Solicitors:
Breene & Breene (Applicants)
M Whitbread (Solicitor for P D and J McLaughlin) - (Interested Parties)
File Number(s): 2013/204311
[2]
Nature of the application
I should first say something about the history of these proceedings, before turning to the content of the Amended Interlocutory Process filed today which is the subject of this application. There have been long running disputes between, on the one hand, Mr and Mrs McLaughlin, who are shareholders in Dungowan Manly Pty Ltd (in liq) ("Company"), and its other shareholders on the other. Those disputes involve proceedings at first instance and in the Court of Appeal. The Company was placed in voluntary administration, and then passed into liquidation, after judgment was given against it in those proceedings. The course of the administration and the liquidation then generated further proceedings, including the substantial issues addressed in my judgment in Re Dungowan Manly Pty Ltd (in liq) [2015] NSWSC 915 ("2015 Judgment").
By Interlocutory Process filed over a year ago, in June 2017, the Company's liquidators sought directions under s 511 of the Corporations Act 2001 (Cth) as to whether they should take steps to cause the Company to cancel its shares on issue and take certain associated steps or whether they (or voluntary administrators appointed to the Company) should issue a further levy to shareholders, in addition to the levy which had been the subject of the 2015 Judgment, and as to the proportions in which such further levy should be issued. That Interlocutory Process was heard on 30 November 2017 and, in my judgment delivered on 15 December ([2017 NSWSC 1771]) ("2017 Judgment"), I held that a direction should not be given for the cancellation of the shares in the Company, and that a direction could be made that, following the liquidators' appointment as voluntary administrators of the Company, they would be justified in issuing a further levy to shareholders if they were adequately funded to bring proceedings to enforce that levy.
I observed in the 2017 Judgment, in a passage to which Mr Assaf who appears for the liquidators, fairly draws attention (at [46]), that Brereton J had previously expressed the view, in another judgment in these proceedings, that there may be no harm in the issue of a further levy by the Company, even if the liquidators did not have the financial capacity to take enforcement proceedings if it was not met. I there observed that:
"While that view is plainly open, I would be inclined to take the view that the liquidators should preferably satisfy themselves as to their capacity to fund enforcement proceedings to their completion before issuing a further levy. At the very least, the fact that the liquidators are adequately funded to enforce that levy, if it is not met, ought to significantly increase the prospects that it will in fact be met; conversely, any perception by the Company's shareholders that the liquidators do not have the financial capacity to enforce a further levy would make it less likely that the shareholders would pay it, in order to avoid their incurring the costs of unsuccessfully defending enforcement proceedings in respect of that levy."
I deferred making a direction that the liquidators would be justified in issuing that further levy to permit them, and Mr and Mrs McLaughlin as the Company's two major creditors, to discuss the question whether they would be funded in respect of any litigation required to enforce a further levy. I also noted the possibility that a further direction would be made that the liquidators were justified in not taking the further steps sought, if Mr and Mrs McLaughlin, quite possibly sensibly and in their own interests, were not willing to fund the costs of enforcement proceedings in respect of the further levy. I adjourned the matter for what was originally intended to be a short period to allow those discussions to take place. The delay while those discussions took place, with multiple mentions of the matter in the interim, extended to a period of nearly seven months.
Now, nearly seven months later, by Amended Interlocutory Process filed today by leave, the liquidators seek several directions. The first, which was not pressed, was an aspect of the earlier application, namely whether they should cause the Company to cancel its shares on issue. I had addressed that matter in the 2017 Judgment and I need not address it further.
Second, the liquidators seek several directions which are expressed as an alternative to the cancellation of the remaining shares in issue on the Company. The first relates to whether they are justified to entering into a funding agreement in a form annexed to the affidavit of Mr Cathro sworn 5 July 2018 ("Funding Agreement"). I will return to the terms of that Funding Agreement below. The second, which I understand is also not pressed, is that the liquidators, in their capacity as liquidators, would be justified in issuing a further levy to shareholders in a specified amount or some other amount. There are difficulties, addressed in the earlier judgments, as to whether the liquidators would have capacity to issue such a levy, and, as I noted, I do not understand that that direction is pressed.
A further direction, in the alternative to the liquidators issuing a further levy, contemplates an order under s 436B of the Corporations Act that leave be granted to the liquidators to appoint themselves as joint and several administrators of the Company, and directions that they are justified in issuing a further levy to the Company's shareholders in the specified amount, or some other amount, in their capacity as voluntary administrators. A direction is also sought that the liquidators would be justified, as voluntary administrators, in entering into the proposed Funding Agreement. Several modifications to the operation of the Corporations Act and the Insolvency Practice Rules (Corporations) 2016 (Cth) in relation to the Company are sought, under s 447A of the Act, largely to avoid duplication with work that had previously been done by the voluntary administrators which were previously appointed to the Company before it passed into liquidation. The question whether those variations would be justified would only arise if the liquidators were first to be granted leave to enter into the Funding Agreement and were to be given the direction that they seek as to the issue of the relevant levy.
The Amended Interlocutory Process also refers to the question of the proportions in which shareholders of the Company would be levied, which I addressed, as a matter of principle, in the 2017 Judgment, and also raises a claim for remuneration by the liquidators, which the liquidators are content to have deferred to a future date.
[3]
Affidavit evidence
With that background, the application is supported primarily by an affidavit of one of the liquidators, Mr Cathro, dated 5 July 2018. Part of a second affidavit of Mr Cathro dated 2 June 2017 (paragraphs 1-2, 33-47) is read, to provide background in respect of a question as to the calculation of interest, which would be relevant if the Court were itself determining the amount of any levy to be issued.
Mr Cathro refers, in his affidavit dated 5 July 2018, to the nature of the directions sought in the application, and to the background of the application, arising from the 2017 Judgment, and subsequent discussions with Mr and Mrs McLaughlin in the period since that judgment was delivered. Mr Cathro's affidavit indicates that Mr and Mrs McLaughlin have agreed, by the terms of the proposed Funding Agreement, to fund the liquidators only to bring this application, to issue a further levy and to conduct the administration of the Company while it is in voluntary administration but, importantly, that finding would not extend to the conduct of any recovery or enforcement proceedings in respect of the levy. That is a significant gap in the proposed funding arrangements, to which I will return below, since there seems to be a substantial prospect, if not an inevitability, that any further levy could not be recovered without enforcement action, in the circumstances to which I will refer below. Mr Cathro also expresses the view, which I accept, that there is no realistic prospect of funding of recovery proceedings by a third party litigation funder, which seems to be plainly correct given the history of the matter, the complexity of the matter, the fact that Mr and Mrs McLaughlin would be the substantial beneficiaries of any recovery, and also that there is no realistic prospect of any other creditor funding recovery, where Mr and Mrs McLaughlin would receive nearly all of its benefit from it.
Mr Cathro expresses the view that he would be justified in entering into the Funding Agreement and issuing a further levy on the basis, inter alia, that there is a prospect that the shareholders, or some of them, would pay the further levy without the need for recovery proceedings; that the issue of a further levy may generate settlement discussions with shareholders, which may result in a return to creditors; and that the issue of a further levy creates a debt owed to the Company, which would be an asset in the form of a receivable, and which is potentially assignable. I will return to the cogency of that reasoning below. I am conscious that in this application, as in all applications of this kind, the Court should give significant weight to the views formed by an experienced insolvency practitioner in respect of matters within his or her professional competence.
Mr Cathro also notes - implicitly recognising some of the matters to which I will refer below and which Mr Assaf also recognised in submissions - that Mr and Mrs McLaughlin, as the Company's major creditors, have been made aware that there is a risk that shareholders will not pay a further levy where they know that the liquidators are not funded in respect of recovery proceedings, and are nonetheless content for the liquidators, as voluntary administrators, to issue a further levy with limited funding.
Mr Cathro's affidavit also sets out the range of variations in Pt 5.3A of the Act and the Insolvency Practice Rules (Corporations) which he would seek, if appointed as voluntary administrator, and indicated those variations were sought to avoid duplication with the work done and costs incurred by the voluntary administrators who had previously been appointed to the Company, and who had then become its liquidators, before the present liquidators were ultimately appointed in their place. Had I been persuaded that there was a basis for making the direction sought in respect of the levies, and in respect of the Funding Agreement, it would have been necessary to review those variations in somewhat greater detail, to confirm whether all of them were justifiable on that basis, and whether the substance of the regime proposed, with those variations, would have been consistent with the objects of the voluntary administration regime specified in Pt 5.3A of the Act. It seems to me likely that at least the majority of the variations sought would have been justified on the bases that were sought, but that question would have had to be determined in respect of each such variation. It is not necessary to address that question given the views that I have formed below as to other aspects of the application.
Mr Cathro's affidavit also refers to a calculation of the suggested levy, including further post-appointment interest in respect of creditors' claims. Mr Assaf has pointed to an issue that has arisen as to that calculation, which might have required further correction. A further issue might have arisen, although it is not addressed in submissions, as to whether post-appointment interest should continue to run for the seven months that have lapsed between the 2017 Judgment and this application, although those to whom a levy would be directed have had the use of the money that would be claimed by that levy in the interim. It is also not necessary to address those questions given the views that I reach in respect of the other aspects of the application.
[4]
Whether the liquidators and proposed voluntary administrators are justified in entering into the Funding Agreement
It will be convenient largely to approach the directions sought in the order set out in the Amended Interlocutory Process and in Mr Assaf's submissions, although, on one view, the question of a direction as to entry into the Funding Agreement depends on whether a direction should be made to issue the relevant levies, both because the Funding Agreement is intended to fund the liquidators and proposed voluntary administrators to issue those levies, and because the liquidators do not, as I understand it, press the entry into the Funding Agreement if no direction is given that they would be justified in issuing the further levies.
Mr Assaf firstly addresses, in submissions, prayer 2 of the Amended Interlocutory Process, directed to whether the liquidators are justified in entering into the Funding Agreement. He rightly draws attention to the application of the transitional provisions under the Insolvency Law Reform Act 2016 (Cth), and submits, with substantial force, that a direction in this case would be given under s 511 of the Corporations Act, by reason of the transitional provision in s 1617 of the Act which applies where proceedings are brought under the Corporations Act, as it stood prior to the Insolvency Law Reform Act, in a Court in relation to an external administration that had been commenced prior to the commencement of the Insolvency Law Reform Act. Mr Assaf also identifies a possible tension between s 1617 of the Corporations Act, which has that effect, and s 1615 of the Act, which provides for the application of Div 90 of the Insolvency Practice Schedule (Corporations) in relation to an ongoing external administration, whether or not the matter to be reviewed occurred on or after the commencement of the Insolvency Law Reform Act. It is not necessary to determine the question whether s 511 continues to apply in this case because, as in many cases, s 511 of the Act and s 90-15 of the Insolvency Practice Schedule (Corporations) (so far as it would allow a direction to the liquidators) would have the same effect in this case.
Mr Assaf drew attention to the case law which addresses the scope of the directions power under s 511 of the Corporations Act, and which has since also been applied in applications for directions under s 90-15 of the Insolvency Practice Schedule (Corporations), including the decision of Ward J in Re Purchas (as Liquidator of Astarra Asset Management Pty Ltd (in liq)) [2011] NSWSC 91. He also refers to my summary of the relevant principles in Re 7 Steel Distribution Pty Ltd (in liq) (recs and mgrs apptd) [2013] NSWSC 669, where I noted, with reference to authority, that the Court may give such a direction where it will be of advantage to the liquidation. Mr Assaf submits, and I accept, that the Court will not ordinarily make a direction as to the making of a business or commercial decision or where no legal issue is raised, but may make such a direction where, for example, significant legal issues are raised or there is a significant prospect of an attack upon an insolvency practitioner's decision. In this case, Mr Assaf submits, and I accept, that there is a real prospect of attacks upon the liquidators' (and proposed voluntary administrators') decision, which would at least include, but may not be limited to, attacks by persons who may be affected by the issue of a further levy.
Mr Assaf also seeks a direction that the liquidators, in their capacity as proposed voluntary administrators, would be justified in entering into the Funding Agreement. Such a direction would be made under s 90-15 of the Insolvency Practice Schedule (Corporations), and by reference to matters by which such a direction would previously have been made under s 447D of the Corporations Act, and Mr Assaf refers to my summary of the relevant principles in Re Nexus Energy Ltd [2014] NSWSC 1041 in that respect.
Mr Assaf submits that these directions should be made, in respect of both the liquidators' and the proposed voluntary administrators' entry into the Funding Agreement, because it would protect them from liability for breach of duty or unreasonable behaviour. Ultimately, the question whether such directions should be made turns upon whether such directions would be of advantage in the liquidation or proposed voluntary administration, and that can only be the case if the entry into the Funding Agreement would promote the interests of the liquidation or the proposed voluntary administration, as a means of supporting the making of a further levy. No submission was made that there was any justification for entry into the Funding Agreement, unless a further levy is to be made. I would make the direction sought, as to entry into the Funding Agreement, if I was satisfied that I could properly make the direction sought as to the making of a further levy, but not otherwise. Because I conclude below that I cannot be satisfied that the liquidators, or proposed voluntary administrators, would be justified in making a further levy in the present circumstances, then I also cannot conclude that they would be justified in entering into the Funding Agreement in order to do so.
[5]
Whether the liquidators and proposed voluntary administrators would be justified in making the further levy
I turn now to the directions sought in respect of the making of the further levy. Directions are sought both in respect of the liquidators, in their capacity as liquidators, and the liquidators in their capacity as proposed voluntary administrators. I have referred to the basis on which such a direction can be made under s 511 of the Corporations Act or under s 90-15 of the Insolvency Practice Schedule (Corporations) above. Here, the making of the direction turns upon whether the matters set out in Mr Cathro's affidavit dated 5 July 2018, to which I have referred above, indicate that the making of a further levy is for the advantage of the liquidation or the proposed voluntary administration, and consequently the direction sought is for the advantage of the winding up or the proposed voluntary administration, although the liquidators are not funded to take recovery steps if the levy they make is not voluntarily paid. By way of summary, those reasons are that there is a prospect of the Company's shareholders or some of them paying the further levy without the need for any recovery proceedings; that there is little risk that the Company will incur any liability, including any adverse costs order, in merely issuing a further levy; that the issue of a further levy may generate settlement discussions between the Company and shareholders; that Mr and Mrs McLaughlin are aware of the relevant risks; and that the issue of a further levy would create a debt, which is itself an asset in the form of a receivable that would be capable of assignment.
As I noted above, I am conscious that the Court, in making a direction whether a liquidator is justified in taking such a step, ought to give weight to the liquidator's reasoning process, and that the Court does not itself make, for itself, commercial decisions that are properly matters for the liquidator. Nonetheless, the Court's role in making such a direction is not as a rubber stamp, and the Court must at least be satisfied that the course which is proposed potentially is to the advantage of the liquidation or the voluntary administration so that it is to the advantage of the liquidation and voluntary administration to make the directions sought. To put it another way, it seems to me that the Court should not make a direction which would protect an administrator or liquidator from liability for a course where there is little or no prospect that that course or the giving of the direction would be to the advantage of the liquidation or voluntary administration.
With all respect to Mr Cathro's reasoning process, I cannot be satisfied that the step which he proposes would advance the interests of the liquidation or proposed voluntary administration, or that a direction that he is justified in taking it would do so. The first aspect of Mr Cathro's reasoning is that there is a prospect of shareholders, or some of them, paying the further levy without the need for funding recovery proceedings, and the issue of a further levy may generate settlement discussions with shareholders. I am unable to accept that as a realistic prospect. It has been many years since this dispute commenced, and shareholders in the Company have already paid (or paid in part) earlier levies in that respect, and were vocal in their opposition to those levies and the prospect of any further levy. The previously appointed voluntary administrator, and then liquidator, was required to take steps, the history of which have been reviewed in earlier judgments, to issue creditors' statutory demands in order to seek to enforce the earlier levies against some shareholders, which were met by applications to set them aside, and then to bring proceedings against some shareholders, some of which were defended and then settled, some for partial payments. The former chairman of the Company, Mr Garratt, a barrister practising in the State of Victoria, appears to have performed a coordinating role for the Company's shareholders, articulating arguments for them to resist the payment of the earlier levies, and to have continued to do so in respect of the prospect of a further levy. I identified arguments which had been put by Mr Garratt, and by other shareholders, in opposition to the making of a further levies in the 2017 Judgment.
The fact that the liquidators are not funded to bring recovery or enforcement proceedings in respect of a further levy would be apparent to Mr Garrett and such shareholders, not least because that is a matter that necessarily has to be addressed in this judgment. It seems to me that, with all respect to Mr Cathro's reasoning, there is little realistic prospect of shareholders, or some of them, paying a further levy, where they know the liquidators have no capacity to bring proceedings to recover or enforce that levy if they do not, absent irrationality, a complete lack of information on their part, or a recognition of a moral or other obligation to Mr and Mrs McLaughlin of which there has been no previous indication.
Mr Cathro also expresses the view that there is little risk that the Company will incur liability, including any adverse costs order, in merely issuing a further levy. That proposition also seems to me to be doubtful, where the propriety of a further levy issued, in the hope that shareholders might pay it, might be challenged. The prospect of such a challenge may be increased where shareholders know that the Company and the liquidators have not been funded to defend that challenge, although I recognise that shareholders may prefer simply to ignore a levy that could not practically be enforced for the reasons noted above, rather than troubling to challenge it. I am also not persuaded by the further proposition that the issue of a further levy may generate settlement discussions with shareholders, since shareholders who know that the liquidators have no practical capacity to enforce the levy would have little reason to offer a settlement, rather than simply leave the levy to be unrecovered.
I recognise that the liquidators also note the fact that Mr and Mrs McLaughlin have been made aware of the "risk" (although that seems to me to be an understatement) that shareholders will not pay the further levy, and are content with that risk. I also recognise that Mr and Mrs McLaughlin are legally advised in this application. While Mr and Mrs McLaughlin may be prepared to take that risk, and to proceed on the basis of a hope that shareholders would act contrary to their interests and in that manner, that does not seem to me to be sufficient to support the Court giving a direction which would justify the relatively complex and costly steps that are proposed to achieve a result that is highly unlikely to be achieved.
The last proposition put by Mr Cathro in support of the issue of a levy is that the issue of a further levy creates a debt, which in itself is a form of receivable, which is capable of assignment. Mr Whitbread, who appears for Mr and Mrs McLaughlin, raises the possibility that Mr and Mrs McLaughlin may take the assignment of such a debt, without making any commitment that they would do so. This proposition seems to me to be too speculative to support the directions sought, where Mr and Mrs McLaughlin have not committed to purchase that debt for any substantial price; no third party is likely to do so; and there is every likelihood that any purchaser would attribute little value, or nominal value, to the debt where its enforcement would face all the difficulties which have been noted above. There is, in my view, little justification for taking the complex and costly steps which would be required to bring about the existence of that debt, including the appointment of voluntary administrators and issue of the levy, if the outcome is a mere possibility that the Company would then sell that debt for nominal consideration to Mr and Mrs McLaughlin. That, it seems to me, does not provide sufficient benefit to the Company or its creditors as a whole to warrant that course.
For these reasons, and notwithstanding that I have given weight to Mr Cathro's commercial analysis of the matters raised, I cannot be satisfied that the approach sought to be taken would advance the liquidation or the proposed voluntary administration, or that the direction sought would do so. In those circumstances, I am not satisfied that I can give a direction that the liquidators, or the proposed voluntary administrators, would be warranted in issuing the further levy. It seems to me that the likely consequence of that direction is that a further period, initially limited in the Funding Agreement to several weeks, but possibly extending beyond that, would be wasted, further costs would be incurred, and the ultimate winding up of the Company would be further delayed.
For these reasons, I do not give the directions sought, either to the liquidators or the proposed voluntary administrators, in respect of the issue of the levy. I also do not give the directions sought in respect of the Funding Agreement, where they would be consequential upon the issue of the further levy. In these circumstances, no question as to orders restricting the application of Pt 5.3A of the Act in the relevant circumstances arises, because the voluntary administrators would not be appointed. No question of the form of notification to creditors and shareholders of such an appointment arises.
[6]
Leave to appoint the liquidators as voluntary administrators
Mr Assaf submits that, in respect of prayer 4(a) of the Amended Interlocutory Process, the Court should grant leave to appoint the liquidators as voluntary administrators under s 436B of the Corporations Act. I would have granted that leave, if that appointment were to proceed, since there is no conflict of interest or duty affecting the liquidators that is inconsistent with that appointment and that section is not directed to the question whether a voluntary administrator should be appointed at all: see the cases cited in Austin & Black's Annotations to the Corporations Act, [5.436B].
[7]
Direction that the liquidators are justified in not taking the proposed steps
In the 2017 Judgment, I had noted the possibility that, if the directions then sought by the liquidators were not made, then a direction should be made that the liquidators are justified in not taking the steps that were the subject of the Interlocutory Process filed 2 June 2017 and, by extension, the Amended Interlocutory Process filed today. Mr Assaf indicated that the liquidators sought such a direction and I gave the solicitors for Mr and Mrs McLaughlin an opportunity to take further instructions as to whether such a direction should be given, and to make submissions as to that matter. After taking instructions, Mr Whitbread did not seek to be heard in opposition to that direction.
[8]
Costs of this application
An order was sought in the Amended Interlocutory Process that the costs of this application be costs in the winding up. The application has raised matters of some complexity. It seems to me that, notwithstanding that I found that the directions sought by the liquidators ought not to be made, the liquidators were correct in identifying a need for and seeking directions as to the relevant matters. For these reasons, I will make a further order that their costs of and incidental to the Interlocutory Process filed on 2 June 2017 and the Amended Interlocutory Process filed today be costs in the winding up.
[9]
Whether the balance of the Amended Interlocutory Process should be dismissed
The liquidators have requested that the Amended Interlocutory Process not otherwise be dismissed, including in respect of issues other than the remuneration application, on the basis that it may ultimately be amended to seek orders for the release of the liquidators and the deregistration of the Company. I have some reservations about that course, where there are no other open issues in it other than the liquidators' remuneration. However, in order to avoid exposing the liquidators to the costs of a further filing fee in a winding up in which assets are limited, I will not otherwise dismiss the balance of the Amended Interlocutory Process at this point.
[10]
Orders
Accordingly, I make the following orders:
Pursuant to s 511 of the Corporations Act 2001 (Cth) and s 90-15 of the Insolvency Practice Schedule (Corporations), direct that Mr Simon Cathro and Mr Christopher Darin as joint and several liquidators of Dungowan Manly Pty Ltd (in liq) are justified in not taking the steps set out in paragraphs 1-6 of the Amended Interlocutory Process filed on 6 July 2018 and the corresponding paragraphs in the Interlocutory Process filed on 2 June 2017.
The liquidators' costs of and incidental to the Interlocutory Process filed on 2 June 2017 and the Amended Interlocutory Process filed on 6 July 2018 be costs in the winding up.
Stand over the liquidators' application for remuneration to the Corporations List for directions at 10am on 16 July 2018.
[11]
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Decision last updated: 16 July 2018