Hathway, in the matter of Stacey Apartments Pty Ltd (in liq) v Southern Cross Estate Developers Pty Ltd

Federal Court of Australia|2019-07-29|Before: Mr J, Jagot J

Pursuant to section 601AH(2) of the Corporations Act 2001 (Cth) (the Act), the Australian Securities and Investments Commission reinstate the registration of the First Defendant, Southern Cross Estate Developers Pty Ltd (deregistered), with effect from the date of deregistration, being 22 February 2018.
Pursuant to section 75-41 of the Insolvency Practice Schedule (Corporations), the resolution passed at the meeting of creditors of the First Defendant held on 8 May 2015 that it enter into a deed of company arrangement be set aside.
Pursuant to section 75-41 of the Insolvency Practice Schedule (Corporations), the deed of company arrangement dated 28 May 2015 between: (a) the First Defendant; (b) David Nicholas Iannuzzi as administrator of the First Defendant; (c) Nasser Khalil Merhi; (d) Merhis Pty Limited; (e) the Fourth Plaintiff; and (f) Payroll Management Pty Ltd, be set aside.
Pursuant to section 459A of the Act, the First Defendant be wound up in insolvency with such order to take effect from 8 May 2015.
Pursuant to section 472(1) of the Act, Stephen Hathway and Philip Hosking be appointed as the liquidators of the First Defendant.
Pursuant to section 90-15(1) of the Insolvency Practice Schedule (Corporations), Philip Hosking be appointed as an additional liquidator of the Fourth Plaintiff and the Fifth Plaintiff.
Pursuant to section 579E(1) of the Act, each of the Second, Third, Fourth and Fifth Plaintiff and the First Defendants (the Group) are a pooled group for the purposes of section 579E of the Act.
The Fourth, Fifth and Sixth Defendants pay the Plaintiffs' costs occasioned by their application to join and their joinder.
The costs of these proceedings otherwise be costs in the pooled winding up of the Group. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

JAGOT J: 1 This is an application brought by the plaintiffs, in effect, to reinstate the registration of a company, Southern Cross Estate Developers (SCED), and to set aside a deed of company arrangement that was entered into in respect of SCED, as well as consequential orders.

Background 2 The submissions in support of the plaintiffs' proposal comprehensively address the relevant background facts and the statutory requirements. Those submissions explain that, relevantly, the liquidator of the company has formed a view, which is not unreasonable on the evidence, that the members of the relevant group of companies (without using this term to prejudge the application for the pooling order) "appear to have been involved in systemic non-compliance with statutory taxation reporting requirements and non-payment of taxation liabilities for the benefit of one or more companies within [the group]". 3 In addition, an important fact is that, in respect of SCED, 32 lots of real property, with an approximate value of $12 million, appear to have been transferred to a related company, Merhis Pty Ltd, also known as NKMH Holdings Pty Ltd, for no consideration. Those 32 lots, on the evidence, have been subsequently sold to purchasers at arm's length. 4 A short time later, SCED was placed into administration and Merhis Pty Ltd voted through a deed of company arrangement (the DOCA) that the Australian Taxation Office (the ATO) voted against. 5 The ATO is by far the largest creditor of the companies in the group and the creditor that would suffer any prejudice by the making of the relief sought in the originating process. However, the ATO has provided its written consent to the orders sought in the originating process. 6 It is not necessary for me to set out in detail the events which took place leading to the entry into the DOCA. What is clear is that on 8 May 2015, the second meeting of creditors was resumed and at that meeting a resolution was passed that SCED accept a revised DOCA proposal and execute the DOCA (the DOCA Resolution). The results of the poll requested by the ATO show that the entities related to SCED cast the deciding vote, and the ATO voted against the proposal.

7 By the amended originating process filed in Court today, the plaintiffs seek an order under s 75-41 of the Insolvency Practice Schedule (Corporations) to set aside the DOCA Resolution. Pursuant to those provisions, the Court can set aside the DOCA Resolution and make other orders as the Court thinks fit, if the requirements of subs 75-41(1)(a) to (c) are satisfied.

Aggrieved Person 8 The defendants contended that the application is not brought by an aggrieved person. However, I accept the argument for the plaintiffs that Southern Cross Rigging & Constructions Pty Ltd (Southern Cross Rigging) was identified as a related party creditor in the DOCA and, pursuant to the terms of the DOCA, the debt due and owing to Southern Cross Rigging has not been released. 9 The fact that the company was deregistered, which would have required a declaration to be made that there were no outstanding liabilities, is not reliable evidence that there were in fact no outstanding liabilities. In the circumstances, the evidence satisfies me that Southern Cross Rigging remained a creditor of the company and, accordingly, is a relevant aggrieved person capable of applying for the relief sought.

Setting aside the DOCA Resolution 10 As set out in the written submissions for the plaintiffs, the requirements for the setting aside of the DOCA Resolution have been satisfied. First, a proposal has been voted on by creditors at a meeting of the creditors pursuant to s 75-41(1)(a). Second, under s 75-41(1)(b), if the votes of related creditors are disregarded, the DOCA resolution would not have passed, given the votes of the ATO. Third, in terms of section 75-41(1)(c), the passing of the DOCA Resolution is contrary to the interests of creditors as a whole and is also reasonably likely to prejudice the interests of a creditor who voted against the DOCA Resolution (that is, the ATO). 11 In this regard, I accept the submissions for the plaintiffs that the DOCA Resolution unreasonably prejudiced the ATO. 12 This question of unreasonable prejudice is to be decided consistently with the principles which the plaintiffs have identified on the basis of whether creditors are better off with the DOCA or with a liquidation. As the plaintiffs submitted, the DOCA Resolution is contrary to the interests of the unrelated creditors for several reasons: (1) it excludes the prospects of any possible recovery from Merhis Pty Ltd of approximately $12 million from the transfer of the 32 lots; (2) the amounts which the ATO received under the DOCA could not be regarded as a real commercial benefit, the return being around 5.8 cents in the dollar; and (3) the DOCA Resolution is contrary to the public interest, given that the primary unrelated creditor is the ATO. 13 Accordingly, I accept the submissions for the plaintiffs that: The DOCA resolution also unreasonably prejudices the ATO, and confers a significant benefit on Merhis Pty Ltd, because it excludes the prospect of any possible recovery from Merhis Pty Ltd of approximately $12 million from the transfer of the 32 lots in circumstances where there are doubts as to the authenticity of the proof of debt for approximately $4 million submitted by Merhis Pty Ltd and admitted by Mr Iannuzzi. 14 I do not accept that the evidence that the defendants have led about these matters (to the effect that the 32 lots were transferred for valuable consideration), including that of the former National Australia Bank (NAB) manager, are sufficiently convincing to reach a contrary view. 15 It follows that I am satisfied that the DOCA Resolution should be set aside. For the same reasons I am also satisfied that the DOCA itself should be set aside.

Reinstatement of Southern Cross Estate Developers 16 In these circumstances, it follows, in my view, that it is just that there be an order that the Australian Securities and Investment Commission (ASIC) reinstate the registration of Southern Cross Estate Developers under s 601AH of the Corporations Act 2001 (Cth) (the Act).

Winding up of Southern Cross Estate Developers 17 Further, I accept the submissions for the plaintiffs that, on the evidence, it would be inappropriate for the Court to return control of SCED to the Merhis family. Rather, it should be wound up and the liquidator and Mr Hosking should be appointed as liquidators.

Pooling of the Group 18 The plaintiffs seek an order determining that the companies constitute a "pooled group" for the purposes of s 579E of the Act. The relevant principles are again set out in the submissions for the plaintiffs, including the importance of a pooling order for the group. I accept the summary of the importance of the pooling order contained in the plaintiffs' submissions at [68] as follows: The importance of a pooling order for the Group is set out at paragraphs 215 to 265 of the affidavit of the Liquidator sworn 25 March 2019. In short: a. without a pooling order: i. the return to creditors in the liquidation of Stacey Apartments is estimated to be between 15 cents to 20 cents in the dollar; ii. the proceedings commenced in the Supreme Court of New South Wales on behalf of Liverpool Business Estate may not be able to be continued as they are not presently funded, meaning that it is unlikely that there will be any return to creditors in that liquidation; and iii. it is unlikely that there will be any further investigations or recovery action in the liquidations of Argyle Builders, Southern Cross Rigging or Southern Cross Estate Developers, as those administrations are without funding, and it is therefore unlikely that there will be any returns to creditors in those liquidations; b. with a pooling order: i. the proceedings commenced in the Supreme Court of New South Wales on behalf of Liverpool Business Estate can be continued; ii. there can be further investigations and recovery action in the liquidation of Argyle Builders, Southern Cross Rigging or Southern Cross Estate Developers; and iii. the return to creditors of the Group is estimated to be approximately 70 cents in the dollar. 19 The plaintiffs also relied on the questions that need to be asked and answered for a pooling order to be made as identified in In the matter of Kirby Street (Holding) Pty Ltd [2011] NSW SC 1536 at [7]. 20 In short, whether there is a group of two or more companies. The group consists of five companies and the requirement is therefore satisfied. 21 Further, each corporation in the group, subject to the orders that I will be making today, is being, or will be being, wound up. 22 In addition, at least one of the conditions in subs (i) to (iv) of s 579E(1)(b) of the Act is satisfied. The plaintiffs relied on s 579E(1)(b)(iv). That is: one or more companies in the group own particular property that is or was used, or for use, by any or all of the companies in the group in connection with a business, a scheme, or an undertaking, carried on jointly by the companies in the group. 23 The submissions for the plaintiffs explain that it is apparent from the evidence that the real property owned by one member of the group, Stacey Apartments, was used or was for use by any or all of the companies in the group as security for facility agreements between NAB and certain companies in the group. This is sufficient to satisfy the statutory requirement. As the plaintiffs submitted: [84] The companies in the Group clearly each contributed to a business, scheme or undertaking carried on jointly by all of them, in the sense that they were each part of the Merhis group, which appears to have operated four main businesses through the various entities in the Merhis Group, being: a. property development; b. property investment; c. construction; and d. structural steel framing manufacturing. [85] The real property owned by Stacey Apartments was therefore used, or was for use, in connection with that business, scheme or undertaking carried on jointly by all the companies in the Group in that it was used, or was for use, as security for facility agreements between the NAB and certain companies in the Group. The funding from those facility agreements was used to fund the projects being undertaken by the companies in the Group, which were part of the relevant business, scheme or undertaking carried on jointly by all of them as members of the Merhis group. [86] The condition in subsection 579E(1)(b)(iv) is satisfied. 24 Section 579E(12) is also relevant. That is, the Court must be satisfied that it is just and equitable to make a pooling order, having regard to the matters set out in s 579E(12). I again adopt the submissions for the plaintiffs as set out at para 68 (quoted above). In terms of the requirement that it be just and equitable that the order sought be made, the matters set out in para 68 confirm that it would be just and equitable for such an order to be made. 25 Section 579E(10)(a) is also relevant, in that the Court must not make a pooling order in relation to a group of two or more companies if, relevantly: The court is satisfied the order would materially disadvantage an eligible unsecured creditor of a company in the group and the eligible unsecured creditor has not consented to the making of the order. 26 In this case, it is put against the plaintiffs that the terms of s 579E(10) have not been satisfied. However, the two creditors in issue, in fact, maintain that they are secured creditors, not unsecured creditors. Accordingly, I am satisfied that s 579E(10) does not preclude the making of the order. 27 In respect of the submissions which have been put against the making of the orders sought by the plaintiffs, I have already addressed the status of Southern Cross Rigging as a person aggrieved. As to the other matters, I do not accept that the plaintiffs have not established any real prospect of recovery by reason of the reinstatement of SCED and the setting aside of the DOCA. On the evidence, it is apparent that a large number of assets have been transferred out of the company and that the explanation for such transfers is, at least on its face, inadequate, raising more questions than answers. 28 In terms of the issue that the plaintiffs have not identified how they intend to repay the funds that were paid under the DOCA, I accept the submission for the plaintiffs that there is no obligation to do so under the terms of the DOCA and that the DOCA does not contemplate any such repayment. 29 In respect of the issue that the plaintiffs have not identified how the creditors who voted in favour of the DOCA would benefit from the DOCA being set aside, where the transaction to be impugned would not be voided or set aside, the fact is, under the DOCA, the related parties received nothing and stand to have their position improved in the liquidation. 30 Further, contrary to the submissions of the defendants, there is sufficient evidence to support the making of the winding up order under ss 459A and 461 of the Act. 31 In summary, I accept the submissions for the plaintiffs, both written and oral, that this is a matter which calls for the making of the orders which have been sought. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot.

SCHEDULE OF PARTIES NSD 462 of 2019 Plaintiffs Fourth Plaintiff: SOUTHERN CROSS RIGGING & CONSTRUCTIONS PTY LTD (IN LIQUIDATION) ACN 077 596 108 Fifth Plaintiff: LIVERPOOL BUSINESS ESTATE PTY LTD (IN LIQUDATION) ACN 126 846 634 Sixth Plaintiff: PHILIP HOSKING Defendants Fourth Defendant: NKMH HOLDINGS PTY LTD (ACN 102 384 314) Fifth Defendant: MERHIS MANAGEMENT GROUP PTY LTD (ACN 602 122 716) Sixth Defendant: PAYROLL MANAGEMENT PTY LTD (ACN 122 191 422)

Corporations Act 2001(Cth)ss 459A, 461, 472(1), 579E(1), 579E(1)(b), 579E(1)(b)(iv), 579E(10), 579E(10)(a), 579E(12), 601AH(2)

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