Prendergast v Rolcross [2008] NSWSC 146 | Case summary

5848/07 John Francis Prendergast v Rolcross Pty Ltd (in liq) & Anor JUDGMENT 1 HIS HONOUR: This is an application to set aside an order for the winding-up of the first defendant, Rolcross Pty Limited ("Rolcross") pursuant to r 36.16(2)(b) of the Uniform Civil Procedure Rules 2005 (NSW). The winding-up order was made on 10 August 2007 in the absence of Rolcross. There is no dispute that Rolcross had been served and that the order was regularly obtained. 2 Alternatively, the plaintiff seeks an order for the termination of the winding-up pursuant to s 482 of the Corporations Act 2001 (Cth). The plaintiff has standing as a creditor and contributory to apply for an order under s 482. He is the sole shareholder of Rolcross. He was also a director, and I infer the managing director of the company. 3 The winding-up order was obtained on the application of the Chief Commissioner of State Revenue. Rolcross had failed to comply with a statutory demand claiming $227,494.61 for unpaid land tax. The assessment giving rise to the demand was issued on 8 September 2006. The land tax assessment had been sent to a property owned by Rolcross as tenant-in-common with Worthbrook Pty Limited ("Worthbrook") but leased to another company. Neither the assessment nor the statutory demand came to the attention of Rolcross's directors. Nor, which is even more perplexing, did the winding-up application come to their attention. 4 The company's registered office is a firm of lawyers in Southport, Queensland. There is no explanation as to how the statutory demand and the originating process for winding-up did not come to the directors' attention. However, there is no dispute that they did not. 5 I am satisfied that Rolcross is not insolvent. To the contrary, it has a very ample surplus of assets over liabilities and a surplus of current assets over current liabilities. It is an owner or co-owner of five parcels of land in Sydney valued in total at about $39,000,000. Its share of those properties is valued at about $27,500,000. The co-owner of some of the properties is Worthbrook. Rolcross and Worthbrook have a liability secured by mortgage over the properties to the St George Bank of $15,000,000. Rolcross currently has current assets of about $3,580,000 and current liabilities of about $2,430,000. This does not include a liability which I infer it has to make contributions to Worthbrook. That liability would arise because, since the winding-up, Rolcross has not made its share of interest payments on the loan, although it has collected and continues to collect its share of rents. Interest payments on the loan run at about $115,000 per month. So far as appears, Rolcross is jointly liable with Worthbrook for the interest payments and would, therefore, owe Worthbrook about $345,000. This assessment of assets and liabilities excludes any tax liabilities from 1 July 2004. 6 It appears that Rolcross has a surplus of assets to liabilities of in excess of $15,000,000. The liquidator does not dispute that Rolcross is solvent, although he says that the records of the company which have come into his possession are insufficient to form a definite view as to its financial position. 7 Rolcross's business is essentially that of a property owner. Leaving aside taxation liabilities, it is unlikely that creditors would not by now have made themselves known to the liquidator. 8 Part of the explanation as to why the petitioning creditor's debt had not been paid appears to be that the assessment was sent to premises which Rolcross did not occupy, and the Office of State Revenue had advised four days before the assessment issued that Rolcross and Worthbrook were liable for land tax for the 2007 year only. The debt presently owed to the Office of State Revenue is $595,407.77. The Office of State Revenue consents to the present application on terms, to which the plaintiff consents, that it be paid by the liquidator. 9 The secured creditor, St George Bank, supports the application. The principal unsecured creditors are Keanlong Pty Limited ("Keanlong") and Mr Vincent Muriti. They are owed about $1,850,000 pursuant to judgments for costs, as appears in various judgments to which I was referred without objection. 10 Mr Muriti and Keanlong (the company Mr Muriti controls), had been in partnership or were co-shareholders with Mr Prendergast and Rolcross in a number of ventures including a highly profitable Mercedes Benz dealership and auto repair business. 11 As a result of an alleged incident on 23 July 2004, Mr Prendergast was forced to transfer his interest in the motor dealership and auto repair business to Mr Muriti, and Mr Muriti transferred all his or his company's interests in property owning partnerships to Mr Prendergast or his company. The parties entered into an agreement on 4 August 2004 to give effect to such a separation, but there was lengthy and complex litigation during which Mr Prendergast resisted, at every turn, Mr Muriti's attempts to enforce the agreement (Muriti v Prendergast [2005] NSWSC 281; Muriti v Prendergast [2005] NSWSC 526; Muriti v Prendergast [2005] NSWSC 949; Muriti v Prendergast [2005] NSWSC 922; Muriti v Prendergast [2005] NSWSC 1352; and Muriti v Prendergast [2005] NSWSC 286). 12 Upon the payment of the judgment debt for costs it would appear that that litigation is concluded. Apart from any claims of the Australian Taxation Office in respect of the financial years after 30 June 2004, the debts of all known creditors are to be provided for by the plaintiff's proposed orders. 13 There are four debts which it appears the liquidator does not dispute, but Mr Prendergast does. In his proposed orders, Mr Prendergast proposes that moneys to cover such debts in respect of which proofs have been lodged or information provided, should be paid into the trust account of the plaintiff's solicitors pending resolution of the existence or quantum of those debts. I will return to the question of whether such orders should be made in due course. Suffice it to say that the company has ample resources with which to pay the claimed debts. 14 The liquidator did not oppose an order terminating the winding-up, but raised issues as to whether either an order terminating the winding-up, or an order setting aside the winding-up orders, should be made. (The issues which the liquidator raised were those which an opponent might have been expected to advance.) Essentially, the liquidator's submissions addressed whether the public interest, or questions of commercial morality, should result in the orders sought being refused at this stage. 15 Four matters are relevant. The first is the position of the Australian Taxation Office. Income tax returns have not been lodged after the 2004 financial year. Nor have business activity statements been lodged. The plaintiff offers an undertaking to the Court that upon the winding-up being terminated or the winding-up order being set aside, he will cause Rolcross to engage a Mr O'Rourke of RSM Bird Cameron to prepare and lodge any outstanding tax returns and business activity statements. He also proffers an undertaking to engage Mr O'Rourke to prepare accounts for Rolcross. 16 The second matter, it was said, is that it may be inferred that Rolcross did not keep records required to be kept pursuant to s 286 of the Corporations Act which correctly recorded and explained its transactions and financial position and performance, and would enable true and fair financial statements to be prepared. 17 The basis for this contention is that on 13 August 2007, the liquidator requested Mr Prendergast and his co-director, Mr Giovannini, to deliver to him all of the books and records of the company. It is unclear precisely when that correspondence came to the attention of the directors, but it is clear that it had done so by at least September 2007. Documents were not produced until they were produced in response to an order for production obtained from the Court in connection with an examination summons. 18 On 4 December 2007, Mr Prendergast produced a box of documents. The liquidator says that documents not produced include a full set of bank statements for the company, cheque-books, deposit books, statements recording internet transfers or payments, tax invoices for rents received from tenants, or for the provision of services, copies of business activity statements or income tax returns and financial statements. The solicitors for the plaintiff suggested to the liquidator's solicitors that enquiry should be made of accountants and lawyers who acted for the company, namely, the firms of Einfeld Symonds Vince, Bedford Titley and ABJK Lawyers. It appears that those enquiries resulted in information being provided to the liquidator that Bedford Titley and ABJK Lawyers held no books and records of the company, and that the records held by Einfeld Symonds Vince related to the 2004 financial year or earlier years. Hence the liquidator contends that if, as the directors said, they did not have possession of the primary books and records of the company, then it should be inferred that such books and records were not kept. 19 The third matter going to questions of commercial morality or public interest concerns the provision of a Report as to Affairs. The Report as to Affairs was not provided within the time prescribed by s 475 of the Corporations Act. It was requested by correspondence of 30 August 2007. A reminder was provided on 24 September 2007 and there was correspondence about it between the solicitors for the plaintiff and the liquidator's solicitors in September, October and November 2007. A draft Report as to Affairs was provided by Mr Prendergast on 21 November 2007 and the executed Report as to Affairs on 27 November 2007. Mr Giovannini's Report as to Affairs was provided on or about 7 January 2008. 20 The fourth matter concerns the failure of the directors to provide information sought by the liquidator pursuant to s 475(2) of the Act. A questionnaire was sent to them but was not completed or returned. 21 The power under s 482 of the Corporations Act and under r 36.16(2) of the Uniform Civil Procedure Rules is discretionary. The discretion to set aside the winding-up order, or to terminate a winding-up, will not be exercised if it appears that it will not be in the public interest to do so, even though the company is solvent and the grounds for an order under r 36.16 made out. 22 In Re Telescriptor Syndicate Limited [1903] 2 Ch 174, the directors or officers of the company which had been allowed to go into liquidation procured the consent of all the creditors to an order staying the winding-up. Buckley J refused the application for a permanent stay of the winding-up. Initially the application was refused on the grounds that further explanations as to various matters were required from the directors. One of those matters was that the directors had failed to attend on the Official Receiver as required by statute and had failed to bring in the statement of affairs as they were bound to do. His Lordship said that an explanation was required for that failure. The reason for that was explained as follows (at 182): " I do not for a moment say how the facts as regards this company may work out, but I decline to order a stay of these proceedings until it is proved to my satisfaction that the winding-up ought to be stayed. That will not be proved to my satisfaction until it is shewn to me that all the facts are as I hope they are--that the trading operations of this company have been fair and above-board. "

23 On the adjourned hearing the evidence showed that the directors had issued shares to themselves at a discount and that there were other breaches of directors' duties and circumstances which made it undesirable that a winding-up be stayed pending an investigation into the affairs of the company and the conduct of its directors. A stay of the winding-up would have allowed the company to resume business with a nominal capital which was largely fictitious (at 195). 24 As I read the judgment, it was not the failure of the directors to comply with their statutory duty to provide information to the Official Receiver and a report as to affairs which, by itself, was the occasion for refusing the stay. Rather those matters, amongst others, gave reason to apprehend that the affairs of the company and the conduct of its directors were not "fair and above-board". 25 In the present case I do not consider that the orders sought should be refused as a mark of the Court's disapproval of the directors' conduct or to provide an additional sanction against non-compliance with statutory duties. The question rather is whether it appears that it would be, or may be, contrary to the public interest if the company were permitted to resume operations. In a case such as the present where all of the shares are held by the plaintiff, the pubic interest means primarily the interests of existing and future creditors. 26 It was the apprehension that it would be contrary to the public interest for the companies to resume operations that was the reason for the adjournment of the application in Re Skay Fashions Pty Limited (in liq) (1986) 10 ACLR 743 at 746 and the refusal of the application in Metledge v Bambakit Pty Limited (in liq) [2005] NSWSC 160 at [35]-[40]. I do not think the circumstances of this case are closely analogous to those in Metledge v Bambakit. 27 The Australian Taxation Office is a potential creditor and it is a matter of serious concern that income tax returns and business activity statements have not been lodged since the 2004 financial year. I infer that the explanation for this is the complications arising from the separation of Messrs Prendergast and Muriti's interests and the subsequent litigation. The complexities of that exercise can be seen in my reasons in Muriti v Prendergast [2005] NSWSC 281. I also infer that the litigation has clouded Mr Prendergast's thinking. This is illustrated by his quixotic action in not banking about $3,000,000 worth of rental payments from the lessees now controlled by Mr Muriti. 28 Mr Prendergast, as I have said, proffered an undertaking to the Court to engage a well-known firm of accountants to prepare and lodge the outstanding tax returns and business activity statements and to prepare the accounts of the company. Now that the litigation has concluded, I see no reason to doubt that the undertaking will be honoured. His engagement of Mr Harris of McGrath Nicol to act as an advisor to Rolcross and Mr Harris's observation that Mr Prendergast has sought to answer his queries to the best of his ability is indicative of his intention to put the company's affairs in order. 29 There are other matters to be taken into account in assessing the public interest. The liquidation is causing significant harm to Worthbrook, or may be doing so, as Worthbrook is servicing the whole of the interest due to the St George Bank. The liquidator has foreshadowed taking steps to sell real estate owned by Rolcross, or to apply for the appointment of trustees for sale in respect of the real estate in co-ownership. He has foreshadowed discharging the debt owed to St George from such asset sales. That would appear to be entirely unnecessary given the financial position of the company. As I have said, St George supports the present application. 30 There is also a public interest in avoiding unnecessary expenditure on external administration. The liquidator's fees from 10 August 2007 to 12 January 2008 amounted to some $78,000 plus GST. Approval for that remuneration was given at a meeting of creditors held in January this year. Legal fees paid to 12 January 2008 were in excess of $115,000. At the meeting of creditors, the creditors approved further remuneration of the liquidator, his partners and staff for the period after 12 January 2008 of $60,000 plus GST. 31 If the winding-up is terminated, the liquidator seeks an order that he be paid or secured for a sum of $250,000 to cover his remuneration and disbursements, being, principally, legal fees, and including the fees of this application. I have no reason to doubt the propriety of the charges but it is not in the public interest that fees for an external administration be incurred if that is unnecessary. 32 If the winding-up is not terminated the liquidator proposes to commission a firm of accountants to do the job that Mr Prendergast has undertaken to commission RSM Bird Cameron to do. 33 Having regard to the clear evidence of solvency and the extraordinary circumstances which have affected Mr Prendergast and the company since the middle of 2004, but which are now resolved, I do not consider that the matters to which the liquidator rightly draws my attention are such that I should conclude that it would be contrary to the public interest for the winding-up of the company to be terminated. I have regard in that respect, of course, to the undertakings proffered by Mr Prendergast to the Court. 34 I do not think that there would be any difference in substance between making an order under s 482 of the Corporations Act and making an order pursuant to r 36.16 of the Uniform Civil Procedure Rules setting aside the winding-up order. It was submitted for the plaintiff that the effect of an order under r 36.16 would be that the winding-up order would be taken not to have been made. I do not accept that that would be so. The order setting aside the winding-up order would not operate retrospectively. However, lest there be any doubt about that, I think it preferable to proceed under s 482. It is also preferable to proceed under s 482 lest others be encouraged to think that applications under r 36.16 need not be brought promptly (George Ward Steel Pty Limited v Kizkot Pty Limited (1989) 15 ACLR 464 at 465). 35 The plaintiff does not oppose an order that the liquidator pay $250,000 to the trust account of his firm on account of his costs and disbursements. The liquidator contends that if the winding-up is to be terminated, he should be authorised to withdraw that sum. It would then be open to the company to take whatever steps are open to it to challenge the payment if there was a dispute about it. 36 The liquidator is entitled to receive such remuneration as is determined by resolution of the creditors, or if no such resolution is passed, by the Court. As I understand it, there is no committee of inspection (s 473(3) Corporations Act). If the liquidator contends that the resolution of the creditors approving future remuneration is sufficient, then it appears to me that no order from the Court is required, and that before an order terminating the winding-up takes effect the liquidator should exercise such right as he contends he has. On the other hand, I am not in a position to determine an amount of remuneration which is proper. 37 An application by a liquidator for remuneration pursuant to an order from the Court should be made by interlocutory process in accordance with r 9.4 of the Supreme Court (Corporations) Rules 1999 (NSW). 38 I see no reason why such an application could not be made after the winding-up had been terminated. There is no reason to apprehend that the liquidator would not recover from the company the amount to which he might be found to be entitled. Were there any such apprehension I would not be prepared to terminate the winding-up. 39 Likewise, the liquidator is entitled to be indemnified from the assets of the company in respect of expenses properly incurred in the winding-up. If he is satisfied that charges for legal services are proper he is entitled to indemnify himself from the assets of the company in respect of them. 40 That is not to say that a company when under the control of its directors would not be entitled elsewhere to challenge the propriety of any such payments. I see no occasion to require payment of moneys into a trust account. Rather, the order permitting the winding-up should take effect at a time when the liquidator has had the opportunity to exercise such rights as are properly available to him to receive remuneration, or to be indemnified against liabilities out of the company's assets. 41 Because of my conclusion that the company is plainly solvent I see no occasion to make an order for the payment of moneys into the plaintiff's solicitors' trust account pending the resolution of the dispute as to debts claimed by Einfeld Symonds Vince, McCullough Robertson, Marshall Motors Pty Limited or Perfect Auto Body Shop Pty Limited. I doubt that I would have the power to order the creditors to provide full particulars of their claims. Given the solvency of the company, I see no advantage in moneys being so set aside. 42 There remains the question of costs. The liquidator contends that the plaintiff should pay his costs of the proceedings. I accept that the liquidator's costs of the proceedings should be paid. The question is whether they should be paid from the assets of the company or by the plaintiff. The liquidator would in any event be entitled to an indemnity in respect of his costs from the assets of the company. 43 It is a matter of no real moment whether the plaintiff is also ordered to pay the liquidator's costs. As the plaintiff is successful in his application, notwithstanding the matters raised by the liquidator, I think the liquidator's position is sufficiently protected by an order that his costs be paid by the first defendant on the indemnity basis. Subject to hearing any further submissions from the parties as to the form of the proposed short minutes of order, I propose to make the following orders:

Prendergast v Rolcross

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Judgment (28 paragraphs)

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