Solicitors:
Marsdens Law Group (Plaintiff)
Bridges Lawyers (Defendants)
File Number(s): 2019/34403
[2]
Application for replacement of liquidator
By Originating Process filed on 1 February 2019 Hawkesbury City Council ("Council") applied for a range of orders. A degree of consensus has been reached between the Council and the Defendants, Hawkesbury House Pty Ltd ("Company") and its incumbent liquidator, Mr Farnsworth, and an application is now pressed, which is not opposed by Mr Farnsworth, for his removal as liquidator of the Company and the appointment of Mr Tonks as liquidator to the Company.
The Council, represented by Mr Chapman in the application, rightly recognises that, although the Council, Mr Farnsworth and the Company consent to that order, the Court must nonetheless be satisfied that it is a proper order to make, so far as it involves the exercise of the Court's discretion and may have an impact upon other creditors of the Company.
The application is supported by an affidavit of Mr Aaran Johnson dated 25 June 2019. Mr Johnson is the solicitor acting for the Council in the application. Mr Johnson sets out the relevant factual history, namely, that, in late September 2014, the Council entered into a lease with the Company in respect of commercial premises situated at Windsor in New South Wales, which commenced on 1 October 2014. The Company then went into arrears in respect of rent, which appears to have continued through to 2017, when the Council served a creditor's statutory demand in an amount of $174,714.87, comprised of arrears of rent, licence fees and other charges. After service of the creditor's statutory demand, on or about 30 October 2017, the members of the Company appointed Mr Farnsworth as liquidator, in a members' winding up which ultimately transitioned to a creditors' winding up.
Mr Johnson refers to concerns raised by the Council, having reviewed information provided by Mr Farnsworth in his initial notice to creditors, that there may have been what is colloquially described as "phoenixing" activity in respect of the Company. That suggestion is here raised in circumstances that it appears a related entity has, since the liquidation of the Company, operated a business of substantially the same nature and character, and an intercompany loan of that entity has been admitted to proof in the liquidation. There appears to be a question, at least raised by the Council, as to the status of that claimed loan.
Mr Johnson draws attention to Mr Farnsworth's first substantive report to creditors, which refers to a "likelihood" that the Company engaged in insolvent trading prior to his appointment; to transactions with related parties involving the Company; and to Mr Farnsworth's concern as to the possibility of phoenix activity and breaches of statutory duties of directors, which Mr Farnsworth indicated he would report to the Australian Securities and Investments Commission.
The Council in turn seeks to have Mr Farnsworth replaced as liquidator, on the basis that it wishes to fund further investigations and public examinations, particularly as to the status of the debt claimed by the related party, and is not prepared to fund Mr Farnsworth for those investigations, but is prepared to fund Mr Tonks to undertake them. An application will shortly be made for approval of a funding agreement, if this application is successful.
I should hasten to add that no criticisms were made of Mr Farnsworth's conduct as liquidator in respect of this application, and, indeed, the Council refers in support of the application to matters which have been identified by Mr Farnsworth in his report. While the Council did not specifically identify matters which support its preference for Mr Tonks to undertake the relevant investigations and examinations, one could readily infer that they may include a common concern of creditors in similar situations, that it may be preferable that a "fresh mind" is brought to bear to such investigations, where Mr Farnsworth was nominated by a director and appointed by members in a creditors' voluntary winding up, possibly exacerbated here by the admission of a proof of debt of the related party which it now appears is in question.
On this basis, the Council seeks, and Mr Farnsworth does not oppose, an order under s 90-15 of the Insolvency Practice Schedule (Corporations) which provides for Mr Farnsworth's removal and Mr Tonks' appointment. I am satisfied that the Council has standing to bring such an application, under s 90-20 of the Insolvency Practice Schedule (Corporations), which allows a person with a financial interest in the Company's external administration to do so. Section 90-15 specifically permits an order that a person cease to be an external administrator of a company, and an order that another registered liquidator be appointed as external administrator.
The relevant principles are well established, and Mr Chapman draws attention to authorities dealing with the corresponding provision in s 503 of the Corporations Act 2001 (Cth), and to the comprehensive review of the relevant principles by Ward CJ in Eq in Re Atlas Construction Group Pty Ltd (in liq) [2018] NSWSC 1189 at [78]ff which I adopt with gratitude.
Her Honour there referred to authority that the question is whether such an order is in the best interests of creditors in the particular circumstances. In particular, her Honour referred to my decision in Re ACN 159 605 188 Pty Ltd (in liq) (formerly Securimax Pty Ltd) [2018] NSWSC 356, where I noted the competing issues in such an application, which required a balance between the appointment of a liquidator who could bring a fresh mind to the issues facing a company and, on the other hand, the time which may be involved in a new appointee becoming familiar with a company's affairs. The evidence here is that that is not expected to be substantial in this case. Her Honour also referred to the recognition in Re Iris Diversified Property Pty Ltd (in liq) [2018] NSWSC 834, there following earlier authorities, of the relevance of the fact that an independent creditor may be prepared to fund investigations by a new liquidator, but not by the incumbent, and the recognition there that it was "not irrational" for an independent creditor to prefer a liquidator who was not originally appointed by those behind the company.
It seems to me that, in the relevant circumstances, there are matters which properly warrant further investigation, possibly including the production of documents and oral examinations, which are contemplated by the proposed funding agreement. That matter, it might be noted, is fairly recognised in Mr Farnsworth's report. Here, the Council is prepared to fund those steps when taken by Mr Tonks, but not when taken by Mr Farnsworth. It may be that that is not the only approach which would have been available to the Council, but it seems to me that it is an open approach, in the relevant circumstances. Noting that the application is fairly not opposed by Mr Farnsworth, I am satisfied that the orders sought may properly be made.
The parties contemplate orders that both the Council's and Mr Farnsworth's reasonable costs of the application be costs in the winding up. It seems to me that, given the sensible way in which this application has been conducted, the fact that Mr Farnsworth's investigations have provided a basis for further inquiries, and the fact that the Council's position is reasonably taken, then that order is properly made.
I make orders in accordance with the short minutes of order, initialled by me and placed in the file.
[3]
Approval of funding agreement
Application is now made, as was foreshadowed at the time of the application for the replacement of Mr Farnsworth by Mr Tonks as liquidator of the Company, for approval of a funding agreement between the Council, Mr Tonks, and legal representatives who it is anticipated will act in the relevant investigations, under s 477(2B) of the Corporations Act. That section relevantly provides that, except with the approval of the Court, or in other circumstances not relevant here, a liquidator of a company must not enter into an agreement on a company's behalf if the term of the agreement may end, or obligations of a party to the agreement may, according to its terms, be discharged by performance more than three months after that agreement is entered into.
The proposed funding agreement is in evidence, as an exhibit to the affidavit of Mr Johnson on which the Council relies in the application. That agreement contemplates that the Council will provide a fund of a specified amount to Mr Tonks so that he may carry out public examinations and seek orders for production of documents, and fund his remuneration in relation to the conduct of that matter and the performance of his general duties and statutory obligations. The agreement contains certain provisions which might be construed as imposing obligations upon the liquidator including, for example, to enter into a costs agreement with the legal representatives in terms satisfactory to the liquidator, and not to change the legal representatives other than in particular circumstances. The agreement also properly recognises that the liquidator is responsible for giving directions and instructions to the legal representatives regarding the conduct of the relevant investigation.
It would have been preferable if the funding agreement made express the fact that the liquidator's conduct of those matters is to occur in accordance with his statutory and professional obligations, and that he is not subject to the direction of the Council in the performance of those statutory and professional obligations. However, it seems to me that that is so obvious that it goes without saying, and that it would either be a term implied by law, or a term implied in fact in the relevant circumstances. The Council has fairly accepted that that term would be implied into the agreement, although it is not express.
The agreement in turn specifies the matters which would be the subject of the relevant investigations, in a manner consistent with those foreshadowed in the earlier application for Mr Tonks' appointment as liquidator.
The circumstances in which the Court will grant orders under s 477(2B) of the Act in respect of litigation funding agreements, as between a creditor and a liquidator, are well established. A number of factors were identified by Austin J in Re ACN 076 673 875 Ltd (2002) 42 ACSR 296 and have frequently been cited in subsequent cases. Plainly, the relevance of those factors will depend upon the amount of the funding in issue, and whether it is intended, as here, for investigations, or for the conduct of lengthy and complex proceedings. In Re 7 Steel Distribution Pty Ltd (in liq) (recs and mgrs apptd) [2013] NSWSC 669; (2013) 31 ACLC 13-021 at [17], I observed that the Court's role in considering an application under s 477(2B) in respect of such an agreement was to determine whether the entry into the agreement was a proper or bona fide exercise of the liquidator's powers, and not ill-advised or improper on the part of the liquidator.
In Re 77738930144 Pty Ltd (in liq) (formerly Commercial Indemnity Pty Ltd) [2017] NSWSC 452 at [54]-[55], Gleeson JA (sitting at first instance) in turn emphasised that the controlling consideration was the interests of creditors concerned in the winding up; and the Court would have regard to the liquidator's commercial judgement; and it was not necessary or appropriate for the Court itself to assess the commercial desirability of the transaction; and it would not generally interfere unless there was some lack of good faith, or error in law or principle, or real and substantial ground for doubting the prudence of the liquidator's proposal. I also have regard to the fact that, generally, s 477(2B) is directed to securing that the conduct of a winding up is not unreasonably delayed, and there is no question of that occurring here, where these are preliminary steps in inquiries in the winding up, directed to the possibility of increasing returns to creditors.
It seems to me that the grant of approval is here in the interests of creditors, other than any potential target of investigation, so far as it may identify causes of action that are available to creditors which might increase a return to creditors. The possibility that such causes of action exist is plainly implicit in Mr Farnsworth's report to which I referred above. A significant creditor is here prepared to fund those investigations, and the funding agreement seems to me to be in the interests of creditors, for the same reason that the appointment of the liquidator and the pursuit of such investigations would be in the creditors' interests. It is here accepted that the liquidator will exercise his independent discretion in respect of the conduct of the investigation, in accordance with his statutory and professional duties, and the funding agreement will not constrain the exercise of that discretion. The amount of funding provided is plainly an amount with which the liquidator is satisfied, albeit that amount might ultimately be increased, by agreement between the funder and the liquidator, if events developed such that an increase was required.
I am satisfied that, in the relevant circumstances, the funding agreement does not raise any question of lack of good faith, error of law or principle, and there is no substantial ground to doubt the prudence of the liquidator's proposal to enter that agreement. For these reasons, the Court should grant approval for that agreement pursuant to s 477(2B) of the Act. I will amend the orders made today to include orders 1-2 as set out in the Interlocutory Process dated 26 June 2019, which will be set out in full in those orders.
[4]
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Decision last updated: 29 November 2019