In the matter of FW Projects Pty Limited (in liquidation) [2019] NSWSC 892

• Re Allebart Pty Ltd (in liq) [1971] 1 NSWLR 24 - Re Atlas Construction Group Pty Ltd (in liq) [2018] NSWSC 1189; (2018) 129 ACSR 238 - Re Bellafountain Pty Ltd [2017] NSWSC 391 - Re Biposo Pty Ltd (1995) 17 ACSR 730 - Re Colorado Products Pty Ltd (in prov liq) [2013] NSWSC 1613 - Re Ji Woo International Education Centre Pty Ltd [2019] NSWSC 93; (2019) 134 ACSR 448 - Re Sarflax Ltd [1979] Ch 592 - Re St George Builders Hardware Pty Ltd (1995) 18 ACSR 451; 13 ACLC 1801 - Re St Gregory's Armenian School (in liq) [2012] NSWSC 1215; (2012) 92 ACSR 588 - Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171 - SingTel Optus Pty Ltd v Weston [2012] NSWSC 674; (2012) 90 ACSR 225 - Stewart v Atco Controls Pty Ltd (in liq) (2014) 252 CLR 307 - Unifor Office Systems Aust Pty Ltd v Brewer Partnership Pty Ltd [1999] NSWSC 137; (1999) 17 ACLC 642 - Wentworth v Rogers [2004] NSWCA 430 - Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) [2012] WASCA 157; (2012) 89 ACSR 1 Texts Cited: Australian Restructuring Insolvency and Turnaround Association, Code of Professional Practice (3rd ed, 2014) Category: Principal judgment Parties: Hindmarsh Construction Australia Pty Ltd (First Plaintiff) Bellerive Homes Pty Ltd (Second Plaintiff) FW Projects Pty Limited (in liq) (First Defendant) Trent Andrew Devine and Bradd William Morelli in their capacity as joint and several liquidators of FW Projects Pty Limited (in liq) (Second Defendant) Manassen Holdings Pty Ltd (Third Defendant) Albert Investment Holdings Pty Ltd (acting in its own capacity and as trustee of the Rose Capital Trust) (Fourth Defendant) S F Capital Pty Ltd (acting in its own capacity and as Trustee of the Fowler Superannuation Fund) (Fifth Defendant) Colin Biggers & Paisley Pty Limited (Heard as interested person under rule 2.13 of the Supreme Court (Corporations) Rules 1999 (NSW)) Representation: Counsel: A J McInerney SC/M A Karam (Plaintiffs) A P Cheshire SC (First and Second Defendants) A Shearer (Third Defendant) R Scruby SC (27-28 June 2019)/P Harkin (Solicitor) (2 July 2019) (Interested Person)

Solicitors: Clyde & Co (Plaintiffs) Mills Oakley (First and Second Defendants) Dentons (Third Defendant) Colin Biggers & Paisley (Interested Person) File Number(s): 2019/155238

Nature of the application and affidavit evidence

1. By an Amended Originating Process filed, by leave, on 28 June 2019, the Plaintiffs, Hindmarsh Construction Australia Pty Ltd ("Hindmarsh") and Bellerive Homes Pty Ltd ("Bellerive") seek interlocutory orders that the Second Defendant, Messrs Devine and Morelli as joint and several liquidators ("Liquidators") of FW Projects Pty Limited (in liq) ("Company") be restrained from disbursing the net proceeds of sale of an asset of the Company, lot 3 in Deposited Plan 1233744 ("Lot 3"), to the Third Defendant, Manassen Holdings Pty Ltd ("Manassen") until further order. Hindmarsh and Bellerive also seek an interlocutory order that the Liquidators are to pay the proceeds of sale of that property into Court or a controlled monies account or otherwise secure them as directed by the Court until further order.
2. The Plaintiffs also seek an order, under s 90-15 of the Insolvency Practice Schedule (Corporations) contained in Sch 2 to the Corporations Act 2001 (Cth), removing Messrs Devine and Morelli as joint and several liquidators of the Company and appointing an independent liquidator to the Company. That order was sought in place of a previous order, which the Plaintiffs had pursued for a considerable period, seeking the appointment of Mr Ian Purchas as liquidator to the Company. The Plaintiffs also previously sought, but abandoned shortly before the hearing, orders for the appointment of a special purpose liquidator and restraining the Liquidators from retaining, and continuing to retain, Mills Oakley to provide legal advice and services to them in their capacity as joint and several liquidators of the Company. In the event, the Liquidators have indicated that they will retain new solicitors in place of Mills Oakley from the point of delivery of this judgment, if they are not removed from office.
3. The Plaintiffs also seek, as final relief, orders setting aside, under s 37A of the Conveyancing Act 1919 (NSW), an alleged alienation of the Company's property by the entry into agreements dated 20 September 2018 ("Manassen Security Agreements") between the Company, Manassen, Albert Investment Holdings Pty Ltd ("Albert Investment") and S F Capital Pty Ltd ("SF Capital"), including a Deed of Amendment and Restatement dated 20 September 2018; Schedule 2 to that deed, being an Amended and Restated Facility Agreement; a General Security Deed; and mortgages in favour of Manassen. The Plaintiffs also seek an order under s 42 of the Real Property Act 1900 (NSW) setting aside the registration of the mortgages, which Counsel made clear is sought as consequential upon the relief sought under s 37A of the Conveyancing Act. This hearing did not determine questions of final relief as to those matters.

Affidavit evidence Plaintiffs' evidence

1. The Plaintiffs read the affidavit dated 17 May 2019 of their solicitor, Mr Kon Nakousis. While no objection was taken to that affidavit, Counsel for other parties rightly noted that significant parts of that affidavit were in the nature of submissions. Mr Nakousis referred, on information and belief from Mr Hindmarsh, to the history of the contractual arrangements between Hindmarsh and the Company and subsequently between Bellerive and the Company; to disputes that had arisen in the course of the construction works; to subsequent adjudication proceedings and steps taken by Bellerive to enforce a judgment which it obtained in respect of the adjudication; and to several other proceedings between Bellerive and the Company.
2. Mr Nakousis also referred to the resolution passed for the voluntary winding up of the Company and to the volume of correspondence that subsequently passed between Mr Nakousis, on the one hand, and the Liquidators and Mills Oakley on the other. This evidence was presumably intended to establish, but did not establish for the reasons that I will note below, a failure by the Liquidators or their solicitors properly to respond to the Plaintiffs' requests for information.
3. Mr Nakousis' evidence (Nakousis 17.5.19 [99]) was also that: "I am instructed that [Hindmarsh and Bellerive] have concerns regarding the Manassen Security Agreements in circumstances where [Hindmarsh and Bellerive] have not been provided with any evidence that any, or any adequate, consideration has been received by [the Company] in exchange for [the Company] granting security by way of mortgage over real property assets to secure liabilities which appear to be owed, if at all, by unit holders of the Freshwater Development Trust to Manassen Holdings." It will immediately be noted that, first, the existence of concerns regarding the Manassen Security Agreements is not the same as the existence of a basis to attack those Agreements; and, second, the absence of evidence provided to the Plaintiffs of the existence of any consideration received by the Company is not the same as the absence of such consideration. I will refer below to the matters that appear to have constituted such consideration, which emerge from relevant documentation.
4. The Plaintiffs rely on a second affidavit dated 29 May 2019 of Mr Nakousis which gave lengthy evidence, on information and belief, of conversations between Mr Hindmarsh and Mr Uzcilas, an adviser to Manassen, and Mr Rose. a director of Albert Investment. Those conversations largely relate to largely unsuccessful attempts by Mr Hindmarsh to persuade Mr Manassen to involve himself in resolving disputes involving the Plaintiffs, Albert Investment and the Company. That evidence has limited relevance to the matters in issue in this application.

Chronology of events

1. By way of broad factual background, the Company undertook a substantial development at Freshwater in New South Wales, as trustee of the Trust. It appears that companies associated with Messrs Rose and a director of SF Capital, Mr Fowler, were interested in that trust. Hindmarsh and Bellerive were engaged to design and construct that development and each claim to be creditors in the liquidation of the Company. The Company initially entered into a contract with Hindmarsh for the design and construction of the development in April 2016.
2. Prior to the entry into financing arrangements between Albert Investment, the Company and Manassen, a third party, Wintech Enterprises Pty Ltd (as lender) ("Wintech"), Albert Investment as borrower, the Company as guarantor and Mr Rose as guarantor, entered into a Cash Advance Facility Agreement, by which Wintech agreed to lend $6,850,000 plus capitalised interest to Albert Investment to be contributed by it as equity to the Company, and then applied by the Company to assist in funding development costs (as defined) in relation to the project (as defined) and for payment of interest. Under the terms of that agreement, the Company unconditionally and irrevocably guaranteed the due and punctual payment of the loan (cl 9.1) and indemnified Wintech against any loss or liability sustained in connection with any failure of an obligor to duly and punctually pay the guaranteed money to Wintech (cl 9.3). That agreement provided for "security documents" (as defined) to be given, including a general security deed executed by the Company in favour of Wintech and a mortgage to be given by the Company in favour of Wintech in respect of the project property.
3. On 9 May 2016, Manassen as lender, Albert Investment as borrower, SF Capital and the Company entered into a Facility Agreement ("2016 Facility Agreement") (McIntosh 29.5.19 [5]) which provided for Manassen to lend $10 million to Albert Investment, to be applied in a specified manner including to repay previous borrowings of Albert Investment from Wintech. That agreement specified the "Approved Purpose" as follows: "As to $8,500,000 to repay financial accommodation provided to [Albert Investment] prior to the date of this document, and as to $1,500,000 and any other Drawing (not being in respect of the $8,500,000) made or provided in accordance with this document to be used by [Albert Investment] to subscribe for further "B Class Preference Units" in the Freshwater Development Trust … with the proceeds of such subscription to be used by [the Company] to pay Project Expenses incurred in the ordinary course of the ordinary business of [the Company] to persons other than any Related Entity of [the Company]."

Application for interlocutory relief

1. As I noted above, the Plaintiffs seek orders that the Liquidators be restrained from disbursing the net proceeds of the sale of Lot 3 to Manassen until further order, and that the Liquidators are to pay the proceeds of sale of Lot 3 into Court or a controlled monies account or otherwise secure them in a manner as directed by the Court until further order. In seeking injunctive relief, the Plaintiffs rely on s 66 of the Supreme Court Act 1970 (NSW) and the Court's power under r 25.3(3) of the Uniform Civil Procedure Rules 2005 (NSW) in respect of the preservation of property. The Liquidators did not seek to be heard as to whether an injunction should be granted in respect of the proceeds of sale of Lot 3, where Manassen was a contradictor in respect of that issue.
2. The Plaintiffs accept that they have the onus of establishing that they have a prima facie case in the sense that, if the evidence remains as it is, they have a sufficient likelihood of success to justify the preservation of the status quo pending the trial; that the Court will address the question whether the inconvenience or injury which the Plaintiffs would be likely to suffer if an interlocutory injunction were refused outweighs or is outweighed by the injury which Manassen or third parties would suffer if the injunction were granted; and discretionary considerations may also arise. The approach set out by the High Court in Australian Broadcasting Corporation v O'Neill [2006] HCA 46; (2006) 227 CLR 57 indicates that, in order to obtain interlocutory relief restraining the distribution of the proceeds of sale of Lot 3, the Plaintiffs must demonstrate a prima facie case or serious question to be tried as to their entitlement to the relief sought at a final hearing, and also that damages would not be an adequate remedy and that the balance of convenience favours the grant of an injunction or other order on an interlocutory basis. These considerations are interrelated so that, the stronger the Plaintiffs' case for final relief, the less that may be required to tip the balance of convenience in their favour, and the weaker their case for final relief, the more that may be required to establish that the balance of convenience is in favour of the grant of interlocutory relief.
3. Turning now to the basis on which the Plaintiffs put this claim, they plead in paragraph 58 of their Amended Points of Claim that: "58. As at 20 September 2018, by entry into the Manassen Security Agreements, [the Company], as a volunteer, and for nil, or for no adequate, consideration, granted a guarantee and security in the nature of a mortgage over the Freshwater site in respect of debt obligations owed to Manassen Holdings by Albert Investment, and did so in circumstances where: 58.1 [the Company] was insolvent; or 58.2 by entry into the Manassen Security Agreements [the Company] became insolvent; or 58.3 alternatively, [the Company] was at grave risk of insolvency where: 58.3.1 the Final Repayment Date for principal and interest owed under the Manassen Security Agreement was 22 December 2018; and 58.3.2 [the Company] was not, and would not be, able to pay the Manassen Principal Debt [as defined] and the Manassen Interest Debt [as defined] on 22 December 2018."

Application for replacement of the Liquidators Applicable principles

1. As I noted above, the Plaintiffs also seek an order, under s 90-15 of the Insolvency Practice Schedule (Corporations), removing Messrs Devine and Morelli as joint and several liquidators of the Company and appointing an independent liquidator to the Company. The Plaintiffs rightly point out that the question of removal of the Liquidators is now to be determined by reference to ss 90-15(1) and (3) of the Insolvency Practice Schedule (Corporations) rather than by reference to former s 503 of the Corporations Act. I have drawn, in the account of those principles that appears below, on my judgment in Re ACN 151 726 224 Pty Ltd (in liq) previously Ridley Capital Holdings Pty Ltd [2016] NSWSC 1801 and on the observations of Ward CJ in Eq in Re Atlas Construction Group Pty Ltd (in liq) [2018] NSWSC 1189; (2018) 129 ACSR 238, on which the Plaintiffs relied.
2. The matters relevant to an application for removal of a liquidator include not only whether that course would be for the benefit of the liquidation, and the body of persons interested in it, but also the need for confidence in the integrity, objectivity and impartiality of the winding up. In Multi-Core Aerators Ltd v Dye [1999] VSC 205 at [48]; (1999) 17 ACLC 1172, which was quoted by Bergin CJ in Eq in SingTel Optus Pty Ltd v Weston [2012] NSWSC 674; (2012) 90 ACSR 225, although held not to be applicable in that case, Warren J (as her Honour then was) noted that "rancour" between the parties would not be sufficient to require removal of a liquidator, particularly if hostility had emanated from the party seeking the removal, rather than from the liquidator, where removal on that basis "would provide a creditor with an opportunity to manipulate the liquidation of the company." Nonetheless, I proceed on the basis that a loss of confidence based on reasonable grounds by the creditors may, although it will not necessarily, justify removal of a liquidator: Re St Gregory's Armenian School (in liq) [2012] NSWSC 1215; (2012) 92 ACSR 588 at [30].
3. In AMP Music Box Enterprises Ltd v Hoffman [2002] BCC 996, in a passage that was also quoted with apparent approval by Bergin CJ in Eq in SingTel Optus Pty Ltd v Weston above at [164], Neuberger J (as his Lordship then was) observed that (at 1001-1002): "On the other hand, if a liquidator has been generally effective and honest, the court must think carefully before deciding to remove him and replace him. It should not be seen to be easy to remove a liquidator merely because it can be shown that in one, or possibly more than one, respect his conduct has fallen short of ideal. So to hold would encourage applications … by creditors who have not had their preferred liquidator appointed, or who are for some other reason disgruntled. Once a liquidation has been conducted for a time, no doubt there can almost always be criticism of the conduct, in the sense that one can identify things that could have been done better, or things that could have been done earlier. It is all too easy for an insolvency practitioner, who has not been involved in a particular liquidation, to say, with the benefit of the wisdom of hindsight, how he could have done better. It would plainly be undesirable to encourage an application to remove a liquidator on such grounds. It would mean that any liquidator who was appointed, in circumstances where there was support for another possible liquidator, would spend much of his time looking over his shoulder, and there would be a risk of the court being flooded with applications of this sort. Further, the court has to bear in mind that in almost any case where it orders a liquidator to stand down, and replaces him with another liquidator, there will be undesirable consequences in terms of costs and in terms of delay."

The Plaintiffs' proposal for funding of an alternate liquidator's investigations

1. I have referred above to Mr Nakousis' evidence as to the basis on which the Plaintiffs initially proposed to fund replacement liquidators. Mr Cheshire points, with considerable force, to the difficulty that the Plaintiffs seek to replace the Liquidators, because they would be indirectly funded from assets over which Manassen has security, but the proposed replacement liquidators would be directly funded by Hindmarsh (but not Bellerive) and Karellas, which each have ongoing litigation against the Company, and that proposed funding is limited in its amount. Mr Cheshire did not have the opportunity to address a further difficulty with that funding, namely the limit imposed by Hindmarsh on its use, which only emerged in the Plaintiffs' reply submissions and which I address below.
2. The funding arrangements proposed by Hindmarsh in respect of the alternate liquidators that it sought to have appointed were varied in the Plaintiffs' reply submissions to indicate that Hindmarsh (as distinct from Bellerive) would provide $50,000 funding for initial investigations; may consider further funding if it was necessary to preserve the interests of all creditors; and: "would understandably not be prepared to fund the prosecution of proceedings against Bellerive that are currently on foot for a number of good reasons, particularly that Bellerive is still attending to the rectification of the properly identified defects (on a without admissions basis) for which Bellerive is alleged to be liable".
3. It should be noted that, first, that variation was not explained by evidence; second, the proposition that Hindmarsh would not fund particular steps would place a significant limit on the role of the proposed replacement liquidator; and, third, the suggestion that Bellerive is attending to the rectification of the "properly identified defects" is also unsupported by evidence. The Plaintiffs' reply submissions also qualified the position in respect of Karellas, by indicating that it would provide $50,000 funding for preliminary investigations but that "it is not clear what Karellas' position is as to other matters". There is also no evidence as to whether the Plaintiffs had sought the views of Mr Kogan and Ms Sozou as to this limitation, or whether they would have withdrawn their consent to appointment had they been advised of it.

Other matters

1. In closing submissions, the Plaintiffs also advanced submissions as to a matter raised in paragraph 7 of their Amended Points of Claim in respect of an inquiry into the conduct of the Liquidators. That matter was not in issue in this hearing and I also do not propose to address it, where other parties have not had a proper opportunity to address it.
2. For completeness, I should note that Mr Cheshire also advanced submissions as to the Plaintiffs' motivations for commencement of these proceedings. Mr Cheshire points out that there was difficulty with the proposition that these proceedings were commenced because the Liquidators did not provide an undertaking in relation to the proceeds of sale of Lot 3, when the Manassen Security Agreements were challenged, because the Plaintiffs first contacted Mr Purchas about the Company's liquidation on 23 April 2019, before the Plaintiffs contacted the Liquidators in respect of the liquidation, and there was continuing correspondence between the Plaintiffs and Mr Purchas until the proceedings were commenced. Those matters tend to suggest that the Plaintiffs were considering a possible application to appoint an alternate liquidator before the matters on which they now rely to attack the Liquidators' conduct had developed.
3. Mr Cheshire points to Mr Nakousis' evidence that the Plaintiffs were unhappy, understandably, about the circumstances in which the Company had failed to meet the judgment in their favour, and had been placed in liquidation, although that does not provide any explanation for their investigation of the appointment of an alternate liquidator from the commencement of the liquidation. It is also puzzling that the Plaintiffs have been prepared to incur significant costs in seeking interlocutory relief in respect of the proceeds of sale of Lot 3, where the net realisations from the sale of that property are likely to be relatively modest, and quite possibly less than the parties' collective costs of this application.
4. Mr Cheshire submits that the Plaintiffs' complaints against the Liquidators are "manufactured" or are at least not the real substance of their reason for bringing the application for the Liquidators' removal, and submits that that undermines their complaints. Mr Cheshire also points out that it is also puzzling why the Plaintiffs withdrew their claim for the appointment of a special purpose liquidator only shortly before the hearing, and that the Plaintiffs never sought to explain that decision. He also points to a number of other aspects of the Plaintiffs' conduct which are not explained, which it seems to me is not necessary to address.

Orders and costs

1. The Plaintiffs' application for interlocutory relief should be dismissed with costs. I am inclined to a preliminary view that, in the particular circumstances, the Plaintiffs should also pay CBP's costs of the application, although this is the exception rather than the rule in respect of parties heard under r 2.13 of the Supreme Court (Corporations) Rules. The parties should bring in agreed short minutes of order to give effect to this judgment, including as to costs and the orders to be made to progress the Plaintiffs' claims for final relief, within 7 days, or, if there is no agreement between them, their respective draft short minutes of order and short submissions as to the differences between them.

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