Shepard & Dean-Willcock v Sports Mondial of Australia Pty Ltd [2005] NSWSC 432 | Case summary

2103/05 ADAM SHEPARD & ANOR v SPORTS MONDIAL OF AUSTRALIA PTY LIMITED (IN LIQUIDATION) JUDGMENT - Ex Tempore 1 HIS HONOUR: This is an application by two men who have occupied positions concerning the defendant company ("the Company") first as administrators, then as administrators of a deed of company arrangement, then as liquidators. They were appointed as administrators on 11 April 2003. A deed of company arrangement was entered into by the company on 29 May 2003. The Deed of Company Arrangement 2 That deed made provision for the coming into existence of a fund, to be distributed amongst certain of the creditors of the company. Some of the definitions in the deed are relevant for the present purposes. The "Fixed Date" was defined to mean 11 April 2003. The "Fund" was defined to mean "The moneys required to be paid to the administrators by or on behalf of the company as specified in clause 16 for distribution in accordance with this Deed". The "Non-Participating Creditors" were defined as meaning three identified creditors. The "Participating Creditors" was defined as meaning Participating Unsecured Creditors and Participating Customer Creditors, and as excluding employees and Deferred Creditors. The Deferred Creditors were the same three entities as were stated to be Non-Participating Creditors. "Participating Customer Creditors" were defined as meaning customers whose claims were admitted by the administrators in whole or part for payment under the Deed. The "Property of the Company" was defined as meaning all the assets owned by the Company as at the Fixed Date. "Terminated by performance" was defined as occuring when "All moneys required for the Fund have been received and distributed in accordance with this Deed so that the Deed comes to an end in accordance with Clause 8A and 9". 3 The deed made provision, in clause 14, for moneys available to the administrators and the creditors to be applied in accordance with the Deed. It said that that money, called the Fund, was to be paid "From the Property of the Company or from assets contributed by the Directors and third parties to the Administrators for the purposes of distribution to the Creditors under the provisions of this Deed". Clause 14(c) provided: "The moneys paid to the Administrators under the Deed by the Company or the Directors or third parties are not refundable to the Company or the Directors or third parties (as the case may be) should the Deed be terminated pursuant to Clause 8(b), 8(c), 8(d) or 11. The moneys paid are held by the Administrators on trust for the benefit of the Administrators and the Participating Creditors …" 4 Clause 15 went on to set out an order in which the payments were to be made from the Fund. This provided for various priority claims, including of employee entitlements, and only after that for payment of claims of the Participating Unsecured Creditors. 5 There was provision in Clause 16 for the Fund to comprise not less than $412,628 made up of moneys held by the administrators at the time the Deed became binding, moneys recovered by the Company from trading and other sources, including book debts, and amounts paid to the administrators at a rate of $50,000 per month commencing on 15 June 2003, and at a rate of $13,499 per month commencing on 15 February 2004. These latter amounts were evidently to be paid by the Company itself, from the proceeds of its trading. 6 There was provision, in Clause 20, that the Deed operated in respect of debts or claims that arose on or before the Fixed Date. There was provision for the deed to operate as a moratorium on claims brought by creditors who potentially had the benefit of the Deed during the time that the Deed remained on foot, or if it was terminated by performance. The Guarantee 7 At the same time as the Deed was entered into a related company of the defendant company, Sports Mondial PLC gave a guarantee to the administrators that the administrators would be paid all the "Guaranteed Money" when it was due. The "Guaranteed Money" was all money which the Company was required to pay to the administrators under the Deed, up to a limit of $277,638. The Equitable Mortgage over Assets 8 Also at the same time that the Deed was entered into the Company gave to the administrators a mortgage over its undertaking and assets, to secure the payment of the various amounts which the Company was required to pay under the Deed. The Deed Terminates 9 The Deed did not work as had been hoped. After a payment due under it had been missed, on 9 December 2003 the creditors resolved to terminate the Deed, and in consequence on 9 December 2003 the administrators became liquidators of the Company. The Funds Available for Distribution 10 The administrators/liquidators have various sums in their hands, and the potential of obtaining further sums. They have some money which was paid to the Company pursuant to the Deed, and intended to be part of the Fund. That money totals $138,114.62. As well, once the Company went into liquidation, certain assets which it had were sold, and realised an amount of $4,590.89. 11 The plaintiffs are contemplating bringing proceedings against Sports Mondial PLC pursuant to the guarantee, and it is possible that there might be some recoveries from that source. As well, the plaintiffs, in their role as liquidators of the Company, are contemplating bringing proceedings against the Federal taxation authorities, seeking to recover some amounts of taxation which were paid by the Company, on the basis that they amount to an unfair preference. Again, it is possible that there may be some recoveries from that source. The Question for Decision 12 The question which the plaintiffs bring to the Court today concerns how the available assets ought be distributed amongst various creditors of the company. During the period that the Deed of Company Arrangement was in place, the Company traded, and it has various creditors whose debts arose after the Deed was entered. Decision 13 The problem now before me is similar to that which was before his Honour Justice Austin in Dean-Willcocks v ACG Engineering [2003] NSWSC 353; (2003) 45 ACSR 290; (2003) 21 ACLC 1226. I respectfully agree with his Honour's conclusion that the manner of application of the available funds depends upon the terms of the Deed of Company Arrangement. In the present case, it is the effect of clause 14(c) that money which should constitute the Fund is held on trust for the benefit of the administrators and the Participating Creditors. It follows that it is those people who are entitled to receive the moneys which should have been part of the Fund, when applied in accordance with the order of application set down in the Deed itself. The amount which should be distributed in this fashion includes the amount of $138,114.62 which made up the Fund at the time of liquidation supervening, and the amount recovered from the asset sales, and any amount which might be recovered under the guarantee or in proceedings to enforce the guarantee. The amount recovered from asset sales is distributable in this way because the mortgage over the assets was given to the administrators to secure the company's obligations under the Deed, and hence, the administrators hold any money received in consequence of enforcing that mortgage on the same terms as they would have held the money the Company was obligated to pay under the Deed. Similarly, the guarantee is a right the administrators hold on the trusts of the Deed. 14 Because the Deed did not operate to bar the claims of the creditors, in the event which has happened - namely, that the Deed has come to an end, in circumstances where it has not been terminated by performance - all those creditors of the company who have received some benefit under the Deed retain the power to prove in liquidation of the company, for whatever debt might still be owing to them, after giving credit for what they have received under the administration. 15 The proceeds of any unfair preference proceedings which might be brought are ones which are distributable in the liquidation alone. Section 588(FF)(1) Corporations Act 2001 (Cth) makes clear that it is the liquidator who has capacity to bring an unfair preference claim. It is to creditors who prove in the liquidation, and in accordance with the order of priorities in the liquidation that any such recoveries are to be distributed. 16 The liquidators have informed the various creditors of certain alternative scenarios for distribution of the moneys now available to them, or which might become available to them. There has been only one submission received, from a creditor who was also an employee, and who expressed concern about the position of his superannuation. 17 Any liabilities connected with that superannuation were all incurred prior to the administration. Thus, that creditor would not be prejudiced if there were to be a distribution in accordance with the manner of distribution which I have outlined. Form of Order - Declaration or Advice? 18 The type of order which the administrators/liquidators seek, is, in part, advice pursuant to section 447D(2) and/or section 511 of the Corporations Act 2001 (Cth). The first of those provisions enables an administrator to approach the Court for advice, and the second enables a liquidator to approach the Court for advice. As McLelland J pointed out in Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674, provisions like those are ones which do not empower the Court to decide any questions as against persons making proprietary claims adverse to those of the Company whose affairs are being administered. His Honour noted, at 680, that there were instances where a court has, in proceedings commenced as a liquidator's application for directions, gone on to make orders declaratory of substantive rights, clearly intended to be of binding effect on the parties to the proceedings, and where necessary has made representative orders for this purpose. His Honour went on to say: "The procedures of the Court are sufficiently flexible to enable proceedings commenced as an application for directions to be changed into proceedings for the determination of substantive rights, and this is sometimes a convenient course in order to avoid the need to commence further proceedings involving additional cost and delay: see, eg, Anmi Pty Ltd v Williams [1981] 2 NSWLR 138 at 156-157. However it is important that the distinction between the two kinds of proceedings be not lost sight of or blurred, and such a fundamental change should not be permitted unless the Court is satisfied that those affected either consent to that course... or will not suffer injustice in consequence of the alteration of the status of the proceedings." 19 In Dean-Willcocks v ACG Engineering [2003] NSWSC 353; (2003) 45 ACSR 290; (2003) 21 ACLC 1226 Austin J held that, in circumstances where both deed creditors and post-deed creditors had been notified of the application, and in terms that the application sought declaratory relief, and where they had chosen not to contest the application for declaratory relief, it was appropriate to make a declaratory order which bound them. The evidence in the present case does not go so far. What the creditors had been notified of is of an intended application by the liquidator to the Court for directions. In those circumstances, I do not think it is appropriate, when no-one appears for any of the creditors today, to make an order of a different type to that of which the creditors have been notified. I recognise that the originating process in its original form sought a declaration, but the evidence does not appear to suggest that the originating process was sent to the creditors. As well, there are no creditors who can be nominated to represent the various classes of creditors. 20 I direct that the plaintiffs would be justified, in their role as both administrators of the Company and in their role as liquidators of the Company, in distributing the funds available to them in the way set out in Schedule A to the Amended Originating Process, namely: "1. The monies paid to the defendant as the Fund pursuant to the Deed of Company Arrangement dated 29 May 2003, be distributed by the liquidators on the basis that the Fund is held on constructive trust for Participating Creditors ("Deed Creditors") entitled to prove under the Deed of Company Arrangement, as defined therein. 2. The monies paid to the defendant from the sale of plant and equipment (after auction and removal costs) in the sum of $4590.98 be distributed by the liquidators on the basis that those monies are payable to Deed Creditors. 3. The monies (if any) paid to the defendant pursuant to the deed of guarantee and indemnity dated 29 May 2003 be distributed by the liquidators on the basis that those monies are payable to Deed Creditors. 4. To the extent that Deed Creditors do not receive payment in full from monies that are available under paragraphs 1, 2 and 3 above, they be entitled to prove for the balance of their debts in the liquidation out of any separately available assets of the defendant, including the monies (if any) paid to the liquidators pursuant to the Unfair Preference Proceedings. 5. Creditors of the defendant not entitled to prove in the Deed of Company Arrangement ("Post Deed Creditors") have their respective debts adjudicated on in respect of any separately available assets of the defendant, including the monies (if any) paid to the liquidators pursuant to the Unfair Preference Proceedings." Costs 21 The determination of the questions involved in this application was necessary for proper dealing with both the fund which is distributable under the Deed, and the fund distributable in the liquidation. In those circumstances it is proper that there be contribution from each of those funds to the costs of this application: (Re French Caledonia Travel Pty Limited [2003] NSWSC 1008; (2003) 59 NSWLR 361 at [212], 427-8 of NSWLR), and that that contribution be proportionate to the value of each fund. 22 I order that the costs of this application be paid out of the deed fund and out of the assets available in the liquidation, with those funds to bear the costs in the proportions of the balances which ultimately come to be distributable from those respective funds. The exhibits may be returned. **********

Shepard & Dean-Willcock v Sports Mondial of Australia Pty Ltd

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