Inverell Shire Council v Australian Gemstone Resources Pty Limited

Supreme Court of NSW|2018-09-27|Before: Rees J

Solicitors: Pure Legal - Applicant Stacks Law Firm Southern Highlands - First and Second Respondents File Number(s): 2018/124364

Judgment

HER HONOUR: This is an application by Sholom Feldman, former director and secretary of Australian Gemstone Resources Pty Limited (in liquidation) (the Company), to terminate the liquidation of the Company under s 482(1) of the Corporations Act 2001 (Cth). The other former director of the Company, Pnina Feldman (Mr Feldman's mother), consents to the application, as does the sole shareholder of the Company, LBT Corp Pty Ltd.
The liquidator, David Kerr, does not oppose the application. The question for the Court is whether it is appropriate in the circumstances for the order to be made.

Assets and liability of the Company

The issued share capital of the Company is $1.
On 14 August 2018, Mr Feldman completed a report as to affairs in respect of the Company. The Company's balance sheet records total equity of $5,254,417. This mainly comprises the estimated $5 million value of the mining lease together with a nett amount owing to the Company by reason of various related company loans
In respect of related party loans, the Company is owed $1.26 million by Australian Gemstone Mining Pty Limited and owes some $900,000 to Mr Feldman, Australian Gemstone House Pty Limited and Volcan Australia Corporation Pty Limited. Mr Feldman is a director of Australian Gemstone House Pty Limited and Volcan Australia Corporation Pty Limited. Mr Feldman says that these sums are not due and payable until the Company undertakes profitable mining operations. Mr Feldman has given an undertaking to the Court that neither he, nor the related companies, will demand repayment of the monies owing to those companies while any sum remains owing by the Company to its creditors.
The Company is guarantor of a loan by New England Sapphire Corporation Pty Limited from First State Pty Ltd. The security for the loan includes a first ranking mortgage granted by the Company over the mining lease and all of the Company's assets and undertakings. A charge has been registered on the Company in respect of this guarantee.
New England Sapphire Corporation is in liquidation, and owes some $173 million to First State Pty Limited. Notwithstanding this, on 15 August 2018, First State Pty Ltd executed a deed releasing the liability of the Company under the Deed of Capital Guarantee and Indemnity stating: First State will not enforce any security interest against [the Company]. This release is subject to and conditional upon the making of orders by the Supreme Court of New South Wales for the termination of the liquidation of [the Company].

Payment of unsecured creditors of the Company

Mr Feldman has paid $197,990.65 to his solicitor on trust to pay the unsecured creditors of the Company on termination of the liquidation. Those creditors are: Australian Taxation Office $37,968.91 Inverell Shire Council $58,123.37 Wayne McCarthy $25,471.00 Costs order in favour of Inverell Shire Council $ 6,630.16 NSW Planning and Environment $ 2,572.40

The monies owing to Mr McCarthy relate to earth moving works, presumably done at the mine, and are disputed by Mr Feldman. I was informed in Court that Mr Feldman has made a further payment to Mr McCarthy.
Mr Feldman has also paid $20,000 on account of working capital into the trust account
The Company has no priority creditors. The Company has no current employees and no unpaid employee entitlements.

Solvency

Mr Feldman says that, based on his knowledge of the financial position of the Company and subject to paying the Company's unsecured creditors with the funds he has paid into the trust accounts of his solicitors, all current debts of the Company will have been paid in full and no debts will be due and owing such that the Company will be insolvent.
Mr Feldman has commissioned a certified practising accountant, Luke James, to prepare an expert report as to the solvency of the Company. Having regard to the balance sheet and Mr Feldman's report as to affairs filed with ASIC, and relying on the report as to the value of the mine, and the release provide by First State, Mr James is satisfied that the Company has sufficient capital available to satisfy current debts in full, and will continue to be able to satisfy its debts as they become due and payable for at least the next twelve months.
The liquidator rightly points out that Mr James' report is not extensively detailed. The liquidator is not able to verify any of Mr James' opinions, but nor is he aware of any basis to dispute it. Subject to arrangements being put in place to pay the creditors of the Company and the liquidator's costs and expenses, the liquidator does not oppose termination of the winding up.

Future plans for the Company

Mr Feldman and Mrs Feldman are both prepared to continue to act as directors if the winding up is brought to an end. They will be responsible for the day-to-day trade, operations management, control, supervision and administration of the business and affairs of the Company. Mr Feldman is experienced in mining operations with more than 20 years' experience in the industry.
Mr Feldman says that the price of sapphires has now reached a point where it is profitable to mine the tenement and he intends to do so if the liquidation is terminated.
Mrs Feldman is chairman of Queensland Bauxite Limited, a publicly listed company. The Company proposes, following termination of the winding up, to enter into a joint venture with Queensland Bauxite Limited to finance the future mining operations so as to enable both the Company and Queensland Bauxite Limited to take advantage of the sapphire mining opportunities available. It is submitted by Mr Feldman that, if the liquidation is not terminated, the mining tenement will be terminated, and there will be no opportunity for a return to creditors.

The law

Section 482 of the Corporations Act provides: (1) At any time during the winding up of a company, the Court may, on application, make an order staying the winding up either indefinitely or for a limited time or terminating the winding up on a day specified in the order. (1A) An application may be made by: (a) in any case-the liquidator, or a creditor or contributory, of the company; or … (2) On such an application, the Court may, before making an order, direct the liquidator to give a report with respect to a relevant fact or matter.
Sholom Feldman has standing to commence these proceedings pursuant to s 482(1A)(a) as a creditor.
The relevant legal principles are summarised by Black J In the matter of MWM Sydney Pty Ltd (in liquidation) [2016] NSWSC 688 at [16]-[21]. In exercising its discretion on such applications, the Court traditionally turns to the principles set out by Master Lee in Re Warbler Pty Limited (1982) 6 ACLR 526, being:

the applicant must make out a "positive case" for the favourable exercise of the court's discretion;
the applicant must show the nature and extent of the creditors, and whether all debts have been discharged;
the attitude of creditors, contributories and the liquidator is relevant consideration;
the applicant must show the current trading position and general solvency of the company;
the applicant must provide a full explanation for any non-compliance by the directors with their statutory duties;
the applicant must explain the general background and circumstances leading to winding up order;
the applicant must show the nature of the company's business, and whether the conduct of the company was in any way contrary to "commercial morality" or "the public interest".

As Brereton J put the matter succinctly In the matter of Recycling Glass Pty Limited (ACN 001 332 654) [2014] NSWSC 439 at [18]: Thus it has been said that an order terminating the winding up would usually be made if all the creditors are paid out, the liquidator's costs and expenses are covered, and the members agree [Apostolou v VA Corporation of Australia Pty Ltd] [2010] FCA 64; (2010) 77 ACSR 84, [58]; Re Kitchen Dimensions Pty Limited (in liq) [2012] VSC 280.
And even more succinctly In the matter of JD & RS Pty Ltd [2016] NSWSC 806 per Brereton J at [2]: On an application of this kind for the termination of a winding up, the essential issues are whether the state of affairs that required or authorised the winding up of the company has ceased to exist, and whether the company may safely be returned to the control of its directors. In that case, as here, the winding up order was made in circumstances where the creditors' statutory demand and the originating process did not actually come to the attention of the company because the company had moved its registered office and the change was not notified to ASIC.
A recent example is In the matter of The Wills Group Pty Limited (in liq) [2016] NSWSC 1907, where a company went into liquidation following court proceedings and a subsequent creditor's statutory demand which never came to the director's attention. In granting the application to terminate the liquidation, the Court had regard to: 1. current and potential projects to be undertaken by the Company; 2. an expert report expressing the view that the Company was solvent; 3. steps that had been taken for funds to be provided to the liquidator of the Company to allow all of the debts of the Company to be discharged; 4. that there was no objection to termination of the winding up by the Company's liquidator or the creditor that brought the winding up application; and 5. that there was no evidence to suggest non-compliance by the director of his previous statutory duties and nothing to suggest that the conduct of the Company's business was contrary to commercial morality or public interest.
I was taken to Benedict v Olde; in the matter of ATS (Asia Pacific) Pty Ltd [2011] FCA 1008, where the court took into account funds held in a trust account and made the orders terminating the winding up conditional upon the making of the payments to outstanding creditors and the liquidator for remuneration and expenses. Similarly in this case, in the matter of Brolrik Pty Ltd v Sambah Holdings Pty Ltd [2001] NSWSC 1171, there were related party creditors and the court accepted an undertaking to the court that no steps would be taken to demand payment of the debt nor steps taken to recover the debts, pending payment of all creditors.
Mr Feldman submitted that the orders sought will enable: 1. all unsecured creditors to be paid in full (excluding related party debts not yet due and payable and subject to relevant undertakings); 2. all of the liquidator's costs and expenses to be paid in full; 3. the release of the Company's secured debt to crystalise; and 4. the Company to be solvent.
In respect of the consideration of "commercial morality" (see Re Data Homes Pty Ltd (in liq) [1972] 2 NSWLR 22) there are no matters adversely affecting the application in this regard. The liquidator has received limited books and records of the Company and, by reason of the stay granted on 20 August 2018, has not completed his investigation. Notwithstanding this, he does not oppose the application. He is not aware of any breaches of directors' duties, other than to keep ASIC informed as to the details of the Company which led to the liquidation of the Company. Nor is the liquidator aware of any matters that would concern the Court in respect of the directors' or the Company's "commercial morality" or that would be against the public interest in terminating the winding up.
I agree that, having regard to the authorities and the detailed evidence before me, it is appropriate for the Court to bring the liquidation to an end.
I make the following orders. 1. On condition and upon making of the following payments, the liquidation of Australian Gemstone Resources Pty Limited (in liquidation) be terminated pursuant to section 482 of the Corporations Act 2001: 1. $60,395.32 to Inverell Shire Council in respect of the outstanding rates; 2. $6,630.16 to Inverell Shire Council in respect of the petition creditors costs; 3. $37,968.91 to the ATO; 4. $2,572.40 to NSW Planning and Environment; 5. $25,471.00 to Wayne McCarthy; 6. $19,709.85 to the Company for working capital; 7. $25,314.36 to RSM Partners in respect of the Liquidator's remuneration, costs and disbursements (noting RMS Partners holds $2,000 in its trust account to also be applied to the Liquidator's remuneration); 8. $17,200.00 to the Liquidator in respect to his legal fees; and 9. $2,728.00 to the Liquidator in respect to his counsel's fees. 1. The sum of $6,630.16 be paid forthwith from funds held in the Trust Account of Pure Legal to Inverell Shire Council on account of the costs order in the winding up proceedings 2018/124364. 2. The sum of $25,471.00 be paid forthwith from funds held in the Trust Account of Pure Legal to Wayne McCarthy on account of the balance of invoice. 3. The sum of $60,395.32 be paid forthwith from funds held in the Trust Account of Pure Legal to Inverell Shire Council on account of the unpaid land rates and charges the subject of the unpaid rates and debt in the winding up proceedings 2018/124364. 4. The sum of $37,968.91 be paid forthwith from funds held in the Trust Account of Pure Legal to the Australian Taxation Office on account of unpaid taxation. 5. The sum of $2,572.40 be paid forthwith from funds held in the Trust Account of Pure Legal to NSW Planning and Environment. 6. A direction that copies of receipts for all such payments be onforwarded to the liquidator of the Company. 7. A direction that pursuant to section 479(3) of the Corporations Act 2001, the First Respondent is justified in not opposing the making of the order for termination of the winding up of the Second Respondent, Australian Gemstone Resources Pty Limited (in liquidation) ACN 121 034 811, and in complying with the regime for payment of the obligations of the Second Respondent as set out above. 8. The remuneration of David Kerr of RSM Australia Pty Limited in his capacity as liquidator of Australian Gemstone Resources Pty Limited (in liquidation) be fixed in the capped sum of $27,314.36 with the amount to be drawn in accordance with the usual time costing of the firm RSM Australia Pty Limited so long as it does not exceed the capped sum plus legal costs and other expenses incurred by the liquidator plus GST or such other sum as agreed between the parties and be paid from funds held in the trust account of Pure Legal. 9. These orders be entered forthwith.

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: 28 September 2018

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