Nikolaidis v Camden Retail Pty Ltd

CATCHWORDS : CORPORATIONS - winding up - interlocutory application for appointment of provisional liquidator - where directors are agreed in principle on best course for company - where differences of opinion on matters of detail only - held intervention by court not warranted

LEGISLATION CITED : Corporations Act 2001 (Cth), ss 459P(2), 459P(3), 461, 462(4)

Constantinidis v JGL Trading Pty Ltd (1995) 17 ACSR 625 Lubavitch Mazal Pty Ltd v Yeshiva Properties No 1 Pty Ltd [2003] NSWSC 535; (2003) 47 ACSR 197 CASES CITED : Natural Extracts Pty Ltd v Stotter (unreported, Fed Ct of Aust, Hely J, NG 3178 of 1998, 18 December 1998) Re Brylyn No 2 Pty Ltd (1987) 12 ACLR 697 Triulco v Chase Property Investments Pty Ltd [2003] NSWSC 861

Brigitte Genevieve Nikolaidis - First Plaintiff PARTIES : Leon Nikolaidis - Second Plaintiff Camden Retail Pty Ltd - First Defendant Michael Angel Sanchez - Second Defendant

COUNSEL : Mr J T Svehla - Plaintiffs Mr D Klineberg - Second Defendant

SOLICITORS : McLachlan Chilton - Plaintiffs Levitt Robinson - Second Defendant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

2010/254311 BRIGITTE GENEVIEVE NIKOLAIDIS & ANOR v CAMDEN RETAIL PTY LTD & ANOR JUDGMENT 1 Camden Retail Pty Ltd ("Camden") has two shareholders, Michael Sanchez and Leon Nikolaidis. They have equal shareholdings. There are also two directors: Michael Sanchez and Brigitte Nikolaidis, the wife of Leon Nikolaidis. Mr Nikolaidis was formerly a director but vacated his office in consequence of his conviction of an offence under s 300(1) of the Crimes Act 1900. His wife took his place. 2 Mr Nikolaidis and Mrs Nikolaidis have filed an originating process seeking an order that Camden be wound up and an order that a liquidator be appointed. They rely on various grounds, principally the insolvency ground and the just and equitable ground.

3 Included in the originating process is an application for interlocutory relief by way of an order for the appointment of a liquidator of Camden provisionally. I heard that application on 26 August 2010. These reasons relate to the interlocutory application. 4 Pendency of a winding up application is, of course, a condition precedent to the court's ability to appoint a provisional liquidator. Mr Nikolaidis and Mrs Nikolaidis each need leave under s 459P(2) of the Corporations Act 2001 (Cth) in order to proceed with an application for winding up in insolvency. As I have said, he is a member and she is a director. Each is also a guarantor of debts of Camden and therefore a contingent or prospective creditor. Each such status - member, director and contingent or prospective creditor - attracts the requirement for leave under s 459P(2) and, under s 459P(3), the court can only grant leave if satisfied that there is a prima facie case that the company is insolvent. 5 Status as a contingent or prospective creditor also attracts a need for leave where a winding up application is made under s 461. This application is made under that section as regards the grounds other than insolvency. The requirement for leave comes from s 462(4). 6 I do not pause now to consider these threshold issues at any great length. In the first place, the need for leave applies only in relation to the hearing of the winding up application itself. Second and at a more practical level, Mr Nikolaidis's status as a contributory enables him to proceed to a hearing of his winding up application under s 461 without any preliminary grant of leave. That is sufficient to satisfy the requirement for pendency of a winding up application as a preliminary to entertaining an application for the appointment of a provisional liquidator. 7 I am also influenced by the fact that no contrary submission was made by counsel for Mr Sanchez who, although named as a second defendant (the first Camden itself), is the effective respondent to the present application. 8 Camden owns two adjoining parcels of land at Camden, Lot 1 and Lot 2. It has an option to purchase Lot 3 which also adjoins. The three parcels are suitable for development for retail purposes. I shall refer to them as "the Argyle Street site".

9 Mr Sanchez and Mr Nikolaidis entered into a joint venture agreement in June 2006. They agreed to develop the Argyle Street site or, at least, to obtain development approval, and ultimately to sell. The company was formed pursuant to the agreement. Initial contributions to the venture were in the form of services on the part of Mr Sanchez and $425,000 cash by Mr Nikolaidis. It was agreed that funding beyond the initial $425,000 would be contributed by each side equally and that each would provide security for joint venture borrowings. 10 In fact, most of the funding has been debt funding obtained by Camden from the National Australia Bank. The individuals gave guarantees and supporting securities. At this stage, however, the only security NAB holds (apart from security over the Argyle Street site itself) is from Mr Nikolaidis. Security taken originally over assets beneficially owned by Mr Sanchez was released by NAB (so far as Camden's debt was concerned), apparently because it stood as security also for separate indebtedness of the Sanchez interests and was to be realised by NAB in that connection. 11 At present, therefore, only properties owned by Mr Nikolaidis stand as third party security for the bank debt of Camden. 12 The NAB facility is due for payment in full on 30 September 2010. It has been extended on several occasions, at a cost (in fees) on each occasion. The bank has stated that there will be no further extension. If default occurs on 30 September 2010, a higher interest rate of 20.68% per annum will come to apply. 13 Camden does not have the money needed to clear the bank debt. Nor does it have the money needed to complete the process of obtaining development approval. At this point, a necessary rezoning is said to have been approved by the Minister and to be awaiting gazettal, but that is, in a sense, only an early stage in a process that involves a council master plan and a subsequent application to the local authority for development consent. 14 It is recognised on both sides that the Argyle Street site (including the option to purchase Lot 3) must be sold. This has been evident and accepted for some time and, in or about March 2010, Camden retained Jones Lang La Salle ("JLL") with a view to marketing the Argyle Street site. The approach taken was to identify and seek out privately parties who might be interested in a development site of the particular kind. JLL identified a dozen or more such parties. Approaches were made to a number of them. One showed interest and in fact submitted a proposal on the basis that the purchaser would assume 100% of the planning risk but require a due diligence period of 60 days. After further negotiation, this party increased the price it had originally indicated a willingness to pay. 15 The commissioning of JLL by Camden occurred as a result of a decision of Mrs Nikolaidis and Mr Sanchez as directors of Camden. They agreed on the appointment and on the terms of engagement. Both signed the agency agreement. They did not, however, have a common view about the offer that was later received from the interested party. Mrs Nikolaidis thought it should be accepted. Mr Sanchez did not. He thought it might be possible to get a better price from someone else. In addition, he did not like the idea of having Camden's hands tied for 60 days while the interested party conducted due diligence, after which that party might simply walk away. 16 In the period beginning on about 14 July 2010, Mrs Nikolaidis made particular efforts to persuade Mr Sanchez to agree to the conditional sale to the interested party. She asked him to join in signing a heads of agreement document accepting the offer. He declined. Conversation and correspondence became heated. Mr Sanchez made it clear that he was prepared to sell out of the venture to the Nikolaidis interests for a price he named. That was not acceptable to them. On 18 or 19 July 2010, Mr Sanchez told JLL that the heads of agreement were not to be released unless the interested party agreed to an increased price which he nominated. 17 On 21 July 2010, Mrs Nikolaidis approached the court seeking an order compelling Mr Sanchez to execute the heads of agreement. The application was made in long-running and still pending proceedings the centrepiece of which is allegations of Mr Sanchez and Mr Nikolaidis against one another of misrepresentation and deceptive conduct in connection with the establishment of the joint venture. Mrs Nikolaidis's application of 21 July 2010 was dismissed by Ball J on 22 July 2010. 18 Ultimately, therefore, the heads of agreement were not signed by Camden and the interested party's offer expired. That party made it clear to JLL, however, that its interest in the site was ongoing. 19 Correspondence between Mrs Nikolaidis and Mr Sanchez ensued. Mr Nikolaidis also engaged in correspondence with Mr Sanchez. There were allegations of breach of the joint venture agreement. There were recriminations and accusations on both sides. 20 On 23 August 2010, Mr Sanchez's solicitors wrote to Mrs Nikolaidis's solicitors. They conveyed, on Mr Sanchez's behalf (and with a view to avoiding the hearing of the application with which I am now dealing and "to maximise the potential sale price" of the Argyle Street site), an offer as follows: "1. That the property situate at Lots 1 and 2 Argyle Street, Camden and the option to purchase Lot 3 Argyle Street, Camden be offered for sale by public auction, to be held on or before 30 September 2010, following a four week targeted marketing campaign. 2. That Messrs Jones Lang Le Salle be appointed exclusive agents for the purposes of the sale. 3. That the parties appoint a solicitor to be selected from the Law Society conveyancing panel to act on the sale. 4. That the reserve price be set at the current total of the NAB debt facility secured against the Argyle Street property. 5. In the event that the reserve price is not met at auction, the directors of Camden Retail Pty limited agree to use their best endeavours to negotiate a sale of the Argyle Street property in good faith to the highest bidder. 6. In the event that contracts for sale of the Argyle Street property have not exchanged within three days following the public auction, that a liquidator be appointed to Camden Retail Pty Ltd. 7. In the event that the Argyle Street property is sold as a result of the public auction, the parties do all acts and things necessary to extend the NAB debt facility on an interest only basis pending settlement of the sale and to pay such interest as may accrue in that period from accumulated rental proceeds. 8. In the event that the Argyle Street property is sold as a result of the public auction, following settlement of that sale, the parties agree to the appointment of a liquidator for the purpose of winding up Camden Retail Pty Limited." 21 Later on the same day, Mr Sanchez accepted a recommendation of JLL that a process of "expressions of interest" (or EOI) should be preferred to public auction. 22 This modification went some way (albeit not a long way, by any means) to meeting Mrs Nikolaidis's objections to Mr Sanchez's proposal as a whole. In her affidavit of 26 August 2010, she said that she did not agree with public auction as an appropriate sale mechanism (nor did she say she agreed with EOI). Mrs Nikolaidis's second stated objection is to a reserve equal to the NAB debt. She says that this is unrealistic, given that the earlier offer - which came from the process of seeking out compatible parties - was less. She also points, in that connection, to the incomplete process directed towards development approval and the money needed to complete that, coupled with other uncertainties and Camden's financial position. Her view is that the sale price should be lower. 23 Mrs Nikolaidis also disagrees with item 7 of Mr Sanchez's proposal, saying that Camden will not be able to meet its liability to NAB. 24 In short, Mrs Nikolaidis's position is that Camden should seek to treat further with the party which submitted the earlier heads of agreement - and thereby seek to revive and accept that proposal. 25 The evidence to which I have referred concerning disagreement about the selling process is put forward in support of the appointment of a provisional liquidator. Before addressing that, however, I should deal with the anterior question whether there are good prospects that a winding up order will be obtained: Natural Extracts Pty Ltd v Stotter (unreported, Fed Ct of Aust, Hely J, NG 3178 of 1998, 18 December 1998); Triulco v Chase Property Investments Pty Ltd [2003] NSWSC 861 at [23] - [26]; Lubavitch Mazal Pty Ltd v Yeshiva Properties No 1 Pty Ltd [2003] NSWSC 535; (2003) 47 ACSR 197 at [106]. 26 The evidence going to the insolvency ground need not be examined in any detail. Camden's income from rent is less than its borrowing and other expenses on an ongoing basis. It has survived to this point because it has not spent all the NAB loan proceeds; however, the buffer is running out, added to which the shareholders do not appear willing to put in more capital. While it probably cannot be said that Camden is insolvent today, it is clearly approaching insolvency. 27 As to the just and equitable ground, it is clear that there has been a serious falling out between the two shareholders. They have been locked in litigation since 2008, with each accusing the other of having misled him. That litigation was in a semi-dormant state while Mr Nikolaidis served a prison sentence but is now active again following his release on parole in December 2009. 28 The plaintiffs also point to other evidence suggestive of serious dislocation. They say that Mr Sanchez's separate relationship with NAB and the release of his property held by NAB as security for the Camden debt entails a serious conflict of interest. There is reference to Mr Sanchez's having allowed his son to hold himself out as a director of Camden. There is also reference to Mr Sanchez's approaches to outsiders regarding the Argyle Street site without the authority of Camden's other director. 29 I need not go further into the allegations underpinning the winding up applications on the insolvency ground and the just and equitable ground. There are good prospects that one or both of these grounds will in due course be made out. 30 The preliminary question should therefore be answered favourably to the plaintiffs. 31 I move therefore to the next question which is whether there is a clearly demonstrated need to install a provisional liquidator.

32 That question was traditionally approached on the footing that, since the application is an interlocutory application in winding up proceedings, the main question is whether it is necessary to appoint a provisional liquidator to preserve the status quo pending the final hearing. More recently, I think, the question has become a more general one concerning the need for stable governance until the final hearing. There must be, in general terms, "some good reason" for the appointment of a provisional liquidator, for example "urgency, or unusual circumstances such as danger to assets, lack of control, deadlock, or some public interest element for his appointment": Re Brylyn No 2 Pty Ltd (1987) 12 ACLR 697 at 707. 33 Mr Sanchez, through his counsel, has offered an undertaking to the court. The undertaking is as follows: "On the basis that a provisional liquidator is not appointed to Camden Retail Pty Limited before 30 September 2010, I undertake to the Court that I agree to comply with the following. 1. That the property situated at Lots 1 and 2 Argyle Street, Camden, NSW, and the option to purchase Lot 3 Argyle Street, Camden, NSW ('the Argyle Street property'), be marketed for tender by Expressions of Interest, in accordance with the email of Luke Harris of Jones Lang Le Salle dated 23 August 2010, with any such tender to have been submitted on or by 4.00pm on Friday, 23 September 2010. 2. That Messrs Jones Lang Le Salle be appointed exclusive agents for the purposes of the sale. 3. That the directors appoint a solicitor as nominated by the President of the Law Society to act on the sale, if the directors have not agreed on such solicitor themselves by 4.00pm on 2 September 2010. 4. That the reserve price be set at XXXX, that being the current total of the NAB debt facility secured against the Argyle Street property. 5. In the event that no tender is submitted which meets the reserve price, the directors of Camden Retail Pty Limited agree to use their best endeavours to negotiate a sale of the Argyle Street property in good faith to the highest tenderer by 4.00pm on 28 September 2010. 6. In the event that contracts for the sale of the Argyle Street property have not been exchanged by 4.00pm on 29 September 2010, a liquidator be appointed by the Court to Camden Retail Pty Limited. 7. In the event that contracts for sale of the Argyle Street property have been exchanged by 4.00pm on 29 September 2010, a liquidator be appointed by the Court to Camden Retail Pty Limited. 8. In the event that a contract for sale of the Argyle Street property is exchanged by 4.00pm on 29 September 2010, the parties shall do all acts and things necessary to seek to extend the NAB debt facility on an interest only basis pending the appointment of a liquidator by the Court to Camden Retail Pty Limited."

(An amount equal to the NAB principal debt appears in paragraph 4 of the undertaking). 34 I must now refer to the circumstances in which this undertaking was offered to the court. There was reference during the hearing to the possibility that an undertaking might be offered along the lines of Mr Sanchez's offer of 23 August 2010. Mr Sanchez was not present. There had been produced at the start of the hearing a medical certificate stating that he was not fit to attend. The parties agreed that the hearing should proceed on the basis of affidavits without any deponent being cross-examined. Mr Sanchez's absence (and the fact that an attempt to contact him by telephone was unsuccessful) meant that his counsel was unable to obtain instructions regarding any undertaking. At the conclusion of the hearing the following interchange occurred: "HIS HONOUR: I think I will just say this; if the second defendant, who is presently indisposed and unavailable, wishes to offer any undertaking to the Court, it should be reduced to writing and forwarded to my Associate, let's say, by 4 pm tomorrow. It should also be forwarded to Mr Svehla.

I don't know, Mr Svehla, whether that will give rise to any need for you to say anything.

SVEHLA: I appreciate that. I suppose I should indicate to your Honour that the formal affidavit evidence in response to the offer is in Mrs Nikolaidis' affidavit at Tab 10 of volume 1, her affidavit of today, at paragraphs 14 and 20. Then Mr Nikolaidis's formal response is in his affidavit of yesterday, Tab 12, paragraphs 11 to 18. Does your Honour have any issues on standing, or things of that nature, that are of any relevance?

HIS HONOUR: I don't think so. I am going to reserve judgment. I may receive something by 4 o'clock tomorrow in accordance with what has just been said, I may not, and unless you hear to the contrary, I will be giving judgment at 3.30 on Tuesday next, 31 August, 2010." 35 Mr Sanchez's undertaking was communicated in writing in accordance with the process thus laid down. It was received by my Associate on 27 August 2010, before 4pm, with a brief covering note only. Thereafter, however, counsel for the plaintiffs forwarded further submissions of nine pages and sought to tender no fewer than 39 pages of additional documentation. The further submissions and documents were received early yesterday morning, 30 August 2010. The submissions and documents were directed to three matters: first, the question whether the EOI timetable in Mr Sanchez's undertaking was realistically achievable; second, the nature and circumstances of Mr Sanchez's separate relationship with NAB and its perceived impact on NAB's attitude to the Camden facility; and, third, the respective merits (particularly from a GST viewpoint) of a sale of the Argyle Street site by a provisional liquidator or receiver rather than by Camden under the auspices of its directors. 36 By letter sent to my Associate yesterday afternoon, counsel for Mr Sanchez objected to the additional tender. The point was made that, except for one document, the additional material sought to be tendered had nothing to do with Mr Sanchez's undertaking (the only aspect left outstanding at the conclusion of the hearing) and should have been tendered by the plaintiffs in chief. That objection is well taken. The whole of the additional tendered material, with the exception of the document at pages U1 to U3, is rejected on that basis. The plaintiffs cannot tender it except after re-opening. By letter emailed at 5.42pm yesterday, the plaintiffs sought leave to re-open to tender the additional documents. Given the way in which the plaintiffs conducted their case, the very limited aspect of the case left to be dealt with in accordance with the direction set out at paragraph [34] above and the statement made by counsel for the plaintiffs when the direction was made, I do not regard re-opening as appropriate. 37 As to the document at pages U1 to U3 of the 39 pages, counsel for Mr Sanchez objects on a different ground. He accepts that it is relevant to the proffered undertaking. It is an email from JLL to Mr Nikolaidis (not Mrs Nikolaidis), copied to Mr Sanchez, dated 28 August 2010 - two days after the hearing concluded - setting out "an example of a timing schedule for a [sic] Expressions of Interest or Tender Campaign as discussed". 38 The objection to this document is that it is not clear on what basis JLL prepared the "timing schedule" and that Mr Sanchez has not had an opportunity to respond to it. This objection is well taken. It seems obvious that Mr Nikolaidis, a shareholder and non-director of Camden, asked JLL to prepare an EOI timetable - hence the words "as discussed" in the JLL email to him. But one cannot know what was "discussed" or, in particular, the terms of the request Mr Nikolaidis actually made of JLL. In the abstract, JLL could no doubt prepare an EOI timetable to fit virtually any timescale a client wished to achieve and according to any summary description a client might specify: "fast-track", "leisurely", "thorough penetration", "prompt without sacrificing", "to achieve exchange not later than [date]", "to achieve exchange not earlier than [date]", etc. In the absence of evidence of the instruction or request to which JLL was working in preparing the "timing schedule" the plaintiffs seek to tender (and in the absence of any opportunity for Mr Sanchez to explore that matter), the probative value of that document is, particularly in the circumstances in which and at the time at which it was tendered, substantially outweighed by the danger that it might be prejudicial to Mr Sanchez. The document at pages U1 to U3 is therefore rejected. 39 Given the direction of the court set out at paragraph [34] above, the possibility of further submissions by the plaintiffs was confined to submissions relating to any undertaking that Mr Sanchez might offer within the timescale allowed by that direction. The submissions in fact received on the morning of 30 August 2010 went substantially beyond that and are, as to their excess, for that reason rejected. In addition, the rejection of the U1 to U3 document means that there is no evidentiary basis for the remainder of the additional submissions, that is, the part that does relate to Mr Sanchez's undertaking. 40 The result is that the decision on the plaintiffs' application for the appointment of a provisional liquidator falls to be decided on the evidence led at the hearing, supplemented by Mr Sanchez's subsequently tendered undertaking, and by reference to the submissions made at the hearing. 41 The evidence shows that the directors of Camden are agreed on a number of fundamental matters. They agree that the only way of reducing the NAB debt (and attempting to clear it) is to sell the Argyle Street site. They agree that the property should be sold promptly. They agree that the property should not be sacrificed and that a sale should be made at the best price reasonably obtainable, given the time constraints. They agree that Camden cannot survive long financially if, as is clearly indicated, NAB does not extend the facility beyond 30 September 2010. They agree that Camden should in due course be wound up. 42 What do they not agree on? They do not agree the method of sale, with Mrs Nikolaidis preferring an attempt at revival of the earlier offer that has lapsed and Mr Sanchez preferring an open market approach based on expressions of interest. They do not agree on price: Mrs Nikolaidis is willing to accept the price offered by the previous offeror whose interest she hopes to rekindle; while Mr Sanchez wants to try for enough to clear the bank debt and, if no expression of interest emerges at that level, to fall back on negotiation with the highest tenderer. 43 The differences between the directors are by no means great. There is a large core of mutual aspiration clearly directed to the best interests of Camden. There are differences on what are, in the final analysis, matters of detail. If the EOI process is undertaken (and even if it is not) there must be a good chance that the previous offeror will return to the negotiating table. Someone else might emerge. In the end, the market will indicate the proper price. 44 This is not a case of jeopardy calling for intervention by the court by way of the appointment of a provisional liquidator. It is not a case of severe dislocation of decision-making. Rather, the court is asked to take the drastic and intrusive step of appointing a provisional liquidator (and thereby to order what was described by Meagher JA, in Constantinidis v JGL Trading Pty Ltd (1995) 17 ACSR 625, as a judicial remedy of "a wholly extraordinary nature") in circumstances where the directors are agreed in principle, although not in detail, as to the best and most prudent way forward for their company. 45 The court will do the creditors of this company a favour by vacating the field and turning back on to the directors pressure to find the small plot of common ground that eludes them at this point. The extent of their agreement is such that there should be confidence that, under the guidance of JLL (whose advice both are quite willing to receive) and with the distraction of these proceedings put off until a final hearing, the directors can resolve their remaining differences and get on with the urgent job of effecting the most advantageous sale of the Argyle Street site that can be negotiated in the particular circumstances. Refusal by the court to intervene will sharpen the directors' responsibility to proceed, failing which, in a month's time, it can confidently be expected that NAB will resort to its security and take matters out of their hands. In that period of a month, there will not be, on the evidence, any pressing matter concerning the welfare of Camden other than the question of sale of the land. 46 The appropriate exercise of the court's discretion in the circumstances of this case is to decline to accept Mr Sanchez's undertaking but to note that it has been offered (so that Mr Sanchez's willingness in terms of the undertaking is acknowledged but not made binding on him) and also to decline to appoint a provisional liquidator. In that way, the directors will be free to implement any action they decide is appropriate to bring about a prompt resolution of the narrow difference that now divides them on the question of sale of the Argyle Street site. 47 The court therefore: (a) notes but does not accept the undertaking tendered to the court in written form by the second defendant by his counsel on 27 August 2010 (with the result that the second defendant is under no obligation to honour or perform that undertaking); and (b) dismisses the plaintiffs' interlocutory application for an order appointing a liquidator of the first defendant provisionally. 48 It will be necessary to deal with costs in due course. The question of the costs of the interlocutory application is in the meantime reserved. **********

14/09/2010 - Words to be omitted - Paragraph(s) Para 13: "for Local Government" omitted after "Minister"

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