Food Improvers Pty Ltd v BGR Corporation Pty Ltd

The application under S 488(2) 5 Holdings is likely to have a surplus in the order of $70,000 after payment of the debt owed to Mr Cordato and the liquidator's remuneration. Its only shareholder is BGR. However, despite its prescriptive complexity, the Act does not provide expressly for the manner of payment of the surplus assets or property of a company other than in s 501 in respect only of voluntary windings up. The liquidator has not been able to find the constitution of Holdings. Therefore, there is no evidence as to how its members, being effectively BGR, intended any surplus assets to be distributed after the company was fully wound up. 6 As a matter of general law, the shares in a company represent, in the hands of shareholders, a congeries of rights governed, in ordinary circumstances, by the terms of its constitution. In principle, once the purpose of the company is exhausted and it is wound up, absent a provision to the contrary in its constitution, any surplus remaining ought be payable rateably to its shareholders, as its owners. That was the result arrived at in Birch v Cropper; In Re Bridgewater Navigation Company Limited (1889) 14 App Cas 525. There, the House of Lords determined that, subject to the payment of the costs, charges and expenses of the winding up, including the costs of all parties to the application before their Lordships, the par value of their shares to the shareholders, the remaining assets of the company ought be distributed to the shareholders in proportion to their shares. Their Lordships considered that this treated both the ordinary and preference shareholders equally. Both classes of shareholders, having paid their shares up in full, were entitled to participate equally in distribution of the surplus assets. As Lord Macnaghten said (Birch 14 App Cas 546-547): "... it rather leads to confusion to speak of the assets which are the subject of this application as "surplus assets" as if they were an accretion or addition to the capital of the company capable of being distinguished from it and open to different considerations. They are part and parcel of the property of the company - part and parcel of the joint stock or common fund - which at the date of the winding-up represented the capital of the company. It is through their shares in the capital, and through their shares alone, that members of a company limited by shares become entitled to participate in the property of the company. The shares in this company were all of the same amount." (emphasis added) 7 Section 488(2) provides that, despite anything in the rules or regulations made for the purpose of s 488(1), a liquidator may distribute a surplus only with the Court's special leave. The purpose of that requirement was to except the distribution of a surplus from the general power to delegate certain powers, conferred on the Court by the rules and regulations for the purposes of the winding up, to the liquidator, as an officer of the Court who always remained subject to its control. When a surplus is realised in a winding up, the Parliament intended that the Court, and it alone, exercise its supervisory function in ensuring the proper and final distribution of surplus assets. Hence, the requirement for the Court's "special leave" ensures that a liquidator must apply to, and receive the leave of, the Court before he or she is authorised to make a distribution of a surplus from a winding up. This accords with the way in which the authorities have approached the requirement in s 488(2). In Brealey v Shields [2009] NSWSC 1148 at [4], Barrett J said: "The requirement for "special leave" means no more than that the court's permission be sought by an application specially made by the liquidator: Re DS Millard & Sons Pty Ltd (1997) 27 ACSR 71." 8 There, his Honour held that the liquidator of a company ought receive a dispensation from the requirement of full compliance with reg 5.6.71 of the Corporations Regulations 2001 (Cth). That regulation requires the liquidator to distribute any surplus, pursuant to special leave granted by the Court, in accordance with a schedule in Form 551, and to send to any person to whom a surplus is distributed a notice in accordance with Form 552. In that case, his Honour dispensed with those requirements, and did not insist on the liquidator identifying a particular sum in the schedule. He found that because there were only two contributories to whom a payment could be made, there was no need for adjustments between them. They would be paid equally by dividing by two, a sum quantified at the end of the winding up. 9 I am of opinion that common sense suggests I should follow a similar course in these windings up. The only shareholder of Holdings is BGR. After Mr Cordato is paid in full, the liquidator will be the only person entitled to any payment, being his fees and expenses before the balance constituting a surplus will be payable to BGR. It will suffice if I direct that the liquidator file and serve an affidavit at the time of making a final payment, identifying how that payment has been arrived at by setting out his fees, the available balance, and any payments that he has made in the course of the further winding up of Holdings, and that he otherwise be authorised to pay any resultant surplus to BGR.

The s 477(2B) application 10 In August 2007, it had become apparent that the liquidator would need to be put in funds to recover amounts from the majority shareholders in BGR which I found had oppressed Food Improvers, namely Mr Cordato's company, Cordato Partners (Services) Pty Limited and the principal defendant in the proceedings, The Triad Health Group of Companies Pty Limited. A number of interlocutory proceedings ensued. The liquidator came to an arrangement with Food Improvers and Mr Bax, under which Food Improvers would fund the liquidator in pursuing those recovery proceedings and associated actions. This was on the basis that at their conclusion, the liquidator would apply under s 564 of the Act for an order that the funders be paid out of any moneys recovered as consideration for the risk they had assumed. 11 That arrangement, self-evidently, was for the benefit of each member of the group of the companies in liquidation that was seeking to recover assets owed to BGR by Triad and Mr Cordato's company or defend proceedings brought by the latter to set aside statutory demands. I had directed that the liquidator would be justified in serving those statutory demands in order to recover the moneys owed to BGR pursuant to orders I had made in consequence of the principal judgment in these proceedings. 12 The liquidator overlooked applying to the Court for leave under s 477(2B) to enter into arrangements that might endure for more than three months in that context. As he pointed out, because Food Improvers and Mr Bax had offered to fund BGR for those purposes, it was not appropriate for the liquidator to resort to Holdings' surplus assets to do so, particularly since in August and September 2007 he had not yet called for proofs of debt in Holdings' winding up. At that time, Holdings and Corporation were creditors of BGR, for about $4.3 million and $1.7 million respectively. Any recovery actions funded by Food Improvers and Mr Bax against BGR's debtors would benefit those two subsidiaries of BGR. As the liquidator said when he entered into the funding arrangement on 10 September 2007, it was likely that a meeting of those creditors, who had lodged proofs of debt, would have approved any funding arrangement, by majority in number and value. In these circumstances it is necessary to decide whether I should exercise the power under s 1322(4) of the Act to extend the period in which the liquidator can make an application under s 477(2B). 13 I am satisfied that no substantial injustice has been, or is likely to be, caused to any person if this application is granted. Plainly, it was in the interests of BGR for the liquidator to make the funding arrangements. In those circumstances, I am of opinion that I should approve that application nunc pro tunc: Emanuele v Australian Securities Commission (1997) 188 CLR 114 esp at 132 where Toohey J referred to remarks of Lord Eldon LC in Donne v Lewis (1805) 11 Ves Jun 601 at 601 [32 ER 1221 at 1222] that the Court will enter a decree nunc pro tunc if satisfied, from its own official documents, that it is only doing now what it would have done then. That encapsulates the position here. 14 The substantive financial positions of the six defendants are that once the order under s 488(2) is given effect, Holdings will have net assets of about $70,000 and all its creditors including the liquidator will have been paid in full. The position of the other companies in the BGR group is easily stated, based on their positions as at late April 2011. Each of SNP Natural Products Pty Limited and Business & Research Management Pty Limited had no funds and no creditors. Advanced Technology Research Pty Limited had assets of only about $400 in cash. Corporation had about $250 in cash and was owed about $200,000 by Holdings. BGR had about $400,000 in cash while owing Hunter Premium Funding $3,751.14 and both about $200,000 due under the funding arrangement, including interest and a dividend of $550,000 to Food Improvers as well as the amounts due to Holdings and Corporation to which I have referred. 15 If the liquidator were to engage in the exercise of declaring dividends around the BGR group, it is obvious that, with the inter-company debt position as it is, there would be a need for a number of distributions. These would serve no apparent purpose. The only substantive external creditor of the subsidiaries of BGR, after the debt to Mr Cordato is paid by Holdings, will be the liquidator in respect of his fees. Once those fees are paid, BGR will have no competing claims against its 100% interest in its other five subsidiaries. Any cascade of distribution around the BGR group ought be disregarded for the purposes of arranging a practical and effective finalisation of the group's winding up. 16 I am satisfied that it is appropriate for the liquidator to apply, as he has, for a direction that he would be justified in withdrawing the inter-company proofs of debt so as to allow the surplus from Holdings to be paid directly to BGR. That will leave all of BGR's subsidiaries effectively with no assets after the liquidator is paid, and will allow BGR then to pay its creditors in the order contemplated by s 556(1), so that both Hunter Premium Funding and Food Improvers will be paid their debts in full, in the amounts they funded together with interest, before the liquidator distributes any balance in the payment of his own fees, costs and expenses, and then, what remains, in respect of the dividend due to Food Improvers. 17 I am satisfied that I should declare the liquidator's entry into the funding arrangement to be valid, notwithstanding leave to do so was not sought earlier under s 477(2B). That failure was essentially of a procedural nature. In any event, I am satisfied that both Mr Bax, as the controlling mind of Food Improvers, and the liquidator acted honestly and that it is just and equitable that the order be made for the purpose of s 1322(6)(a).

COnclusion 18 For these reasons I will make the orders and directions that are appropriate for the liquidator to finalise the windings up of the group members. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.