect.

28 It should be noted as Crisp has pointed out that approximately 79.7 per cent of any payment made by MCP to DPA pursuant to the DPA proof of debt (after any costs are deducted from the liquidators of PPL and CL) is anticipated to be received back into MCP after the Liquidator of PPL distributes further funds to the shareholders of PPL.

29 Accordingly, for the reasons given, the Liquidator was, in my opinion, justified in accepting the proof of debt lodged by PPL in the liquidation of DPA.

30 Energy Australia has lodged a proof of debt in the amount of $52,709.15 in relation to utilities provided to DPA.

31 The Liquidator considers that the proof of debt is accurate in the following circumstances:

(a) the proof of debt is supported by invoices, correspondence and a running account;

(b) he was informed by the creditor that the reference made to a bill correction (referred to below) was an internal process that occurs following the occurrence of an insolvency event to its customer (in this case, DPA) and does not affect the debt; and

(c) in any event, a review of the running account indicates that the bill correction merely corrected a duplication of the final bill.

32 The Trimble interested parties dispute the proof of debt on the following basis:

(a) it is alleged all accounts were up to date at the time of the appointment of the Liquidator; and

(b) the debt appears to relate to a recalculation of prior periods of supply with no substantive explanation given other than 'billing problem'.

33 The proof of debt lodged by Energy Australia comprises of three accounts attached to the proof of debts dated 28 June 2017. There is no dispute about one of the accounts, a gas account in the sum of $803.33. The remaining two accounts are electricity accounts, the first in the sum of $33,751.95 and the second in the sum of $18,153.87.

34 The first electricity account is for account number 6046 428 122. It records the service address at 9 to 12 Horne Street, Elsternwick. Under the due date it states that 'Payment not required'. The Adjustment Note refers to an Issue Date of 1 April 2014. The Electricity Account Summary records the period as '01 Feb 2014 to 28 Feb 2014' (CB 647). Although the account records a correction of a past bill, as noted, it states that payment is not required.

35 The second electricity account is for account number 1858 562 123. It records the service address as 7 to 12 Horne Street, Elsternwick. Under the due date 30 June 2016 appears. The Adjustment Note refers to an Issue Date of 21 May 2016. The Electricity Account Summary records the period as 23 March 2016 to 21 April 2016 (CB F651). The account also records a 'correction of past bill calculation'. Further, a letter from Energy Australia dated 31 May 2016 under account number 1858 562 123 enclosed a revised bill (CB F650). The letter is a standard letter and although it refers to bill(s), it applies to relate only to the specific account ending 123.

36 In his affidavit sworn 27 November 2018, Crisp deposes to the following:

1. In adjudicating the proof of debt lodged by Energy Australia, I considered all of the documents provided in support ...

In particular, I relied upon the following documents, which were provided in support:

(a) Invoice of $803.33 issued 17 May 2016;

(b) Invoice of $33,751.95 issues 1 April 2014;

(c) Invoice of $18,153.87 issued 31 May 2016;

(d) A letter dated 31 May 2016 from Energy Australia and addressed to DPA; and

(e) A running account summary spreadsheet of the three accounts in DPA's name.

1. I note that the running account summary indicates that the debts owing to Energy Australia accumulated as a result of DPA failing to pay its invoices in full from September 2013.
2. I also note that I made further enquiries in relation to the correction of the billing problem mentioned in the letter of 31 May 2016. I was advised that this latter and the phrase 'correction of past bill calculation' refer to internal system processes that occur following insolvency of a company and the closure of the accounts. Energy Australia have advised that there was no recalculation of actual invoices issued.
3. Moreover, a review of the running account summary confirms that the result of the 'Correction of past bill calculation' was to correct the duplication of the final bill that occurs within the Energy Australia system.

37 I am not satisfied that there is sufficient information to confirm the first electricity account. There is no explanation in relation to this account and whether the letter from Energy Australia (despite referring to account ending 123) applies to it. Further, the first electricity account specifically says that it is not payable. It is unclear what the position is. The summary account (CB F653) is of no assistance in this regard as it relates to the account ending 123.

38 I do propose, however, to permit the second electricity account in the sum of $18,153.87 to be admitted.

39 Lennon Mazzeo provided legal services to DPA. The firm has lodged a proof of debt in the amount of $58,005.02 in relation to services provided to DPA.

40 The Liquidator has submitted that he approved the proof of debt in the following circumstances:

(a) invoices have been provided by the creditor;

(b) the invoices detail the work conducted in relation to each invoice;

(c) the time has passed for an application for a review of the invoices to be made (pursuant to the Legal Professional Uniform Law Application Act 2014 (Vic)) and DPA does not hold enough funds to make any application for such a review; and

(d) in any event, the Liquidator considers the amount claimed to be reasonable considering the work conducted by the creditor and the costs of any application for a review would not be in the best interest of creditors of DPA.

41 The Trimble interested parties dispute the proof of debt on the basis that the accounts provided by Lennon Mazzeo are not adequately itemised and that there should be some assessment made in order to determine with they are reasonable for the work performed.

42 I have perused the four invoices attached to the proof of debt dated 11 April 2017 and totalling $58,005.02.[12] I consider that they are adequately itemised save for the absence of any time allocation for each task. Although this is unfortunate, the nature, scope and extent of the work undertaken is clearly and adequately set out. From this, experienced legal and insolvency practitioners are able to make an adequate assessment of the reasonableness of the charges. This is what Crisp has done. I have done the same exercise and consider first that the amounts are reasonable and secondly that taking the matter further would indeed be disproportionate and unnecessary. Finally the work described in the invoices fall within the very broad definition of Expenses.

43 Accordingly, in my opinion the Liquidator of MCP is justified in accepting a proof of debt submitted by DPA for the amount referred to in paragraph 15, that is $2,335,146.60, less the amount of the first electricity account ($33,751.95). The final amount is $2,301,394.70.

44 I will hear from the parties as to the precise form of order and costs.

[1] He was appointed liquidator of MCP and DPA on 29 April 2016.

[2] The relevant background, most of which is uncontested, is taken from the plaintiffs' submissions.

[3] It should be noted that the income from the operation of the Brothel Business was received by MCP and further that DPA did not have any source of income, other than its right to recover expenses from MCP.

[4] This debt was originally contested. However, opposition to this claim was withdrawn during the course of the hearing.

[5] [2011] FCA 645 [10]-[12] (Stone J).

[6] Affidavit of John Ross Lindholm sworn 17 December 2018 (Lindholm affidavit).

[7] The invoices are attached to the proof of debt.

[9] CBF702, F703, F708, F710, F711, F716, F717 and F719. So far as council rates and land tax are concerned, the supporting documentation is attached to the related tax invoice. All of the documentation appears to be in order.

[11] There was no attack on the arithmetic or the CPI figures or percentages used and I rely on Lindholm's calculations in this regard. There also was no attack on the enforceability of this clause in the Lease.