By Interlocutory Process filed on 11 July 2016 Messrs Honner and Merryweather, as joint and several liquidators of Belmont Sportsmans Club Co-Operative Limited (in liq) ("Club") apply for relief, including an order under s 482 of the Corporations Act 2001 (Cth) that the winding up of the Club be terminated.
The application has been supported by comprehensive affidavit evidence which is, if I may say so, a model of the kind of evidence that ought to be led in an application of this kind and makes the determination of this application more straightforward. That evidence rightly involves a close focus on cashflow of the Club going forward which is, of course, critical to its solvency and critical in any application to terminate a winding up. I have also been assisted by comprehensive submissions of Mr Mitchell, who appears for the liquidators in the application, and I will draw on those submissions in the brief analysis of the facts which follow. That analysis will not seek to record all of the matters that are addressed in the evidence or in the submissions, which will be retained with the Court file. It is also important to note that this application is brought by the liquidators who were, in this case, liquidators appointed by the Court, and are officers of the Court in that capacity. The Court can draw a degree of comfort from the fact that an application of this kind is brought by a Court-appointed liquidator, who expresses views, as Mr Honner does, as to the position in respect of the Club's solvency, albeit on the basis of assumptions and analysis which must necessarily be made in respect of any assessment of that kind.
Mr Honner's affidavit dated 8 July 2016 provides an outline of the appointment of Messrs Honner and Merryweather as liquidators of the Club in a Court-ordered winding up, after it had originally been placed in administration, and of the Club's business, and refers to the steps which have been taken by liquidators in the course of the liquidation. Mr Honner also refers to steps which were subsequently taken to obtain leave for the appointment of the liquidators as administrators which, in turn, allowed the implementation of a Deed of Company Arrangement ("DOCA"), which contemplated the sale of the Club's real property, on the basis that the Club would take a lease of that real property, and has thereby realised funds which have been able to be applied to discharge some of the debts of the Club. Mr Honner also refers to the fact that the DOCA contemplated the termination of the winding up, albeit this application is brought before the DOCA is finally effected, because one matter that needs to be taken into account in respect of the DOCA is the costs of this application. Mr Honner also refers to the interests of creditors of the Club, in respect of the outcome of the application. It may be noted that creditors who attended the second meeting of creditors unanimously voted in favour of the DOCA, and that a number of interested parties, including the Club's first secured creditor, the second secured creditor and the Australian Taxation Office are either supportive of this application, or have been advised of the application and do not seek to appear to oppose it.
A second affidavit of Mr Honner dated 21 November 2016 refers to the section 439A report provided to creditors of the Club in respect of the administration, indicates that certain conditions precedent to the DOCA have now been satisfied, and deals with Mr Honner's assessment of the solvency of the Club after the DOCA is implemented. Mr Honner sets out his view that the Club is now solvent, as at the date of swearing his affidavit on 21 November 2016, applying the ordinary definition of "solvency", that is by reference to the Club's ability to pay its debts as and when they fall due. Mr Honner makes several identified assumptions in expressing that view, including as to arrangements which have been reached for payment of certain superannuation and other obligations which were extinguished by the DOCA, on the basis of a substitute obligation to pay certain amounts in the future. Mr Honner's view as to solvency as expressed in that affidavit is, in turn, supported by balance sheet information as to the Club through to August 2017, a profit and loss forecast through to August 2017 and, most importantly, a cash flow forecast through to August 2017, to which I have been taken by Mr Mitchell in submissions.
As Mr Mitchell rightly recognises, that cashflow forecast does not extend beyond August 2017, but there is also evidence before me as to matters which are likely to impact the Club's financial performance beyond August 2017, which are broadly speaking positive for that performance rather than negative. Equally, while an assessment of solvency is future looking, and will have regard to liabilities which may fall due in the middle and longer term, as well as the short term, it is plain that the effect of the DOCA has been substantially to reduce the Club's liabilities by way of debt, and to that extent to increase its ability to meet those liabilities, both in the short term and in the middle term.
The liquidators also rely on an affidavit of Ms Cullen, the secretary and chief executive officer of the Club, dated 22 November 2017. Ms Cullen has been involved, with Mr Honner, in preparing the relevant cashflows, and also addresses the reasons for the decline in the Club's previous financial position, which will appear to have included the debt which resulted from a substantial renovation and adverse developments in trading conditions in earlier years; the conduct of the Club's business through the administration; the terms of the DOCA; and the reasons that Ms Cullen also forms the view that the Club will be able to trade in a profitable manner going forward. Plainly, Ms Cullen's evidence in that respect should not be read as a guarantee of future positive trading performance, or of future solvency, but, as I have observed in earlier judgments, no company, or registered club, including a solvent company or solvent registered club, will ever have a guarantee of its future trading or financial performance.
The application is also supported by an affidavit of Mr Hughes, who is the company secretary and director of Belmont 88 Pty Limited ("Belmont 88"). Belmont 88 has acquired land from the Club and proposes to develop an over 55's development upon that land, with construction expected to commence in early 2017. That matter is significant because that construction is anticipated, over time, to allow the possibility of additional patrons for the Club, and because Belmont 88 is a lender to the Club of an amount which will fall due in some five years' time, and is also the lessor to the Club under the terms of a lease with a five year term and five year option available if the Club complies with its loan obligations. Importantly, Mr Hughes expresses the view, which seems to me to be consistent with the commercial probabilities, that the Club's operations are attractive to Belmont 88, so far as they may assist in attracting residents to its proposed development, and avoid the need for Belmont 88 itself to construct facilities that might otherwise be required within the development, including a meeting place and recreational centre for residents, and that Belmont 88 is therefore likely to be supportive of the Club, including by favourably considering a request by the Club to extend the term for repayment of the loan if it is unable, for example, to take other steps to facilitate that repayment, including an amalgamation with another club which remains in contemplation. Again, that evidence should not be understood as a guarantee, but supports a view that, as a matter of the commercial probabilities, the Club has options available to it to address the repayment of the loan made by Belmont 88, or the extension of the term of the loan, when it falls due in five years' time.
There is also evidence of service of the application upon persons interested in it, including, importantly, the Department of Fair Trading (NSW), the Australian Securities and Investments Commission ("ASIC"), the Deputy Commissioner of Taxation, and the secured creditors. ASIC has advised that it considers the application is properly one for the determination of the Court and does not propose to intervene or seek to appear at the hearing. The Deputy Commissioner of Taxation indicates that the Deputy Commissioner does not seek to appear. That is of particular significance where the Deputy Commissioner of Taxation was the applicant for the winding up. A representative of the Club's first ranking secured creditor has advised that it supports the application, although it will not be attending Court. A representative of the Club's second ranking secured creditor has advised that it has no objection to the application.
Turning now to the relevant principles, before I return to Mr Mitchell's submissions in respect of the application, I should note that the Club is, of course, not a company incorporated under the Corporations Act but is a co-operative registered under the Co-operatives National Law (NSW). Section 444 of the Co-operatives National Law provides that a co-operative may be wound up in the same way and in the same circumstances as a company under the Corporations Act. Section 444(3) provides that the winding up of a co-operative is an applied corporations legislation matter for the purposes of the Corporations Application legislation in respect of, relevantly, Pt 5.4B of the Corporations Act which includes the Court's power to terminate a winding up under s 482 of the Corporations Act. It is in that context that the principles applicable to s 482 of the Corporations Act dealing with the termination of a winding up are applicable in this case.
The Court's power to make an order terminating the winding up under that section, and under the Co-operatives National Law so far as it applies it, is discretionary. The factors relevant to such an application are well known, and reference is often made to the decision of the Supreme Court of Queensland in Re Warbler Pty Ltd (1982) 6 ACLR 526 at 533, where Master Lee QC identified several matters. Those matters include the nature and extent of creditors, whether debts have been discharged, and the general solvency of the relevant entity and the circumstances that led to the winding up. In Mercy & Sons Pty Ltd v Wanari Pty Ltd [2000] NSWSC 756; (2000) 35 ACSR 70 at [47]-[51], Austin J in turn referred to various categories of interests that are relevant in such an application, including the interests of present and future creditors, and the interests of the liquidator and contributories. His Honour also referred to the importance of the public interest, including matters of commercial morality.
In Re Glass Recycling Pty Ltd [2014] NSWSC 439 at [18]-[19], Brereton J in turn provided a helpful summary of the relevant principles:
"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."
His Honour also referred to the observation of Bergin CJ in Eq in Re SNL Group Pty Ltd (in liq) [2010] NSWSC 797 which emphasised the importance of solvency in such an application, and that other considerations are largely relevant to the determination whether the company has returned to, or will be returned to, solvency.
I have also had regard to the comprehensive submissions of Mr Mitchell in respect of the application, which have addressed the history of the Club, the circumstances in which the DOCA was created, and identified the matters that are applicable to the determination of a winding up, including referring to the decision in Re Glass Recycling Pty Ltd above. Mr Mitchell submits, and I accept, that the effect of the DOCA has been to bring about a sale and lease-back of the Club's premises, reducing its assets but significantly improving its debt position, including extinguishing all debt other than amounts in respect of continuing and terminating employees which will be paid over a specified period as provided in the DOCA, and a debt of $1.05 million owed to Belmont 88, which is repayable in five years or upon amalgamation of the Club with another club or termination of the deed of loan, which arises only upon an event of default in relatively standard terms. Mr Mitchell also refers to the work that has been undertaken, both by Mr Honner and by Ms Cullen, the Club's chief executive officer, in respect of future solvency of the Club and points to opinions expressed by Mr Honner and Ms Cullen in that respect. Mr Mitchell also points to the matters to which I have referred above that support the Club's ability, at least as a matter of commercial probability, to be able to deal effectively with the repayment obligation of the amount of $1.5 million when the term of the loan by Belmont 88 expires in five years' time, including the option of achieving an amalgamation with another club, or the possibility that the Club will be able to refinance the loan from its own resources or, finally, as I have noted above, the evidence that Belmont 88 presently anticipates it will be supportive of an extension of the loan term if required.
Mr Mitchell refers to the interests of creditors, which I am satisfied are consistent with this application. A number of creditors, have, of course, indicated their own view of that matter in voting in favour of the DOCA or indicating their support for this application. There is evidence that employee creditors are supportive of the application, both because they voted in favour of the DOCA and because of Ms Cullen's general discussions with them. That is not surprising, because employee creditors benefit from the continuance of the Club's business as their employer. There is also evidence that trade creditors have been supportive of continuing dealings with the Club, and Belmont 88 supports the termination of the winding up as I have noted above. The liquidators' interests are adequately addressed in the application, and indeed the liquidators have brought the application. The Club is a co-operative whose members do not have an interest in its assets or profits. However, members of the Club have an interest in the Club's continuing activities, so far as it allows them the benefit and use of the Club's facilities at a modest annual fee.
Mr Mitchell has, fairly, drawn attention to matters which may be relevant to the public interest and commercial morality, including any issue as to whether insolvent trading may have occurred during the period prior to the Club's administration. I have regard to the fact that the Club is a voluntary organisation and its board of directors serves in a voluntary capacity. I have also had regard to the fact that creditors of the Club have formed the view that the Club's and their best interests are served by the DOCA. I also have regard to the evidence which Ms Cullen has given as to the steps that she and, she anticipates, the Club's board will take to monitor the Club's solvency going forward. It is, regrettably, the case, that, in difficult financial circumstances, tax, superannuation and employment obligations are sometimes not met, and that is a matter which ought not to occur in the future, even if the Club were in the future to come under financial difficulty. Having said that, I am satisfied that the public interest will be served by the termination of the winding up, rather than there being any public interest or issue of commercial morality which is inconsistent with that course.
In these circumstances, I am satisfied that the order that is sought by the liquidators may be made, and does not need to be deferred until the final steps in respect of the DOCA are implemented, because, as Mr Mitchell points out, all steps necessary to address the Club's solvency have now been taken, and the remaining steps that are to be taken under the DOCA, after the costs of this application are known, are steps that deal only with satisfaction of the claims of the Club's secured creditors to the balance of moneys that are then due to them.
I make orders in accordance with the short minutes of order initialled by me and placed in the file.
[3]
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Decision last updated: 18 July 2017