Londish v Sheahan & Ors - In re Valofo Pty Ltd

CATCHWORDS : CORPORATIONS - ADMINISTRATION - LIQUIDATION - Whether company placed in administration although not insolvent - whether administration and subsequent liquidation for proper purpose - whether position of administrators and liquidators so compromised that they should be replaced.

LEGISLATION CITED : Corporations Act 2001 (Cth) - s 435A, s 436A, s 447A(4)

• Citrix Systems Inc v Telesystems Learning Pty Ltd (in liq) (1998) 28 ACSR 529 CASES CITED : - Kazar v Duus (1998) 29 ACSR 321 - Londish v Sheahan & Lock in Re Valofo Pty Ltd [2009] NSWSC 1175

Peter Londish (Plaintiff) PARTIES : John Sheahan and Ian Lock (First Defendants) David Bowman (Second Defendant) Sidney Londish (Third Defendant)

S.J. Burchett (Plaintiff) COUNSEL : A.P. Coleman (First Defendant - Submitting Appearance) J. Stoljar SC, Ms A Horvath (Second and Third Defendants)

Hartmann & Associates (Plaintiff) SOLICITORS : O'Neill Partners (First Defendant - Submitting Appearance) Philip Evans & Associates (Second and Third Defendants)

2009/291621 In re Valofo Pty Ltd: Londish v Sheahan & Ors

1 These proceedings are part of a protracted dispute between the Plaintiff, Mr Peter Londish, and the Second and Third Defendants, Mr David Bowman and Mr Sidney Londish, who are, respectively, the Plaintiff's brother-in-law and father. The disputants are, through a complex chain of companies and trusts, the ultimate beneficial owners in roughly equal shares of the Londish group of companies. 2 Valofo Pty Ltd ("Valofo") is one of the companies in the Londish group. On 26 November 2009 its directors, Mr Sid Londish and Mr Bowman, resolved pursuant to s 436A Corporations Act 2001 (Cth) that in their opinion Valofo was insolvent and they appointed the First Defendants, Messrs Sheahan and Lock, as voluntary administrators. 3 On 10 December 2009, Mr P. Londish filed an Originating Process seeking the termination of the administration of Valofo or, in the alternative, an order removing Messrs Sheahan and Lock as administrators and appointing some other person in their place. The grounds for the relief sought were said to be that Valofo was not insolvent at the time of the resolution placing it in administration, that Mr Sid Londish and Mr Bowman voted to place the company in voluntary administration for an improper purpose, and that the administrators were biased in favour of Mr Sid Londish and Mr Bowman. 4 At a meeting of creditors on 5 January 2010 it was resolved to place Valofo in liquidation and Messrs Sheahan and Lock were appointed liquidators. 5 On 27 January 2010 Mr Peter Londish filed a Statement of Claim in these proceedings in which he sought the following additional relief:

• alternatively, that Messrs Sheahan and Lock be removed as liquidators and another person appointed in their place. 6 When the trial of the proceedings commenced, Mr S. Burchett of Counsel, who appeared for Mr P. Londish, informed the Court that Mr Londish was not now opposed to Valofo remaining in liquidation; what he really sought was the removal of Messrs Sheahan and Lock as liquidators and their replacement by a liquidator whom Mr Peter Londish regarded as independent. 7 Mr A.P. Coleman of Counsel, who appeared for Messrs Sheahan and Lock, advised that his clients submitted to the order of the Court and that he did not wish to address save as to costs, if necessary. Mr Stoljar SC, who appeared with Ms Horvath of Counsel for Mr S. Londish and Mr Bowman, made it clear that if Mr Peter Londish did not press for termination of the winding up of Valofo, as he had sought in his Statement of Claim, then Mr S. Londish and Mr Bowman would seek an appropriate costs order in due course. In view of that stated position, Mr Burchett then advised that he would press the issue of Valofo's solvency as at the date of voluntary administration. 8 The issues for determination in these proceedings may be summarised thus:

• first, was the appointment of the voluntary administrators invalid on the ground that Valofo was not insolvent and the appointment was not for a proper purpose;

• were Messrs Sheahan and Lock disqualified from accepting appointment as administrators by virtue of their prior dealings with Valofo and Mr Sid Londish and Mr Bowman;

• was the creditors' resolution to wind up Valofo invalid on the ground that the company was not validly in administration and was not insolvent, and that the resolution to wind the company up was passed for an improper purpose;

• should the Court, while leaving Valofo in liquidation, replace Messrs Sheahan and Lock as liquidators. 9 In view of Mr Peter Londish's agreement that Valofo should remain in liquidation, the first three issues have practical consequences only for the costs orders which must ultimately be made. Background

10 Valofo is the sole unitholder of the Baltarna Trust which, in turn, is the sole unitholder of the Prime Index Lease Trust ("PILT"). PILT Nominees Limited is the trustee of PILT. The assets of PILT are a number of service stations which had been leased to Shell Petroleum. 11 Valofo is a wholly owned subsidiary of Londish Nominees Queensland Pty Ltd ("LNQ") which is, in turn, a wholly owned subsidiary of Vesudi Investments Pty Ltd ("Vesudi"). The shareholders of Vesudi are (omitting a minor shareholder of no consequence) three companies holding roughly one-third of the shareholding each, namely Tiffany Properties Pty Ltd ("Tiffany"), Argendram Pty Ltd ("Argendram") and Masalo Pty Ltd ("Masalo"). Argendram is controlled by Mr Peter Londish,Tiffany by Mr Sid Londish, and Masalo by Mr Bowman. 12 Mr Sid Londish and Mr Bowman, acting in concert through their companies, control Vesudi which, in turn, controls LNQ which, in turn, controls Valofo which, in turn, controls the Baltarna Trust, which is the sole beneficiary of PILT, which owns the service stations. 13 Mr Sid Londish and Mr Bowman say that PILT was established by the parties with the intention that, by the time the leases of the service stations to Shell expired, the mortgages on the properties would be fully paid out, the properties would be sold, the PILT trust would be wound up and the profits of the trust distributed to the Baltarna Trust which, in turn, would distribute 55% of the profits to its sole unitholder, Valofo, and 45% to interests associated with a Mr Crossman and a Mr Sellers, who were instrumental in setting up the investment scheme. The distribution of profits to entities controlled by Messrs Crossman and Sellers respectively was to be effected via the Baltarna Class Trust, which was to be a beneficiary of the Baltarna Trust. 14 It appears that by 2008 the mortgages on the service stations had been paid out. On 6 March 2008 Mr Seller, as appointor under the Baltarna Trust Deed, removed the Baltarna Class Trust as a beneficiary of the Baltarna Trust, leaving the whole of the beneficial interest in the Baltarna Trust assets in its sole unitholder, Valofo. 15 In May 2008 Mr Crossman commenced proceedings in this Court against PILT Nominees, the trustee of the Baltarna Trust, Baltarna Pty Ltd, and Mr Seller, claiming a declaration that the removal of the Baltarna Class Trust as a beneficiary of the Baltarna Trust was void and claiming orders for the removal of Baltarna as trustee of the Baltarna Trust and of PILT Nominees as trustee of PILT. 16 On 27 May 2008, Hamilton J granted interlocutory injunctions restraining PILT Nominees from dealing with the service stations. Notwithstanding this injunction, in June 2008 PILT Nominees borrowed $11.3M on the security of the service stations. The directors of PILT Nominees are Mr P. Londish and Mr Seller. Of the proceeds of the loan, about $5.3M was paid by PILT Nominees to Davlon Management ("Davlon"). Mr P. Londish is the sole director and beneficial shareholder of Davlon. 17 On 16 July 2009, by a resolution of the directors of Valofo, the company was placed in voluntary administration and Messrs Sheahan and Lock were appointed administrators. The directors of Valofo who passed the resolution were Mr Sid Londish and Mr Bowman. There is no doubt that Valofo was placed in administration in order that the administrators, with the benefit of litigation funding, could pursue Valofo's rights, through its unitholding in the Baltarna Trust, to attack the transactions with the service stations which had been effected by PILT Nominees and to secure distribution of the sale proceeds of the PILT assets ultimately to Valofo, and thence to their own companies. 18 On 2 October 2009, Brereton J held that the resolution placing Valofo in administration on 16 July 2009 was invalid because Mr Sid Londish, who purported to vote as a director of Valofo, was not in fact a director. His Honour ordered that Messrs Sheahan and Lock and Messrs Sid Londish and Bowman pay the costs of the plaintiff in those proceedings, Mr Peter Londish. 19 On 16 October 2009 Mr Sid Londish was appointed a director of Valofo in place of Mr Peter Londish. The validity of that appointment is not in issue. 20 On 11 November 2009, PILT Nominees placed the service stations in the hands of real estate agents for sale. 21 On 26 November 2009 Mr Sid Londish and Mr Bowman, as sole directors of Valofo, resolved to place it in voluntary administration and appointed Messrs Sheahan and Lock. Again, there is no doubt that the purpose of the appointment was to enable the administrators, with the benefit of litigation funding, to pursue Valofo's rights to a distribution of the PILT assets and to attack the transactions effected by PILT Nominees. 22 Mr Peter Londish wishes to prevent Valofo from pursuing this litigation. However, he is not a shareholder or a director of Valofo. Accordingly, he became a creditor by taking an assignment for value of a debt of $25,579.95 owing by Valofo to its former solicitors, ClarkeKann (NSW) Pty Ltd. On 1 December 2009, he submitted a Proof of Debt for that amount to the Administrators. 23 On 4 December 2009, a first meeting of creditors of Valofo was held. Mr P. Londish attended the meeting through a proxy and his assigned debt was admitted to vote for $25,579.95. The other creditors present at the meeting were Mr Bowman (a creditor for $2,500), Masalo represented by Mr Bowman (for $6,500), Tiffany, represented by Mrs Linda Londish (for $2,500), and Philip Evans & Associates (admitted for $11,880). 24 A resolution was moved to replace Messrs Sheahan and Lock as Administrators with an administrator nominated by Mr P. Londish. Mr P. Londish was the sole creditor who voted in favour of the resolution. The motion was lost, Mr Lock as Administrator exercising a casting vote. Mr Lock explained that he had concerns that Mr P. Londish had become a creditor of Valofo by assignment only to frustrate pursuit of Valofo's litigation in respect of the PILT assets. Mr P. Londish's proxy at the meeting responded that Valofo had been placed in administration for an improper purpose, namely, to benefit the interests of Mr S. Londish and Mr Bowman through recovery of assets ultimately for the benefit of those companies, which were the majority shareholders of Valofo's ultimate parent company, Vesudi. Mr Lock confirmed that this was, indeed, the purpose of the administration but he did not concede that it was an improper purpose. 25 On 8 December 2009, the Administrators commenced proceedings on behalf of Valofo against PILT Nominees, seeking to attack the borrowings secured on the trust assets effected in June 2008. On 10 December 2009, Mr P. Londish commenced these proceedings against the Administrators. 26 On 5 January 2010, the Administrators filed a Notice of Appeal against the judgment of Brereton J holding that their appointment on 16 July had been invalid (Londish v Sheahan & Lock in Re Valofo Pty Ltd [2009] NSWSC 1175). On the same day, at a meeting of creditors of Valofo, it was resolved to place the company in liquidation. Mr P. Londish voted against that resolution. Was Valofo insolvent?

27 The appointment of an administrator under s 436A Corporations Act may be made only if the board of a company has resolved that in its opinion the company is insolvent or likely to become insolvent at some future time. If a board has passed such a resolution but an opinion as to insolvency is not actually held, or is not held in good faith, or is founded upon some material error of fact of law, then the resolution is invalid and so also is the consequent appointment of an administrator: see Kazar v Duus (1998) 29 ACSR 321, at 333-334 per Merkel J and the cases there cited. 28 Mr Burchett says that the resolution of the board of Valofo on 26 November 2009 that the company was insolvent is unsupportable as a matter of fact. I do not agree, for the following reasons, which may be very shortly stated. 29 Valofo never carried on any business and never had any cash flow. It simply held the units in the Baltarna Trust, which produced no income for Valofo. On 30 October 2009, ClarkeKann served a Statutory Demand on Valofo claiming a debt of $25,579.95. There was no cash in Valofo available to pay that debt. It is that debt which Mr P. Londish acquired by assignment, clearly with the purpose of giving him standing as a creditor of Valofo under s 447A(4)(a) to apply for an order terminating the company's administration. Mr P. Londish's standing to apply for such an order would be far more secure as a creditor than as "an interested person" under s 447A(4)(f) because he would have had to state expressly that his "interest" in Valofo's administration was that, as a director of PILT Nominees, he did not wish to be sued in respect of PILT Nominees' borrowing on the security of PILT assets, in apparent breach of the injunctions granted by Hamilton J on 27 May 2008. 30 The ClarkeKann debt has not been paid. Mr P. Londish now says that it is not a debt owing by Valofo so that non-payment is not evidence of the company's inability to pay. Yet if the ClarkeKann debt is not a debt of Valofo, then Mr P. Londish is not a creditor of the company and his claimed standing to bring these proceedings disappears. 31 Mr P. Londish has not endeavoured in this proceeding to prove by evidence that the ClarkeKann debt is not a debt of Valofo. This is for obvious reasons: if he succeeds in proving that he is not a creditor of Valofo, then this application would be dismissed for want of an applicant with standing. Mr P. Londish cannot approbate and reprobate. As long as he relies upon the ClarkeKann debt for his status in these proceedings, the Court must treat that debt as a debt which has been, and continues to be, payable by Valofo. As at 26 November 2009 Valofo had no ability to pay that debt and the other debts admitted to proof and was, accordingly, insolvent at that date. 32 Mr Burchett says that the directors of Valofo could have supported the company by making cash available to pay any debts and that the Court may have regard to such a resource in determining solvency. I accept that the directors of Valofo certainly could have supported the company with cash injections. However, they were not obliged in law to do so and, evidently, they did not choose to do so. As a matter of commercial reality, the directors' personal resources are not, therefore, to be taken into account as resources available to Valofo. 33 Mr Burchett says that another asset of Valofo could have been realised to pay outstanding debts as at 26 November. The other principal asset is a debt of $420,000 owed by Feenix Investments Pty Ltd. It is significant that that company is under the control of Mr P. Londish and that when the Administrators wrote to Feenix on 15 December 2009 calling up the debt and requiring payment within fourteen days, payment was not forthcoming. It is rather curious that Mr P. Londish points to the debt owing by Feenix as a readily realisable asset of Valofo when he, as controller of Feenix, refuses to procure Feenix to pay the debt. 34 These reasons are sufficient to dispose of the contention that the board of Valofo had no basis to form an opinion that the company was insolvent on 26 November 2009. Was the resolution for an improper purpose?

35 There is no doubt that the purpose of the directors in placing Valofo in voluntary administration was to enable the company to pursue a claim against PILT Nominees with the benefit of litigation funding, if it could be procured. Messrs Sheahan and Lock had no doubt that that was the primary purpose of their appointment: so much was admitted by Mr Lock at the creditors' meeting on 4 December 2009. Messrs Sheahan and Lock commenced proceedings against PILT Nominees four days later. 36 Mr Burchett submits that the purpose of the directors in placing the company in voluntary administration was improper because it is not in accordance with the objects of an administration as expressed in s 435A Corporations Act. I am unable to agree, for the following reasons. 37 Section 435A provides: "The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or

(b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company." 38 As I have noted, Valofo has never conducted any business. Its sole purpose was to hold units in a trust, to enable it to receive and then to pass down, ultimately to companies controlled by Mr Peter Londish, Mr Sid Londish and Mr Bowman, the capital profits realised from the sale of PILT's assets upon termination of PILT. The assets of PILT have been, or are about to be, sold. This litigation is part of a dispute about who is to get what out of the proceeds of sale. 39 The administration of Valofo could never have properly had anything to do with enabling Valofo to continue its business or to continue in existence; it could only have had to do with obtaining a better return for its creditors and members. It is clear that Valofo would have to sue PILT Nominees and Mr P. Londish in order to set aside, or recover compensation for, the borrowing secured on the trust assets: the benefit of the unencumbered assets was to flow, through the Baltarna Trust, to Valofo and thence to its shareholders, direct and indirect. If the proceedings are successful, Valofo's sole shareholder, LNQ, will obviously receive a better return in the winding up of Valofo than if it took no proceedings against PILT because successful proceedings will result in a greater distribution to Valofo from the Baltarna Trust. 40 Clearly, Mr P. Londish did not wish the administrators, and now the liquidators, of Valofo to prosecute proceedings against PILT Nominees and himself in his capacity as a director of PILT Nominees. His interest in the PILT litigation is not primarily concerned with his status as a creditor of Valofo but, rather, with his interest as a director and shareholder of PILT Nominees. 41 In my opinion, the resolution placing Valofo in administration was passed for a proper purpose, namely, to obtain a better return for its sole shareholder, LNQ. Were Messrs Sheahan and Lock disqualified?

42 Mr Burchett submits that Messrs Sheahan and Lock were not entitled to accept appointment as administrators of Valofo on 26 November 2009, or as liquidators on 5 June 2010 because:

• they were not independent of the directors in that they were intent on carrying out the directors' wishes to pursue litigation against PILT Nominees and Mr P. Londish;

• they had had substantial involvement with Valofo before their appointment in that they had previously been appointed as administrators in an administration which had been declared invalid;

• they were in adverse litigation with Mr P. Londish, having filed an appeal from the decision that their prior appointment as administrators was invalid;

• they were indebted to Mr P. Londish by virtue of an adverse costs order in the prior litigation;

• for all these reasons, a natural inclination to justify their position as against Mr P. Londish would be an insuperable obstacle to the proper performance of their duties as administrators, and now liquidators, to act impartially for the benefit of Valofo, its creditors and its member, LNQ, as a whole. 43 It is well established that the Court may remove a liquidator, or an administrator, when demonstrated partiality, or some other circumstance, detracts from the ability of that person to act fairly and impartially in administering the company's affairs: see e.g. Citrix Systems Inc v Telesystems Learning Pty Ltd (in liq) (1998) 28 ACSR 529, at 536 and the authorities cited. Of course, each case must depend upon its particular facts. 44 Here, the administration and the subsequent liquidation of Valofo are for one purpose only: to pursue litigation against PILT Nominees to ensure a better return for Valofo's sole shareholder, LNQ. As I have held, that purpose is a proper one. Carrying out that purpose necessarily involves action by the administrators, now the liquidators, adverse to PILT Nominees and the interests of Mr P. Londish as shareholder and director of PILT Nominees. It was only for the purpose of impeding that action and thereby furthering his own interests in PILT Nominees that Mr Peter Londish took an assignment on 16 November 2009 of the ClarkeKann debt so as to become a creditor of Valofo. Having voluntarily acquired an interest in the affairs of Valofo as a creditor, with full knowledge of the purpose of the administration, Mr P. Londish cannot now claim that the administrators, and subsequently the liquidators, must pay regard to his interest as a director and shareholder of PILT Nominees and must act impartially as between those interests and the interests of the other creditors of Valofo and of its sole shareholder. 45 In the very unusual circumstances of this case, the involvement of Messrs Sheahan and Lock as administrators in the prior invalid administration of Valofo and their admitted intention of pursuing litigation against Mr P. Londish's interests in PILT Nominees do not make them incapable of administering the affairs of Valofo in a way relevantly unfair or prejudicial to the interests of Mr P. Londish as a creditor of Valofo. Was the winding up resolution of Valofo invalid?

46 As I have noted, Mr Burchett submits that the resolution to wind up Valofo was invalid because Valofo was not validly in administration and was not insolvent. He also submits that the resolution to wind up the company was passed for improper purposes. 47 For the reasons I have given above, I do not accept these submissions. Should the liquidators be replaced?

48 For the reasons I have given above, I do not accept that any reason has been shown for the replacement of Messrs Sheahan and Lock as liquidators of Valofo. Orders

49 There will be judgment for the Defendants on the Plaintiff's Statement of Claim. I will hear the parties as to costs.

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