In the matter of Anne Lewis Pty Limited [2016] NSWSC 1860

Supreme Court of NSW|2016-11-09|Before: Black J

as liquidator of Anne Lewis Pty Ltd (in liq) (Plaintiff) Pamela Lewis (First Defendant) Peter Howarth Lewis (Second Defendant) Roger Lewis (Third Defendant) Representation: Counsel: S Golledge (Plaintiff/Liquidator) G D McDonald (First Defendant)

Solicitors: O'Neill Partners (Plaintiff/Liquidator) Bartier Perry (First Defendant) File Number(s): 2016/83803

Application for leave to distribute surplus and directions

By Amended Originating Process filed on 7 July 2016 Mr Hugh Thomas, as liquidator of Anne Lewis Pty Ltd (in liq) ("Company") sought, broadly, an order granting leave under s 488(2) of the Corporations Act 2001 (Cth) to distribute the surplus in the liquidation of the Company to the Defendants; that he have leave to make such adjustments as between the two contributories as were necessary to equalise their distributions; and leave for distributions of a cash amount and an in specie distribution of shares. The liquidator also sought directions in the alternative. That Amended Originating Process was further amended today to substitute Mr Roger Lewis, who has recently been appointed as joint executor of the estate of Mr Geoffrey Lewis as a defendant, in place of a former executor.
By an Interlocutory Process filed on 31 October 2016, the liquidator also sought an order that the Court approve his remuneration, and also that the Court approve that remuneration prospectively with respect to work to be performed to finalise the liquidation. An order was also sought approving, nunc pro tunc, the liquidator's retainer with his solicitors in respect of the proceedings.
There have been some developments in the manner in which the application has proceeded, which are reflected in the form of short minutes of order which are now sought by the liquidator. Those developments seem to me to have reflected a sensible approach to accommodating issues which remain open in the liquidation or in the proceedings.
The first development is that special leave is now sought to make a distribution of a cash amount to the executors of the estate of the late Mr Geoffrey Lewis, and to distribute, in specie, up to 50% of the value of a specified share portfolio. That proposed distribution of the share portfolio has substantial value, which will of course vary as the value of the shares varies, but is presently in excess of $3.75 million. The liquidator also seeks a direction under s 479 of the Corporations Act as to matters relating to the distribution in specie, and as to an adjustment to be made in calculating the distribution to be made to Mrs Lewis. He seeks an order which is in relatively common form dispensing with reg 5.6.71 of the Corporations Regulations 2001 (Cth), so far as it would contemplate a schedule of contributories in Form 551 annexed to the order, and an order that a publication requirement under r 7.9(2) of the Supreme Court (Corporations) Rules 1999 (NSW) be dispensed with. The application for approval of the liquidator's remuneration is now to be adjourned, although substantial evidence has been led in respect of it, to allow the liquidator to address one further matter as to which the Court would be assisted by further evidence.
I should first refer to the detailed affidavit evidence which has been led in respect of the application, before turning to the particular orders which are sought, which are largely not contentious between the parties. I will, nonetheless, need to be affirmatively satisfied that each order may properly be made, so far as each requires the exercise of a statutory discretion by the Court. The liquidator relies on an affidavit of Mr Thomas sworn 16 March 2016, which set out aspects of the background to the conduct of the liquidation and addressed the circumstances in which the liquidator sought to pay an equalising distribution to the Second and Third Defendants, to adjust for the fact that an amount had been withdrawn from the Company by the First Defendant, Mrs Lewis, after his appointment. That affidavit also referred to the basis on which an in specie distribution of securities of the Company was proposed, and to a proposal to retain a portion of those securities which would otherwise be distributed to Mrs Lewis to reflect amounts owed by Mrs Lewis pursuant to the orders previously made by White J in related proceedings, and the further orders that I will make to give effect to the matters determined above. That matter is in turn reflected by a proposed direction that the liquidator make adjustments to reflect the liability of Mrs Lewis in respect of the orders made in those proceedings.
The liquidator also refers, in that affidavit, to the amount that would be retained after the proposed distribution, which is on any view substantial, and reflects the likelihood of further outgoings from the Company, in the period prior to completion of the liquidation, including a potentially substantial tax liability. The extent of the amount retained was a factor which may have caused difficulty for an application to distribute the surplus on a final basis, which would have had to be forward looking to a surplus which was not yet known, which could only be distributed sometime in the future. That difficulty has been sensibly addressed by the liquidator, who instead seeks an order permitting further interim distribution today. I should add that this will be the second interim distribution in respect of the Company, a previous interim distribution having been approved by an earlier judgment of the Court.
A second affidavit of Mr Thomas dated 6 July 2016 establishes a matter which is relevant to the application, namely that the Company has a very substantial share capital, in excess of $1,180,376, which would ultimately be returned to shareholders. The liquidator has calculated the surplus to which this matter relates as the amount to be distributed in excess of that share capital. The liquidator relies on two further affidavits dated 26 September 2016, one initially filed in the 2014 proceedings but read in these proceedings which relates largely to his remuneration, and to the extent to which that remuneration was incurred in respect of work done in relation to the 2014 proceedings. I will defer addressing the evidence in respect of that matter to the point at which I am required to deal with the liquidator's remuneration application.
Mr Thomas' further affidavit dated 26 September 2016 in these proceedings also deals with issues in respect of remuneration, but provides important evidence, ordinarily required in an application of this kind, as to the steps which have been taken to identify creditors and ensure that their debts have been discharged, to the recovery of certain property of the Company, as a result of the proceedings determined by White J, and to the basis of the proposed distribution, involving a proposed equalising distribution to which I have referred above. The affidavit also addresses a second stage of distribution, comprising a distribution of 50% of the value of the share portfolio in specie, which is now thought to proceed as the interim distribution; and then, finally, a potential further distribution of remaining shares in specie, to the extent that they do not need to be sold to address the outgoings contemplated in the final stage of the liquidation. Again, that affidavit deals in detail with remuneration, which I need not presently address for the purposes of this application.
A further affidavit of Mr Thomas sworn 3 November 2016 deals with the position of the retainer of his solicitors, as to which he had not previously sought approval under s 477(2B) of the Corporations Act although, as events have developed, it is plain that retainer extended for a period of greater than three months. It is, of course, not uncommon that applications for the approval of such retainers are dealt with on a nunc pro tunc basis, and it is also not uncommon that the need for such approval is only recognised at a later stage of the liquidation. Mr Thomas also updated the calculation as to his remuneration at that point, but I will again defer dealing with that matter until I come to deal with the question of approval of his remuneration.

Order for special leave for interim distribution and directions as to in specie distribution

I now turn to the form of orders that are sought. The first is an order under s 488(2) of the Corporations Act granting special leave to Mr Thomas to make an interim distribution of the amount of $184,405.31 to the Second and Third Defendants as executors of Mr Geoffrey Lewis' estate and up to 50% of the value of the share portfolio to both contributories as noted above. That order is not opposed by the First Defendant, Mrs Pamela Lewis, the other shareholder in the Company, who is represented by Mr McDonald in this application. The nature of the court's jurisdiction to grant special leave for a proposed distribution is well-established and I need deal with it only briefly, so far as this application ultimately does not raise controversial issues. Section 488(2) of the Corporations Act relevantly provides that a liquidator may distribute a surplus only with the Court's special leave. That provision is intended to ensure that there is in reality a surplus, in that creditors' claims have been recognised and met in full and also to ensure that the correct relativities among contributories have been observed: CGU Workers Compensation (NSW) Ltd v Ascom Service Automation (Australia) Pty Ltd [2005] NSWSC 747 at [4]; Re Allseal Floor Preparations Pty Ltd (in liq) [2015] NSWSC 1990 at [4]. The phrase "special leave" requires that a special application be made to the court, as has occurred in this case: Re D S Millard & Son Pty Ltd (1997) 24 ACSR 71 at 72; Re HIH Services Pty Ltd (in liq) [2012] NSWSC 1188 at [10].
I am satisfied, having regard to Mr Thomas' evidence, that appropriate inquiries have been made to determine and identify the Company's creditors and that their claims have been met, and I am also satisfied that the amount now available, after setting aside amounts to meet future outgoings, remuneration and costs of the liquidator, can properly be treated as a surplus available for distribution on an interim basis. I can more readily draw that conclusion where the application has been served upon both contributories of the Company. Mrs Lewis who appears and has otherwise been in a different interest to the liquidator, consents to this order, and there is evidence that the executors of the estate of the late Mr Geoffrey Lewis also consent to the order.
I am satisfied that I can properly make an order under s 488(2) of the Corporations Act, in respect of the distribution by interim distribution. I should add that it seems to me that Mr Thomas is plainly correct that it is not necessary or desirable that he retain the substantial amount involved, beyond the extent necessary to meet future outgoings and claims against the Company including his remuneration, where contributories would in the ordinary course benefit from the receipt of those funds.
Mr Thomas also seeks a direction, under s 479 of the Corporations Act, that he would be justified in distributing the surplus, including the interim distribution, by making an in specie distribution of the share portfolio. That order is framed in terms that invites me to approach that question generally, and not only for the purposes of the interim distribution, and it seems appropriate that I do so in order that the matter need not again be addressed in respect of a third distribution, unless there has then been any change in circumstances. The Court has power to make a direction under s 479 of the Corporations Act in respect of a matter which involves issues of legal complexity, since, in those circumstances, it is proper that the liquidator have the benefit of advice from the Court which will give him a measure of protection in relation of the course he seeks to take, provided that fair disclosure has been made to the Court in respect of the relevant circumstances. Plainly, the question of an in specie distribution, particularly in the present case where the Company is subject to Table A to the Companies Act 1936 (NSW) involves a matter of legal complexity. There has also been correspondence with Mr Peter Lewis, one of the executors, who has expressed the view that approval for an in specie distribution is not required. It is, however, plain that both contributories consent to an in specie distribution, so far as Mr Lewis has, in effect, suggested that it should be implemented and court approval for it is not required, and Mrs Lewis, represented by Mr McDonald, has indicated that she consents to this order.
There is a question whether the Company would have power to make such a distribution, subject to its constitution and the complex issues which arise in respect of transitional provisions in respect of a company incorporated under earlier legislation, under s 124(1)(d) of the Corporations Act which allows a power for a company to distribute any of the company's property among its members, in kind or otherwise. Here the unanimous consent of the directors and members to that in specie distribution is established. In Longley v ACN 090 609 868 Pty Ltd (in liq) [2010] FCA 1468; (2010) 81 ACSR 517, Finkelstein J held that a distribution in specie was permissible in the context of a winding up, since a company and its creditor, relevantly, could substitute a different obligation for the obligation to make payment, and there was no reason why creditors (or, in this case, contributories) could not unanimously agree to have transferred to them a company's assets in liquidation instead of the proceeds of the sale of those assets. In Official Trustee in Bankruptcy v Buffier [2006] NSWSC 870 at [64], Austin J noted that the Court could make an order for an in specie distribution, even if there was no evidence of the contents of the company's constitution, where the sole contributory of the company consented to that distribution, and no remaining creditors of the company were adversely affected by it. Barrett J (as his Honour then was) took the same view in Re FAI Car Owners Mutual Insurance Company Pty Ltd [2009] NSWSC 1350; (2009) 76 ACSR 164 at [46], and I followed that approach in Re Allseal Floor Preparations Pty Ltd (in liq) above. The same reasoning is applicable, as I noted in Re Allseal Floor Preparations Pty Ltd (in liq) above at [7], where creditors' claims have been discharged and what is proposed is a distribution of assets to contributories. The course is plainly a sensible one where, on Mr Thomas' evidence, and from the correspondence which is in evidence, it appears that it will allow a more advantageous realisation of the Company's assets than the sale of the relevant securities.
I am satisfied that, where there is unanimous consent of the contributories to the in specie distribution of the Company's share portfolio, and where there is evidence that creditors of the Company have been paid out and will not be prejudiced by that course, then it is appropriate to give the direction sought in paragraph 2 of the short minutes of order, that the liquidator would be justified in making the interim distribution of the surplus by means of an in specie distribution of the share portfolio.

Equalising distribution

I can deal briefly with the third issue raised. The liquidator seeks a direction that he would be justified in calculating the distribution to be made to Mrs Lewis, making such adjustments as are necessary to equalise the amount to be paid to contributories after taking into account her liability to make payments to the Company arising in the 2014 proceedings. In submissions, Mr Golledge rightly draws attention to the rule in Cherry v Boultbee [1838] 41 ER 171, to the effect that a person who is both a claimant in, and a debtor to, a fund, cannot obtain payment of his or her claim out of the fund until he or she has first paid his or her debt into the fund. There is a qualification to that rule, not applicable here, to the extent that a company may be insolvent and a partial distribution will be paid out of it on a winding up.
It seems to me that it is not necessary to rely on the rule in Cherry v Boultbee above to make the direction which is sought, although the direction is consistent with that rule. It seems to me that the direction which is sought can be made, particularly where it has Mrs Lewis' consent, on the basis that it would be a proper course for a liquidator to have regard to the fact that there would be potential hardship to Mrs Lewis in funding a payment of a substantial amount of a judgment to the Company, shortly before she is to receive an amount of an interim distribution also in a substantial amount. In those circumstances, it is a pragmatic and responsible course, quite apart from its consistency with the rule in Cherry v Boultbee, for the liquidator to take the view that, rather than Ms Lewis being required first to make payment to the Company without taking into account the amount she will receive on a distribution, the two figures should be addressed by an equalising adjustment, in respect of the amount that would otherwise be payable and distributed to Mrs Lewis. On that basis, and also by reference to the consistency of the approach adopted with the rule in Cherry v Boultbee, I consider that I should make the direction sought in paragraph 3 of the orders, pursuant to s 479 of the Corporations Act.

Dispensation from formal of requirements

Orders 4 and 5 seek directions, which I noted above are in common form, that the Company need not annex a schedule in Form 551 pursuant to reg 5.6.71 of the Corporations Regulations and that the order for advertisement under r 7.9(2) of the Supreme Court (Corporations) Rules be dispensed with. Mrs Lewis consents to those orders, and they seem to me to be uncontroversial. No useful purpose would be served by annexing the schedule in Form 551, where the identity of the contributories is clear. There is no need for advertisement under r 7.9(2) where it is plain that creditors' debts have been discharged and that contributories are on notice of the application.

Approval of retainer of liquidator's solicitors

Next, the liquidator seeks an order under s 477(2B) of the Corporations Act that the Court approve, nunc pro tunc, the liquidator's retainer with his solicitors. Mrs Lewis does not consent to that order, but has not sought to be heard in opposition to it. Mr McDonald developed detailed submissions, which raised an interesting question as to whether such an order is properly required, and suggested that any requirement for such an order served no useful purpose. Interesting as that question is, the practice of seeking such orders by liquidators is well established, although perhaps not universally followed in practice. It seems to me that, as Mr McDonald fairly accepted, it is preferable not to determine a question of that kind where it is not necessary to do so where the grant of leave would in the relevant circumstances be uncontroversial.
The purpose of the requirement for leave under s 477(2B) of the Corporations Act is to ensure that the court exercises some oversight of the liquidator's action where the liquidator will, relevantly, enter a contract for more than three months. The court will grant such approval where it sees a case for the exercise of the power in the relevant circumstances, and the court does not seek to substitute its commercial judgment for that of the liquidator, but will instead satisfy itself that there is no error of law or bad faith or impropriety, and no other good reason to intervene by declining such approval.
The liquidator's evidence addresses the basis on which he considered that he may properly retain the solicitors who acted for him, who are experienced in the field of insolvency, and it seems to me that there is no reason to doubt the prudence of that retainer. The complexity of the issues raised are such that the liquidator plainly required legal representation, and there is no reason to think that it was not a reasonable choice to retain the solicitors to obtain such representation, at rates which are not unreasonable by industry standards. For those reasons, I will make order 6 as sought.

Other orders

An order is sought that the costs of the application form part of the costs of the winding up. That order was not opposed by Mrs Lewis and is plainly appropriate, whether this application advanced the winding up in the interests of contributories, by ensuring that assets are made available to them by way of the interim distribution.
Otherwise, I will make orders that deal with the preparation of the balance of the liquidator's application for remuneration for hearing, which is to be listed before me on 20 December 2016. I make an additional order, order 7A, that the Plaintiff serve and send to the Associate to Black J any further affidavit evidence and his submissions in support of the application for approval of his remuneration by 4pm on 7 December 2016. I make a further order 7B that the Defendants serve and send to the Associate to Black J any affidavit evidence in response and their submissions, identifying any basis for opposition to the application with specificity, by 4pm on 14 December 2016. I otherwise make orders in accordance with the short minutes of order in proceedings 2016/83803 in the form initialled by me and placed in the file.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 23 December 2016

Corporations (Supreme) Court Rules 1999(NSW)

Companies Act 1936(NSW)

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