Jay-O-Bees Pty Ltd (in liq), Re Rosseau Pty Ltd (in liq) v Jay-O-Bees

Judgment (ex tempore) 1HIS HONOUR: The company bCode Pty Limited was wound up on grounds of insolvency and oppression at the suit of the present plaintiff Futurecorp International Pty Limited, a 20% shareholder, by order of Black J made on 26 November 2012. The defendants Stephen Wesley Hathway and Terry Grant Van Der Velde, are its liquidators. They propose to conduct a telephone auction sale of the company's assets at 3pm this afternoon. 2By interlocutory process filed on 15 March 2013, Futurecorp seeks an interlocutory injunction to restrain them from proceeding with that sale, in aid of its originating process also filed on 15 March 2013 seeking orders pursuant to (Cth) Corporations Act 2001, s 1321, reversing a decision of the liquidators to reject a proposal for a deed of company arrangement (DOCA) made by Futurecorp and, alternatively, refusing to take steps or further steps to secure certain assets of the company before the sale and, further alternatively, for the removal of the liquidators and, in addition, damages, presumably for misfeasance in their capacity as liquidators. 3Futurecorp's interest is, first, that as I have said, it is a 20% shareholder and contributory and, secondly, that pursuant to orders made by Black J it is a priority creditor for its costs of the winding-up proceedings which on a solicitor/client basis exceed $700,000. In the context of a liquidation in which there are claimed employee creditors of $605,000 and other priority creditors including Futurecorp of $925,000 and lower ranking unsecured creditors of approximately $800,000, Futurecorp's interest is a significant and substantial one. 4On an application such as the present, the essential questions are whether the applicant has a seriously arguable case for the final relief that it claims and, secondly, the balance of convenience. These considerations are, however, interrelated: the greater the extent to which the balance of convenience favours one course over another, the less strong a case for final relief might be required to justify an injunction; conversely, the stronger the case for final relief, less might be required to tip the balance of convenience. 5Essentially, the final relief claimed in this case is the reversal of decisions made by the liquidators pursuant to Corporations Act, s 1321. Not being an appeal from a rejection of a proof of debt, the role of the court in hearing an appeal from a liquidator under s 1321 requires that, before intervening, the court be satisfied that the liquidator was acting unreasonably or in bad faith [see Jay-O-Bees Pty Ltd (in liq), Re Rosseau Pty Ltd (in liq) v Jay-O-Bees (in liq) [2004] NSWSC 818; Re Equity Funds of Australia (in liq) (1976) 2 ACLR 238, 239; Re Burnells Pty Ltd (in liq) v Walsh [1979] Qd R 440; Spedley Securities Ltd, Ex parte Australian National Industries Ltd (No 2) (1991) 4 ACSR 552; UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd [1997] 1 VR 667]. 6In short, the background to the present application is that following the making of winding-up order on 29 November 2012, Futurecorp's lawyers wrote to the liquidators on 29 December 2012, noting the proposed sale and contending that a fuller investigation of the assets was required, and their securing in the meantime. The liquidators distributed a report to creditors on 11 January 2013. The meeting of creditors, to which I shall return, took place on 25 January 2013. Not long thereafter, the liquidators assessed the value of the realisable assets at $150,000. 7On 13 February 2013, Futurecorp's lawyers again wrote to the liquidators, contending that former controllers of the company had appropriated its assets and were conducting a "phoenix operation" under the name KI Experience at a nominated address in Pitt Street, Sydney. They requested that the liquidators take urgent action, and offered to indemnify the liquidators and fund them to do so. This proposal and offer was reiterated on 15 February. I shall return to the liquidators' response in due course. 8On 21 February 2013, the liquidators' lawyers advised that an auction was proposed, and an information memorandum in connection with such an auction was distributed on 27 February 2013, with the auction then proposed for 8 March 2013. The information memorandum identified that there were multiple unresolved claims and potential encumbrances affecting the assets, and stipulated for certain releases of the company and of the liquidators, to which I shall also return. 9On 5 March 2013, Futurecorp's solicitors again raised issues with the liquidators concerning the timetable of the auction and the proposed sale terms. Without admission, the liquidators postponed the auction to 26 March 2013. 10On 14 March, Futurecorp's solicitors proposed a deed of company arrangement, under which Futurecorp would contribute $300,000 and disclaim its priority costs claim. The following day, Futurecorp commenced these proceedings, which were initially returnable on 18 March 2013. 11Negotiations between Futurecorp and the liquidator continued until 20 March and the proceedings were adjourned on the application of Futurecorp until yesterday when, negotiations having been unsuccessful, the application was set down for hearing today. 12The first matter advanced as constituting a seriously arguable case for final relief, at least originally, was the liquidators' rejection of Futurecorp's proposed deed of company arrangement. In the liquidators' affidavit sworn in connection with the present application, the rationale for the rejection of that proposal has been set out. Essentially, the liquidators have formed the view that the DOCA is less likely to produce any benefit for creditors than the proposed auction. In the light of what the liquidators have now put forward and the analysis contained in the affidavit, Futurecorp has not seriously (if at all) advanced a case that it could be suggested that the liquidators' judgment in this respect, which after all is a matter of commercial judgment, was unreasonable or in bad faith. In my view, it cannot be concluded that there is a seriously arguable case for final relief reversing the liquidators' decision to reject the proposal for a deed of company arrangement. 13As a result of that, the focus of Futurecorp's case shifted to the circumstances of the sale. It is fair to say that Futurecorp by its solicitors made repeatedly reasoned requests of the liquidators for them to take action to investigate and secure assets of the company and to do so urgently, in order to avoid their being effectively appropriated by associates of the majority shareholders or others. 14At the creditors' meeting, to which I have referred, which was held on 25 January 2013, this and other issues were discussed following the tabling of the report to creditors. Amongst other things, "The chairperson stated that the resources of the liquidators were limited and no effort would be placed in the unravelling and involvement of the employees in another business". In addition, the chairperson further explained the process of the sale of the business and the distribution from any proceeds from the sale and asked creditors whether they had any objection to the liquidators trying to sell the business. A resolution proposed by the chair that the liquidators proceed to have the assets of the company realised in the most appropriate way possible, was declared to be carried unanimously on the voices. Futurecorp was represented at that meeting. The chairperson stated that the sale may be conducted by way of a "Dutch auction", though there would be no need to conduct an auction if only one bid was received. 15One representative of creditors asked whether it was correct that the liquidators would provide no warranties as to the items, the subject of the sale. The chairperson stated that this was correct, that no warranties would be given as to the assets and rights subject to the sale". Later, Claudio Ferrero, representing Futurecorp, asked whether access had been demanded to the server, and the chairperson stated that such a demand had been made. 16In response to Futurecorp's solicitors' correspondence, to which I have referred, solicitors for the liquidators wrote on 15 February 2013: As discussed in our conference yesterday with your barrister, ... we do not accept a number of the contentions contained in your letter. As we made the position clear in that conference, I do not consider it to be necessary to repeat those matters, save that my clients deny that they were allowing the major assets of the company to dissipate as you allege or at all. 17On 21 February 2013, the liquidators' solicitors responded to Futurecorp's solicitors: I have taken instructions in relation to your letters dated 18 and 21 February 2013. My client's position is as follows: Under s 545 of the Corporations Act 2001, my clients are not liable to incur any expense in relation to the winding up of the company unless there is sufficient available property (save for statutory lodgments with ASIC). As you know, there are no funds remaining in this matter. It follows that my clients are not required to take action of the nature referred to in your correspondence, and they do not intend to do so. 18Corporations Act, s 545, relevantly provides as follows: Expenses of winding up where property insufficient (1) Subject to this section, a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property. (2) The Court or ASIC may, on the application of a creditor or a contributory, direct a liquidator to incur a particular expense on condition that the creditor or contributory indemnifies the liquidator in respect of the recovery of the amount expended and, if the Court or ASIC so directs, gives such security to secure the amount of the indemnity as the Court or ASIC thinks reasonable. (3) Nothing in this section is taken to relieve a liquidator of any obligation to lodge a document (including a report) with ASIC under any provision of this Act by reason only that he or she would be required to incur expense in order to perform that obligation. 19The information memorandum contained the proposed terms of sale. Amongst the terms for which it is stipulated were releases of the company and of the liquidators in the following terms: 6.1 In consideration of receiving the transfers and assignments referred to in clause 2.1 above, the Assignee forever releases and indemnifies the Company and holds it harmless from and against all Claims, claims, losses, damages, costs and expenses that the Assignee has or may, but for this release have against the company on any grounds including but no limited to any claim arising in relation to: - the Information Memorandum and its contents; - any claim arising in relation to the Auction; - this Deed and its contents. 6.2 In consideration of receiving the transfers and assignments referred to in clause 2.1 above, the Assignee forever releases and indemnifies the liquidators and holds them harmless from and against all claims, claims losses, damages, costs and expenses that the Assignee has or may, but for this release, have against the liquidators or either of them on any grounds including but not limited to any claim arising in relation to: - the Information Memorandum and its contents; - the Auction; - this Deed and its contents 6.3 The Assignee agrees that the Company and/or the liquidators may plead this Deed as an absolute bar to any claim brought against them by the Assignee. 20Although Mr McNally argued, at least initially, that the releases of the liquidators could be read down, it seems to me that they are very widely drawn, and would capture any claims against the liquidators on any ground, not limited to claims arising in connection with the sale process; in particular, as drawn, they would capture claims for damages for misfeasance, including negligence or other breach of duty by the liquidators. However, in the course of submissions, it was indicated on behalf of the liquidators that this was not the intent and, as I understand it, the liquidators are prepared to undertake that any release required will be limited in its terms to capture only liability arising out of the sale process, and not to extend to claims against the liquidators for damages for misfeasance. 21Although the responses provided by the liquidators to Futurecorp's correspondence about securing the assets are somewhat perfunctory, it is clear enough, when they are reviewed, that the liquidators were adopting the position that, there being insufficient available assets for the purpose, they did not propose to take further steps to secure the company's assets, and that they were justified in that respect by s 545. As s 545(2) provides, a dissatisfied creditor has a remedy in that respect, by seeking a direction that the liquidators take such a step. It may well be that minds could differ as to whether not taking such steps when provided with an offer of indemnity and funding was the best commercial decision in the interests of the company in liquidation. But ultimately it was a commercial decision made by the liquidators in the context that there were no funds available in the liquidation to do so. 22In those circumstances, I do not think that it is seriously arguable that the liquidator's decision not to take further steps to secure the assets - or, alternatively, to proceed to an expeditious sale without taking further steps to secure the assets - was unreasonable or in bad faith in the requisite sense to be liable to be overturned under s 1321. That conclusion is fortified by the circumstance that if, indeed, the liquidators have not taken steps that ought to have been taken, the conduct of the sale will not affect any claim for damages that might lie against them, and damages would be a sufficient remedy. It is further reinforced by the circumstance that, whether or not such steps ought to have been taken in December or January, the horse has almost certainly bolted by now, and that there would be no practical utility in deferring a sale to enable such steps now to be taken at additional cost, all the more so when to do so would jeopardise a selling process which, on the evidence, has the potential to realise $400,000 to $500,000 for the benefit of the liquidation. 23For those reasons, in my view, the application for an injunction fails. I therefore decline to make the order sought in paragraph 4 of the interlocutory process. I will hear the parties as to where that leaves the position so far as order 3 is concerned. 24I stand over the balance of the interlocutory process and the originating process to 15 April 2013 at 10am in the Corporations Judge Directions List. I order that the plaintiff pay the defendants' costs of the interlocutory process to date.