In the matter of Rubix Investments Group Pty Ltd (in liq) [2018] NSWSC 1184

Legal principles - s 447(2A)

1. Section 477(2A) of the Corporations Act provides that, except with the approval of the Court, the committee of inspection or a resolution of the creditors, a liquidator of a company must not compromise a debt to the company if the amount claimed by the company is more than, relevantly, the prescribed amount of $100,000: Corporations Regulations 2001 (Cth), reg 5.4.02.
2. Section 506(1A)(a) provides, relevantly, that s 477(2A) applies in relation to the liquidator (in a voluntary winding-up) as if he or she were a liquidator in a winding-up insolvency or by the Court.
3. The liquidators seek approval of the Court given that the amount claimed by Rubix as a debt due by Gogetta is more than $100,000, there is no committee of inspection, and two attempts to convene a meeting of creditors to vote on a resolution approving the compromise have failed for want of a quorum.
4. Section 477(2A) applies only in relation to a "debt" strictly so called: Re Luxtrend Pty Ltd (in liq) (1996) 135 FLR 170; [1997] 2 Qd R 86; Re Tietyens Investments Pty Ltd (in liq) (rec and mgr apptd) [1999] FCA 206; (1999) 31 ACSR 1; Re HIH Insurance at [12]. The course of dismissing a s 477(2A) application on the basis that the particular claim is not, strictly speaking, a "debt" should only be followed in a clear-cut case: Re HIH Insurance Ltd at [12]. Here, the relevant claim by Rubix against Gogetta in respect of unpaid repair costs answers the description of a "debt". The compromise contained in the release by Rubix in the deed of "all claims" against Gogetta would include that debt.
5. The essential purpose of the requirement of approval under s 477(2A) is to ensure that the interests and wishes of those affected by a compromise, chiefly the creditors, are a major consideration in making such a compromise: Re One.Tel Limited [2014] NSWSC 457 at [28].
6. The approach that the Court is to take in deciding whether to grant approval under s 477(2A) is well-established. As Barrett J explained in Re HIH Insurance at [15], s 477(2A) is concerned to ensure that the Court exercises some oversight of the liquidators' actions, and the Court's assessment must be made in light of the purposes for which liquidators' powers exist. One overriding purpose is to serve "the interests of those concerned in the winding-up - here, the creditors": Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85 (Giles J); the other is to do whatever needs to be done "for the proper realisation of the assets of the company" or to assist its winding-up: Re GA Listing & Maintenance Pty Ltd (1994) 15 ACSR 308 at 311 (Young J).
7. The Court does not concern itself with the commercial desirability of the transaction. As Giles J said in Re Spedley Securities Ltd (in liq) at 85: The court pays regard to the commercial judgment of the liquidator (Re Chase Corporation (Australia) Equities Ltd (1990) 8 ACLC 1118). That is not to say that it rubber stamps whatever is put forward by the liquidator, but, as is made clear in Re Mineral Securities Australia Ltd [1973] 2 NSWLR 207 at 231-2, the Court is necessarily confined in attempting to second-guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct.
8. In Re One.Tel Limited, Brereton J remarked at [26]: … The role of the court is to grant or deny approval to the liquidator's proposal, not to reconsider every issue considered by the liquidator, nor to develop some alternative proposal which might seem preferable. In reviewing the liquidator's proposal, the court pays due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, but satisfies itself that there is no error of law or ground for suspecting bad faith or impropriety, and evaluates whether the proposal is consistent with the expeditious and beneficial administration of the winding up. …
9. Counsel for the liquidators has provided detailed submissions drawing the Court's attention to all relevant matters to the grant of approval under s 477(2A) of the Corporations Act. Having considered the liquidator's reasons for the compromise given in his report to creditors, the evidence of Mr Lysle and the terms of the deed, I am satisfied that the deed is an appropriate compromise; it is commercially realistic and sensible, and there is nothing to suggest any lack of good faith, error in law or principle, or real or substantial grounds for doubting the prudence of the liquidators' proposal.

Directions under s 90-15

1. Section 90-15(1) of the Insolvency Practice Schedule (Corporations) provides that the Court may make such orders as it thinks fit in relation to the external administration of a company. The liquidators have standing to make such an application: s 90-20(d).
2. The authorities on the predecessor provision in s 479(3) of the Corporations Act again emphasise that it is not the function of the Court to pass an opinion on the liquidators' commercial judgment. In Re HIH Insurance, Barrett J said at [19], "generally speaking, such directions are appropriate only where there is some doubt or difficulty going beyond the question of what is commercially desirable". His Honour cited with approval the statement by Goldberg J (in the context of a voluntary administrator's application for directions under s 447D) in Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409; [2002] FCA 90 at [65]: There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, the decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised. It is insufficient to attract an order giving directions that the liquidator or administrator has a feeling of apprehension or unease about the business decision made and wants reassurance. There must be some issue which arises in relation to the decision. A court should not give its imprimatur to a business decision simply to alleviate a liquidator's or administrator's unease. There must be an issue calling for the exercise of legal judgment.
3. In Re Spedley Securities Ltd (in liq), after noting that a court will not make a liquidator's commercial decision for him, Giles J said at 85, "it is nonetheless common for a liquidator to seek directions as to whether he is justified in entering into a particular compromise".
4. While the Court may give a direction in the context of a proposed compromise and/or where the decision is likely to be contentious, there is an important distinction between a direction such as under s 90-15 and an approval under s 477(2A), namely, that the former exonerates the liquidator from personal liability: Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674; (1991) 5 ACSR 673 at 678. This means that a closer examination of the liquidator's decision is required under s 90-15 because a direction that the decision is proper and reasonable involves a wider enquiry than is required by s 477(2A). Usually this will necessitate consideration of the liquidator's reasons, and the process by which the decision has been reached: Re One.Tel Limited at [35]-[36].
5. The reasons given by the liquidators for settling the cross-claim and the outstanding questions of costs have been referred to above. The essence of those reasons concern the uncertainty of the outcome of the cross-claim given the settlements between Gogetta and Kwikfix and Galaxy and the other defences raised by Gogetta, as well as the risk that Gogetta might obtain a costs order on its claim (for conversion or detinue) notwithstanding that this claim had been dismissed by consent.
6. It can be accepted that the amount of the settlement sum ($40,000, inclusive of costs) relative to the amount of the claim (approximately $193,000, plus costs) implies a judgment that while the proceedings are not devoid of prospects of success, they are attended by very considerable risk. Those risks included both evidentiary and legal risks.
7. The evidentiary risks largely centred around the difficulty in Rubix establishing an amendment to a written agreement (the preferred partnership agreement) by relying upon verbal communications or a course of conduct in circumstances where: (1) there was a risk that large parts of the liquidators' evidence (Mr Lysle's affidavits) may have been rejected on objection, as either hearsay from the company's director (who did not give evidence in the proceedings) or because of the late service of the evidence; (2) the liquidators had been unable to serve a subpoena to attend to give evidence on the director of Rubix; and (3) the forensic decision by counsel for Gogetta on the morning of the hearing to no longer call many of Gogetta's previously advised witnesses significantly diminished the liquidators' ability to obtain concessions in cross-examination, in support of their claim that the terms of the preferred partnership agreement had been varied by an oral agreement or a course of conduct).
8. The legal risks included the effect of the settlement of Gogetta's claims against Galaxy and Kwikfix on Rubix's cross-claim against Gogetta under the invoices it was relying upon; and the s 553C set-off defence, the quantification of which ($84,000 approximately) had been advised to the liquidators only shortly prior to the hearing.
9. Taken together, the cumulative risk associated with the above matters warranted an assessment that the continuation of the cross-claim was attended by a high degree of risk for Rubix.
10. Counsel for the liquidators submitted that there was a possibility that the liquidators may be criticised for having compromised the proceedings on the terms of the deed in circumstances where the costs incurred in conducting the proceedings exceeded the settlement amount, with the effect that there is no monetary benefit for creditors. Counsel emphasised that the concern that the reasonableness, if not the proprietary, of the liquidators' decision may be called into question by creditors, was reinforced by the absence of any creditors attending the two meetings which had been convened by the liquidators to approve the compromise. That may be accepted.
11. The decision of the liquidators involved more than making a commercial decision; it also involves the exercise of legal judgment in assessing the merits of settlement against the prospects of success in the proceedings. I accept that the decision to compromise Rubix's claim is likely to be contentious.
12. Taking into account the risks attendant on the cross-claim, the process of commercial negotiation between legally represented parties that has led to the settlement, the liquidators have received the benefit of advice from experienced lawyers, the benefit of a prompt settlement albeit for a small return to the company, and the savings in legal costs associated with what otherwise would have been a lengthy trial with the possibility of an appeal, I am satisfied that the liquidators would be justified in entering into the deed.

Conclusion and Orders

1. I am satisfied that the Court should give its approval under s 477(2A) to the liquidators entering into the deed with Gogetta compromising the debt claimed against Gogetta in respect of unpaid repair costs.
2. I am also satisfied that it is appropriate that the liquidators be given a direction pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) that they would be justified in entering into the deed with Gogetta.
3. Accordingly, the Court orders that: 1. Pursuant to s 477(2A) of the Corporations Act 2001 (Cth) (as applied by s 506(1A)), the applicants, David Nicholas Iannuzzi and Vincent Joseph Pirina, as liquidators of and on behalf of Rubix Investments Group Pty Ltd, have the approval of the Court to enter into the deed of settlement and release which is in or substantially to the effect of the form which is Annexure A to the affidavit of Adam John Lysle sworn 23 July 2018. 2. Direct pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) the applicants, David Nicholas Iannuzzi and Vincent Joseph Pirina, as liquidators of and on behalf of Rubix Investments Group Pty Ltd, would be justified in entering into and performing, and causing Rubix Investments Group Pty Ltd to enter into and perform, the deed which is in or substantially to the effect of the form which is Annexure A to the said affidavit of Adam John Lysle. 3. The applicants' costs of the application be costs in the liquidation of Rubix Investments Group Pty Ltd.

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: 02 August 2018