Modena Imports Pty Ltd (in liq), In the matter of; Leveraged Capital Pty Ltd (R&M app) (in liq) v Modena Imports Pty Ltd

Modena Imports Pty Ltd (in liq), In the matter of; Leveraged Capital Pty Ltd (R&M app) (in liq) v Modena Imports Pty Ltd - [2010] NSWSC 739 - NSWSC 2010 case summary — Zoe

[17]

ASIC further found that Mr Byrnes' conduct leading to the liquidation of above named four companies, and his conduct after the companies were placed into liquidation, was very similar to the management style and conduct which resulted in his 1998 banning. ASIC also found that in 1999, 2000 and 2001, Mr Byrnes managed companies while disqualified." 6 The evidence in support of the application was scant. I required much more evidence to explain the circumstances surrounding the liquidation and the proposed DOCA. When more evidence was filed, my concerns deepened. I stood the proceedings over for a short time and requested the Registrar to notify ASIC of my concerns. ASIC then appeared by Mr D.L. Cook of Counsel who was granted leave to appear as amicus curiae. 7 As a result of ASIC's intervention and the cross examination of a director of Modena, Mr Peter Trad, circumstances were revealed concerning the company's history and the involvement of Mr Byrnes in the DOCA which would not otherwise have come to light because the application had no active contradictor. What has been revealed has led me to refuse the application, for reasons to which I will come in a moment. 8 The particular circumstances of this case throw into sharp relief the role of the Court in an application of this kind. It is not the traditional role of umpire in a contest between adversaries, where the Court takes no part in the contest other than to ensure a fair trial and, at the end, to give a decision in favour of one of the contestants. On the contrary, in applications such as this, many of which have no contradictor, the Court is vigilant to protect the public interest. 9 Protecting the public interest is not confined to ensuring that a company, if released from liquidation, will be able to trade solvently. Public interest will also include ensuring that the creditors who are to be bound by a DOCA are treated reasonably and fairly. Further, protecting the public interest includes upholding commercial morality: the Court should not, by granting such an application, ignore and thus be seen to condone, conduct by the company's officers which has breached standards of behaviour required by the law. Those who have already offended against those standards should not lightly be given the opportunity of doing so again. 10 A judge may feel disquiet about a transaction for which the Court's sanction or approval is required, such as termination of a liquidation or approval of an arrangement or reconstruction under Pt 5.1 Corporations Act. The disquiet may arise either from the terms of the transaction or because of the reputations of those involved. In such a case, the judge is entitled to ask for assistance from ASIC or from some other body or person having a legitimate interest in the proper scrutiny of the proposal: see generally Corporations and Markets Advisory Committee Report "Members Schemes of Arrangement" December 2009, paras 2.3.2 and 6.4.2. Such a course of action has been followed in cases such as Re Stork ICM Australia Pty Ltd [2006] FCA 1849 per Lindgren J at [11]-[12]. For the reasons I have given, I took that course of action in this case. Who is the applicant

[41]

I believe that the proposed DOCA presents the best option for creditors." 15 It appeared from the Report that the DOCA would provide $50,000 in part payment of Mr Hall's fees and disbursements and nothing at all for creditors, whose claims were said to total $3M. The Report said that Mr Hall did not necessarily accept all of those claims. 16 Reading Mr Hall's Report as a whole, one gets the strong impression that he was unable to find out much of real substance about the company's operation, its assets and liabilities, and that he recommended the DOCA because nothing better was on offer. 17 Minutes of the meetings of creditors held on 23 March 2010 show that present were Mr Hall and two members of his staff, Mr Peter Trad as director of Modena and Mr James Byrnes as a creditor and as proxy for four other creditors, including ACRS. The resolution approving the DOCA was passed unanimously. 18 I was concerned at the lack of any meaningful information about Modena, particularly as to why claims apparently totalling $3M would be extinguished by the DOCA for no dividend at all. I was further concerned at the obvious close involvement of Mr Byrnes in promoting the DOCA and, possibly, in the management of Modena if its liquidation should be terminated. I expressed these concerns to Mr Beazley, who sought an adjournment in order to provide further information. 19 The application was listed before me on 25 May 2010. Mr Beazley filed in Court a further affidavit of Mr Trad. That affidavit gave rise to even deeper concerns. I stood the application over to 22 June 2010, informing Mr Beazley that I would request the Registrar to write to ASIC, drawing this application to its attention and inviting its participation. 20 On 22 June 2010, Mr D.L. Cook of Counsel sought and was given leave to appear for ASIC as amicus curiae. ASIC did not provide a report to the Court under s 482(2A)(a)(iii), but Mr Cook said that ASIC's purposes would be served by his cross examination of Mr Peter Trad. 21 By the time Mr Cook had concluded his cross examination of Mr Trad I was left in no doubt that it would be contrary to public interest and contrary to commercial morality to permit Modena to resume trading by terminating its liquidation. The company's background

[43]

26 Mr Trad endeavoured to explain how certain persons claiming substantial debts were shown as creditors of Modena. He said in his affidavit of 24 May 2010 that Modena had obtained approval to import certain expensive cars, which were owned by members of his family and friends. The cars were then consigned to a company called Galleria Veloce for sale. Galleria Veloce received a commission on the sale. The principal of Galleria Veloce was Mr Papas. 27 Mr Trad said in his affidavit Mr Papas later suggested that Galleria Veloce be registered as the owner of the cars and that the company would hold those cars on trust for the relevant owners. Mr Trad said that, unknown to him, Galleria Veloce had given a fixed and floating charge over its assets to a lender. The lender subsequently seized and sold the cars, causing substantial loss to the beneficial owners. 28 Mr Trad's affidavit was extremely vague about this transaction. In cross examination, Mr Trad said that he did not know much about it because it was arranged by his brother, Carl. When he professed almost total ignorance of the transaction, he was asked about the details of the transaction set out in his affidavit. He said that he "must have" given those instructions to his solicitors and must have recounted what Carl had told him about the agreement with Mr Papas. 29 Mr Trad said that he agreed to Mr Papas' request, recounted to him by his brother Carl, that cars owned by members of his family and his friends be registered in the name of Galleria Veloce upon a trust. He said that he did not know why Mr Papas wanted this arrangement and he did not ask. He said that he did not even suspect that Mr Papas would claim that the cars were stock of Galleria Veloce in order to obtain money on a floor plan financing scheme. 30 I do not accept Mr Trad's evidence. By the time of the transaction with Mr Papas, Mr Trad had been in the motor vehicle industry for some time. He did not strike me as naïve - indeed, Mr Trad appears highly knowledgeable about the car industry. There was no apparent benefit to the owners of the cars in having them registered in the name of Galleria Veloce rather than simply consigning them to that company for sale. Indeed, there was an obvious risk in doing so. It is grossly improbable, in my opinion, that Mr Trad did not know that the reason for this scheme was to enable Galleria Veloce to include the cars in its floor plan financing, falsely representing to the financier that they were beneficially owned by Galleria Veloce. I conclude that Mr Trad was willing to be a party, in whatever way was necessary, to such a dishonest scheme. 31 Mr Trad said that when the scheme with Mr Papas resulted in a loss to the family members and friends who were the true owners of the cars, he decided that they would be shown as creditors of Modena, although the losses had occurred before Mr Trad and his brother had acquired control of Modena and Modena itself had played no part in the transactions with Galleria Veloce. Mr Trad said that he caused Modena to assume this liability out of considerations of commercial morality, as he wished by some means or other to repay his family and friends for the losses they had suffered at the hands of Mr Papas. 32 Mr Trad did not seem to appreciate that there was no proper basis upon which Modena could gratuitously assume liability for these losses and that it was contrary to Modena's interests - or at least the interests of its trade creditors - for it to accept such liability. Mr Trad's position was that if family and friends had lost money through the activities of Carl or his brothers, then they should be repaid out of the profits of Modena. It is clear that Mr Trad has no notion that the interests of Modena as a corporate entity are separate from the interest of his brothers and friends. Prima facie, at least, his actions were in breach of his duties as a director under s 182(1) Corporations Act. Ability to resume trading

[63]

50 There are several other concerns which Mr Cook raised in the course of cross examining Mr Trad and to which he referred in his final submissions. However, I have already said enough to show why this application fails by a very wide margin to make out a positive case for the exercise of the Court's discretion in favour of terminating Modena's liquidation. 51 In short, Mr Trad has failed to persuade me that the true nature and extent of Modena's creditors have been fully disclosed. He has failed to show how the company can trade solvently. He has failed to provide any adequate explanation for the failure by the company's directors to ensure that the company's financial records were properly maintained. He has failed to explain how Modena could lawfully and properly assume liability for debts which had nothing to do with its own trading activities. He has failed to explain why those debts should now be extinguished by the DOCA, for no consideration or dividend. 52 Finally, I am satisfied that it would be contrary to the interests of creditors and an affront to commercial morality for Modena's liquidation to be terminated and a DOCA given effect in accordance with a scheme devised by Mr Byrnes whereby he is to receive the benefit of assets of Modena to the value of $500,000, if not more, while Mr Hall is out of pocket for his remuneration and expenses, and the creditors of Modena receive nothing. If Modena has assets worth $500,000, they should be realised for the benefit of the company's creditors and to enable Mr Hall to investigate fully the company's affairs. I place no weight on the fact that those creditors who attended the creditors' meeting on 23 March 2010 voted in favour of the DOCA. Those creditors comprised Mr Byrnes himself and four others for whom he was proxy, including ACRS. 53 I conclude that it would be contrary to the public interest to enable Modena to be released into the marketplace to conduct its affairs under the control of Mr Trad and, probably, under the control of his brother Carl, both of whom are prepared to engage in dishonest practices such as the transaction with Mr Papas and the falsifying of evidence of sale of Modena's assets to Mr Byrnes. 54 The application is dismissed. I will hear the parties as to any costs order which may be sought by ASIC and Mr Hall.

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At a glance

Court

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Before

Source

Judgment (65 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (3)