[2009] FCA 333
Carter v New Tel Ltd (in Liq) (2003) 44 ACSR 661[2003] NSWSC 128
CBA Corporate Services (NSW) Pty Ltd v Walker (2013) 212 FCR 444
Judgment (14 paragraphs)
[1]
Background
KDC owned and operated a number of mining tenements collectively known as the Ellendale Mine, spread across the west Kimberley region of Western Australia. Mr Arnautovic gave evidence that the Ellendale Mine was the world's leading supplier of rough yellow diamonds. The business of KDC was extracting rough yellow diamonds from its tenements and selling them through certain retailers or on the open market via traditional auction or tender processes. It seems that the relevant world diamond sales centres are located in Antwerp, Belgium and Dubai, United Arab Emirates. According to the liquidators' enquiries, KDC held a certain number of diamonds extracted from the Ellendale Mine and/or from the processing and re-processing of piles of extracted earth known as 'tailings'. The sale of rough yellow diamonds comprised KDC's primary source of income.
The liquidators contend that, as at 2 June 2015, KDC was indebted to KDL in an amount of $4,379,914.61, which was unsecured.
On 3 June 2015, KDC entered into a loan agreement and a security deed with Kimberley Diamond Limited (KDL), its parent company. The loan agreement provided for the making of advances to KDC by KDL, upon request, but subject to the election of KDL to lend the funds requested. Any loans were to be secured by the terms of the security deed. The security deed provided that KDC granted a security interest to KDL over property of the company described as the "Secured Diamonds" to secure payment of all present and future debts and monetary liabilities of the company to KDL. The security extended both to liabilities under the loan agreement and liabilities owed to KDL before the date of the security deed.
KDL asserts that it made further advances to KDC after 3 June 2015 totalling $3,886,837.42. In his affidavit sworn 10 June 2016 (par 93), Mr Arnautovic described this amount as comprising, among others, alleged cash advances, management fees and corporate service charges.
The security deed was registered on 28 June 2015 on the Personal Property Securities Register established under the Personal Property Securities Act 2009 (Cth) (PPSA). KDL's registration described the class of collateral for the purposes of the Personal Property Securities Regulations 2010 (PPSA Regulations), Sch 1, cl 2.3 as "All present and after acquired property - No exceptions", which is commonly abbreviated to "AllPAAP".
Mr Arnautovic gave evidence in his affidavit sworn 9 March 2017 (par 6) that the diamonds extracted from the Ellendale Mine were stored with Brinks Australia Pty Ltd (Brinks) at a storage facility in Perth where they were held for and on behalf of KDC. There was no challenge to that evidence. The liquidators contend that between about 24 April 2015 and 30 June 2015 certain diamonds recovered by KDC from the Ellendale Mine were sent by KDC to Antwerp, Belgium to be sold. There is documentary evidence in the form of Shipper's letters of instruction dated between 18 January 2015 and 30 June 2015, recording the collection by Brinks of diamonds held by KDC for shipping to various consignees in Antwerp, Belgium. In each case the Shipper is shown as KDC. Mr Arnautovic said in his affidavit (par 13) that as at 3 July 2015 no account had been created with Brinks in the name of KDL. Rather, the only accounts held with Brinks were in the name of KDC.
It seems that the diamonds shipped to various consignees in Antwerp, Belgium were sold in in two tranches, one in June 2015 and one in September 2015. Of the proceeds of sale in June 2015, $5,513,525.06 was paid to KDL. Part of the proceeds of sale in September 2015, being $1,782,731.55 was also paid to KDL. There is evidence of a joint direction dated 21 August 2015 given by the liquidators of KDC and by KDL to the auctioneer in Belgium authorising the payment of $1,783,000 to KDL, without admissions by KDC or its liquidators. The liquidators contend that between 3 June 2015 and October 2015, KDL received in total $8,931,623.91 from the proceeds of sale of the diamonds in reduction of the debt owed by KDC. So much is admitted by KDL.
One further matter should be mentioned in relation to the sale of the diamonds. KDL tendered in evidence, without any further explanation, two documents. One was an irrevocable direction given by KDL to eDiamonds Belgium BVBA (eDiamonds) dated 10 June 2015 in respect of all diamonds that Anthony Peter Rough Diamond Dealer (APRD) had already received from KDL and all diamonds APDR would receive from KDL prior to the auction scheduled at the end of June 2015. The direction acknowledged that APRD held those diamonds on behalf of the "secured party" absolutely as bare trustee. The secured party was identified to be Yan Xie. The precise diamonds the subject of that direction were not established in the evidence.
The other document tendered by KDL was styled "Share Transfer Deed" between KDC, Zihan He (Mr He) and eDiamonds dated 12 June 2015, in respect of 50 ordinary shares in eDiamonds. The document contained acknowledgements by Mr He concerning the diamond inventory received from KDL prior to completion of the share transfer, which were to be sold at auction on 24 June 2015. Again, the precise diamonds the subject of that direction were not established in the evidence. In oral argument, counsel for KDL accepted that there is a factual contest as to the circumstances in which eDiamonds obtained possession and then later sold the diamonds shipped to Belgium by KDC (T34, lines 25-29).
As indicated above, on 1 July 2015, the directors of KDC appointed voluntary administrators, and on 5 August 2015, the creditors resolved that the company be wound up.
On 17 June 2016 the liquidators of the company commenced this proceeding against KDL and three directors of the company (the recovery proceeding). The originating process made various claims for relief, including claims for compensation against all defendants for insolvent trading; and declarations and related relief against KDL that the loan agreement and security deed, both dated 3 June 2015, are void under various provisions of the Corporations Act including (a) s 588FP on the basis that they constituted a security interest which had been granted in favour of KDL, being a person associated with officers of the company, (b) s 588FF on the basis that they constituted voidable transactions, and (c) s 588FJ on the basis that they constituted a circulating security interest in property of the company granted within six months of the relation-back day, 1 July 2015.
[2]
Liquidators' interlocutory process and KDL's opposition
On 20 February 2017 the liquidators filed an interlocutory process in the recovery proceeding, seeking an order that the company be wound up in insolvency by the Court under s 459A of the Corporations Act and that they remain as the liquidators of the company. Consents to act as liquidators were not available at the hearing, but have since been filed by Mr Arnautovic and Mr Williamson.
Two preliminary matters should be mentioned. One is that, if KDC is wound up in insolvency, Mr Arnautovic and Mr Williamson, as the existing voluntary liquidators, do not simply remain in place as liquidators of the company. It will be necessary for the court to appoint one or more liquidators pursuant to s 472(1) of the Corporations Act. The other matter is that if more than one liquidator is appointed by the Court, s 472(6) provides that the Court must declare whether anything that is required or authorised by the Corporations Act to be done by the liquidator is to be done by all or any one or more of the persons appointed.
It is well accepted that the Court may make a winding up order under s 459A even if the company is already being wound up voluntarily. So much is recognised by s 467B which provides that the Court may make an order under ss 233, 459A, 459B or 461, even if the company is already being wound up voluntarily. However, s 467B is not a source of power to order winding up; it is facultative and confirms that such an order can be made despite the fact that the company is already being wound up voluntarily: Citrix Systems Inc v Tele Systems Learning Pty Ltd (in Liq) (1998) 28 ACSR 529 at 535 (Moore J) in relation to s 467B of the then Corporations Law.
The terms of s 588FJ are set out at [33] below. The liquidators have taken the view, on advice, that a company that is being wound up pursuant to a resolution of creditors after a process of voluntary administration is not a company that is being "wound up in insolvency" as referred to in s 588FJ. Support for that view can be found in Carter v New Tel Ltd (in Liq) (2003) 44 ACSR 661; [2003] NSWSC 128 (New Tel). After noting there was little authority on this question, Austin J concluded in New Tel at [15] that s 588FJ is available only where the company is being wound up by virtue of an order under s 459A. That view has been followed in Hadfield v ACN 092 328 400 Pty Ltd [2011] NSWSC 114 at [19]-[20] (Barrett J).
The liquidators point to the potential benefit to creditors of the company if s 588FJ of the Corporations Act is made available to the liquidators in a court ordered winding up of the company to seek to challenge the security deed given by the company shortly before being placed into voluntary administration, and to recover certain payments received by KDL as the secured party from the sale of the company's property the subject of that security.
KDL was granted leave, as an interested person, to be heard on the liquidators' application for an order under s 459A without becoming a party to the interlocutory process. As indicated, KDL is a defendant in the recovery proceeding. Mr D Sulan, of counsel, who appeared with Mr C Mitchell for KDL, cross examined Mr Arnautovic on issues of delay and the liquidators' purposes in commencing the recovery proceeding making a s 588FJ claim, before seeking to convert the winding up into a compulsory winding up by the court. Ultimately, no submissions based on delay were advanced as a discretionary reason against granting the relief sought by the liquidators.
KDL opposed the liquidators' application because, it was submitted, the liquidators do not have a plausible case for relief against KDL under s 588FJ of the Corporations Act.
The essential question raised by KDL's submissions is what is the proper approach to the exercise of the Court's discretion to wind up a company in insolvency under s 459A, in circumstances where the advantage to creditors of a court winding up is the potential availability of a s 588FJ claim. Should the Court embark on an inquiry into the merits of the proposed s 588FJ claim, in a manner similar to an application for summary dismissal of such a claim (as submitted by KDL), or is that too high a bar and is the relevant discretionary consideration whether the proposed s 588FJ claim might result in potential benefits to the general body of creditors (as submitted by the liquidators)?
[3]
Standing of liquidators to seek winding up order
Mr Arnautovic and Mr Williamson as liquidators of the company have standing under s 459P(1)(e) of the Corporations Act to seek an order for the winding up the company by the Court under s 459A. See also Re Green (as liq of Australian Resources Ltd (in liq)) (2004) 52 ACSR 452; [2004] NSWSC 1095 (Re Green) at [3] (Barrett J).
[4]
Insolvency
Insolvency is defined in s 95A of the Corporations Act:
(1) A person is solvent if, and only if, the person is able to pay all of the person's debts as and when they become due and payable.
(2) A person that is not solvent is insolvent.
Authority establishes that the relevant date for proof of insolvency for winding up under s 459A is both the date of the making of the application and the date of the hearing of the application: Ann Street Mezzanine Pty Ltd (in Liq) v Beck (2009) 175 FCR 532; [2009] FCA 333 at [9] and [12] (Finkelstein J).
Applied to the present case, the liquidators correctly submitted that the relevant date for demonstrating that the company was insolvent is the date of the making of the application under s 459A, here 20 February 2017, and the date of the hearing of the application. KDL did not dispute that the company was insolvent on both of those dates, whilst reserving its position in relation to any earlier date.
As to evidence of insolvency as at 20 February 2017 and subsequently, the liquidators rely upon an affidavit of Mr Arnautovic sworn 17 February 2017, which referred to his opinion as to insolvency expressed in two earlier affidavits sworn in this proceeding on 10 June 2016 and 6 February 2016. Mr Arnautovic expressed the opinion that KDC is and was insolvent on 1 July 2015 and as at 17 February 2017.
The evidence establishes that a rights issue by the company in October 2014 was undersubscribed by $9.8 million and no further capital was raised after that date; the company made a loss before tax of $11.406 million in the financial year ended 30 June 2015; that as at 30 June 2015 the company had a deficiency of cash to pay current liabilities of $12.183 million; that the claims of employees, as at 1 July 2015, were $6.083 million; and the debts incurred by the company in the period February to June 2015, which remained unpaid as at 1 July 2015, totalled $15,396,472, of which $8,293,056 were current, $4,720,014 were outstanding more than 30 days, $1,485,014 were outstanding more than 60 days, $768,220 were outstanding more than 90 days and $129,624 were outstanding more than 120 days. The company was in default of its obligations to the Australian Taxation Office and the Office of State Revenue as at 31 January 2015 and that default continued thereafter. The claims of all unsecured creditors lodged in the winding up total $33.554 million. Against these liabilities the only assets of KDL which could be readily used to raise money was its stock of diamonds, which were the subject of security in favour of KDL. The company's other assets were primarily capital equipment used in its mining operations. Some of this equipment was sold prior to the appointment of the administrators. There is a substantial deficiency in the value of the assets available in the liquidation to meet the liabilities of the company.
I am satisfied that the company was insolvent, both at the date of the making of the application under s 459A on 20 February 2017 and at the date of hearing.
[5]
The loan agreement and security deed dated 3 June 2015
Clause 2 of the security deed provides for the creation of a security interest over property of KDC as follows:
2 Creation of Security
(a) KDC grants to KDL a Security Interest over the Secured Diamonds to secure payment of the Secured Money by KDC to KDL, by way of a transfer to KDL of the right, title and interest in the Secured Diamonds for the Loan Period in accordance with the terms of this deed.
(b) KDL accepts the transfer of the right, title and interest in the Secured Diamonds for the Loan Period in accordance with the terms of this deed.
The "Loan Period" is defined in cl 1.1 as the period commencing on the Effective Date (being 1 June 2015), and ending on the Termination Date (being the date on which the Secured Money is repaid by KDC to KDL in full and the loan agreement is terminated by KDL).
Clause 1.1 of the security deed also contains the following definitions, among others:
Secured Diamonds means all of the diamonds described in Schedule 1 and all proceeds of sale thereof.
Secured Money means all present and future debts and monetary liabilities (whether actual or contingent and whether owed jointly or severally or in any other capacity) of KDC to:
(a) the KDL, for any reason under or in connection with this deed or the Loan Agreement, or any other loan agreement entered into by the Grantor and the Secured Party from time to time and to which the Parties agree is secured by the terms of this deed; and
(b) and irrespective of whether those debts or liabilities are:
(c) owed as principal, interest, fees, charges, taxes, losses, damages, costs or expenses or on any other account;
(d) owed as a result of the assignment to KDL of any debt or monetary liability of KDC or any other person, or as a result of any dealing with that debt or monetary liability by any person; or
(e) owed to KDL before the date of this deed or before the date of any assignment of this deed to KDL by any person.
Security Interest means any mortgage, pledge, lien, charge, assignment, hypothecation or security interest, or any other agreement or arrangement having a similar commercial or legal effect, and includes an agreement to grant or create any of those agreements or arrangements. It includes a security interest within the meaning of s 12 of the PPS Act, other than an interest in Personal Property that would not be a security interest but for the operation of s 12(3) of the Personal Property Securities Act 2009 (Cth).
Personal Property has the meaning given in the PPS Act [ie the Personal Property Securities Act 2009 (Cth)].
Schedule 1 of the security deed contains the definition of "Secured Diamonds" in the following terms:
Schedule 1
The Secured Diamonds
The Secured Diamonds will constitute all commercial quality rough diamonds recovered by KDC while the Secured Money remains outstanding and until the Loan Agreement is terminated by agreement between the parties. For the avoidance of doubt this does not include the diamonds which remain in the ground.
[6]
Section 588FJ
Part 5.7B of the Corporations Act deals with the recovery of property or compensation for the benefit of creditors of an insolvent company. Section 588FJ deals with certain security interests which are void against a liquidator. The section was amended with effect, on 30 January 2012, by the Personal Property Securities (Corporations and Other Amendments) Act 2010 (Cth) (2010 Amendment Act), items 95-101 in Pt IV of Sch 1. New definitions were also inserted in the Corporations Act as ss 51, 51A, 51B and 51C by the 2010 Amendment Act.
Section 588FJ is relevantly in the following terms:
588FJ Circulating security interest created within 6 months before relation-back day
(1) This section applies if:
(a) a company is being wound up in insolvency;
(b) the company created a circulating security interest in property of the company at a particular time that is at or after 23 June 1993 and:
(i) during the 6 months ending on the relation-back day; or
(ii) after that day but on or before the day when the winding up began.
(2) The circulating security interest is void, as against the company's liquidator, except so far as it secures: [various things specified in (a) to (e)]
(3) Subsection (2) does not apply if it is proved that the company was solvent immediately after that time.
(4)-(5) …
(6) If, during the 6 months ending on the relation-back day, or after that day but on or before the day when the winding up began, a debt secured by the circulating security interest was discharged, out of the company's money or property, to the extent of a particular amount (in this subsection called the realised amount ), the liquidator may, by proceedings in a court of competent jurisdiction, recover from the secured party, as a debt due to the company, the amount worked out in accordance with the formula:
Unsecured amount - Realisation costs
where:
realisation costs means…
unsecured amount means…
Section 51C of the Corporations Act provides:
In this Act:
"circulating security interest " means a security interest that is:
(a) a PPSA security interest, if:
(i) the security interest has attached to a circulating asset within the meaning of the Personal Property Securities Act 2009
(ii) the grantor (within the meaning of that Act) has title to the asset; or
(b) by a floating charge.
The term "security interest" is defined in s 51A of the Corporations Act as meaning a PPSA security interest or a charge, lien or pledge. The term "PPSA security interest" is defined in s 51 of the Corporations Act to mean a security interest within the meaning of the PPSA and to which that Act applies, other than a transitional security interest within the meaning of that Act.
The PPSA, s 12 defines a "security interest" relevantly as follows:
Meaning of security interest
(1) A security interest means an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).
Note: For the application of this Act to interests, see section 8.
(2) For example, a security interest includes an interest in personal property provided by any of the following transactions, if the transaction, in substance, secures payment or performance of an obligation:
(a) a fixed charge;
(b) a floating charge;
(c) a chattel mortgage;
(d) a conditional sale agreement (including an agreement to sell subject to retention of title);
(e) a hire purchase agreement;
(f) a pledge;
(g) a trust receipt;
(h) a consignment (whether or not a commercial consignment);
(i) a lease of goods (whether or not a PPS lease);
(j) an assignment;
(k) a transfer of title;
(l) a flawed asset arrangement.
The effect of s 588FJ is that a "circulating security interest" (whether a PPSA security interest or a floating charge) created in property of a company during a stated period before the beginning of the company's winding up is void against the liquidator except insofar as it secures certain advances and other payments made after the time of the security and as consideration for it: s 588FJ(2). However the avoidance effect of s 588FJ(2) does not apply if it is proved that the company was solvent immediately after the time that it created the circulating security interest: s 588FJ(3). Importantly, s 588FJ(1)(a) provides that the section applies if "a company is being wound up in insolvency".
[7]
The proposed s 588FJ claim
The material facts underlying the liquidators' present pleading of the s 588FJ claim in the recovery proceeding include that:
on 2 June 2015, the debt owing by KDC to KDL was $4,379,914.61, which amount was unsecured (the KDC Debt)(pars 45 and 107);
between about 24 April 2015 and 30 June 2015 certain diamonds recovered by KDC from the Ellendale Mine were sent by KDC to Antwerp, Belgium to be sold (the KDC Diamonds)(par 94); and
between about 3 June 2015 and October 2015 KDL received payment of, in total, $8,931,623.91 in reduction of the KDC debt from the two sales of the KDC Diamonds in the June 2015 and in September 2015 (pars 94 and 109).
The liquidators also relevantly assert that:
the security interest created by the security deed attached to the "Secured Diamonds" (Diamonds) (par 117);
that security interest constituted a "security interest" within the meaning of s 12 of the PPSA (par 118);
the Diamonds constituted part of the "inventory" of KDC within the meaning of s 341(1B) of the PPSA (par 119);
the Diamonds constituted a "circulating asset" within the meaning of s 340 of the PPSA and the security interest over the Diamonds is a "circulating security interest" within the meaning of s 51C of the Corporations Act (pars 120-121);
the security interest arising under the terms of the security deed was a circulating security interest which was created during the six months ending on the relation back day (1 July 2015) within the meaning of s 588FJ(1) of the Corporations Act (at par 122);
the security interest created under the security deed is void as against the liquidators of KDC pursuant to s 588FJ(2) insofar as it applied to all advances and liabilities made and arising before 3 June 2015, including the KDC Debt (which immediately before the security deed stood at $4,379,914.61) (at pars 45 and 123); and
the liquidators of KDC are entitled, pursuant to s 588FJ(6), to recover from KDL as a debt due to KDC the amount worked out in accordance with the formula provided for in that section (par 126).
PPSA, s 340 defines a "circulating asset" as follows:
Meaning of circulating asset
General definition
(1) For the purposes of this Act, if a grantor grants a security interest in personal property to a secured party, the personal property is a circulating asset if:
(a) the personal property is covered by subsection (5) (unless subsection (2) or (3) applies); or
(b) in any other case - the secured party has given the grantor express or implied authority for any transfer of the personal property to be made, in the ordinary course of the grantor's business, free of the security interest.
Exceptions
(2) Despite paragraph (1)(a), personal property covered by subsection (5) is not a circulating asset if:
(a) an effective registration with respect to the property, in relation to the grantor, discloses, in accordance with the regulations, that the secured party has control of the personal property; and
(b) the secured party has control of the personal property.
Note: For the meaning of control in this subsection, see section 341.
(3) Despite subsection (1), personal property covered by subsection (5) is not a circulating asset if:
(a) the personal property is goods; and
(b) the security interest is perfected by possession.
(4) For the purposes of paragraph (1)(b), personal property is not a circulating asset merely because the secured party has given express authority to transfer specific personal property, or a specific class of personal property, free of a security interest.
(4A) Despite subsection (1), if a grantor grants a security interest provided for by a transfer of an account or chattel paper, the account or chattel paper is not a circulating asset in relation to the security interest.
Current assets
(5) This subsection covers the following personal property:
(a) an account that arises from granting a right, or providing services, in the ordinary course of a business of granting rights or providing services of that kind (whether or not the account debtor is the person to whom the right is granted or the services are provided);
(b) an account that is the proceeds of inventory;
(c) an ADI account (other than a term deposit);
(d) currency;
(e) inventory;
(f) a negotiable instrument.
Example: An example of an account mentioned in paragraph (a) is an account that is a credit card receivable.
Note: For the meaning of inventory in this subsection, see section 341.
PPSA, s 341, defines the concepts of "control" of personal property and "inventory" for the purposes of determining what is a circulating asset. Relevantly, s 341 provides:
Meaning of control and inventory
General rules
…
(1B) For the purposes of subsection 340(5) and this section:
(a) inventory has its ordinary meaning; and
(b) the definition of inventory in section 10 does not apply.
Control of inventory
(1) For the purposes of subsection 340(2), a secured party has control of inventory if:
(a) the secured party and the grantor have agreed in writing that the grantor:
(i) will specifically appropriate the inventory to the security interest; and
(ii) will not remove any specifically appropriated inventory without previously obtaining the specific and express authority of the secured party to do so; and
(b) the grantor's usual practice is to comply with the agreement.
…
While the liquidators do not accept that KDL made fresh advances to KDC totalling $3,886,837.42 after the entry into the loan agreement and the security deed (see [5] above), the liquidators contend that at least $5,026,786.49 of the total proceeds of the sale of the KDC diamonds received by KDL in June 2015 and September 2015 relates to past indebtedness existing before entry into the security deed. Accordingly the liquidators contend that the value of the claim against KDL under s 588FJ will be at least $5,026,786.49.
The defence filed by KDL on 17 November 2016 admits that KDL received a total sum of $8,913,623.91 from KDC from the proceeds of the sale of the KDC Diamonds after 3 June 2015, however KDL denies that such diamonds constituted part of the "inventory" of KDC within the meaning of s 342(1B) of the PPSA; denies that such diamonds constituted a "circulating asset" within s 340 of the PPSA; and also denies that such diamonds constituted a "circulating security interest" within s 51C of the Corporations Act. KDL admits that the security deed was created within 6 months ending on the relation back day with respect to KDC, but says that s 588FJ "has no application to the present external administration". Although a little opaque, that pleading can be taken as intended to raise KDL's contention that s 588FJ is only available where the winding up is by order of the Court under s 459A.
Both the liquidators and KDL made written and oral submissions directed to their respective contentions in the pleadings referred to above.
Counsel for KDL submitted that the cumulative requirements of the definition of a "circulating security interest" in s 51C(a) are not satisfied in the present case, and hence s 588FJ cannot apply to the security deed.
As to the requirement in s 51C(a)(ii) that the grantor has "title" to the asset, the parties joined issue on two questions of construction raised by the liquidators. One is the time at which the grantor has to hold "title" to the asset - that is, whether before or after the creation of the security deed. KDL submitted that this question admits only of one answer - after the creation of the security deed. The liquidators argued for the contrary view. The other issue, assuming that the grantor must hold title after the creation of the security deed, is whether the reference to "title" means legal title or equitable title or possibly both. KDL submitted that this question also admits only of one answer - legal title. The liquidators submitted that the word "title" is open to a wider construction, and that under the terms of the security deed the "right, title and interest in the Secured Diamonds" of KDL was not absolute but was qualified by cls 3(a) and 4 and 5. Neither party referred the Court to any authority directly in point on the construction of s 51C.
As to the requirement in s 51C(a)(i) that the security interest has attached to a circulating asset within the meaning of the PPSA, the parties joined issue on whether either of the exclusions in PPSA, s 340(2) and (3) might operate to exclude the KDC Diamonds from answering the definition of a "circulating asset" in s 340, in particular, that the KDC Diamonds were personal property covered by s 340(5), relevantly "inventory": s 340(5)(e).
The exclusion in s 340(2) is based on an effective registration and the secured party's control of the personal property. Counsel for KDL accepted that there is an issue as to whether KDL's financing statement adequately disclosed, in accordance with the PPSA Regulations, that it had control over the relevant property (T39, lines 37-40). The parties also joined issue on whether KDL had relevant "control" of the KDC Diamonds, within the meaning of that term in PPSA, s 341(1)(a) which deals with the concept of control of inventory. The liquidators pointed to a number of matters as suggesting that KDL did not have control of the KDC Diamonds including, it was submitted, that KDC had possession of the KDC Diamonds, that KDC authorised the shipment of such diamonds to Belgium, and that such diamonds were sold by eDiamonds in accordance with the commercial relationship between eDiamond and KDC.
The exclusion in s 340(3) is based on the security interest being over goods and having been "perfected by possession". That directs attention to the concept of possession in PPSA, s 24. KDL pointed to PPSA, s 24(2) and submitted that KDC did not have possession of the KDC Diamonds because the property was in the actual or apparent possession of the secured party (KDL), or another party on behalf of KDL, relevantly eDiamonds. KDL submitted that eDiamonds held such diamonds for sale on behalf of KDL not KDC. As already mentioned, counsel for KDL accepted that there is a factual contest as to the circumstances in which eDiamonds came into possession and sold the KDC Diamonds, but submitted nonetheless that it is plain that such diamonds were sold by eDiamonds as agent for KDL. The parties joined issue on whether eDiamonds was holding such diamonds for KDL, not KDC, and whether that issue was to be answered solely by reference to the terms of the security deed and, if so, what was the proper construction and effect of the relevant terms, in particular cls 3 and 4.
[8]
Approach to exercise of discretion to make winding up order under s 459A
It is necessary to say something about the proper approach to the exercise of the Court's discretion to wind up a company which is already subject to voluntary winding up.
[9]
A "good reason" for making a s 459A order
It has been said in a number of authorities that there needs to be a "good reason" why, where a creditors' voluntary winding up is already in progress, the Court should make an order imposing a different form of winding up: New Tel at 663 (ACSR) (Austin J); Re Green at [5] (Barrett J); Deputy Commissioner of Taxation v Tull Reinforcing Pty Ltd (2006) 153 FCR 394; [2006] FCA 810 at [17] (Besanko J). As Barrett J explained in Re Green at [5], this is because ordinarily there is little practical difference between a creditors' voluntary winding up and the form of winding up imposed by the Court.
However, as Brereton J noted in Re Evcorp Grains Pty Ltd (No 2) [2014] NSWSC 155, the Full Court of the Federal Court (Foster, Barker and Griffiths JJ) in CBA Corporate Services (NSW) Pty Ltd v Walker & Ors (2013) 212 FCR 444; [2013] FCAFC 74 (CBA Corporate Services) expressed some degree of disapproval of the phrase "good reason". The Full Court noted at [40] that the appellants' reliance in that case upon the language used in cases such as New Tel and Re Green, effectively advanced a construction of s 459A of the Corporations Act which inserted the phrase "for good reason" into the body of the text of the provision. Of that approach, the Full Court said at [41] - [42]:
[41] In our view that is an erroneous approach. It is well established that the correct approach in determining the scope of a statutory discretion which is unconfined by express statutory criteria is to ascertain the factors that may be taken into account by reference to the subject matter, scope and purpose of the statutory provision (see, for example, Water Conservation and Irrigation Commission (NSW) v Browning (1947) 74 CLR 492 at 505 per Dixon J and Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24 at 40 per Mason J).
[42] While on one view it could reasonably be said that the phrase "for good reason" simply reflects a requirement that the power to order a winding up in insolvency should only be made in an appropriate case, there is a danger that that phrase could displace or distort the otherwise broad discretion conferred by s 459A. As the Full Court stated recently in Hua Wang Bank Berhad v Cmr of Taxation [2013] FCAFC 28 at [13] the substitution of other words for the terms of a statutory discretion is to be discouraged as it is likely to lead to error. That danger is manifest here where the appellants seek to impugn the primary judge's decision by reference to the fact that the particular matters which were accepted as "good reasons" in cases like New Tel and Re Green are not present here. Whether or not the discretion under s 459A should be exercised in any particular case necessarily turns on an assessment all the relevant circumstances. In our opinion, the broad discretion under that provision should not be inhibited by artificially introducing a requirement of "for good reason" as though that is part of the provision itself.
In Re Evcorp Grains Brereton J observed at [14], that while the Full Court in CBA Corporate Services emphasised that the judicial gloss "for good reason" should not be treated as if it were part of s 467B itself, nonetheless, their Honours accepted that an order under s 459A should only be made in an appropriate case, and that it was relevant that the company was already subject to a winding up. Brereton J continued at [16] - [19], stating the following four points:
[16] First, while an unpaid creditor who establishes insolvency is usually regarded as entitled to a winding up order almost as of course, that is not so where the company is already in liquidation. The existence of a voluntary liquidation is a relevant consideration, so that where a voluntary liquidation is in place, there needs to be some justification for replacing it with a compulsory liquidation.
[17] Secondly, such justification will ordinarily be found, if at all, in the interests of the administration and, in particular, the general body of creditors. Typically, the possibility that a court-appointed liquidator will be able to realise additional benefits for the creditors not available to a voluntary liquidator will provide such justification [Re Green (as liq of Australian Resources Ltd); Carter v New Tel; Deputy Commissioner of Taxation v Tull Reinforcing].
[18] Thirdly, on the other hand, the mere preferences of the plaintiff - such as a mere desire to replace the liquidator - are insufficient. This is because it would otherwise afford a means of circumventing s 503. Thus, where the sole purpose of proceeding with a winding-up application is to replace a voluntary liquidator with a court-appointed liquidator, the court adopts the same approach as on an application under s 503 to remove a liquidator and appoint another [Citrix Systems v Telesystems Learning; Neha Impex International v Mintz and Co; Commissioner of Taxation v Tull Reinforcing]. Likewise, it is not sufficient justification that making a winding up order will meet the plaintiff's desire to recover its costs [Commissioner of Taxation v Tull Reinforcing [2006] FCA 810 ; (2006) 153 FCR 394].
[19] Finally, the views of the general body of creditors are also a relevant consideration. It would usually tell against a compulsory winding up if the majority of unrelated creditors supported continuation of a voluntary administration.
It can be seen by the contextual matter emphasised by Brereton J that it is relevant when exercising the discretion under s 459A to take into account that the company is already being wound up under the Corporations Act, and since there is little practical difference between the two forms of winding up, a further winding up by the court may not be appropriate. Counsel for KDL did not submit that the summary by Brereton J in Re Evcorp Grains at [16] - [19] was incorrect. For my part, I respectfully agree with his Honour's summary of the authorities.
On the facts in Re Evcorp Grains, Brereton J declined to make a compulsory winding up order where the company was in voluntary liquidation essentially because the order was sought only so that the plaintiffs' preferred liquidator would be substituted for the liquidator appointed on the unsuccessful completion of the voluntary administration.
[10]
The standard for whether the proposed proceedings might result in a potential benefit to the general body creditors proceedings?
That an order under s 459A would potentially enable the liquidators to rely on s 588FJ to have a security set aside for the benefit of unsecured creditors has been considered a sufficient reason for a voluntary winding up to be converted to a court ordered winding up.
In New Tel, Austin J referred to a "plausible case" for a challenge to be made to the validity of certain charges under s 588FJ and a probability that if the challenge was successful, the unsecured creditors would receive a substantial benefit.
After referring to the facts in New Tel, which involved a potential attack on the validity of two charges, the Full Court observed in CBA Corporate Services at [51] - [52]:
[51] Significantly, Austin J noted at [9] that the evidence before him relating to the second charge was to the effect that the charge "may secure only "new advances" and therefore may fall outside s 588FJ, although Mr Hall [the liquidator] has not yet formed a concluded view on this point" (emphasis added). This uncertainty concerning the second charge was not viewed as significant. Austin J expressly acknowledged that, by making an order under s 459A, he would make it possible for the liquidator to attack the validity of both charges under s 588FJ. His Honour then added at [15]:
On the evidence before me, there seemed to me to be a plausible case for such a challenge to be made, and a probability that if the challenge was successful, the unsecured creditors would receive a substantial benefit.
[52] Justice Austin was satisfied that there was a "plausible case" in respect of the foreshadowed challenge to both charges, even though there was a possibility that the second charge might fall outside s 588FJ and in circumstances where the liquidator was yet to form a concluded view on that issue. In our view, there is no inconsistency between that approach and that taken by the primary judge here.
In Re Green, Barrett J was satisfied that there was a sufficient basis for making an order under s 459A in circumstances where the liquidator considered that there may have been insolvent trading and, if that were established, the liquidator could obtain recoveries against the directors for the potential benefit of the general body of creditors. Importantly, his Honour made clear at [8] that he was not required to come to any definitive view on the proper construction of the terms of the contract (being an insurance policy) and whether it was responsive to claims for insolvent trading by a liquidator appointed by the Court. He considered that it was sufficient that the prospects of making good that construction would be "substantially enhanced" if the liquidator pursuing those claims was a court-appointed liquidator, rather than a liquidator under a creditors' voluntary winding up.
In CBA Corporate Services, the Full Court concluded that it did not view Re Green as creating a standard higher than the need for there to be "a rational possibility that s 588FJ proceedings might be commenced and might result in potential benefits for the general body of creditors": at [53].
Re Patterson Group Pty Ltd (in Liq) ACN 070 677 020 [2014] NSWSC 1927 involved an application by liquidators to convert a deemed creditors' voluntary winding up into a Court-ordered winding up, to enable the liquidators to pursue a claim against the Australian Energy Market Commission (AEMC), based on s 468 of the Corporations Act. Section 468 provides that a disposition of property after the commencement of a winding up by the Court is, unless the Court otherwise orders, void. There is no corresponding provision in connection with a creditors' voluntary winding up. AEMC disputed the liquidators' contention that certain payments would, upon commencement of a Court-ordered winding up, be void as dispositions of the company's property after the commencement of the winding up, and invoked the decision of the Full Court of the Supreme Court of Western Australia in Gericevich Contracting Pty Ltd v Sabemo (WA) Pty Ltd (1984) 9 ACLR 452. In granting the application to convert the winding up into a court winding up, Brereton J said at [10]-[11]:
[10] In the present case, I accept for present purposes that AEMC may have a powerful defence to any claim that may be brought against it. Counsel for the liquidator has identified arguments for distinguishing the decision of the Western Australian Full Court in Sabemo, whereas counsel for AEMC submits that that it is relevantly indistinguishable. It may well be that AEMC would succeed at the final hearing of the foreshadowed application, and it may even be that AEMC could succeed on an application for summary dismissal should the proceedings be instituted against it. Of course, I make no finding or even prediction in that respect.
[11] But it seems to me that, where the liquidators' purpose is to put themselves in a position where they will at least have the standing to bring such proceedings which necessarily, if successful, would be for the benefit of the general body of creditors as a whole, it is one stage too early to decline them the ability to gain that standing by refusing to convert the voluntary winding up into a Court ordered winding up. The potential that such an application might be brought is in my judgment sufficient reason in the general interests of the administration to grant the liquidators the relief they sought. Such an approach is consistent with that adopted by Barrett J, as his Honour then was, in Re Green (2004) 52 ACSR 452 where his Honour referred to "a rational possibility that proceedings might be commenced and might result in potential benefits for the general body of creditors", and took the view that he was not required to come to any definitive view on the proper construction of the terms of the contract then in question the subject of the foreshadowed recovery action.
[11]
KDL's submissions should be rejected
Counsel for KDL submitted that the approach stated by Brereton J in Patterson Group was incorrect, or at least too broad a statement (T35, lines 21-28). I reject that submission. His Honour's statement at [11], although incorrectly attributing a quote from the Full Court in CBA Corporate Services at [53] to Barrett J in Re Green, is nonetheless consistent with the well-established approach in the earlier cases.
That the proposed defendant might have a powerful defence to the foreshadowed claim by the liquidators at a final hearing, or indeed, might be successful in a summary dismissal application of such a claim, does not circumscribe the exercise of the court's discretion under s 459A. Adopting the words of the Full Court in CBA Corporate Services, the standard of satisfaction that an order under s 459A would potentially enable the liquidators to rely on s 588FJ to have a security set aside is no higher than that there be "a rational possibility that s 588FJ proceedings might be commenced and might result in potential benefits for the general body of creditors": at [53].
Counsel for KDL further submitted, with reference to the statement of Austin J in New Tel, that the exercise of discretion to convert the winding up into a court ordered winding up required an assessment, at least, at the level of "plausibility" of the likely prospects of the proposed claim by the liquidators, if s 588FJ was made available in a court ordered winding up (T 35, lines 48-50). I reject that submission.
First, it ignores the context in which Austin J was satisfied that there was a "plausible case" in respect of a foreshadowed challenge to two charges under s 588FJ. As the Full Court observed in CBA Corporate Services at [51]-[52] (see [59] above), Austin J acknowledged in New Tel that there was a possibility that the second charge might fall outside s 588FJ and the liquidator was yet to form a concluded view on that issue. Austin J was not using the words "plausible case" in any prescriptive sense as if to indicate the likely prospects of success of the foreshadowed s 588FJ claim. I would read his Honour's reasons as consistent with the approach expressed by the Full Court in CBA Corporate Services at [53].
Second, to read the reasons of Austin J differently and prescriptively as KDL contends, involves the very error in approach to statutory construction which the Full Court deprecated in CBA Corporate Services, namely placing an impermissible gloss on the statutory language in ss 459A (and also 467B). It is an error to read the reasons for judgment in New Tel as a statement of a rule for the purpose of s 459A, when no such requirement is found in the text or the scope or purpose of s 459A.
As Basten JA explained in AB v Director of Public Prosecutions (NSW) [2014] NSWCA 122 at [10], in relation to the proper construction of the statutory provisions in issue in that case (the Costs in Criminal Cases Act 1967 (NSW)):
….there is no occasion to impose some gloss upon the words of the section. Further, if such a step were taken by an earlier court, that should not distract a judge from the application of the statutory language: Damjanovic & Sons Pty Ltd v Commonwealth [1968] HCA 42; 117 CLR 390 at 408-409 (Windeyer J), noting that "[t]o prefer the gloss to the text is an old and besetting temptation for lawyers", referring to Kavanagh v The Commonwealth [1960] HCA 25; 103 CLR 547 at 578. Windeyer J continued in Damjanovic, noting that "[t]he text becomes submerged in the illustrations." The temptations are no doubt reinforced by judicial decisions which purport to extract "principles" from authorities dealing with similar applications.
[12]
Should a winding up order be made?
Counsel for the liquidators fairly acknowledged in oral argument that there are potential difficulties in making out the proposed s 588FJ claim, while submitting that the Court is not required to determine on the present application the merits of the liquidator's claim that the security deed created a circulating security interest over the KDC Diamonds and is void under s 588FJ.
Counsel for KDL submitted that the legal questions raised by the proposed s 588FJ claim can only be answered favourably to KDL; it was argued forcefully that KDL "can't lose the case" (T34, line 18). KDL further submitted, by analogy with a summary dismissal application, that the Court should decide the legal questions raised by the proposed s 588FJ claim, even if they raise a difficult legal point, if the point seems to be a good one (T35, lines 13-16).
Acceptance of this last submission would impose a higher standard of satisfaction as to whether an order under s 459A might result in potential benefits for the general body of creditors (by enabling the liquidators to rely on s 588FJ to seek to set aside a security), than the approach reflected in the authorities such as New Tel, Re Green, CBA Corporate Services, Re Evcorp Grains and Re Patterson Group. It needs to be kept in mind that the liquidators' purpose in seeking an order under s 459A is to put themselves in a position where, as Brereton J observed in Re Patterson Group "they will at least have the standing to bring a s 588FJ claim which necessarily, if successful, would be for the benefit of the general body of creditors as a whole": at [11].
In the present case, the proposed s 588FJ claim raises questions of construction which are disputed, and as I have noted, there is a contest as to certain factual issues. However, it is not necessary to come to a definitive view on the proper construction of the provisions of the Corporations Act, the PPSA or the security deed: Re Green at [8]. There seems to me to be a rational possibility that the proposed s 588FJ claim might result in potential benefits for the general body of creditors: CBA Corporate Services at [53]; Re Green at [8]. Beyond that it is not appropriate to make findings, let alone attempt to predict the likely prospects of the proposed s 588FJ claim.
It may be accepted that KDL may have a powerful defence to the proposed proceedings. That would seem to turn on the construction arguments relating to a "circulating security interest", and also certain contested factual issues. While KDL may well succeed at a final hearing, and it may even be the case that an application for summary dismissal of the proposed claim could succeed, I agree with the view expressed by Brereton J in Re Patterson Group that an application by the liquidators for an order under s 459A is "one stage too early to decline [the liquidators] the ability to gain that standing [under s 588FJ] by refusing to convert the voluntary winding up into a Court winding up": at [11]. That is to say an application for an order under s 459A is not the occasion for a preliminary trial of the proposed s 588FJ claim. Such an approach is consistent with the approach in New Tel, Re Green, CBA Corporate Services and Re Evcorp Grains.
Turning to the other considerations relevant to the exercise to the Court's discretion to make an order under s 459A. Delay in making the application under s 459A is a relevant factor: Walker and Maloney v CBA Corporate Services (NSW) Pty Ltd [2012] FCA 328 at [78]. Although the liquidators pleaded the s 588FJ claim in the recovery proceeding, the evidence of Mr Arnautovic, which I accept, is that the liquidators were not prepared to pursue that claim based solely on their own evidence as to solvency; (Mr Arnautovic's evidence was filed in June 2016). The liquidators sought a report as to solvency from an independent expert. The report of Mr Alan Walker was received by the liquidators on 3 February 2017 and the application for an order under s 459A was made promptly thereafter on 20 February 2017. I have taken into account the delay in applying for relief under s 459A, but do not consider that it precludes making such an order.
Insofar as KDL complains that making s 588FJ available to the liquidators in a court winding up, will shift the burden of proof in respect of solvency to KDL (under s 588FJ(3)), that will always be the case whenever an order is made under s 459A. As Nicholas J said in Walker and Maloney v CBA Corporate Services (NSW) Pty Ltd at [70]:
The fact that the liquidators may be able to rely on s 588FJ if an order is made under s 459A is not in itself a relevant prejudice.
Importantly, KDL did not suggest that it has been unfairly prejudiced as a result of the liquidators' delay in applying for an order under s 459A. Nor was it suggested that evidence concerning solvency as at the date the security deed was given has been lost or destroyed.
Plainly, it is in the interests of the general body of creditors of the company that s 588FJ is made available to the liquidators, as a claim under s 588FJ might result in potential benefits to the general body of creditors. That factor is entitled to considerable weight.
[13]
Conclusion and orders
I am satisfied that an order should be made under s 459A which will have the effect of converting the voluntary winding up of the company to a winding up in insolvency by the Court. There is no reason why the existing liquidators should not be appointed by the Court under s 472 as liquidators. Although not sought in the interlocutory process, it is appropriate to make an order under s 472(6): see [14] above.
Orders should also be made under s 467(3)(b) and the Supreme Court (Corporations) Rules 1999 (NSW), r 5.6(1) dispensing with the requirements to advertise or publish notice of the application under s 465A and r 5.6 and the requirement that the application be served on the company under s 465A. I will also dispense with the requirement under s 470(2)(b) to serve a copy of the order on the company and the requirement to deliver to the liquidator an office copy of the order and a statement that the order has been served under s 470(2)(c). No substantive purpose would be achieved by compliance with those requirements and they would involve unnecessary costs: see New Tel at [23]. I will not dispense with the requirement to publish notice of the winding up order and the liquidators' appointment under r 5.11(3). It is appropriate that the making of those orders be published in the usual way.
Accordingly, I make the following orders:
1. That pursuant to s 459A of the Corporations Act 2001 (Cth), Kimberley Diamond Company Pty Ltd (in liq) (ACN 061 899 634) (the Company), be wound up in insolvency.
2. That Sule Arnautovic and Christopher Michael Williamson be appointed joint and several liquidators of the Company.
3. Pursuant to s 472(6) of the Corporations Act, declare that anything required or authorised by the Corporations Act to be done by the liquidator may be done by any one of the liquidators of the Company.
4. That pursuant to s 467(3)(b) of the Corporations Act and r 5.6(1) of the Supreme Court (Corporations) Rules 1999 (NSW), the requirement to advertise, or publish notice of, the application under s 465A of the Corporations Act and r 5.6 of the Corporations Rules be dispensed with.
5. That pursuant to s 467(3)(b) of the Corporations Act, the requirement that the application be served on the Company under s 465A of the Corporations Act be dispensed with.
6. That pursuant to s 467(3)(b) of the Corporations Act, the requirements to: (a) serve an office copy of the order on the Company under s 470(2)(b) of the Corporations Act; and (b) deliver to the liquidators an office copy of the order together with a statement that the order has been served under s 470(2)(c) of the Corporations Act be dispensed with.
[14]
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: 05 May 2017
Legislation Cited (5)
Personal Property Securities (Corporations and Other Amendments) Act 2010(Cth)
092 328 400 Pty Ltd [2011] NSWSC 114
Re Evcorp Grains Pty Ltd (No 2) [2014] NSWSC 155
Re Green (as liq of Australian Resources Ltd (in liq)) (2004) 52 ACSR 452; [2004] NSWSC 1095
Re Patterson Group Pty Ltd (in Liq) ACN 070 677 020 [2014] NSWSC 1927
Walker and Maloney v CBA Corporate Services (NSW) Pty Ltd [2012] FCA 328
Category: Principal judgment
Parties: Sule Arnautovic in his capacity as Liquidator of Kimberley Diamond Company Pty Limited (ACN 061 899 634) (First Plaintiff)
Christopher Michael Williamson in his capacity as Liquidator of Kimberley Diamond Company Pty Limited (ACN 061 899 634) (Second Plaintiff)
Kimberley Diamond Company Pty Limited (in Liquidation) (ACN 061 899 634) (Third Plaintiff)
Kimberley Diamonds Limited (ACN 150 737 563) (First Defendant)
Representation: Counsel:
D R Stack (First and Second Plaintiffs)