Horton Asset Pty Ltd v HMSY Group Pty Ltd, in the matter of HMSY Group Pty Ltd [2025] FCA 1051

1. The plaintiff provide a copy of these orders to the following within seven days:

(a) AHMA Pty Ltd;

(b) AIMC Pty Ltd;

(c) Mohamad El Jarrar as Trustee for the Hamka Family Trust;

(d) Mohamad El Jarrar as Trustee of the LJ Family Trust;

(e) YDZZ atf Yahya Diana Family Trust;

(f) Hussein Soukie;

(g) IMS Aust Pty Ltd;

(h) Mohamad El Jarrar;

(i) SSS Aus Pty Ltd;

(j) SSS NSW Pty Ltd;

(k) Synergy Scaffolding Holdings (SSH) Pty Ltd; and

(l) Norman Formisano.

1. Any party who can demonstrate a sufficient interest has liberty to apply to vary or discharge orders 1 or 2 above, within 21 days from the date of these orders, on three business days' written notice to the plaintiff, the Liquidator, and the Court.

1. Before the Court is an application brought by Horton Asset Pty Ltd seeking orders pursuant to s 445D of the Corporations Act 2001 (Cth) terminating a deed of company arrangement entered into by the defendant, HMSY Group Pty Ltd (Company) on 7 February 2025 (DOCA). In the alternative, Horton seeks orders setting aside the resolution approving the Company's entry into the DOCA pursuant to s 75-41 of the Insolvency Practice Schedule (Corporations), being Schedule 2 to the Act.
2. Horton relies on affidavits of Xiangyu Chen of 18 February 2025 and Yu Chen of 4 March 2025, both of whom are solicitors representing Horton. It also relies on various affidavits of service.
3. Horton was represented at the hearing by Ms N Bailey of counsel. The Deed Administrator appeared and was represented by Mr MK Condon of senior counsel, who indicated that his client neither opposed nor consented to the application.
4. Horton served the application and supporting materials on all but one of the related entities referred to below. Formal service was not effected upon Mariam Hamka, despite several attempts. The evidence indicates that discussions after an attempt at personal service was made led to a conversation with a solicitor representing Ms Hamka who indicated that he would take instructions as to whether or not he could accept service on her behalf. He did not further respond. However, that evidence is sufficient for me to conclude that Ms Hamka was aware of the application, but chose not to participate in the proceedings.
5. Horton has standing to bring this application pursuant to s 445D(2)(a) of the Act, as a creditor of the Company. It principally relies on ss 445D(1)(f) and (g) of the Act.
6. Section 445D of the Act provides:

(1) The Court may make an order terminating a deed of company arrangement if satisfied that:

...

(f) the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be:

(i) oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or

(ii) contrary to the interests of the creditors of the company as a whole; or

(g) the deed should be terminated for some other reason.

1. For the reasons set out below, I consider that it is appropriate to make the orders sought pursuant to s 445D(1)(f) of the Act.

1. In July 2016, Horton lent money to the Company for the proposed purchase and development of real estate located in Padstow, New South Wales. The development did not proceed and the Company instead sold the property in several parcels.
2. In March 2024, Horton commenced proceedings against the Company, seeking recovery of the money lent and interest. Default judgment was entered in Horton's favour on 16 December 2024 in the amount of $2,016,642.47 plus costs: Horton Asset Pty Ltd v HMSY Group Pty Ltd [2024] NSWSC 1619.
3. On 28 June 2024, the New South Wales Supreme Court made Orders for the net proceeds of the sale of the last remaining block of land purchased for the purpose of the property development to be held in the Company's solicitor's trust account. They amounted to $442,483.27 and are referred to below as the funds in trust.
4. On 17 December 2024, Horton filed an ex parte application to wind up the Company.
5. There was a change of directors after the filing of the application. On 23 December 2024, Norman Formisano was appointed its sole director. Prior to his appointment, Ali Hamam held that office from 20 February 2024 until 23 December 2024. Prior to Mr Hamam, from 26 February 2021 until 20 February 2024, the sole director of the Company was Hussein Soukie.
6. On 27 December 2024, prior to the hearing of the winding up application, the company by its director arranged for Mohammad Najjar to be appointed as voluntary Administrator.
7. On 28 January 2025, the Administrator issued a Report which noted:

(a) that the current director, Mr Formisano, had no knowledge of the Company's books and records prior to his appointment, which was six days prior to the winding up application being filed;

(b) that the Company's former solicitors asserted a lien of $96,102 over funds held in trust;

(c) that there were 12 related entity creditors (related entities) in respect of which investigations would be undertaken in a liquidation concerning any unfair loans and insolvent trading claims and identified some indicia of insolvency and the prospect of a presumption of insolvency applying;

(d) that a DOCA was proposed, attaching a draft form; and

(e) a recommendation that the Company be placed into liquidation and stating, as an estimate, that participating ordinary unsecured creditors would receive about 5.4 cents in the dollar under the proposed DOCA and between 0.3 and 19.7 cents in a winding up.

1. On 5 February 2025, the second meeting of creditors of the Company was held. The minutes record that the creditors resolved, notwithstanding the recommendation of the Administrator, that the Company enter into the DOCA. The vote in favour of the DOCA was passed as a result of the voting by ten of the related entities, who had lodged claims totalling $2,279,193.75 as against the votes of two unrelated entities, one being Horton and the other being Lilygao Pty Ltd, whose combined claims were for debts amounting in total to $2,044,176.83.
2. As a result, Mr Najjar became the Deed Administrator.

1. The case advanced by Horton may be briefly stated and confined to its application under s 445D(1)(f).
2. Horton contends that the DOCA is oppressive or unfairly prejudicial to, or unfairly discriminatory against it, because the effect of the DOCA is to preference the claims of the related entities whilst disadvantaging the claims of the unrelated entities, including Horton and Lilygao, in circumstances where there are no reasonable grounds for doing so. Horton submits that the Report identifies potential insolvent trading claims that lead to the conclusion that there is a not unrealistic prospect of the Company recovering more in a liquidation, including by pursuit of those claims, than through the performance of the DOCA, citing Britax Childcare Pty Ltd, in the matter of Infa Products Pty Ltd v Infa Products Pty Ltd (Administrators Appointed) [2016] FCA 848 at [93].

1. In the DOCA, the defined terms make a distinction between "Non-Participating Creditors" and "Participating Creditors". "Non-Participating Creditors" are defined by a list of 15 individuals, trustees of trusts, and companies. All but three of those are identified by the Administrator in the Report as "related entities". Of the three exceptions one is a former director of the Company, another is a shareholder of the Company and director or former director of one of the related companies, and none of the three lodged any proof of debt. A "Non-Participating Claim" is defined to mean any claim (other than a secured claim) of any Non-Participating Creditor.
2. By contrast, "Participating Creditor" is defined as a creditor in respect of a "Participating Claim", being a claim that is not secured or a Non-Participating Claim.
3. The DOCA provides in cl 7.1 and the Reference Schedule that there will be a Deed Fund controlled by the Administrator, which will comprise the funds in trust and any as yet unidentified property of the Company. There is no provision in the DOCA for the Administrator to conduct investigations into voidable transactions for the benefit of the recovery of creditors which would otherwise be available in a liquidation and no indication that there will be any further funds available.
4. Clause 10.2 provides for the distribution of the Deed Fund, which must be in the order set out in the Reference Schedule, being payment of the Administrator's remuneration and expenses, then the Deed Administrator's remuneration and expenses, then the payment of any petitioning creditor's costs, and finally the payment of the claims of other Participating Creditors in the order set out in s 556 of the Act.
5. Notably, the DOCA makes no provision for the payment of the Non-Participating Creditors, with the apparent consequence that they will receive no payment from the Deed Fund. This is made express in clause 11.1 of the DOCA.
6. The DOCA provides in clause 12.1 that Participating Creditors must accept their entitlements under the deed "in full satisfaction and complete discharge" of their claims, once the arrangements in the deed have been completed. In clause 13.1, the DOCA provides that Non-Participating Claims shall not be compromised or released by the operation of the deed upon its completion.
7. The effect of these arrangements is that the claims of Participating Creditors, including Horton, will be released upon completion of the deed, but those of Non-Participating Creditors are not, leaving the Non-Participating Creditors free to pursue their claims against the Company.
8. So summarised, it may be thought that this arrangement serves to preference Horton and other Participating Creditors, because it is they who are entitled to distributions from the funds held. However, this must be considered in the light of the potential recovery in the event of the winding up of the Company.
9. In this regard the Report of the Administrator observes that a liquidator has the right to recover property or compensation from directors and third parties whereas a deed administrator does not.
10. In reviewing potential claims that may be brought under a liquidation, the Report relevantly says:

(1) that it has identified two potential unfair preference payments made to Lilygao in respect of amounts of $500,000 and $1,488,849 that warrant further investigation;

(2) that further investigation would be required to ascertain whether loans made by related entity creditors constitute unfair loans. As I have noted, the related entities claim debts to them in excess of $2,000,000, many of which are likely to be in the form of loans;

(3) that there is the potential for a creditor or the liquidator to pursue an insolvent trading claim against the former directors. The Report refers to an absence of company books and records for the Company. It states that it is probable that the Company contravened s 286 of the Act by not keeping adequate written financial records, and that the directors contravened s 344 of the Act by failing to take all reasonable steps to ensure the Company complied with its obligations in this regard. It also states that it is probable that the directors contravened s 438B by not delivering all books in their possession that relate to the Company. The absence of books and records would lead to a presumption of insolvency pursuant to s 588E of the Act. Furthermore, the Report examines the historical financial position of the Company and notes for each financial year ending in 2019, 2020 and 2021, the Company had a considerable deficit of total equity and that at the date of the appointment of the Administrator, the liabilities over assets of the Company exceeded $6 million. After reviewing five potential defences to such a claim under s 588H of the Act, the Administrator concludes that no facts, matters or circumstances suggest that any of the defences under that provision would apply if the Company is wound up and legal proceedings against the former directors for insolvent trading are commenced.

1. Each of the points identified in (1) to (3) above represent potential areas of investigation and recovery for the Company. The evidence of Mr Chen includes real estate owner enquiry searches for the former directors of the Company, which reveal that each is the owner or part owner of real estate in New South Wales. The historical transfer values of the properties identified suggest that the directors are likely to hold substantial equity in those properties such that a successful claim is likely to yield a return to creditors. None of these investigations or returns would be available under the DOCA.
2. Mr Chen gives evidence on information and belief that a director and authorised representative of Horton has indicated that Horton would consider funding a liquidator to conduct investigations into the Company should the DOCA be terminated.
3. In Re SBL Solutions Pty Ltd (subject to a deed of company arrangement) [2021] NSWSC 1002, Black J said:
   1. ... whether a deed of company arrangement is oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more of the company's creditors or is contrary to the interests of the creditors of the company as a whole, and whether that is the case will be determined by reference to the general principles underlying Pt 5.3A, including by reference to a creditor's right to be paid or wind up a company or have the company administered by the administrator in a way which will see the creditor paid from the company's property: Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd (2005) 228 ALR 598; [2005] WASC 261 at [59]-[60]; Mondello Farms Pty Ltd v Annatom Pty Ltd (subject to deed of company arrangement) (2007) 64 ACSR 91; [2007] SASC 296 at [114]; Re Recycling Holdings Pty Ltd (2015) 107 ACSR 406; [2015] NSWSC 1016 at [60]-[61]; Guo v Song [2018] NSWSC 12 at [148]; Citadel Financial at [22].
4. That purpose is set out in s 435A of the Act and is to ensure that the business, property and affairs of an insolvent company are administered in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence, or, if that is not possible, results in a better return for the company's creditors and members.
5. In Britax, I observed at [115]:
   1. In deciding whether a deed is oppressive or unfairly prejudicial within the subsection, the Court will have regard to the following factors:

(1) the objects of Part 5.3A;

(2) the interests of other creditors, the company and the public;

(3) the comparable position of the creditor on a winding up compared with their position under the deed; and

(4) other relevant facts such as the relative position of all creditors under the Deed (that is, whether they are better off), the existence of a collateral benefit to the shareholders and the whole of the effect of the Deed;

TiVo, Inc v Vivo International Corporation Pty Ltd (subject to deed of company arrangement) [2014] FCA 789; (2014) 9 BFRA 583 (TiVo) at [54], per Gordon J.

1. The inquiry under section 445D involves two stages. Each is related. The first is whether one of the grounds referred to in subsection (1) is established. It is sufficient if the Court is satisfied that there is a "not unrealistic prospect that there may be a return to creditors on a winding up that is better than under the [Deed]": Britax at [93], quoting In the matter of Mustang Marine Australia Services Pty Ltd (admin apptd) - Perpetual Trustee Company Ltd v Mustang Marine Australia Services Pty Ltd [2010] NSWSC 1429 at [136]. The second, which arises only if the first is established, is whether as a matter of discretion, the deed should be terminated: In the matter of Recycling Holdings Pty Limited [2015] NSWSC 1016; 107 ACSR 406 (Recycling Holdings) at [29], cited in Britax at [90].
2. The plaintiff bears the onus of establishing that each of the stages have been satisfied: Britax at [91]. I am satisfied that Horton has discharged that onus in the present case.
3. The effect of the DOCA is oppressive, prejudicial and contrary to creditor interests within s 445D(1)(f). If the DOCA were permitted to continue to completion, the various avenues of exploration for recovery from the former directors of the Company would remain unexplored. The claim of Horton would be met by reference only to the funds in trust which would likely yield a small fraction of its claim. This may be reduced further once all creditors have lodged claims. The Report refers to the likelihood of the Australian Taxation Office lodging a claim. There may be others.
4. By contrast, the related entities, a number of which appear to be controlled or directed by former directors of the Company, will be free to advance their claims against the Company upon the completion of the DOCA. Any conduct in contravention of the Act which may be the subject of recovery by a liquidator will remain unexplored.
5. In relation to the exercise of discretion, the primary consideration is the interest of the creditors. In this regard, I note that the majority of creditors have voted in favour of entry into the DOCA. However, that must be tempered by the fact that the DOCA identifies, in effect, two classes of creditor. The discrimination is apparently because the Non-Participating Creditors are related entities to the Company. On its face, that might be a good reason why those creditors are not to benefit from any payment from the Deed Fund. However, upon closer examination, the segregation would appear to have the effect of insulating some or all of those entities from the closer scrutiny of a liquidator and depriving the Participating Creditors of an opportunity to benefit from that scrutiny by any subsequent recovery. On the basis of the materials before me, I am satisfied that there is a not unrealistic prospect that those investigations would yield an improved return to the creditors.
6. Further, there is no evidence to indicate that the Company will continue to trade or, if it does, what it will do. To the extent that it does continue to trade, that cannot be to the benefit of Horton or the other Participating Creditors because, by the effect of the DOCA, they receive no benefit from any monies realised.
7. Accordingly, the balance favours the grant of Orders that pursuant to s 445D the DOCA entered into by the Company on 7 February 2025 be terminated.

I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Burley.