Hathway v Stacey Apartments Pty Ltd

B. BACKGROUND 4 On 29 July 2019, Jagot J made an order that the first to fifth defendants were a pooled group for the purposes of s 579E of the Act. 5 Each of the first to fifth defendants was part of a broader group of companies known as the "Merhis Group" which operated in the property, construction and development industry. The Merhis Group was a family-run business and was made up of numerous companies. It undertook development and construction projects with values of between $15 million and $145 million. 6 In or about September 2019, the Liquidators, together with the first to fifth defendants, entered into a document titled "Deed of Global Merhis Settlement" (Settlement Deed). The other parties to the Settlement Deed included, inter alia, certain members of the Merhis family and, in particular, the sixth, seventh, eighth, ninth, seventeenth, eighteenth, nineteenth, twenty second, twenty third, twenty fifth, twenty sixth, twenty seventh and twenty eighth defendants to these proceedings (Merhis Companies). 7 By entering into the Settlement Deed, the parties agreed to settle all matters in dispute between them upon the terms of the Settlement Deed. In particular, pursuant to clause 6.1 of the Settlement Deed, the Merhis Companies agreed to pay the first five defendants the sum of $25 million (Settlement Sum). 8 Between October 2019 and June 2021, the parties entered into four separate deeds that varied the terms of the Settlement Deed. 9 At the time of entry into the last deed of variation, the balance of the Settlement Sum outstanding was $16,433,326 (Unpaid Amount). 10 The Merhis Companies did not pay the Unpaid Amount. 11 Subsequently, the Merhis Companies, as well as various other companies in the Merhis Group, were voluntarily wound up and the Liquidators were appointed as joint and several liquidators of each of them. Those companies are the sixth to twenty ninth defendants in these proceedings.

C. POOLING OF THE GROUP 12 As set out above, the Liquidators seek an order that all twenty nine defendants constitute a "pooled group" for the purposes of s 579E of the Act. Such an order is designated by s 9 of the Act as a "pooling order". 13 If a pooling order is made in respect of the defendants, all of the defendants will be jointly and severally liable for the debts of, and claims against, each of them, with debts owing among the companies themselves extinguished. In this way, the assets available in each winding up become applicable towards satisfaction of the external debts of all of the defendants: In the matter of Kirby Street (Holding) Pty Limited [2011] NSWSC 1536 at [3] (Barrett J). 14 In approaching an application for a pooling order, the Court must consider the six questions identified by Barrett J in Kirby Street at [7]: (a) is there a "group of 2 or more companies"? (b) is each corporation in the group being wound up? (c) is at least one of the conditions in subparagraphs (i) to (iv) of s 579E(1)(b) satisfied? (d) what does the evidence show with respect to the matters in s 579E(12) as they may affect the answer to the following question? (e) is it just and equitable that the order sought be made? (f) does s 579E(10) preclude the making of a pooling order?

C.1. Is there a "group of 2 or more companies"? 15 A "group" will exist if two or more companies are identified: Allen v Feather Products Pty Ltd (2008) 72 NSWLR 597; [2008] NSWSC 259 at [9] (Barrett J). This statement is consistent with s 579N of the Act which provides, relevantly, that for the purposes of Div 8 of Pt 5.6 of the Act, a group of 2 or more companies need not be associated with each other in any way (other than a way described in s 571(1)(b) of s 579E(1)(b)). 16 This requirement is satisfied as the group here, consists of twenty nine companies.

C.2. Is each corporation in the group being wound up? 17 At present, each of the defendants is being wound up. This requirement is, therefore, satisfied.

C.3. Is at least one of the conditions in subparagraphs (i) to (iv) of s 579E(1)(b) of the Act satisfied? 18 Section 579E(1)(b)(iv) of the Act is satisfied if: (iv) 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. 19 In Kirby Street at [40], Barrett J stated: The questions for the court are thus whether, at the time of the court's decision, particular property "is or was used, or for use" in a relevant way and is property that "one or more companies in the group own". The inquiry into use directs attention to both the present (whether the property "is ... used, or for use") and the past (whether the property "was used, or for use"). The inquiry into ownership, by contrast, concentrates wholly on the present - whether one or more of the relevant companies "own" the property at the time of the court's decision. 20 The Court must, therefore, ask first, whether, at the time of its decision, particular property "is or was used, or for use" in a relevant way, and second, is it property that "one or more companies in the group own". 21 With respect to whether the property was used, or was for use, "in connection with a business, scheme or undertaking carried on jointly" by the defendants, Barrett J stated in Kirby Street at [26]: In Allen v Feather Products Pty Ltd (above) at [14] to [19], I expressed the opinion that, if several companies, by arrangement with one another, contributed part of what was required to carry on a single business, the business each element of which came from one or more of them might properly be characterised as a business "carried on jointly" by all of them. "Jointly" does not connote merely action in unison but extends also to circumstances in which there is co-ordinated or co-operative action, with the separate acts of each participant complementing or supplementing acts of the others. 22 I am satisfied that the requirement in s 579E(1)(b)(iv) of the Act is satisfied for the following reasons. 23 First, "particular property" is owned by "one or more" of the defendants. The following defendants are currently the registered proprietors of real property: (a) the twenty sixth defendant, Oger Holdings (Aust) Pty Ltd (in liquidation); (b) the twenty seventh defendant, Hassall Developments Pty Ltd (in liquidation) (receivers and managers appointed); and (c) the twenty ninth defendant, Goldenia Developments Pty Ltd (in liquidation) (receivers and managers appointed). 24 Second, property owned by one or more of the defendants was used, or was for use, by any or all of the companies in the group as security for facility agreements between the Wingate Group and certain companies in the group, in connection with a business, scheme or undertaking carried on jointly by the defendants, being the four main businesses carried out by the Merhis Group: (a) property development; (b) property investment; (c) construction; and (d) structural steel framing manufacturing. 25 Previously property owned by one or more of the defendants was also used as security for facility agreements between the National Australia Bank (NAB) and certain companies in the Merhis group, in connection with the four main businesses carried out by the Mehri Group. These security arrangements included: (a) a "Guarantee and Indemnity" for the "Merhis Group" dated 6 August 2013 pursuant to which each of the second to sixth defendants, twenty third and twenty fifth defendants granted various forms of security to NAB, including general security deeds, real property mortgages, debentures and goods mortgages; (b) a "Global Variation Deed" for the "Merhis Group" dated 14 February 2014 between the NAB and all of the defendants referred to in the previous sub-paragraph, together with the tenth defendant; (c) a "Letter of Amendment" dated 2017 to several defendants concerning amendments to certain NAB facility agreements; (d) a NAB document dated 3 March 2015 and styled "Property Client Evaluation - Investment / Term Debt", which refers to several of the defendants and NAB facility agreements and describes the four principal businesses conducted by the Mehri Group; and (e) a NAB document dated 28 April 2015 and styled "Property Client Evaluation - Investment / Term Debt", which refers to the use of property owned by one or more of the defendants as security for two potential NAB facility agreements with the eighteenth defendant. 26 The previous use of property owned by the defendants as security for facility agreements between NAB and certain companies in the group, in connection with the four main businesses carried out by the Mehri Group supports the drawing of an inference that property currently owned by defendants is property that is held "for use" by any or all of the defendants in connection with the businesses carried on by the Mehri Group. 27 The property owned by one or more of the defendants was, therefore, used, or was for use, in connection with that business, scheme or undertaking carried on jointly by all of the defendants in that it was used, or was available for use, as security for facility agreements with the Wingate Group. The funding from those facility agreements was used to fund the projects being undertaken by certain defendants, which were part of the business, scheme or undertaking carried on jointly by all of them as members of the Merhis Group. 28 For the foregoing reasons, I am satisfied that the requirement in s 579E(1)(b)(iv) of the Act is satisfied.

C.4. What does the evidence show with respect to the matters in s 579E(12), as they may affect the answer to the following question? 29 With respect to s 579E(12)(a) of the Act, the matters referred to above at [23]-[26] establish that: (a) each of the defendants was involved in the operations of other defendants; and (b) the officers and employees of each of the defendants were involved in the operations of other defendants. 30 With respect to s 579E(12)(b) of the Act, the matters referred to above at [23]-[26] establish that the defendants, and their officers and employees, held themselves out to creditors as a group. 31 With respect to s 579E(12)(c) of the Act, the winding up of the sixth to twenty ninth defendants is directly or indirectly attributable to the Merhis Companies not paying the Unpaid Amount to the first to fifth defendants. 32 With respect to s 579E(12)(d) of the Act, the matters referred to above at [23]-[26] demonstrates that the activities and business of the defendants was intermingled. 33 With respect to s 579E(12)(e) of the Act, the ATO is the principal largest unsecured creditor of the defendants and the only unsecured creditor that would suffer any potential material prejudice by the making of the relief sought. However, it has no objection to the proposed pooling order being made and the practical effect of the pooling order was expressly brought to its attention by the plaintiffs. 34 With respect to s 579E(12)(f) of the Act, the evidence of Mr Hathway establishes that: (a) the Liquidators have distributed three dividends to unsecured creditors of the first to fifth defendants in an aggregate amount of approximately $2.3 million; (b) there is presently $385,488.83 remaining in the pooled administration of the first to fifth defendants; (c) each of the administrations of the sixth to twenty ninth defendants received a nominal amount of funds (mostly $3,400; in some instances $4,000 and in one instance $10,000), some had minimal funds in bank accounts, and otherwise each is presently without funds, except for the administration of the twenty third defendant, NKMH Holdings Pty Ltd (in liquidation), where the Liquidators received a term deposit from NAB in the amount of $117,344, and the funds currently held total approximately $72,000; (d) the Liquidators have either been provided with no books and records or limited books and records for each of the sixth to twenty ninth defendants; (e) the paucity of books and records has hindered the Liquidators' ability to conduct further investigations into the affairs of each of the sixth to twenty ninth defendants, to identify assets that may be realisable and identify transactions which may be deemed to be voidable and recoverable by the Liquidators; (f) from their review of the limited books and records of the sixth to twenty ninth defendants that they have been provided with, the Liquidators have formed the view that the affairs of those defendants are intermingled, with numerous intercompany transactions, intercompany shareholders and intercompany debtor and creditor relationships; (g) with respect to some of the sixth to twenty ninth defendants, certain transactions have been identified by the Liquidators as potentially voidable under Part 5.7B of the Corporations Act and may benefit from further investigations and, where applicable, litigation. Similarly, with respect to certain of the sixth to twenty ninth defendants, the directors may have breached their duty to prevent insolvent trading. However, there are insufficient funds in those administrations to conduct further investigations, including with respect to the commerciality of the claims and whether the potential defendants would be able to meet any judgments obtained against them, or to commence proceedings; (h) the Liquidators have not received any funding offers from creditors and in their experience, given the limited books and records that are available for each of the sixth to twenty ninth defendants, a litigation funder would not consider providing funding to carry out preliminary investigations; (i) at present, it is unlikely that sufficient funds will be recovered in any of the administrations of the sixth to twenty ninth defendants to enable a dividend distribution; (j) the pooling of all of the defendants will permit the Liquidators, where appropriate, to conduct further investigations with respect to any potential recovery actions, as well as investigations into the conduct of the directors of the various defendants, which, depending on the outcome and given the number of insolvent companies in the Merhis Group, may result in ASIC disqualifying the directors pursuant to s 206F of the Act or the directors being prosecuted for offences under the Act; (k) the work in progress and outstanding disbursements incurred by the Liquidators for the sixth to twenty ninth defendants is approximately $695,000; (l) as each of the administrations of the sixth to twenty ninth defendants are presently without funds (or have nominal or minimal funds), as set out above at [34(c)], but for the making of the pooling order sought, the Liquidators will not be paid for most of the work in progress and outstanding disbursements incurred by them in the administrations of the sixth to twenty ninth defendants; (m) although the amount of approximately $695,000 is more than the $385,488.83 presently remaining in the pooled administration of the first to fifth defendant, if the pooling order sought is made the Liquidators are content to carry out the further investigations into the affairs of the defendants referred to above and write off any work in progress exceeding the funds remaining in the administration of the first to fifth defendants, assuming no further recoveries are made; (n) pooling of the defendants will also likely result in significant savings across the respective administrations, and otherwise ensure the orderly and efficient completion of those administrations, including with respect to: (i) undertaking the necessary administrative, day-to-day duties of liquidators; (ii) satisfying the statutory requirements for each of the companies, including the filing of documents and calling and holding of meetings; and (iii) the allocation of the costs of the liquidations of each company on a company- by-company basis; (o) the Liquidators have given notice of these proceedings and the hearing date to creditors of each the defendants under s 579J of the Act; (p) the Liquidators have not received any objection to a pooling order being made from any creditor of any of the defendants, nor do the Liquidators understand that any creditor intends to appear at the hearing and oppose the making of the orders sought in the Originating Process; and (q) the largest creditor, the ATO, has confirmed in writing that it has no objection to the pooling order being made.

C.5. Is it just and equitable that the order sought be made? 35 Section 579E(12) of the Act confers a discretion that, while wide, can only be exercised judicially in the light of the whole of the circumstances surrounding the relevant subject matter: Kirby Street at [77]-[78] (Barrett J). 36 For the reasons set out above at [29] to [34], I am satisfied that it is "just and equitable" that the pooling order be made.

C.6. Does s 579E(10) preclude the making of a pooling order? 37 Section 579E(10) of the Act provides: (10) The Court must not make a pooling order in relation to a group of 2 or more companies if: (a) both: (i) the Court is satisfied the order would materially disadvantage an eligible unsecured creditor of a company in the group; and (ii) the eligible unsecured creditor has not consented to the making of the order; or (b) all of the following conditions are satisfied: (i) a company in the group is being wound up under a members' voluntary winding up; (ii) the Court is satisfied that the order would materially disadvantage a member of that company; (iii) the member is not a company in the group; (iv) the member has not consented to the making of the order. 38 The effect of s 579E(10) of the Act is that even if a Court concludes it is "just and equitable" to make a pooling order, it will be precluded by s 579E(10) of the Act from making such an order if it would cause material disadvantage of the kind referred to in the provision. 39 As none of the windings up in the present case is a members voluntary winding up, s 579E(10) is to be approached by reference to s 579E(10)(a) only: Kirby Street at [84]. 40 The term "eligible unsecured creditor" is defined in s 579Q of the Act as follows: Eligible unsecured creditor (1) Subject to subsection (2), for the purposes of the application of this Division to a group of 2 or more companies, a creditor of a company in the group is an eligible unsecured creditor of that company if: (a) both: (i) the creditor's debt or claim is unsecured; and (ii) the creditor is not a company in the group; or (b) the creditor is specified in the regulations. … (2) The regulations may provide that, for the purposes of the application of this Division to a group of 2 or more companies, a specified creditor of a company in the group is not an eligible unsecured creditor of that company. 41 The relevant provision of the Corporations Regulations 2001 (Cth) (Regulations) is reg 5.6.73: 5.6.73 Eligible unsecured creditor Creditors that are eligible unsecured creditors (1) For paragraph 579Q (1) (b) of the Act, the following creditors are specified: (a) a creditor to which either of the following applies as a result of a modification of the Act made under paragraph 571 (1) (d) of the Act: (i) a debt payable by a company or companies in a group to any other company or companies in the group is not extinguished; (ii) a claim that a company or companies in a group has against any other company or companies in the group is not extinguished; (b) a creditor that is determined by a Court to be an eligible unsecured creditor. Creditors that are not eligible unsecured creditors (2) For subsection 579Q (2) of the Act, a creditor that is determined by a Court not to be an eligible unsecured creditor is specified. 42 Because there has been no modification of the kind referred to in reg 5.6.73(1)(a) of the Regulations and the Court has not made, or been invited to make, any determination as envisaged by reg 5.6.73(1)(b) or reg 5.6.73(2), the only creditors to be taken into account under s 579Q are those mentioned in s 579Q(1)(a) being, in summary terms, unsecured creditors of one or more of the defendants where those creditors are not themselves defendants. 43 With respect to what is "material disadvantage", in Hutson (liquidator), in the matter of WDS Limited (in liq) (Receivers and Managers Appointed) [2020] FCA 299, Markovic J said at [62]: The determination of whether an eligible unsecured creditor would be materially disadvantaged by the making of a pooling order is a question to be determined in all of the circumstances of the case: Re Walker at [42], [50]. Relevant matters to take into account in determining that issue include the dividend payable to creditors in a pooled scenario and whether any creditor has appeared to object to the making of the proposed pooling order: Re Walker at [40]; Re Aboriginal Connections at [42]. 44 I am satisfied that s 579(10) of the Act does not preclude the making of a pooling order for the following reasons. 45 First, none of the creditors of the sixth to twenty ninth defendants could be materially disadvantaged by the making of the pooling order given the evidence of Mr Hathway that each of the administrations of the sixth to twenty ninth defendants are presently without, or, with only limited funds and it is unlikely that sufficient funds will be recovered in any of the administrations of the sixth to twenty ninth defendants to enable a dividend distribution. 46 Second, the Liquidators have distributed three dividends to unsecured creditors of the first to fifth defendants in an aggregate amount of approximately $2.3 million. 47 Third, Mr Hathway gives evidence that the ATO has submitted a formal proof of debt for $20,343,140.97. Even if the whole of the $385,488.83 presently remaining in the pooled administration of the first to fifth defendants was paid to the ATO as a dividend, this would be a further return of just under 2 cents on the dollar, as opposed to no further return if the pooling order is made. In any event, as explained above, the ATO has confirmed in writing, after it being fully informed of the practical effect of making a pooling order, that it has no objection to the pooling order being made. 48 Fourth, the Liquidators have otherwise given notice of these proceedings and the hearing date to creditors of each of the defendants under s 579J of the Act. The Liquidators have not received any objection to a pooling order being made from any creditor of any of the defendants, nor has any creditor appeared at the hearing and opposed the making of the orders sought in the Originating Process. 49 In the circumstances, I am satisfied that: (a) the pooling order would not materially disadvantage an eligible unsecured creditor of a company in the group; and (b) in any event, the only eligible unsecured creditor that could potentially be said to be materially disadvantaged, being the ATO, has effectively consented to the making of the order. 50 For the reasons set out above, I am satisfied that an order determining that the defendants constitute a "pooled group" for the purposes of s 579E of the Act should be made.

D. ANCILLARY AND OTHER ORDERS 51 The plaintiffs also seek two ancillary orders pursuant to s 579G(1) of the Act. 52 First, an order that the plaintiffs are only required to lodge one annual administration return, within the meaning of s 70-5 of the Insolvency Practice Schedule (Corporations), being Sch 2 to the Act (IPS), for the group and not an annual administration return for each defendant. 53 Second, an order that the plaintiffs are only required to lodge one end of administration return, within the meaning of s 70-6 of the IPS, for the group and not an end of administration return for each defendant. 54 I am satisfied that these ancillary and largely consequential orders should be made. 55 The plaintiffs also seek an order that the costs of these proceedings be costs in the pooled winding up of the defendants. I am not aware of any reason why such a costs order should not be made.

E. DISPOSITION 56 For the reasons set out above, the pooling and ancillary orders sought by the plaintiffs will be made. I certify that the preceding fifty-six (56) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Halley.

SCHEDULE OF PARTIES NSD 481 of 2023 Defendants Fourth Defendant: LIVERPOOL BUSINESS ESTATE PTY LTD (IN LIQUIDATION) (ACN 126 849 634) Fifth Defendant: SOUTHERN CROSS ESTATE DEVELOPERS PTY LTD (IN LIQUIDATION) (ACN 119 092 634) Sixth Defendant: E Z HIRE PTY LTD (IN LIQUIDATION) (ACN 159 848 450) Seventh Defendant: MERHIS MANAGEMENT GROUP PTY LTD (IN LIQUIDATION) (ACN 602 122 716) Eighth Defendant: PAYROLL MANAGEMENT PTY LTD (IN LIQUIDATION) (ACN 122 191 422) Ninth Defendant: BATROUNI HOLDINGS (AUST) PTY LTD (IN LIQUIDATION) (ACN 159 086 905) Tenth Defendant: DONOVAN DEVELOPMENTS PTY LTD (IN LIQUIDATION) (ACN 165 367 724) Eleventh Defendant: HSL DEVELOPMENTS PTY LTD (IN LIQUIDATION) (ACN 601 461 821) Twelfth Defendant: LE CHATEAU DEVELOPMENTS PTY LTD (IN LIQUIDATION) (ACN 161 482 328) Thirteenth Defendant: MERHIS BLACKTOWN PTY LTD (IN LIQUIDATION) (ACN 165 912 747) Fourteenth Defendant: MERHIS BUILDING SYSTEM PTY LTD (IN LIQUIDATION) (ACN 165 912 747) Fifteenth Defendant: MERHIS CONNECT PTY LTD (IN LIQUIDATION) (ACN 628 531 822) Sixteenth Defendant: MERHIS CORP PTY LTD (IN LIQUIDATION) (ACN 602 121 737) Seventeenth Defendant: MERHIS FAIRFIELD PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 609 753 371) Eighteenth Defendant: MERHIS FINANCE PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 169 444 008) Nineteenth Defendant: MERHIS LIVERPOOL PTY LTD (IN LIQUIDATION) (ACN 621 766 265) Twentieth Defendant: MERHIS LIVING PTY LTD (IN LIQUIDATION) (ACN 624 869 487) Twenty First Defendant: MERHIS PROP DEV PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 609 753 059) Twenty Second Defendant: MIKEON PROJECTS PTY LTD (IN LIQUIDATION) (ACN 602 122 252) Twenty Third Defendant: NKMH HOLDINGS PTY LTD (IN LIQUIDATION) (ACN 102 384 314) Twenty Fourth Defendant: NMKM INVESTMENTS PTY LTD (IN LIQUIDATION) (ACN 095 962 646) Twenty Fifth Defendant: RICKARD APARTMENTS PTY LTD (IN LIQUIDATION) (ACN 600 187 317) Twenty Sixth Defendant: OGER HOLDINGS (AUST) PTY LTD (IN LIQUIDATION) (ACN 159 086 898) Twenty Seventh Defendant: HASSALL DEVELOPMENTS PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 608 342 712) Twenty Eighth Defendant: NERA DEVELOPMENTS PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 607 373 777) Twenty Ninth Defendant: GOLDENIA DEVELOPMENTS PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 164 693 181)