Consideration and determination
- Section 461(1)(k) of the Corporations Act confers power on the Court to order that a company be wound up if the Court is of the opinion that it is just and equitable to do so. The cases in which orders are made under s 461(1)(k) conventionally fall into a number of classes, including those identified by Brereton J (as his Honour then was) in Re Catombal Investments Pty Ltd: [2] (1) failure of the substratum of the company; (2) deadlock or disagreement in the management of the company's affairs; (3) fraud in the formation of the company; (4) misconduct by the directors of the company; (5) constitutional and administrative vacuum in the management of the company; and (6) lack of confidence, fairness and public interest, and commercial morality. In relation to the second of those classes, it is not the case that any breakdown or loss of confidence between shareholders necessarily provides a sufficient foundation for winding up on the just and equitable ground. It is generally necessary to demonstrate that the breakdown is of a nature and degree that materially frustrates the commercially viable and sensible operations of the company in accordance with the shareholders' expectations, that the loss of confidence is justified, and that there is a restriction on the transferability of the shares of the applicant for winding up. [3]
- As counsel for the plaintiffs submitted, the power under s 461(1)(k) is not restricted to the classes referred to above, or to any particular classes of case. The concept of "just and equitable" is a broad one incapable of exhaustive definition. An applicant for winding up is entitled to rely on any circumstances of justice and equity that affect them in their relationship with the company, and each case must turn on its own facts. [4] Winding up under s 461(1)(k) must be just and equitable for all, not only for the applicant for winding up. [5]
- The persons who have standing under s 462 to apply for a winding up order under s 461(1)(k) include creditors of the company, including contingent or prospective creditors.
- Counsel for the plaintiffs submitted that ADCF and Pyramid Builders have standing under s 462 because they are both creditors (or at least contingent or prospective creditors) of Etna. It was further submitted that ADCF "in a sense … should have been a 49% shareholder [in] Etna save for Mr Lagan's and Etna's breaches of the warranties", referring to the alleged breaches relied on by the plaintiffs in the 2022 proceedings in support of their claims for relief referred to at [21] above. It was submitted that ADCF is "effectively in a position where they have paid for half of Etna but have no control, and there has been a complete relationship breakdown".
- I reject the submission that Pyramid Builders is a creditor of Etna. The evidence referred to at [21] above establishes that that Pyramid Builders incurred certain costs in providing services that Mr Abdelbadie engaged Pyramid Builders to provide in connection with the development of the Land in order to discharge ADCF's obligations to Etna under the December 2021 Minority Share Sale Agreement. On Mr Abdelbadie's own evidence, he considered Etna to be liable to reimburse him for the cost of providing those services. That evidence is consistent with Pyramid Builders being a creditor of Mr Abdelbadie in respect of the costs of those services. For the reasons explained at [27] above, ADCF's claim for restitution in the 2022 proceedings referred to at [22(4)] above is a further matter that tells against Pyramid Builders' claim to be a creditor of Etna in respect of the costs of those services.
- I accept that ADCF is a contingent creditor of Etna in respect of its claim for restitution in the 2022 proceedings referred to at [22(4)] above. The other claims for monetary relief in those proceedings are claims against Mr Lagan.
- I reject the submission that ADCF's payment of $1.5 million to Mr Lagan for 49 per cent of the shares in Etna that were never transferred to ADCF is relevant to its standing to make the winding up application under s 461(1)(k). As counsel for the plaintiffs unequivocally stated, ADCF no longer seeks to enforce its right to a transfer of those shares under the December 2021 Minority Share Sale Agreement. ADCF's $1.5 million payment is the basis of its damages claim against Mr Lagan in the 2022 proceedings. ADCF is an unsecured contingent creditor of Mr Lagan for damages for breach of warranty, and an unsecured contingent creditor of Etna in respect of the sum of $287,165 referred to at [22(4)] above.
- The plaintiffs seek an urgent winding up of Etna under s 461(1)(k) because "Mr Lagan has ceased communication and the reasonable inference is that Etna remains in default and that Manda may at any time go mortgagee in possession to sell [the Land]". Relying on Mr Sukkar's report to which I have referred above, it was submitted that the Land would fetch less than $4 million if sold in its present state, whereas it would fetch a gross value of $37.9 million if sold after completion of the development.
- Counsel for the plaintiffs submitted that Etna is:
"… essentially at the mercy of its single financier, which has the first registered mortgage over the property, [Manda]. But nobody else, including, relevantly, Mr Abdelbadie, through any entity, has any real traction with the company, itself, and so seeks for a liquidator to be appointed"
- The written submissions filed on behalf of the plaintiffs stated that:
"The plaintiffs' objective is to have a liquidator appointed to Etna that can protect [the Gosford property's] commercial value by dealing in a commercially effective way with Manda in a way that facilitates the extraction of that commercial value."
- During the hearing, counsel for the plaintiffs confirmed that the plaintiffs were seeking to have Etna wound up in order to attempt to influence, through a liquidator, the course of conduct that Manda will now take as the secured creditor and mortgagee, "in circumstances where … ADCF should have been a 49% shareholder".
- Counsel for the plaintiffs purported to give evidence from the Bar table that the development has not progressed beyond the demolition phase, and submitted that Etna should be wound up so that a liquidator would "be able to make commercial decisions, to make the tough decisions, to say well this should be developed and let's work out how to do that or sell that right". Counsel almost immediately walked that submission back, accepting that these are decisions for the receiver appointed by Manda, and will remain so even if Etna is wound up. Counsel then submitted that, in view of the significant gap between Mr Sukkar's valuation of the Land in its current state and the amount owing to Manda, there is a "good commercial rationale" for Manda to work cooperatively with a liquidator in circumstances where Mr Abdelbadie owns various construction entities. That prompted me to ask why the plaintiffs were seeking the appointment of a liquidator to achieve their stated objective, rather than simply having Mr Abdelbadie engage with the receiver directly.
- Rather than answering that question, counsel for the plaintiffs submitted that the Court should also take into account: (1) that Etna is insolvent; (2) that Mr Abdelbadie has been concerned that Etna's "asset pool" may be "diminishing"; (3) that "there is a real and significant concern on our part as to what happened to the $12 million‑odd drawn down from Manda by Etna by Mr Lagan, because there is just not $12 million worth of work that's been done"; (4) that Mr Lagan, as the sole director or Etna, had not instructed any solicitor to act for Etna to defend the 2022 proceedings, and had "apparently ignored" the undertakings that he gave to the Court in February 2023; (5) that there was an "apparent complete dereliction of Mr Lagan in discharging his duties as a director so that the company takes proper steps both in relation to its debt to its main debtor [sic - creditor], Manda, and in relation to its other potential creditors, including by either resolving or defending litigation": and (6) that Mr Lagan's failure to discharge his duties as a director of Etna was prejudicing the plaintiffs as unsecured creditors and "one time potential owner" of Etna. That sweeping submission was prefaced with counsel's acknowledgement that these matters were "not incredibly well fleshed out in evidence".
- The matters referred to at [43]-[44] above are the legal and commercial consequences of ADCF's position as an unsecured contingent creditor of Etna in circumstances where Manda has a registered mortgage over the Land and a security interest in Etna's other assets. Justice and equity do not require that Etna be wound up in order to give an unsecured contingent creditor a perceived opportunity to influence decisions that Etna's secured creditor is entitled to make in its own interests and, in the event that it decides to exercise its power of sale, subject to s 420A of the Corporations Act and the general law principles that apply to mortgagees and controllers exercising a power of sale.
- An unsecured creditor is not entitled to "traction" with the debtor, other than by taking such steps as may lawfully be available to it to pursue its claim and to recover the alleged debt against the debtor. ADCF has taken such steps by commencing the 2022 proceedings. Any breakdown in the relationship between ADCF and Etna is not a problem that affects the management of Etna. In the events that have transpired, neither ADCF nor Mr Abdelbadie have had any role in the management of Etna, and they have accepted that position by framing the claims for relief in the 2022 proceedings in the manner in which those claims have been pleaded.
- I have referred to ADCH's objective of obtaining a perceived opportunity to influence Manda's decisions through a liquidator because, in my opinion, the plaintiffs' submissions were based on the unrealistic premise that Manda will not give due consideration to how best to realise the value of the Land without the intervention of the hypothetical liquidator. As the plaintiffs' submissions accepted, there are sound commercial reasons for Manda to pay close attention to that question without the intervention of a liquidator. The amount owing to Manda under the Loan Agreement and Mortgage significantly exceeds what the plaintiffs contend to be the present value of the Land. Manda's rights under the Loan Agreement referred to above at [10] provide a range of options for Manda in the circumstances.
- Moreover, as I have noted at [47]-[48] above, counsel did not identify any reason why Mr Abdelbadie - drawing on his expertise in the construction industry - could not discuss these matters with Manda or the Receiver directly, rather than through the hypothetical liquidator. The only possible reason disclosed by the evidence is Mr Abdelbadie's representation to Etna and Mr Lagan that neither he, nor ADCF, nor any of their associates would contact any financier or prospective financier or potential purchaser. As referred to at [32]-[33] above, that representation was recorded in, and as the basis for, Mr Lagan's undertakings given to the Court in the 2022 proceedings. If the plaintiffs' objective in applying to wind up Etna in the present proceedings were to enable Mr Abdelbadie to attempt to use the hypothetical liquidator as an intermediary to do that which Mr Abdelbadie cannot do himself by reason of the terms of ADCF's undertakings in the 2022 proceedings, then it is my opinion that the present proceedings would be an abuse of process. This possible reason for ADCF seeking to wind up Etna did not become apparent to me until after the hearing of these proceedings, and I therefore did not put to counsel for the plaintiffs that the present proceedings may be an abuse of process. I will therefore refrain from expressing any concluded view about that matter, in circumstances where I have determined to dismiss the winding up application for the other reasons explained above and below.
- It remains to address the six points raised by the sweeping submission referred to at [48] above.
- In relation to the first point - Etna may be insolvent, but the evidence adduced in these proceedings did not establish that on the balance of probabilities. Much would depend on the current status of the refinancing negotiations, about which no evidence was placed before the Court. I acknowledge that ADCF complains that it lacks information about those negotiations due to Mr Lagan's alleged non-compliance with his undertakings in the 2022 proceedings. ADCF has taken no action to enforce those undertakings in the 2022 proceedings, or to compel production of relevant information in these proceedings.
- In relation to the second point, Mr Abdelbadie's evidence about his claimed concern that Etna's "asset pool" may be diminishing carries no weight for the reasons explained at [30] above.
- In relation to the third point, the plaintiffs' claimed concern about what happened with the funds drawn down by Etna under the Loan was not articulated in Mr Abdelbadie's evidence, and lacks substance and credibility having regard to the provisions of the Loan Agreement that permit Manda a significant degree of control over how the Loan funds are used. It is inherently probable that Manda exercised those rights when releasing funds under the Loan Agreement.
- In relation to the fourth and fifth points, the alleged conduct of Mr Lagan and Etna in the 2022 proceedings is a matter to be addressed in those proceedings, and is not grounds for winding up in these proceedings. Any concern on the part of ADCF about the manner in which Etna has conducted itself vis-à-vis its secured creditor are matters in respect of which Manda may exercise its own rights. Any such concerns would not render it just and equitable to wind up Etna at the suit of an unsecured, contingent creditor.
- The sixth point reverts to the plaintiff's reliance on ADCF's "status" as a "one time potential owner" of Etna, which is irrelevant for the reasons that I have already explained.
- For all of the reasons explained above, Pyramids Builders lacked standing to apply for the winding up of Etna under s 461(1)(k) of the Corporations Act, and ADCF failed to establish that it is just and equitable for Etna to be wound up in all the circumstances of this case. The proceedings must therefore be dismissed.