The principal proceedings were commenced by the plaintiff, Stefan Isacson, by summons filed on 5 February 2015. The defendants are Riad Tayeh and David Solomons, who are the liquidators (the Liquidators) of Isacson Pty Ltd (the Company).
The application that is now before the court was commenced by notice of motion filed on 20 August 2015 by Saravillea Pty Ltd (the Applicant), which is a shareholder in the Company.
The commencement of the present application by the Applicant filing a notice of motion in the proceedings is irregular, because the Applicant is not a party to the proceedings.
I will consider this procedural issue below. As I understand it, the unusual procedure that has been adopted on the present application has arisen in part because the Applicant is a party to a deed of settlement that relates to the present, as well as other proceedings. Under that deed, the settlement is contingent on the court making the orders sought in the notice of motion. That appears to have led the Applicant to seek the relief by notice of motion in these proceedings, even though it is not a party.
The primary relief sought in the notice of motion is an order under s 482(1) of the Corporations Act 2001 (Cth) that the winding up of the Company be terminated.
Section 482 of the Corporations Act relevantly 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…
…
(3) Where the Court has made an order terminating the winding up, the Court may give such directions as it thinks fit for the resumption of the management and control of the company by its officers, including directions for the convening of a general meeting of members of the company to elect directors of the company to take office upon the termination of the winding up.
(4) The costs of proceedings before the Court under this section and the costs incurred in convening a meeting of members of the company in accordance with an order of the Court under this section, if the Court so directs, forms part of the costs, charges and expenses of the winding up.
(5) Where an order is made under this section, the company must lodge an office copy of the order within 14 days after the making of the order.
As the Applicant is a contributory of the Company, it has standing under s 482 to make the present application.
The application is not opposed by any party. The parties to the proceedings (which include the liquidators of the Company), the principal creditor of the Company, Stevens Carpets Pty Ltd (Stevens Carpets), the present Applicant, Steven and Samuel Issa (being to persons associated with the Applicant), and the Company itself, are parties to the deed of settlement. It must be taken that they all consent to the making of the orders sought in the notice of motion, because they have made the making of those orders a condition of the effectiveness of the deed into which they have all entered. As will be seen, the creditors of the Company have all either been paid out, or arrangements reached so that the existence of the debts owed by the Company at the time of the commencement of its winding up will no longer affect the solvency of the Company.
The most straightforward way to introduce the issues that the court must consider on this application is to set out the primary material facts.
The company was incorporated on 4 May 1999. It was a shelf company at the time of its incorporation.
The only commercial venture into which the Company has entered is the purchase of 19 Weston Street Rosehill (the Property) on 16 December 2003, for a purchase price of $1,240,000. The Property was purchased for the purpose of developing it into townhouses.
It is material to the present application that Samuel Issa is the sole director and shareholder of Weston Investment Group Pty Ltd (Weston). Weston owns 15 and 17 Weston Street Rosehill, which are adjacent to the Property. If the winding up of the Company is terminated, and the control of the Company is given to the person who will become entitled to control it if the deed of settlement becomes unconditional, that will permit the commercially desirable result of the three adjacent properties being developed in an efficient manner together.
Immediately before the winding up of the Company, Stefan Isacson and the Applicant each owned one share in the Company, and Stefan Isacson and Samuel Issa were its directors.
Samuel Issa and his sister, Belinda Issa, are the two shareholders in the Applicant, and Samuel Issa is its sole director.
The Company borrowed $750,000 from Westpac Banking Corporation Ltd (Westpac) in order to fund the purchase price for the Property. The Company granted security to Westpac, including a mortgage over the Property. The balance of the purchase price was provided by Stefan Isacson and Stevens Carpets.
Stefan Isacson and Steven Issa guaranteed the obligations of the Company to Westpac.
On 25 February 2014, Stefan Isacson commenced proceedings in this court against Steven Issa and Stevens Carpets, in relation to a loan agreement that is not related to the circumstances of the present proceedings (the First Proceedings).
On 30 June 2014, the Westpac loan facility fell into default. That was primarily because Stefan Isacson declined to sign documents necessary to roll over the loan. It is not necessary to enter upon the detail of these events, but I infer that that the breakdown in the interpersonal relationships between Stefan Isacson and Steven Issa that led to the commencement of the First Proceedings was a cause of Mr Isacson's refusal to sign the roll over documents.
For the purposes of the present application, it is material to note that the events that led to the winding up of the Company flowed from the breakdown of the interpersonal relations between its directors and shareholders, and not from any inherent commercial inadequacy of the business of the Company, or any questionable activities in the way in which it was managed.
On 4 July 2014, Steven Issa, as a guarantor of the Company's loan from Westpac, paid out the balance outstanding of the Westpac loan.
Westpac assigned its rights in respect of the loan and its security to Steven Issa on 25 November 2014, as Mr Issa was entitled to be subrogated to those rights.
On 19 December 2014, Steven Issa appointed the Liquidators as administrators of the Company under s 436C of the Corporations Act.
On 4 February 2015, at the second meeting of creditors under Part 5.3A of the Corporations Act, the creditors resolved that the Company be wound up and that the Liquidators be appointed as joint and several liquidators of the Company.
Stefan Isacson filed the summons in these proceedings (the Second Proceedings) on 5 February 2015, the following day, seeking orders that the appointments of the Liquidators as administrators, and later as liquidators of the Company, be declared invalid and that their appointments be set aside.
The deed of settlement was entered into on 23 July 2015, for the purpose of settling both the First and the Second Proceedings.
The deed of settlement described the present Applicant or its nominee as the "Moving Party". Clause 3 obliged the Applicant by either an interlocutory process in the Second Proceedings, or an originating process, to apply for an order terminating the winding up of the Company under s 482 of the Corporations Act. That was required to be done within 30 days of the exchange of executed copies of the deed of settlement; and as I have noted above, it has led to the filing of the notice of motion that is now before the court.
The parties to the deed of settlement acknowledged in cl 3 that the outcome of the present application is at the discretion of the court.
The day upon which the court makes final orders terminating the winding up of the Company is defined in the deed of settlement as the "Date of Entry". It is not necessary to go in detail into the operative provisions of the deed of settlement. It is sufficient to note that the termination of the winding up of the Company is a condition to the various settlement arrangements becoming absolute, and various steps in the implementation of the settlement have to be taken by reference to the Date of Entry.
If the deed of settlement becomes unconditional, it will lead to the settlement of both the First and the Second Proceedings. A sum of money will be paid to Stefan Isacson.
Relevantly, Stefan Isacson will transfer his shares in the Company to the Applicant, and resign as a director of that company.
Consequently, if the deed of settlement becomes absolute, the Applicant will become the sole shareholder in the Company, and Samuel Issa will become its sole director. The withdrawal by Mr Isacson from his interest in the Company will remove entirely the source of the disputation that was the effective cause of winding up of the company.
The effect of cl 6.3 of the deed of settlement is that, if the deed becomes unconditional, parties defined as the "Issa Parties", which includes the present Applicant and various members of the Issa family and related companies, will be obliged to pay the fees and expenses of the Liquidators as administrators and liquidators of the Company, as well as the Liquidators' legal costs in respect of the Second Proceedings. A consequence will be that the court can be satisfied that, if it makes an order terminating the winding up of the Company, a proper arrangement will be made for meeting the various costs and fees to which the Liquidators are entitled. The Liquidators are evidently satisfied with the adequacy of that arrangement.
The deed of settlement also contains in cl 5 mutual releases in a common form. Relevantly, the Company will also be released from any claims that Stefan Isacson may have had against the Company, so that the court can be satisfied that if the termination order is made, the Company will not be subject to any residual liability to Mr Isacson.
Subject to the making of an order terminating its winding up, the position of the Company is that it remains the owner of the Property.
The evidence satisfies me that various debts to third parties, in amounts of $5000, $2000 and $2000, that were owed at the commencement of the winding up, have been paid in full. Samuel Issa has forgiven a debt of $500. Steven Issa will forgive a debt of $7000, conditional upon the termination of the winding up.
The Company had two substantial debts at the commencement of its winding up. A debt of $1,400,000 was owed to Stevens Carpets. Georgette Issa, who is the sole director and shareholder of Stevens Carpets, affirmed an affidavit on 14 September 2015 that has been read on the hearing of the notice of motion.
Ms Issa referred in pars 14 and 16 to the payment by Stevens Carpets of various identified costs associated with the winding up of the Company, and Council rates that have been levied on the Property. Ms Issa stated that Stevens Carpets waives any rights to repayment of these amounts from the Company.
By par 17 of her affidavit, Ms Issa gave the following undertaking to the court in respect of the amount of $1.4 million, which she deposed is owed by the Company to Stevens Carpets:
Stevens Carpets undertakes to the Court that if [the Company] is reinstated:
(a) Stevens Carpets will not demand repayment of any amount owing to it by the company for 3 years commencing on the date on which [the Company] is reinstated; and
(b) at the end of the 3 year period referred to above, if [the Company] is unable to repay any amounts owing to Stevens Carpets, it will not demand payment in cash of the amounts outstanding but will accept the capitalisation of the value of these amounts in issued share capital of [the Company] at $1 per share.
Finally, it is convenient to note at this point that, in pars 18 and 19 of her affidavit, Ms Issa stated that she and Steven Issa have been granted a joint loan facility by Westpac, up to a limit of $2,600,000 for their personal use, of which $1,479,335.37 were available funds as at 16 June 2015. Ms Issa undertook to the court to make the funds available to her from this facility available to the Company, on the same undertaking as was set out in par 17. The significance of this evidence is that, if the court makes the order terminating the winding up of the Company, it can be satisfied that at least about $1.4 million, if not more, will be available to the Company to pursue its objective of developing the three adjacent properties, including the Property.
The Company is also indebted to Steven Issa for $740,000, which is the amount that Mr Issa was obliged to pay to Westpac to satisfy his obligations under his guarantee of the Company's debt to Westpac. In par 26 of his affidavit affirmed on 14 September 2015, Mr Issa gave to the court an undertaking in relation to the recovery of that debt that is materially the same as that which Georgette Issa has given, and which is set out above.
The only other possible debt of the Company is an amount of $2000 that may be owed to Georgette Issa. There has been some confusion in the administration of the Company as to whether Ms Issa was entitled to prove on that debt. By affidavit made on 17 September 2015, Ms Issa affirmed that she has waived that debt.
The effect of this evidence concerning the indebtedness of the Company is that all of its debts have either been paid or waived and in relation to the substantial debts of $1,400,000 owed to Stevens Carpets and $740,000 owed to Steven Issa, if the Court makes an order terminating the winding up of the Company, it will not be required to repay any part of those debts. If any part is not repaid within 3 years, then Stevens Carpets and Steven Issa will accept the issue of share capital in the Company in consideration of the release of the amounts outstanding. Consequently, the Company would not be at risk of any continuing insolvency as a result of any of the debts that it owed at the date of commencement of its winding up.
The Applicant tendered in support of its application a solvency report on the Company dated 14 September 2015, prepared by an accountant, Suelen McCallum. The solvency report has been prepared in a manner that satisfies the requirements for the giving of expert evidence, and I am satisfied that Ms McCallum has appropriate expert qualifications to express the opinions that she has expressed, and that she had access to appropriate information concerning the affairs of the Company, in order to make her opinions reliable for the purposes of the issues that are before the Court.
Ms McCallum expressed the opinion that the Company was solvent from 4 May 1999 up to 19 December 2014, by reason of its ability to pay its debts as and when they were due and payable. She has also expressed the opinion that the Company will be solvent if an order is made under s 482 of the Corporations Act terminating the winding up of the Company, and the Company is placed into the control of Samuel Issa, as its sole director.
Ms McCallum was satisfied that the Company maintained the required written financial records pursuant to s 286 of the Corporations Act, or that any books and records that may be missing are not material.
Based on the financial reports that were available to her, Ms McCallum considered the financial circumstances of the Company for the year to 30 June 2014 (page 10). She found that the financial accounts disclosed a deficiency of assets over liabilities of $639,881, taking into account primarily the loans owed to Westpac (now Steven Issa) and Stevens Carpets; and bringing the value of the Property to account at its historical cost of $1,432,502.
Ms McCallum noted that there was evidence that the value of the Property had increased since the date of its purchase. That evidence was before the court in the form of a valuation prepared by Access Valuations Pty Ltd, which valued the Property at $2,940,000 as at 4 February 2015.
When Ms McCallum adjusted the Company's balance sheet as at 30 June 2014 to take into account the updated value of the Property, there was an excess of assets over liabilities of $867,617.
For the purposes of the present application it is to be noted that, if an order is made terminating the winding up, not only will the Company have the benefit of that excess of assets over liabilities, but by reason of the undertakings given to the court by Stevens Carpets and Steven Issa, the Company will not be compellable to repay the $2,140,000 in debt that was assumed to be payable before that excess was calculated by Ms McCallum.
The evidence shows that, if the court makes an order terminating the winding up of the Company, Samuel Issa proposes to undertake a substantial residential development on the three adjacent properties. Mr Issa proposes to seek loan funding from Westpac, and to rely upon the offer of loans from Steven and Georgette Issa (who are his parents). Samuel Issa anticipates that he will need to borrow $12 million or thereabouts from Westpac to finance the construction of the development, which he anticipates will take approximately 18 months to complete.
In reality, it follows from the circumstances that I have outlined above, that if the winding up of the Company is terminated, and control of the Company goes to Samuel Issa, because the steps required by the deed of settlement are taken, the Company will effectively have a clean slate. It appears to me that the commercial aspirations of Samuel Issa are reasonable, although quite substantial. The evidence suggests that members of the Issa family have substantial, and successful experience in the property development industry. I would observe, as well, that it is most unlikely that Westpac would lend any significant amount to the Company for the purpose of conducting the development if it was not satisfied that it was a bankable proposition.
One of the Liquidators, David Solomons, swore an affidavit on 15 September 2015 in support of the notice of motion. Among other things, Mr Solomons expressed the view in par 14 that, as a result of the deed of settlement, he is of the opinion that, if the deed of settlement becomes absolute because the winding up of the Companies is terminated, "the cause of the dysfunction in [the Company will] now be resolved". Mr Solomons said at par 16 that he agreed with the conclusions in Ms McCallum's solvency report. He said at par 19 that he is satisfied that it is in the best interests of the creditors of the Company, and in the public interest, for the winding up of the Company to be terminated. Finally, as a liquidator of the Company, in par 20, he consented to the Applicant's application under s 482 of the Corporations Act.
There was also evidence that Stefan Isacson has specifically consented to the making of the orders sought in the notice of motion.
As, in my view, the present application is relatively uncontentious, it will be sufficient for me to record that I respectfully agree with the following statements of principle made by Brereton J in In the matter of Glass Recycling Pty Ltd (ACN 001 332 654) [2014] NSWSC 439:
[15] The considerations that inform the exercise of the court's discretion to terminate a winding up pursuant to Corporations Act, s 482, have been referred to in many cases [for example, Re Warbler Pty Ltd (1982) 6 ACLR 526; Mercy and Sons Pty Ltd v Wanari Pty Ltd [2000] NSWSC 756 ; (2000) 35 ACSR 70, [47]ff; Anderson v Palmer [2002] NSWSC 192, [6]; Vero Workers Compensation (NSW) Ltd v Ferretti Pty Ltd [2006] NSWSC 292 ; (2006) 57 ACSR 103, [17]; Re Yeling Group Pty Ltd [2012] NSWSC 74, [8]-[11]; In the Matter of TMPL Pty Ltd (in liq) [2012] NSWSC 1059, [10]; In the Matter of 311 Hume Hwy Liverpool Fund Pty Ltd (in liq) [2013] NSWSC 465, [4]]. They include:
The attitude and interests of the creditors, including future creditors whose interests might be prejudiced if the company were released from winding up;
The interests of the liquidator, particularly with regard to remuneration;
The interests of contributories, so that a stay or termination will not generally be granted unless each member either consents to it or is bound not to object to it, or his or her rights are properly secured;
The public interest, including matters of commercial morality, and whether all the company's debts have been discharged;
The company's trading position and general solvency; and
Any explanation for any non-compliance with statutory duties and of the circumstances leading to the winding up.
[16] The relevant considerations were summarised by Master Lee QC in Re Warbler Pty Ltd (1982) 6 ACLR 526, as follows (at 533):
1. The granting of a stay is a discretionary matter, and there is a clear onus on the applicant to make out a positive case for a stay: Re Calgary & Edmonton Land Co Ltd (in liq) [1975] 1 WLR 355 at pp 358-9 per Megarry J. See also s 243 of the Act [ie Companies Act 1961].
2. There must be service of notice of the application for a stay on all creditors and contributories, and proof of this: Re South Barrule Slate Quarry Co (1869) LR 8 Eq 688; Re Bank of Queensland Ltd (1870) 2 QSCR 113.
3. The nature and extent of the creditors must be shown, and whether or not all debts have been or will be discharged: Krextile Holdings Pty Ltd v Widdows, (above) [[1974] VR 689]; Re Data Homes Pty Ltd, (above) [ [1971] 1 NSWLR 338]; Law of Company Liquidation (above) at p 395.
4. The attitude of creditors, contributories and the liquidator is a relevant consideration: s 243(1); Re Calgary & Edmonton Land Co Ltd (in liq), (above).
5. The current trading position and general solvency of the company should be demonstrated. Solvency is of significance when a stay of proceedings in the winding up is sought: In Re a Private Company [1935] NZLR 120; Re Mascot Home Furnishers Pty Ltd [1970] VR 593 at 598.
6. If there has been non-compliance by directors with their statutory duties as to the giving of information or furnishing a statement of affairs, a full explanation of the reasons and circumstances should be given: Re Telescriptor Syndicate Ltd, (above) [[1903] 2 Ch 174].
7. The general background and circumstances which led to the winding up order should be explained: Krextile Holdings Pty Ltd v Widdows, (above).
8. The nature of the business carried on by the company should be demonstrated, and whether or not the conduct of the company was in any way contrary to "commercial morality" or the "public interest": Krextile Holdings Pty Ltd v Widdows, (above).
[17] The list is non-exhaustive, as has been emphasised in Dubolo Pty Ltd (t/as Fender Signs) v Codrington Investment Corporation Pty Ltd (1998) 26 ACSR 723 at 725; Metledge v Bambakit Pty Ltd (in liq) [2005] NSWSC 160, [5]; and Von Riesefer v Main Freight International Pty Ltd [2009] VSCA 129 ; (2009) 73 ASCR 427, 438.
[18] Essentially, on such an application, the court must be satisfied, first, that the state of affairs that required that the company be wound up no longer exists. Where the winding up was on grounds of insolvency, it will be necessary for the applicant to demonstrate that the company is not, or is no longer, insolvent. This is usually the most significant consideration [Re SNL Group Pty Ltd (in liq) [2010] NSWSC 797, [24]]. Thus it has been said that an order terminating the winding up would usually be made if all the creditors are paid out, the liquidators' 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 Ltd (in liq) [2012] VSC 280].
[19] However, the factors to which the cases refer demonstrate that more is necessary than merely establishing that the state of affairs that required the company to be wound up no longer exists. This appears from, inter alia, the references to "commercial morality" as a relevant consideration, and also from references to the interests of future as well as extant creditors. These factors illustrate that the second broad consideration that informs the exercise of the court's discretion - once satisfied that the state of affairs that originally required winding up no longer exists - is that it would be reasonable to entrust the affairs of the company, once again, to the directors, under whose management it previously failed.
I am of the opinion that the justification for the court to make the orders sought in the Applicant's notice of motion flows clearly from the facts that I have set out above, as well as the commentary I have provided as to the significance of some of those facts. It is not necessary for the court to examine the issues relevant to the making of the orders sought in great detail.
It is important that there is no issue of "commercial morality" in this case, as the winding up was originally brought about because of the development of a dysfunctional relationship between the persons who were in equal control of the management of the Company. That impediment to its management will be removed entirely if the terms of the deed of settlement are implemented.
There was no non-compliance with statutory duties leading up to the winding up and, but for the apparent failure of Stefan Isacson to complete a report as to affairs for the Company (which the Applicant properly disclosed to the court, but which cannot be laid at the feet of the Company or the Applicant), there has not apparently been any breach in the present case of any statutory or general law duties concerning the management of the Company.
The Liquidators are content for the order to be made, and it appears that their legitimate interests have been accommodated by the terms of the deed of settlement.
For the reasons that I have explained above in detail, the interests of the creditors of the Company are not an impediment to the termination of its winding up.
In my view, the public interest weighs in favour of the court terminating the winding up of the Company, so that a commercially valuable and publicly useful development may be carried out by Samuel Issa, through the Company and Weston, of the three adjacent properties at Rosehill.
In these circumstances, there is no reason why the court should thwart the aspirations of the parties to the deed of settlement, or the capacity of the Applicant to enjoy the fruits of that settlement.
It is appropriate, in the exceptional circumstances of this case, that I excuse the informality of the Applicant, who is not a party to the proceedings, seeking the relief that has been given by notice of motion. The court has the power to dispense with rules in particular civil proceedings, if satisfied that it is appropriate to do so, pursuant to s 14 of the Civil Procedure Act 2005 (NSW). It was, in practical terms, the most convenient course for the Applicant to take, and has not had any unsatisfactory procedural consequences.
I will accordingly make the following orders:
1. Order pursuant to s 482(1) of the Corporations Act 2001 (Cth) that the winding up of Isacson Pty Ltd (in liquidation) be terminated.
2. Order pursuant to s 482(4) of the Corporations Act 2001 (Cth) that the costs of the notice of motion form part of the costs, charges and expenses of the winding up.
I note that by par 3 of the notice of motion, the Applicant sought such directions pursuant to s 482(3) of the Corporations Act as the court deems fit for the resumption of the management and control of the Company by its officers. The Applicant did not seek any specific directions pursuant to this claim. As I understand cl 4 of the deed of settlement, the transfer of Stefan Isacson's shares in the Company and his resignation as director must be effected within seven days of the Date of Entry. If that is correct, it is unlikely that any special directions will be necessary. However, when I publish these reasons for judgment, I will give the Applicant an opportunity to confirm whether or not it seeks any particular directions within par 3 of its notice of motion.
[2]
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: 24 September 2015
Parties
Applicant/Plaintiff:
Isacson
Respondent/Defendant:
Riad Tayeh & David Solomons as liquidators of Isacson Pty Ltd