Solicitors:
Solve Legal (Applicant)
Anderson Sjoquist (First Respondent and Liquidators)
Edmond Khoury Solicitors (Second Respondent)
File Number(s): 2021/56299
[2]
Nature of the application and affidavit evidence
By Interlocutory Process filed on 3 September 2021 the applicant, Mr Leo Fang, applies for an order that the winding up of Sails Corp Pty Ltd (in liq) ("Company") made by order of the Court on 18 August 2021 be terminated. What might have been a straightforward application, in that respect, became much more complex because of certain conduct of Mr Fang, on the day on which the winding up application was determined, which I will address below. However, I have ultimately concluded that the winding up should be terminated, notwithstanding that conduct.
Mercy & Sons Pty Ltd v Wanari Pty Ltd [2021] NSWSC 1241 | Case summary | Zoe
Mr Fang relies on several affidavits. The first, the affidavit of his solicitor Ms Hookham dated 31 August 2021, refers to several proceedings between the Third Respondent, Mr Christian, and entities which may be associated with him, and the Company in liquidation in the Local Court of New South Wales. In four of those proceedings, Mr Christian or other entities had obtained default judgment against the Company, apparently in circumstances that the Company contends that it has merits defences of the proceedings, and at the time the Company was under control of a former director. Applications are presently on foot in the Local Court to set aside those default judgments, but have been delayed initially at the request of Mr Christian's solicitor, then by the COVID-19 pandemic, and most recently by the appointment of a liquidator to the Company.
By a second affidavit dated 1 September 2021, Mr Adams, the former director of the Company, refers to the circumstances in which the Company dealt initially with Mr Christian and others, and later with Mr Fang. Mr Adams' evidence, to which Mr Christian did not respond, is that he had been introduced to Mr Christian and others as potential lenders to the Company in respect of the purchase of a property for development, but it had subsequently emerged that Mr Christian was a former bankrupt and another of the lenders had a criminal history, and, perhaps unsurprisingly, Mr Adams considered that those matters would make it difficult for them to obtain finance for any development. He referred to his subsequently having dealt with Mr Fang in respect of the provision of financing for the development property, which appears to have involved, perhaps regrettably from Mr Fang's perspective, Mr Fang assuming control of the Company and becoming its director.
Mr Adams also refers to the circumstances in which he had changed his residential address, but failed to lodge notice with the Australian Securities and Investments Commission ("ASIC") of the change in the Company's registered office, which appears to have contributed to the fact that a creditor's statutory demand issued by Mr Christian to the Company did not come to its attention, and Mr Adams first became aware of it after the winding up application was brought. He also addresses the position in respect of certain amounts claimed against the Company in the Local Court proceedings. His evidence, as Mr Golledge who appears for Mr Fang points out, indicates that the Company had a very limited range of activities prior to July 2020, when it had entered a contract to acquire the relevant development property but had not completed that acquisition.
By his first affidavit dated 3 September 2021, Mr Fang in turn refers to the circumstances in which he became involved in the Company as a potential financier of the acquisition of the development property; to the fact that that acquisition was not able to complete, not least because Mr Christian and another person lodged caveats over the property and, after they were removed, an associated entity then appears to have done so; he refers to his provision of funds to the Company; and to the event which has caused significant difficulty in this application that, during the hearing of the winding up application, on 18 August 2021, he caused $1,664,000 to be withdrawn from the Company's account "because [he] did not know what would happen to the money if the Company was wound up and [he] wanted to preserve the asset for the benefit of ACFT [a company associated with Mr Fang] and the Company." That evidence is problematic, to say the least, because at the time this was occurring, the Court was being asked not to make a winding up order on the basis that the money held in that account demonstrated the Company's solvency, at the same time that Mr Fang was taking steps to withdraw that money that undermined the basis on which that submission was put. Those steps give rise to the risk that, had that submission been accepted, the winding up application may have been dismissed on a false basis, where the money said to establish the Company's solvency had already been withdrawn.
In the event, Mr Fang's evidence, which is corroborated by the liquidator's report, is that on the same day he caused all but $64,000 of the money he had withdrawn to be repaid to the Company's account, after receiving sound legal advice from his solicitors, and then caused the balance of $64,000 to be repaid to the Company on 1 September 2021. I will refer to further evidence led by Mr Fang in that respect below. Mr Fang also addressed the Company's liabilities, including the position in respect of the disputed default judgments in the Local Court. He refers to the Company's future activities, which include seeking to continue the purchase of the development property, although there is now an uncertainty as to the status of the contract in that respect; seeking to address the position in respect of an adjacent property, which appears to have been sold to a third party at the time the Company had an option agreement over it; and, subject to those matters, seeking to develop residential townhouses on the development property, or otherwise seek to rent that property in the short term while development planning progresses.
Mr Fang addresses the costs that will potentially be incurred in respect of that process, although I recognise those costs will only be incurred if the contract for the purchase of the development property has not been terminated by the vendor, and the position will develop differently if, for example, it has been terminated and that termination is either accepted by the Company or becomes the subject of a dispute. Mr Fang also refers to, and the liquidator has not contested, the fact that he has cooperated with the liquidator in the liquidation. He offered certain undertakings as to steps which would be taken to support a winding up. Consistent with the authorities and in the particular circumstances of this application, I would not be making orders to terminate a winding up in anticipation of those steps being taken, on the basis of an undertaking by Mr Fang to do so.
The exhibit to that affidavit in turn includes correspondence with Mr Christian's solicitor, by which Mr Fang's solicitors proposed an arrangement for moneys to be paid into a controlled moneys account in the name of the two solicitors, for the amount of the default judgments in the several Local Court proceedings, and a further sum which is undisputed be paid to Mr Christian. It appears there has been no response by Mr Christian to that proposal, but I will refer below to the position put by Mr Allen, who appears for Mr Christian, in this application.
By further affidavit dated 8 September 2021, Mr Fang addressed the steps which would be taken to secure the Company's solvency, including in respect of the deferral of liability for legal fees paid by Mr Fang on the Company's behalf, the conversion of part of a debt owed by the Company to ACFT in the amount of $400,000 to equity, and the lodgement of outstanding tax returns, which will apparently be nil returns, in respect of the period in which the Company was under the former director's control.
By an affidavit dated 8 September 2021, Mr Roufeil, annexes his special purpose financial report in respect of the Company, which identifies a present deficiency of assets, which would be addressed by the proposed conversion of part of ACFT's loan to equity, to which I referred above. The profit and loss and balance sheet information contained in that report in turn indicates that, with the benefit of the funds held by the Company, it would have a surplus of cash in the middle term even after meeting any successful claims in respect of the Local Court proceedings and incurring expenditures in respect of the development property.
Mr Fang in turn relies on an affidavit of service of Ms Hookham dated 20 September 2021, which indicates that ASIC has been given notice of the application. By her affidavit dated 21 September 2021, Ms Hookham addresses the position in respect of stamp duty in relation to the property, which is overdue, but which will be sought to be addressed by a payment to be made by the liquidator, before the winding up is terminated.
Ms Hookham also refers to a conversation with the vendor's solicitor in respect of the development property, which appeared to suggest that the contract for that property had not yet been terminated, although there is evidence that raises the possibility that the vendor has either terminated that contract or proposes to do so. There is in turn a degree of doubt as to how that would occur under the relevant contract, where it does not appear a notice to complete has been given, and the provision in respect of liquidation provides for rescission rather than termination of the contract, and may have different contractual consequences.
By a further affidavit dated 22 September 2021, Mr Fang refers to having been provided a copy of an email from that solicitor which purports to terminate, or at least foreshadows the prospect of termination of, the contract for the sale of the development property, which adds to the uncertainty in that respect. By his further affidavit dated 23 September 2021, Mr Fang refers to the circumstances in which he transferred the funds from the Company's account to his own account, apparently during the hearing of the winding up application, but without reference to his solicitor, who he did not understand he could consult during that hearing. He also refers to the fact the circumstances in which those moneys were repaid. He was cross examined by Mr Allen as to those matters.
I am by no means convinced that Mr Fang did not have an understanding of what he was doing, at the time of making the transfer, and it seems to me at least possible that that transfer was made at a time he apprehended that the Company may not be successful in avoiding a winding up application. Having said that, it seems to me likely that, as Mr Fang said, he did not have an understanding of the legal implications of what he was doing, and I can more readily draw that inference where what he was doing was highly unlikely to achieve any benefit to him because, had he not promptly returned the funds, it is almost inevitable that the Court would have granted a freezing order on the liquidator's application, over his personal account into which the funds had been transferred. I also bear in mind the importance of the fact that, on the same day that he made the transfer, he appears to have disclosed it to his solicitor; his solicitor rightly advised him that the money should be repaid, and the very large part of it was repaid, other than an amount which was referrable to legal costs which he had or would pay on behalf of the Company.
In that affidavit, Mr Fang apologises to the Court for that conduct, and I bear that apology in mind, for what it is worth. I ultimately do not conclude, foreshadowing a matter to which I will return below, that this matter is such that Mr Fang would be likely to repeat it in the future, a matter which Mr Allen put to him in cross-examination and which he denied. At the very least, it seems to me that Mr Fang's experience in this matter, and the fact that the money was repaid after he was advised of the impropriety of what had occurred, makes it highly unlikely that he would repeat the same mistake in the future. I bear in mind that his conduct in that respect means that I should give less weight, as a matter of reliability, to his evidence and any undertakings that he might give than might otherwise be the case. However, the Court would not ordinarily rely on undertakings in an application of this kind in any case.
The liquidator, Mr Ghedia, in turn relies on his affidavit dated 20 September 2021, which provides an update in correspondence in respect of the purchase of the development property, for the information of the parties and the Court. He has also provided evidence, which he tendered, as to the amount of his remuneration, and an order that that remuneration be paid was not contested by Mr Fang. He also attaches information provided to him as to Mr Christian's substantial claim for costs of the winding up application, and Mr Fang proposes to set moneys aside, to be held by the liquidator, to meet that claim for costs, subject to a not unreasonable request that those costs be assessed before the very substantial amount claimed is paid.
Mr Christian in turn relies on the affidavit of his solicitor Mr El Khoury dated 23 September 2021, which appears to demonstrate that the creditor's statutory demand was served at the address for service shown on ASIC's records. That demonstrates the proposition on which Mr Fang relies, that that did not bring the creditor's statutory demand to the Company's attention, where Mr Adams had changed residential address, as I noted above, without notifying that change of address to ASIC.
[3]
The parties' submissions
With that evidentiary background, Mr Golledge, with whom Ms Bailey appears for Mr Fang, provides a detailed outline of the background to the winding up, including the position in respect of the several Local Court proceedings; he addresses the legal principles in respect of an application of this kind, to which I will refer below; and addresses the steps which are to be taken to address the Company's financial position, including the execution of the written loan agreement which would defer a part of the Company's indebtedness to ACFT and the conversion of the balance of that indebtedness of $400,000 to equity. He also refers to Mr Roufeil's evidence as to the Company's insolvency and he submits that an amount should be paid into a controlled moneys account in respect of the default judgments in the Local Court proceedings, where there appears to be a significant dispute as to the basis of those judgments, and applications to set them aside have been on foot for a considerable period and have not been determined, without fault of Mr Fang. He addresses the Company's circumstances leading to the winding up application, and also addresses, in oral submissions, the position in respect of Mr Fang's conduct in respect of the transfer of funds in the winding up application, to which I have referred above. He also points to Mr Fang's evidence that he has been a director of ten companies, none of which have been the subject of external administration, other than the Company, and has never been bankrupt.
Turning now to the case law, I summarised the relevant authorities in Re Spartan Pastoral Company Pty Ltd (in liq) [2020] NSWSC 1218, and also there referred to my judgment in Re MWM Sydney Pty Ltd (in liq) [2016] NSWSC 688. I there noted that a person who seeks an order to terminate a winding up under s 482 of the Act must establish that order is appropriate, and referred to the well-known factors relevant to whether a winding up should be stayed or terminated as summarised by Master Lee QC in Re Warbler Pty Ltd (1982) 6 ACLR 526 at 533 and to Austin J's summary of the relevant factors in Mercy & Sons Pty Ltd v Wanari Pty Ltd [2000] 35 ACSR 70; [2000] NSWSC 756 at [47]-[51]. I also referred to the identification of relevant factors by Austin J in Vero Workers Compensation (NSW) Ltd v Ferretti Pty Ltd (2006) 57 ACSR 103; [2006] NSWSC 292 at [17] as including the interests of the company's creditors, including future creditors; the interest of the liquidator, particularly with regard to costs; the interests of contributories and the interests of the public, including the public interest in matters of commercial morality; and the public interest that insolvent companies should be wound up. The relevant principles were in turn summarised by Brereton J in Re Glass Recycling Pty Ltd [2014] NSWSC 439, to which I have also had regard, including the importance of solvency in determining such an application, which Bergin CJ in Eq emphasised in Re SNL Group Pty Ltd (in liq) [2010] NSWSC 797.
Mr Allen, who appears for Mr Christian, in turn addressed the application in admirably efficient submissions, in which he put essentially three propositions. The first was that the Company's solvency was not established, where the effect of the loan agreement entered into between it and ACFT would be that an amount would be repayable to ACFT in some two years' time, when that loan agreement expired. I accept that Mr Fang has not established now, with certainty, how that loan will be repaid in two years' time. However, as Mr Golledge pointed out, that has the consequence that, in two years' time, either ACFT will need to extend the period of the loan, or enter a new loan agreement with the Company, or the Company will need to refinance with a third party. At that time, the possibilities include that it retains the substantial part of the funds borrowed from ACFT, because it has not expended them on the purchase of the development property, if the contract has been terminated; or that it retains the development property, undeveloped, or has acquired other property; or that it has developed the property and retains less of the funds, but potentially a more valuable property. These are, it seems to me, the exigencies of commercial life, and it is not necessary, to establish the Company's present solvency, that it be able to say how, precisely, in two years' time it will realise its then assets in order to repay a loan from a related company. I bear in mind, and Mr Allen did not contend to the contrary, that the expert evidence suggests that, at least until that loan falls due, the Company will remain solvent, and it seems likely, as a matter of probability, that Mr Fang, having taken such steps as this application has now required to terminate the winding up, would not likely let the Company again be wound up in two years' time.
Mr Allen in turn addresses the question of commercial morality, and submits, by reference to Mr Fang's affidavit, that he only now realises that the transfer of funds out of the Company at the time of the winding up application was wrong, and that he had a lack of understanding of the nature of a winding up application at the time he transferred funds out of the Company. Both of those propositions seem to me likely to be correct. However, I do not infer that these matters amount to any wider lack of commercial morality and, indeed, the plain pointlessness of the transaction, which as I noted above was only likely to generate a freezing order against Mr Fang's personal accounts, had it not been reversed as it was, demonstrates more a lack of knowledge on his part than a lack of commercial morality. I have noted above that there seems to me to be little realistic prospect that he would commit the same error twice.
Mr Allen submits that it is Mr Christian's interests that he should be entitled to prove the debts claimed against the Company in a liquidation, rather than in several Local Court proceedings, and that it should be a condition of the winding up that the moneys claimed in those Local Court proceedings be paid to Mr Christian. I do not accept that submission. It seems to me to have two obvious difficulties. The first is that it seeks to convert the default judgments, in the Local Court proceedings, which are binding until set aside, but are presently subject of an application to set them aside, into a judgment that is final for all purposes and bring about payment to Mr Christian without a determination of the merits of the application to set aside those judgments. I see no attraction in that course, particularly in circumstances where the application to set aside the judgments may have merit. It also seems to me that the proposition that Mr Christian would be better off by a proof of debt in a liquidation is incorrect, where any determination by the liquidator would no doubt also explore the merits of the default judgments, and where an appeal could be brought from the liquidator's determination in a proper case. It seems to me that, in the relevant circumstances, Mr Fang's proposal to pay the moneys into a controlled moneys account is the best that Mr Christian could hope for, in order to secure his position pending the determination by the Local Court of whether the default judgments should be set aside, and any subsequent determination of the proceedings on their merits.
Mr Gerard, who appears for the liquidator, indicated that the liquidator neither consented to nor opposed the substantive orders sought by Mr Fang. He indicated that the liquidator's position as to costs, a matter which is relevant as I have noted above, was adequately addressed by the orders that were proposed by Mr Fang.
For these reasons, I will indicate that, subject to the steps proposed by Mr Fang being completed prior to terminating the winding up, and subject to the funds necessary to deal with other matters (including payment of the liquidator's remuneration; payment of the undisputed amount to Mr Christian; payment of funds into a controlled moneys account in the name of both solicitors in respect of the Local Court proceedings; the securing of the amount of costs of Mr Christian as the petitioning creditor, pending an assessment; and payment to the Office of State Revenue for the amount of stamp duty) being held by the liquidator so that they could be paid out by the liquidator as appropriate, I would make orders to terminate the winding up.
At this point I make orders 1 and 2 in the form proposed by Mr Fang staying the winding up for a period of 30 minutes commencing at 3.35pm on 23 September 2021. It is proposed that, in the period of the stay, certain documents necessary to place the Company in a position where the winding up may be terminated will be executed. Once that has occurred I will deal with the balance of the application to terminate the winding up, consistent with this judgment.
[4]
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Decision last updated: 14 October 2021