Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 668 | Case summary

2445/08 LEMERY HOLDINGS PTY LTD V RELIANCE FINANCIAL SERVICES PTY LTD JUDGMENT (Ex tempore, revised on 30 June 2008) 1 HIS HONOUR: The plaintiff seeks an order for the winding up in insolvency of the defendant company. That application is supported by the Commissioner of Taxation as supporting creditor and also by Kalache's Investments Pty Limited. 2 The plaintiff's originating process was filed on 22 April 2008. On the same day the defendant company was placed into voluntary administration. The administrators made an application, heard by Palmer J on 2 June 2008, for an adjournment of the winding up hearing. The application was made both under s 440A(2) of the Corporations Act and in the exercise of the court's inherent jurisdiction. 3 Section 440A(2) says that the court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. 4 Palmer J reviewed the work that had been done by the administrators since their appointment, and considered the arguments on the application for an adjournment, which was contested by the plaintiff and the Commissioner as supporting creditor. 5 He said that under s 440A(2), a clear case must be demonstrated that it is in the best interests of the creditors for the administration to continue before the court will adjourn a winding up application. The mere possibility or hope of a better result for creditors under administration than in liquidation is not enough to justify an adjournment. He said that if the company is insolvent and there is no realistic hope that it can be saved through an administration and deed of company arrangement, then there are strong reasons why it should be wound up as soon as possible, and he added that the sooner there is an investigation of matters such as whether there has been insolvent trading or dispositions of assets which may be avoided, the better it will be for creditors (Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 548 at [11]). 6 Applying those considerations to the application before him, he said that the administrators had conceded that whether or not the creditors would do better, under the deed of company arrangement proposal then under consideration, than in liquidation was at that stage almost in the realm of speculation. In those circumstances, he concluded that he could not find that the test for an adjournment under s 440A(2) had been met. 7 His Honour decided, however, that the application was one of those cases where there are advantages in the continuation of an administration, such that it may well be the proper course to give a sufficient adjournment to allow the creditors to vote upon a proposal and determine which course they prefer. In circumstances where the administrators were willing and, indeed, anxious to continue their investigations and there was a prospect of improvement of the deed of company arrangement proposal, Palmer J decided that the administrators should be given the opportunity to continue their work by the allowance of a further short time. He granted an adjournment to 23 June 2008. 8 The matter came before me as Corporations Judge on that day, and the administrators made an application for a further adjournment of two weeks. The basis of the application was that they had conducted further investigations and had received a fresh proposal from the same source, but in terms which, in their view, were better for creditors than the first proposal. They reached the following view, expressed in Mr Joubert's affidavit of 18 June 2008, para 42: "Notwithstanding the vagaries of the results of the joint administrators' investigations in relation to the assets of the Company, the joint administrators believe that execution of the deed of company arrangement adopting the terms of the Proposal [the revised Proposal then under consideration] is in the interests of creditors as opposed to the Company proceeding to be wound up." 9 The proposal initially put to the administrators, and before the court on 2 June, was for the establishment of an administration fund of $200,000 by way of lump sum payment within six months of the date of execution of the deed of company arrangement. The proposal contemplated that not all creditors would be participating creditors, and that in the case of creditors other than participating creditors, the debts would be deferred and would not be due and payable until 31 December 2009. 10 The new proposal before the court now is, like the previous proposal, a proposal by the director of the defendant company, but, on the face of it, the terms have been improved. Under the new proposal the administration fund would be an amount of $600,000, which the director would cause to be paid by instalments: a payment of the sum of $100,000 into the administrators' trust account on or before 23 June 2008, and payments of $200,000 and $300,000 respectively in six and twelve months' time. The later payments were to be secured by second mortgage over a property in Duke Street, Canley Heights. The fund would be distributed amongst participating creditors, and the debts of creditors who were not participating creditors were to be extinguished by the execution of the deed. 11 The application for a further adjournment of two weeks was hotly contested on 23 June, in circumstances where it seemed to me that there were some important matters of fact that were unclear on the evidence before the court. I adjourned the application until today, and directed the administrators to put on an additional affidavit clarifying certain matters, in particular identifying who would be permitted to vote at the proposed adjourned meeting of creditors, and for what amounts, and who would be the participating creditors in the proposed fund and for what amounts. There was also an issue as to whether the amount of $100,000, the initial payment under the proposal, was in fact available. The evidence at that time indicated that the administrators had received a cheque drawn by a company called Villa Antiques Pty Ltd, but it had not been banked and cleared. 12 At the resumed hearing today, Mr Joubert provided a further affidavit made on 25 June 2008 in which he deposed that he had presented the cheque that was in his possession on 23 June to the bank for clearance and that the bank had declined to clear it. His evidence was that he contacted the accountants for the company, CAP Accounting, and was told that the party drawing the cheque, at the request of the director of the company, had drawn the cheque from a defunct bank account by accident. Mr Joubert received a letter dated 25 June from a company called SMW Property Investments Pty Ltd, saying that "due to an error in our office" the director was provided with a cheque that would not be honoured on presentation, apologising for the inconvenience and saying that a new cheque would be provided that would be honoured. The administrators have received a cheque from a company called Baltic Antiques Pty Ltd dated 25 June 2008, but as of today it has not been cleared. 13 Mr Joubert has also given evidence as to the state of the creditors of the company. He has listed fifteen creditors in annexure E to his affidavit, of which only four are participating creditors. Annexure E identifies the amounts in respect of which it is proposed that the creditors will be admitted for voting purposes at the adjourned second meeting of creditors. The amounts attributed to the listed creditors who are not participating creditors exceed the amounts attributed to the participating creditors, including the Commissioner as supporting creditor and the plaintiff. It appears that at the adjourned second meeting, creditors will be allowed to vote for all of the amounts listed. Consequently, I proceed on the assumption that there is a probability that the majority voting on the proposal for the deed of company arrangement will be creditors who are not participating creditors, and who therefore may well have some connection with the director who proposes the deed. 14 That assumption is subject to a qualification that emerged during the hearing this morning. After the hearing began, an application was made on behalf of Kalache's Investments Pty Limited, which claimed to be a creditor for about $1.3 million and sought leave to appear for the purpose of supporting the winding up application. It is striking that this creditor, and the amount of the debt purportedly owing to it, have not been recognised in the list of creditors. I am not in a position to know whether the administrators would allow the creditor to vote for that amount, or any amount, at the adjourned second meeting, and whether that creditor would be treated as a participating creditor for the purposes of the proposed deed. 15 There are some other matters that cause me some concern in relation to the financial position of the defendant company, although I must make it clear that nothing that I will say is intended to imply criticism of the voluntary administrators. 16 The concern arises because the evidence they have presented to me is internally inconsistent in various ways. There are some financial accounts provided by CAP Accounting which are inconsistent with Annexure E to Mr Joubert's most recent affidavit. There is an indication that there may be an underlying trust of the company's property, the nature and consequences of which have not yet been explored. There is no evidence as to whether the company is to resume trading if the deed of company arrangement is approved and, therefore, the court is not really in a position to conduct the overall assessment that is the underlying foundation of Part 5.3A of the Corporations Act: namely, whether the implementation of the deed of company arrangement would maximise the chances of the company or as much as possible of its business continuing in existence or, if that is not possible, would result in a better return for the company's creditors and members in winding up. 17 An additional and major concern is that in various ways, the evidence about the level of debts of some related creditors is unspecific and inconsistent. The circumstances of those relationships raise a general issue about potential recoveries. In my view there is a need, in the interests of creditors, for further investigations to be undertaken as to whether the company has entered into voidable transactions, either unfair preferences or other voidable transactions, and whether there might be some breach of fiduciary duties or insolvent trading on the part of the director. If a deed of company arrangement is approved, those investigations will not be pursued. 18 I turn to the particular deed proposal that is before the court now. It is very significant, in my view, that under the proposal there was to be an initial payment of $100,000 into the administrators' trust account on or before 23 June 2008, which has not been made, in circumstances where a cheque for payment of that amount has "bounced". That, it seems to me, raises a concern about the degree of probability of payment of the further two amounts contemplated by the proposal. 19 That concern is reinforced by considering the nature of the security that is offered to support those later payments. My particular concern about the security arises because a firm of solicitors purporting to act for Mr Sam Cassaniti, who was formerly a director of the defendant company, and is now in custody, has written a letter which is at page 92 of Exhibit A1, in which it is said: "As a former director and public officer of Reliance Financial Services Pty Ltd, Mr Cassaniti has also agreed to mortgage other properties he controls to meet the requirements of the deed." 20 If it is true that the property at Duke Street Canley Heights that is offered as security under the deed proposal is controlled by Mr Cassaniti, the availability of good security over it must be put in question. This is because Mr Cassaniti is an undischarged bankrupt who has not yet provided his statement of affairs to his trustee in bankruptcy. The concern is that the trustee in bankruptcy may be entitled to recover that property for the benefit of the bankrupt's estate, if it is established that such control exists. 21 Further, according to the evidence of Mr Joubert in his most recent affidavit, two sources of funds for the $100,000 payment contemplated by the proposal were proffered, and the second source of funds was identified as a borrowing at a reasonably high interest rate for a term of six months, on condition that security was given over various properties. 22 In all those circumstances, my view is that it is unlikely that the deed proposal, if adopted, would be in the best interests of creditors, in terms of giving them a better return than winding up. The administrators have not discharge the onus identified in s 440A(2). 23 This is no longer a case where the court should grant an adjournment in the exercise of its inherent jurisdiction on the grounds identified by Palmer J in his judgment of 2 June. My view is that the correct course is to deny the application for an adjournment and proceed to consider the application for winding up. **********

Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd

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