Onefone Australia Pty Limited v One.Tel Limited

• 10 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

5291/03 ONEFONE AUSTRALIA PTY LIMITED & ORS V ONE.TEL LIMITED (IN LIQUIDATION) AND ORS JUDGMENT 1 This is an application for the appointment of a special liquidator in respect of a particular aspect of the winding up of One.Tel Limited. 2 The plaintiffs, DCA Resources Australia Pty Limited and Pacific Finance Group Pty Limited are creditors in the winding up of One Tel Limited (In Liquidation) (One.Tel). Messrs Sherman and Walker, the second and third defendants are the liquidators of One.Tel having been so appointed on 24 July 2001 at a meeting of creditors. Prior to that they were administrators appointed by resolution of the directors on 25 May 2001. 3 Prior to the appointment of the administrators, One.Tel had determined to raise additional capital through what has been referred to as a renounceable rights issue under which capital of $132 million was to be sought from shareholders through the issue of new shares. It was proposed that companies associated with Publishing and Broadcasting Limited and News Limited would underwrite the issue. For the purposes of this claim I proceed on the basis that there was a binding underwriting agreement. That is not a finding of fact nor a finding as to its terms express or implied. Any such underwriting agreement was obviously subject to the rights issue proceeding in accordance with a prospectus which would be required to be lodged in relation to the issue. The company announced the rights issue to the Australian Stock Exchange and through the media on 17 May 2001. 4 A meeting of directors of the company was held on 28 May 2001. Mr Sherman was present at that meeting. He had been requested to attend by the chairman, Mr Yates who told the other persons present that Mr Sherman had been invited to discuss "receivership issues" and to assist Mr Paul Howell-Davies who was an independent director. In other words he was not there just as a casual bystander. At that meeting the main discussion was the financial position and solvency of One.Tel. Mr Sherman gave some limited advice about this. It was agreed that further work as to the financial position would be done by Messrs Ernst and Young within the next twenty-four hours and another meeting would be held the next day. 5 In accordance with this arrangement a further meeting of directors was held on 29 May 2001. As result of further information on creditors and likely funding requirements in the near future, it was apparently accepted by the directors that a rights issue raising $132 million would not be sufficient for the company and on one basis would not enable it to pay its existing commitments. There was discussion and advice by a solicitor as to the alternatives of administration and provisional liquidation. 6 Mr Yates then said that the question of the rights issue should be dealt with before any decision to appoint an administrator. A resolution was put that the issue be cancelled. It was carried. Messrs Packer, Murdoch, Marcourt and Yates abstained, they being associated with the proposed underwriting companies. Mr Sherman then explained the process of administration and provided his consent to act if appointed. A resolution was passed appointing him and Mr Walker joint administrators. 7 On 24 June 2002 the solicitors for the liquidators wrote to the solicitors for Mr Yates and Mr Packer referring to a forthcoming examination of those men by the liquidators, stating that the principal areas of investigation with respect to Messrs Yates and Packer were (a) the circumstances in which proposed rights issue did not proceed; (b) the circumstances in which the underwriting or proposed underwriting announced to the Stock Exchange on 17 May 2001, did not proceed; and (c) the circumstances in which a proposed bridge funding agreement did not proceed. The letters went on to state that at the conclusion of the investigation of those areas, the liquidators would decide whether proceedings should be commenced against those persons seeking to recover damages or compensation by reason of breach of duties as a director. It is not necessary to go into the details of the robust responses produced by those letters other than to say that the responses from the solicitors for each of Mr Packer and Mr Yates were not unalike, each suggesting that there was no possible basis for any proceedings against their client and each suggesting that if proceedings commenced, Mr Sherman would be both a party and a witness as he was present at the meetings and gave advice at the meetings at which the resolution was passed to cancel the rights issue and each stating that proceedings against their client would result in a claim against Mr Sherman. The question of a conflict of interest on the part of the liquidators, particularly Mr Sherman was clearly raised. As neither Mr Packer nor Mr Yates has sought to have the present liquidators removed it might perhaps be thought their purpose in raising the conflict question was to protect themselves from action rather than the good of the company and its general creditors. 8 At the annual general meeting of creditors called for 21 August 2003 and adjourned to 4 September 2003, a resolution was put as follows: That the Liquidators of One.Tel Limited approach the Court for the appointment of a Special Purpose Liquidator to investigate the cancellation of the Renounceable Rights Issue by the directors of One.Tel Limited and to make recommendations to the creditors as to whether any rights of action exist and whether any action should be commenced against any party(s) in relation to that rights issue or the cancellation of it, or such other orders as the Court may think appropriate.

This resolution was carried by creditors as to number but not as to value. The chairman did not use the general proxies in his favour, nor did he vote his casting vote. He declared the resolution lost. 9 These proceedings were commenced by originating process filed on 15 October 2003. As originally filed the then plaintiffs sought an order pursuant to s600C(3) of the Corporations Act 2001 (the Act) that the resolution be taken to have been passed. In the alternative they sought the following order:- That a Special Purpose Liquidator be appointed to the First Defendant to investigate the cancellation of the Renounceable Rights Issue by the directors of the First Defendant and to make recommendations to the creditors of the First Defendant as to whether any rights of action exist and whether any action should be commenced against any party(s) in relation to that rights issue or the cancellation of it or such other orders as the Court may think appropriate.

When the matter came on for hearing it was only this second order that was sought, the s600C(3) claim being abandoned. The liquidators oppose the order sought; the committee of creditors supports the liquidators. 10 It is not I think necessary to go into the law in any great detail. It is accepted that in appropriate circumstances a special purpose liquidator may be appointed. Re Obie Pty Limited(In liq) (No 4) (1984) 8 ACLR 967; Re Spedley Securities Ltd (In Liq) (1991) 4 ACSR 555. It is accepted that a liquidator may be removed if a reasonable observer would consider the liquidator was in a position of conflict. While removal is not sought, the same general principles which would apply to an application for removal apply to the present application for a special purpose liquidator. 11 There can be no doubt that if there were some claim against the directors for breach of duty in respect of the cancellation of the rights issue, then this sort of litigation being as it is, there is a good chance that Mr Sherman would be joined by the directors as a cross-defendant, thereby placing him in an almost impossible position. It is not necessary to decide whether the limited part played by Mr Sherman in the meetings on 28 and 29 May 2001, would result in the company having any claim against him or the directors having any claim against him for advice given or not given at those meetings. There is some possibility of some liability. That would obviously place Mr Sherman in a position of conflict in considering whether or not a claim should be brought on behalf of the company against the directors for some loss arising from the cancellation issue. 12 Mr Sherman is, I think, well aware of this potential conflict. If there is some possibility of a claim against those responsible for the cancellation the attitude which he has taken and which the committee of creditors has approved, is that any such decision should await the outcome of proceedings which the Australian Securities and Investment Commission has taken against Mr Rich and others associated with One.Tel. The reason put forward for taking that stance is that, if the financial position of the company were such at 29 May 2001, that it was insolvent and would remain insolvent even with a capital injection of $132 million, then the rights issue could not have proceeded as a prospectus could not have properly been issued in which circumstance there could be no possible claim against the directors for cancelling the issue as that was the only action properly available to them. The limitation period for an action against directors for breach of duty in cancelling the renounceable rights issue would be six years from 29 May 2001. It is known that the proceedings by ASIC against Mr Rich and others are fixed for hearing in this Court on 4 July 2004. Evidence before me establishes that solvency of the company is an issue in those proceedings. While one does not know the evidence of the defendants the evidence of ASIC without going into any detail will be that $132 million would not have been sufficient to enable the company to continue in business. It follows from this that if that were the only question I would determine that the decision of the liquidator to wait and see the result of those proceedings was a proper determination and there would be no proper reason to appoint the special liquidator in accordance with the resolution at this stage. 13 One of the matters to be taken into account in any determination as to whether or not a special purpose liquidator should be appointed is the question of the cost, as there would undoubtedly be considerable expense to the company if an appointment were made. If the position were that the vital question of solvency would not be made clear in the ASIC proceedings then I think the position would be different. At the present time I consider the attitude of the liquidators, subject to the matters to which I will refer, to be reasonable and therefore that, leaving aside those matters, the appointment of a special purpose liquidator should not be made. The position may change at a later date. 14 There are two other matters which must be dealt with. The first is an argument put forward by Mr Newlinds SC for the plaintiff towards the end of his argument, namely that that the liquidators had been in a position of conflict as administrators when they advised on liquidation rather than on some deed of company arrangement. As I understood it that is because had there been a deed the creditors' claims would have crystallized and it may in some way have been possible to reinstate the rights issue. While the court in this application should not be deciding arguable matters, that seems to me to be so farfetched as to warrant immediate dismissal. No doubt that is why it was thought of at the heel of the hunt. The fact is that there was no proposition put before the creditors for a deed of company arrangement. 15 The more important argument was addressed to the question of the possibility that the cancellation of the rights issue would amount to an uncommercial transaction within s588FB(1) of the Act. The time limit for an application by a liquidator for an order under s588FF(1) of the Act in respect of voidable transactions is three years after the relation-back date, which is in this case, 29 May 2001, or within such longer period as the court orders on an application by the liquidator within the three years. As the defendants, as liquidators, have made it clear that their intention is to wait and see, it can be assumed they will not be making such application or applying for an extension of time within the three year period. Thus, if there were some arguable position that the company and creditors would be adversely affected by expiry of a limitation period then the grounds for a special purpose liquidator might be made out. This matter was discussed in some detail at the annual meeting of creditors to which I have referred, but that of course does not determine the question. 16 It is the cancellation of the renounceable rights issue, which is the subject of the resolution; unless there were to be a rights issue there could be no claim under any underwriting agreement. For the purposes of determining whether there is an uncommercial transaction under s588FB(1) it is the cancellation of the rights issue to which attention must be given. It is not the function of the court on this application to decide the question, but nevertheless I consider it is the function of the court to decide whether there is any possible claim. This does not require a finding on whether or not it is necessary for there to be two parties to an uncommercial transaction which is a matter of some doubt. I have difficulty in seeing how a proposed renounceable rights issue could be property of a company before the offer to shareholders is made so as to bring its cancellation within the definition of a transaction under s9 of the Act. Once the offer is made the subscriptions would become property of the company, as would rights under an underwriting agreement. All I need say is that the position is not so crystal clear that no expense should be incurred considering it further. 17 The fact that a transaction is uncommercial does not in itself bring about any result. For there to be a result the uncommercial transaction must also be an insolvent transaction as defined by s558FC of the Act, namely a transaction entered into when the company is insolvent or a transaction which causes the insolvency. Thus the argument in this case would have to be that the decision to cancel the renounceable rights issue was a transaction of the company which brought about the insolvency of the company because if the company was insolvent at the time of the cancellation, then quite clearly it would have been impossible to proceed with the issue. If the cancellation were an insolvent transaction then for the purposes of s588FE it would be voidable. If there were some voidable transaction this must have occurred through fault of the directors in which case there is a six year limitation period for a claim against the directors for breach of duty and the three year limitation period under s588FF(3) would not avail the directors or for that matter anyone who gave advice to the directors. However, counsel for the plaintiffs argued that the company may have some rights, through its liquidator, to an order under s588FF(1)(c) requiring the proposed underwriters to "pay to the company an amount that in the court's opinion represents some or all of the benefits" the proposed underwriters have received through the cancellation of the rights issue. It is not desirable that I express any view on this question. It is not, I think, automatically doomed to fail. It is to be remembered that the evidence before me indicates that the creditors who voted for the resolution which was lost suspect that the cancellation of the rights issue was brought about for the benefit of underwriters, not for the benefit of the company. 18 Finally I point out that the decision to conduct the business of the meeting of 29 May 2001 in the order it was conducted so that the cancellation became one for the directors not the administrators could not have been a transaction. Any claims said to arise out of the order of business would have a limitation period of six years. 19 It is not to the benefit of creditors to have a vast sum of money spent on establishing the solvency question when this is going to be established at no expense to them unless they will lose valuable rights by reason of delay. I accept that there is a reasonable apprehension of conflict in the position of the liquidator in connection with matters arising out of the cancellation. Were it not for the possibility of some order being made for the benefit of the company through that cancellation being held to be an uncommercial transaction I consider the decision of the liquidator to wait and see reasonable and proper. In light of the matters put before me on the uncommercial transaction question I consider there is a basis for ordering there be further investigation by a special purpose liquidator but that for a start this should be done on the basis of an assumption that the company became insolvent as a result of such cancellation. I will need to hear submissions as to whom the special purpose liquidator should be. 20 Proposed orders.

1. Order that ___________________________ be appointed a special purpose liquidator of One.Tel Limited (in liquidation) (the company) to investigate the cancellation of the Renounceable Rights Issue and to make recommendations to the creditors of the company as to whether any rights of action exist in respect of which there is a limitation period for the commencement of any such action of less than six years on the assumption that the company became insolvent as a result of such cancellation and further to make recommendations to the said creditors as to whether any action should be commenced against any person on any such rights of action.

2. Leave to apply in these proceedings to extend the purposes for which the said special purpose liquidator is appointed and generally.

3. Costs of all parties to the proceedings to date be paid out of the assets of the company.

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