By Amended Originating Process filed on 8 May 2018, Messrs Kassem and Tang ("Liquidators") in their capacities as liquidators of Manband Pty Ltd (in liq) (subject to deed of company arrangement) ("Company") seek an order under s 90-15 of Schedule 2 to the Corporations Act 2001 (Cth) terminating the winding up of the Company. They also seek an order that the costs of these proceedings be costs in the liquidation of the Company and that they be entitled to be indemnified for their costs of the proceedings out of the Company's assets as a priority expense in the liquidation under s 556 of the Corporations Act. This application was adjourned, at the Liquidators' request, on several occasions to allow the Liquidators to lead further evidence, including better evidence of the Company's solvency.
The Liquidators relied on an affidavit of Mr Tang dated 4 April 2018, and I have drawn on that affidavit for the factual background that I set out below. The Company was incorporated on 5 September 1995 and Mr John Furia and Ms Maria Furia were its directors, and Mr John Furia was its secretary, from 18 May 1999 until 13 September 2016. Mr Furia holds 5,000 and Ms Furia holds 5,000 of the 10,000 ordinary class fully paid shares on issue in the Company. Mr Frank Furia was subsequently appointed as director and secretary of the Company on 13 September 2016, about six weeks before voluntary administrators were appointed to the Company. However, Mr Tang's evidence is that he and Mr Kassem formed the view that Mr John Furia and Ms Maria Furia remained shadow directors of the Company after the date of Mr Frank Furia's appointment, having regard to the level of control exercised by them over the Company (Tang 4.4.18 [11]).
It appears that the Company conducted transactions in its own right and as trustee of the J & M Furia Family Trust ("Trust") (Tang 4.4.18 [11.3]). The Company was the trustee of the Trust from 22 September 1995 to 19 August 2016 and operated a café business at Eastern Creek from 1995 until 2004, operated a pub business at Eastern Creek from 2003 to 2012, and operated both of those businesses from 2012 to 2015. Mr Tang's evidence is that certain real property assets were held within the Trust. It appears that Mr John Furia and Ms Maria Furia are also partners in a partnership trading as the J & M Partnership (Tang 4.4.18 [58]), and are also partners, with other persons, of another partnership known as the J, M, FN & R Furia Partnership. On 2 February 2015, the Company sold the café and the pub business to a third party, Red Cape Hotel Group Pty Ltd, for a consideration totalling $7,508,422. The Company in its capacity as trustee of the Trust also sold one of the properties to RHG Properties Pty Ltd at the same time for an amount of $2,991,558. The Company then ceased business operations and ceased employment of staff and a new trustee was appointed to the Trust on 19 August 2016.
The Liquidators were initially appointed as joint and several voluntary administrators of the Company on 26 October 2016 and were subsequently appointed as its liquidators on 30 November 2016, and were later again appointed as voluntary administrators. The Liquidators, then in their capacity as administrators, provided a report to creditors under s 439A of the Corporations Act on 23 November 2016 (Ex A1, 27-101). In March 2017, now over 16 months ago, Mr Frank Furia and Mr John Furia indicated their intention to propose that the Company enter into a deed of company arrangement ("DOCA"). The Liquidators then issued an updated report on the liquidation to creditors on 5 April 2017 (Ex A1, 122-137). An unexplained eight month delay then followed and, on 18 December 2017, Mr Frank Furia and Mr John Furia submitted a proposal for the DOCA to be entered into, inter alia, by the Company (Ex A1, 138-141). That DOCA proposal contemplated that a particular creditor would not participate, but that creditor's proof of debt was subsequently rejected by the Liquidators. It is a term of the DOCA that the winding up of the Company is terminated and this application seeks orders terminating the winding up.
On 11 January 2018, creditors of the Company passed a resolution appointing the Liquidators as joint and several administrators of the Company under s 436B of the Corporations Act. In a report dated 9 February 2018 provided by the Liquidators (in their capacity as administrators in the second administration) to creditors, the Liquidators expressed the view that the estimated return to creditors if the Company were to effectuate the DOCA as proposed would be between 73.27 and 74.34 cents in the dollar and, if the Company were to continue in liquidation, the estimated return to creditors would be between nil and 52.3 cents in the dollar, having regard to specified matters, including the likelihood that foreshadowed proceedings would be defended, the costs of litigation and the need for litigation funding.
On 16 February 2018, creditors passed a resolution that the Company execute a DOCA in accordance with the DOCA proposal. On 9 March 2018, the Company, Mr Frank Furia, Mr John Furia and the liquidators (as administrators) entered into that DOCA (Ex A1, 280 - 300) and the Company and several creditors, Artisan Concrete Constructions NSW Pty Ltd, Mr Greg Evans, DAFCSS Pty Ltd t/as Lancaster ST Fresh Food Market (LSFFM), Malcat Enterprises Pty Ltd, Stellar Excavations Pty Ltd and Nino Mura executed deeds of deferral.
[3]
Mr Tang's evidence as to the terms of the DOCA and matters relating to the termination of the winding up
Mr Tang's affidavit referred to matters relating to the Liquidators' investigations to 11 January 2018, and noted that the Company's former accountant had died and his accounting practice had been dissolved before the voluntary administrators' appointment, and that financial accounts prepared by that former accountant were incorrect and failed to reflect the existence of the Trust. Mr Tang indicates that the voluntary administrators formed the view that a number of voidable transaction claims would be available to liquidators of the Company (Tang 4.4.18 [64]). Mr Tang's affidavit also dealt with claims and recoveries to 11 January 2018, and noted that the majority of proceeds of sale of the Company's business have been transferred to its related entities. It appears that much of the information available to the Liquidators as to these matters turns on matters of which they have been informed by Mr John Furia or the representatives of Mr John Furia and Ms Maria Furia.
Mr Tang identifies a number of claims available by way of constructive trust and voidable transaction claims, a claim for insolvent trading and claims for breach of directors' duties. The Liquidators indicate that they contemplated commencing those proceedings, prior to receiving the DOCA proposal (now, as I noted above, over 16 months ago) and had sought funding from an external litigation funder and the Company's major creditor, the Australian Taxation Office ("ATO"). The Liquidators also express the view that, as at 9 February 2018, the Company had a significant deficiency of assets against its liabilities in its own right, but may, by the exercise of indemnity against the new trustee of the Trust, recover a sufficient amount to pay the Company's sole creditor in its capacity as trustee of the Trust. The Liquidators also identify a debt owed by the Company in its own right to the ATO, in the amount of $1,642,822.36, reduced from the amount originally understood to be owing, and claims of several other unsecured creditors and of related party unsecured creditors. The Liquidators express the view that the Company became insolvent as a result of its inability to attend to its taxation obligations in a timely and efficient manner and payments made by the Company to related entities out of the proceeds of sale of the Company's business (Tang 4.4.18 [135]).
Mr Tang also refers to the terms of the DOCA, which contemplate that several creditors would not participate in any distribution under it; that Mr John Furia would contribute a sum of $1,550,000 to the deed fund to be distributed to participating creditors, and to be paid in full within six months of the DOCA being entered into, which was initially expected to be by 9 September 2018; that security for payment of the contributions to the deed fund would be held by the Company retaining caveats over certain properties; and that the deed fund would be applied to administration and liquidation liabilities in the first instance, then to remuneration payable to Mr Kassem and Mr Tang, and then to priority creditor claims (of which none have been identified) and pro rata to participating creditors. The DOCA also dealt with the position of related party creditors. The Liquidators expressed the view, in their report to creditors dated 9 February 2018, that the DOCA would likely result in a greater return to creditors than the liquidation continuing and claims being pursued against third parties, and it was in creditors' best interests for the Company to execute a DOCA on the terms of the DOCA proposal. On 16 February 2018, the creditors resolved that the Company execute that DOCA, and the ATO and several other creditors voted in favour of the proposal.
Mr Tang's affidavit also addresses other matters relevant to the termination of the winding up, including the Liquidators' views as to creditors' interests, members' interests, commercial morality and the public interest, the likelihood of the Company remaining solvent in the future, albeit in circumstances that it had ceased to trade, and the conduct of Mr Frank Furia and Mr John Furia. Mr Tang expresses the view that, although Mr Frank Furia and Mr John Furia had caused the Company to pay monies for their benefit, they now propose to contribute significant funds under the DOCA which would place the ATO in a better position than it would be if the DOCA was to be terminated and the winding up was to continue. Mr Tang also noted that Mr Frank Furia and Mr John Furia contended that the monies were paid in repayment of outstanding loan monies, but had not provided sufficient evidence of that matter.
By a further affidavit dated 30 April 2018, Mr Tang referred to correspondence with the Australian Securities and Investments Commission ("ASIC") including reports that he had lodged with ASIC under s 533 of the Corporations Act and further correspondence with ASIC as to the possibility of a banning order made against Mr Frank Furia under s 206F of the Corporations Act. It appears that ASIC has agreed to defer a request for a supplementary report as to Mr Furia, from the Liquidators, at their request.
At a second substantive listing of the matter on 16 August 2018, the Liquidators read a further affidavit of Mr Tang dated 16 May 2018, which annexed a letter from ASIC dated 16 May 2018 by which ASIC appeared to accept the Liquidators' intention not to lodge a further report under s 533 of the Corporations Act. By a further affidavit of Mr Tang dated 22 May 2018, Mr Tang set out hypothetical return to creditors, had the Company not participated in the voidable transactions identified in his reports to creditors, and expresses the view that unsecured creditors would then have received a dividend return of approximately 61 cents in the dollar, excluding any costs of external administration. Mr Tang also expressed the view that the DOCA offers a better return to creditors than a liquidation scenario, and a more favourable result than would have been available had the related party transactions not been undertaken.
By a further affidavit dated 15 August 2018, also read on 16 August 2018, Mr Tang led further evidence that funds were available for payment of the initial deed fund contribution of $1,500,000, subject to the release of caveats that the Liquidators had placed over several properties. The time for making that contribution under the terms of the DOCA had been extended, with the Liquidators having waived a requirement to pay interest in that regard. There was evidence that the Commonwealth Bank of Australia ("CBA") had approved the loan of that amount, on an application by Mr John Furia, with the borrowers being several members of the Furia family. That loan was subject to several conditions, which had largely been satisfied, including a condition that the funds would only be released in exchange for the simultaneous release of the relevant caveats and that the deed administrators would undertake that the release of funds would result in the satisfaction of all claims outstanding under the DOCA, including the ATO's claims against the Company, and that the CBA was to control the release of the amount of $1.5 million by way of distributing cheques to the necessary recipients, for example, the deed administrator, ATO, any priority creditors or other participating creditors of the deed fund.
Mr Tang also refers to steps which had been taken to seek to negotiate an arrangement by which caveats could be withdrawn, and then new caveats lodged until the winding up was terminated, but that arrangement was not suitable to the CBA. The Liquidators in turn were concerned, reasonably enough, as to the position if they withdrew caveats over the relevant properties, allowing those properties to be further encumbered, before the winding up was terminated. The ATO, which was a major creditor of the Company, had also opposed the withdrawal of the caveats over those properties prior to the termination of the winding up. Mr Tang's evidence was that, based on his discussions with the CBA, he understood that the relevant funds were available to be advanced, subject to these matters, and settlement could occur on one business days' notice to the CBA. Mr Tang also drew attention to a confirmation provided by the current accountants to Mr John Furia and associated entities that those entities had no outstanding tax debt as at 11 July 2018 and their tax compliance was up to date. Mr Tang also referred to confirmation received from the CBA that all preconditions under the relevant financing agreement had been satisfied (presumably, with the exception of the position as to caveats) and that approval was said to rely on that agreement remaining open for the next 30 days.
[4]
Other evidence
At the second listing of the matter on 16 August 2018, the Liquidators also relied on an affidavit of Mr John Furia dated 3 July 2018. No affidavit evidence was led from either Ms Maria Furia or Mr Frank Furia. Mr Furia referred to the relationship between members of his family and the several commercial entities with which they were involved and the circumstances of the sale of the Company's and Trust's business assets. His evidence is that he took advice from the Company's former accountant in that process and sets out his then knowledge of the Company's then creditors and its liabilities. Mr John Furia's evidence was that, at the time of the sale of the Company's café and pub business, he believed the sale proceeds would be sufficient to discharge all of its creditors, and began to pay various creditors. Mr Furia also refers to advice provided by the Company's former accountant, in about May 2016, as to an increased tax liability (subsequently significantly reduced) and that the Company did not have sufficient funds to pay all of its creditors and could only pay about 50-60 per cent of what was owed by it. Mr Furia also refers to steps subsequently taken to assess the Company's financial position, to the ATO's requirement that the tax due to it be paid, the identification of a reduction in the amount of tax due (later accepted by the ATO) and the circumstances in which Mr John Furia became anxious about these matters and, he says, Mr Frank Furia was appointed as director and made the decision to appoint an external administrator.
Mr Furia also offered, by his evidence, an undertaking to make further loans to the Company, after the DOCA is effected. He also referred to the proposed use of the contributed amount to set up a management company to manage 650 storage units which are presently under construction by a partnership associated with him. The making of loans, depending on their terms, would not necessarily establish solvency. The authorities also indicate that the Court will not necessarily accept an undertaking as to future actions, as the basis for establishing solvency in a termination of a winding up. In the event, Mr Furia altered his position in the course of the further hearing on 16 August 2018 and indicated a willingness to contribute the amount of $10,000 by way of capital to the Company, if the Court indicated that it was disposed to terminate the winding up after payment of the required amount into the deed fund, and prior to orders terminating the winding up being made. A contribution of capital, to a company which is not presently trading, may well be sufficient to establish its solvency. Mr Furia also led evidence of the steps that he had taken, with the advice of the Company's new accountant, to better manage and seek to avoid insolvency of the Company in the future.
The Liquidators also relied on an affidavit of their solicitor, Ms Kozary, dated 12 April 2018, which annexed correspondence from ASIC indicating its view that the matter was properly left for determination of the Court and that it did not propose to intervene in or seek leave to be heard in the application. The Liquidators also relied on an affidavit of Mr Hidayat dated 12 April 2018 indicating that notice of the application had been given to interested parties, none of which appeared at the hearing of the application.
[5]
Whether the winding up should be terminated
When the matter was initially listed before me on 8 May 2018, I indicated that I would not then have been satisfied that the winding up should be terminated, on the evidence as it stood. There was then no satisfactory evidence that the directors in fact had the capacity to perform their obligations under the DOCA, in circumstances that the financing facility on which the Liquidators then relied was then directed to payment of the ATO's debt and not a payment into the deed fund. I also noted that, although the creditors may achieve a better return from the DOCA than a winding up, there was nonetheless a significant discount to their entitlements which resulted from transactions undertaken by the Company for the benefit of its related parties; that the Liquidators' evidence as to the directors' reliance upon their former accountants was not then supported by any evidence of the directors; there was no evidence that similar events would not be repeated if the winding up was terminated; and the better return to creditors did not outweigh the public interest factors that tended against a termination of the winding up. I allowed the Liquidators an opportunity to lead further evidence in respect of the application, before making orders dismissing the application. The Liquidators have now done so as I noted above.
Ms Kozary, who appears for the Liquidators, draws attention to the power to terminate a winding up by the Court under s 482 of the Corporations Act and noted that, prior to 1 September 2017, the Court could make an order terminating a voluntary winding up under s 511 of the Corporations Act. Ms Kozary relied on Div 90 of the Insolvency Practice Schedule (Corporations) as permitting the termination of a winding up following the repeal of s 511 of the Act. She pointed to s 90-15 of the Insolvency Practice Schedule (Corporations) which provides that the Court may make such orders as it thinks fit in relation to the external administration of a Company. In Re Krejci (as liquidator of Community Work Pty Ltd) (in liq) [2018] FCA 425, Gleeson J treated s 90-15 of the Insolvency Practice Schedule (Corporations) as supporting the making of a direction to a voluntary liquidator, analogous to those which might previously have been made under ss 479(3) and 511 of the Corporations Act. I am satisfied that the Court has power to terminate a voluntary winding up under that section. Ms Kozary points out, and I accept, that the persons who may bring an application under s 90-15 of the Insolvency Practice Schedule (Corporations) include the liquidator, as an officer of a company in external administration, under s 90-20 of the Insolvency Practice Schedule (Corporations).
Ms Kozary submits and I accept that, in an application of this character, the Court would take into account the objectives of Part 5.3A of the Act, given the existence of a deed of company arrangement: Mercy & Sons Pty Ltd v Wanari Pty Ltd (subject to deed of company arrangement) (in liq) [2000] NSWSC 756; (2000) 157 FLR 107; (2000) 35 ACSR 70 at [53]. In Sutherland v Rahme Enterprises Pty Ltd (in liq) [2003] NSWSC 673; (2003) 46 ACSR 458 at [27] Barrett J observed that:
"Pt 5.3A's objective of obtaining for creditors a better return than they would receive in an immediate winding up may be accepted as a factor to be taken into account in a case where a deed of company arrangement is promoted and termination of winding up forms part of the overall plan in which the deed of company arrangement plays a part. But it seems to me that the public interest factors of the Data Homes kind are in no way relegated when the application to terminate the winding up eventually comes before the court. The interest of creditors (or, as it is here, a section of them) in obtaining a more favourable return through the deed of company arrangement cannot, to my mind, justify the court's re-launching a company which, viewed alone and in the context of its future activities or likely activities, presents a potential for a new group of creditors to be unacceptably prejudiced by legacies from its former life."
Ms Kozary also draws attention to factors that are generally relevant to an application to terminate a winding up of a company that is subject to a deed of company arrangement, as summarised in Vero Workers Compensation (NSW) Ltd v Ferretti Pty Ltd [2006] NSWSC 292; (2006) 57 ACSR 103 at [17], as follows:
"(i) the court has a discretion as to whether the winding up should be terminated;
(ii) in exercising its discretion, the court considers the interests of:
● creditors of the company (including future creditors);
● the liquidator, particularly with respect to costs;
● the contributories;
● the public, including the public interest in matters of commercial morality, and the public interest that insolvent companies should be wound up."
I summarised the principles applicable to such an application in Re Living Creatively Exhibitions Pty Ltd (in liq) (subject to deed of company arrangement) [2013] NSWSC 717 at [7] as follows:
"Generally, the court will not terminate a winding up unless a company will have additional financial strength and stability to provide confidence that it can continue without an appreciable risk of returning to liquidation: Re Data Homes Pty Ltd (in liq) [1972] 2 NSWLR 22 at 27; Leveraged Equities Ltd v Hilldale Australia Pty Ltd [2008] NSWSC 190; (2008) 26 ACLC 182; Re SNL Group Pty Ltd (in liq) [2010] NSWSC 797. A question will arise as to whether sufficient steps have been taken to recapitalise a company or restore its solvency so that, in the language of Re Pine Forests of Australia (Canberra) Pty Ltd [2010] NSWSC 1127 at [3], its "financial health" is such that it may safely be released from the form of external administration focussed mainly on the interests of creditors and returned to the mainstream of commercial life where it may, under the control of its directors, incur new debts that have to be paid as and when they fall due. Similarly in Re SNL Group Pty Ltd (in liq) above at [24] Bergin CJ observed that:
"it is clear that in determining whether to terminate the winding up of a company, it is usual that the most significant matter for consideration is the solvency of the company. The other considerations, such as the extent of the creditors, the status of the debts and the nature of the company's business will be taken into account in determining whether the company has returned to, or will be returned to solvency.""
Ms Kozary rightly draws attention to the relevance of the objectives under Part 5.3A of the Act. I accept that the entry into the DOCA, where it now appears the payment to the deed fund has been properly financed and could be implemented, should result in a better return to creditors than a liquidation. It seems to me that the termination of the winding up would promote the objectives of Part 5.3A of the Act in that regard. Where a Court ordered winding up is sought to be terminated, in respect of a company subject to a deed of company arrangement, the Court must also have regard to the matters specified in s 482(2A) of the Corporations Act. I also have regard, by way of analogy to those factors, to the fact that the Liquidators have lodged reports with ASIC that express the view that officers of the Company have engaged in misconduct, have identified several claims that arose out of the conduct of Mr Frank Furia, Mr John Furia and Ms Maria Furia, and have identified possible offences and contraventions under ss 180-182 and 588G of the Corporations Act. I have regard to the decision of the Company's creditors to resolve that the Company enter into the DOCA and recognise that that is a significant matter in respect of the interests of creditors, and has particular weight where a major independent creditor, the ATO, voted in favour of the entry into the DOCA.
I have regard to the question whether the DOCA will result in the Company becoming or remaining insolvent. Ms Kozary submits that, upon effecting the DOCA, the Company will no longer be insolvent as all creditor claims are disposed of under it. So far as public interest considerations and commercial morality is concerned, Ms Kozary points to the Liquidators' conclusion that the Company's insolvency primarily resulted from its accountants' failure to discharge their obligations to the Company and the directors having dispersed the proceeds of sale prior to the tax obligations of the Company being finalised. The former proposition seems to me to provide limited assistance to this application, where it is the directors' obligation to maintain proper financial accounts, although they may no doubt seek professional assistance from an accountant in order to do so, and the latter proposition demonstrates a significant failure to meet taxation obligations. However, I have also had regard to Mr Furia's evidence of the circumstances in which that occurred, which at least involved a significant misapprehension as to the level of tax due, and the efforts which appear now to have been made to address the issue and place the Company on a proper footing going forward.
In the result, although not without reservations, I am satisfied that the winding up should be terminated, but only after the monies to be advanced by the CBA have in fact been paid into the deed fund, and the amount of capital of $10,000 has been subscribed by Mr Furia, so that there can be confidence that funds are available to meet creditors' debts and the Company has been properly capitalised, at least for its presently limited activities. I will terminate the winding up once that occurs, absent any matter arising that was not disclosed at this hearing. Ms Kozary advised that confirmation should be sufficient for the Liquidators to withdraw the caveats, in exchange for the monies to be paid into the deed fund from funds made available by the CBA. The matter will then be listed at 9.15am on 31 August 2018 to allow the Liquidators to lead evidence establishing that capital has been subscribed by Mr Furia and funds paid into the deed fund. If that has then occurred, I will make orders terminating the winding up as noted above. If that has not occurred, the application may well be dismissed.
I will reserve the question whether to make an order that the costs of these proceedings be costs in the liquidation of the Company and whether the Liquidators should be entitled to be indemnified for their costs of the proceedings out of the Company's assets as a priority expense in the liquidation under s 556 of the Corporations Act. Whether such an order should be made will depend, in significant part, on whether the proposed steps are successfully implemented and orders for the termination of the winding up are made.
[6]
Amendments
30 August 2018 - Typographical correction - para 20.
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Decision last updated: 30 August 2018