RAVENSWOOD RESORT PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ACN 064 679 698)

Corporations - Application to wind up in insolvency - Construction of s 459C(2) of Corporations Act - Effect of tender of debt - Appointment of common liquidator to companies - Turns on own facts

Corporations Act 2001 (Cth), s 459C(2), s 461(1)(k)

Buckland Products Pty Ltd v Deputy Commissioner of Taxation [2002] VSC 410

Collector of Customs v Agfa-Gevaert Ltd [1996] HCA 36; (1996) 186 CLR 389

David Grant & Co Pty Ltd v Westpac Banking Corporation [1995] HCA 43; (1995) 131 ALR 353

Jarena Pty Ltd v Sholl Nicholson Pty Ltd (1996) 19 ACSR 425

Maunsell v Olin [1975] AC 373

Moutere Pty Ltd v Deputy Commissioner of Taxation [2000] NSWSC 379; (2000) 34 ACSR 533

1 MASTER NEWNES: This is an application to wind up the defendant in insolvency under s 459A of the Corporations Act 2001 (Cth), alternatively on the ground that it is just and equitable, under s 461(1)(k) of the Act. The first plaintiff applies as a creditor of the defendant. The second plaintiff is a director of the defendant.

2 By way of background, I should say that it appears from the evidence on this application that the defendant is a land development company. By an agreement dated 2 October 1996, it entered into a joint venture with three other parties for the development of certain land owned by the defendant. One of the other parties agreed to contribute "the Project and all goodwill associated therewith" and the other two parties agreed to contribute $7,500,000 each. Each of the participants was to have a 25 per cent interest in the development and to be liable for that proportion of the development costs. By a process that was not explained in the papers before me, a company, RRCM Pty Ltd (Receiver and Manager Appointed), was appointed to manage the development work.

3 The application to wind up the defendant in insolvency is based on two grounds. First, it is said that the defendant is presumed to be insolvent under s 459C(2) of the Act because a receiver and manager was appointed to it on 5 November 2002 pursuant to a floating charge over its assets. Secondly, it is said that, in any event, the evidence establishes that the defendant is insolvent.

4 The application was opposed by two of the directors of the defendant, Chok Keang Lao and Kasi Palaniappan, who appeared by counsel and who each swore affidavits filed in this application.

5 Turning to the first ground relied upon by the plaintiffs, so far as is relevant, s 459C(2) of the Act provides:

"The Court must presume that the company is insolvent if, during or after the three months ending on the day when the application was made:

...

(c) a receiver, or receiver and manager, of property of the company was appointed under a power contained in an instrument relating to a floating charge on such property."

6 As I have said, a receiver and manager was appointed to the defendant on 5 November 2002. This application was made on 4 April 2003. The first question, therefore, is whether it was made within the time period specified in s 459C(2). That depends on the meaning of "after the three months ending on the day when the application was made". Counsel for the plaintiffs argued that the words "or after", meant that the application could be made after three months from the relevant event and accordingly the application fell within s 459C(2).

7 Counsel for the plaintiffs, quite properly, referred me to Pinn v Barroleg Pty Ltd (1997) 23 ACSR 541, which he conceded was against the contention he was advancing. In that case, a creditor's statutory demand was served on the company on 6 August 1996. The company filed an application to set it aside on 23 August 1996 and served that application on 28 August 1996. The application to set aside the statutory demand was dismissed on 4 October 1996. On 24 December 1996, an application was made to wind up the company and a winding-up order was made on 7 April 1997. The appellant appealed from the making of the order. It contended that the time period to comply with the statutory demand expired on 27 August 1996. As this was more than three months before 24 December 1996, when the winding-up application was made, no presumption of insolvency could be made under s 459C(2). In dealing with the construction of s 459C(2), Santow J said at 554:

"The issue which arises in this case is whether the relevant event (failure to comply with a statutory demand within the time prescribed by s 459F(2)) fell, as required by s 459C(2): 'During or after the three months ending on the day when the application [for winding up] was made.'

There was some argument on the construction of this particular provision. It was argued by the respondent that the words 'or after', meant that the application could be made after three months from the relevant event - though this may be years later. However, despite a somewhat puzzling reference to the words 'or after', I am satisfied that the section means:

(a) that the s 459C(2) event relied upon goes stale after three months as the basis for a winding up application; but

(b) where the application is made at a date preceding the event, but based on it, it may still be granted, provided of course the event actually occurs before the winding up order is made; for example if the application were made before expiry of 21 days after notice of demand.

Thus - giving practical effect to the words 'or after' - a concerned creditor may immediately lodge an application to wind up the company, knowing the 21 days for compliance with the statutory demand still has to expire, but on the basis that the 21 days will expire after (but before the application is heard). This would give a purpose to the words 'or after' in the clause above. Without those words, an application made before the s 459C(2) event could not satisfy the three months requirement, as it was not made during the three months. The sense of the section is seen more clearly when the syntax is therefore rearranged to read: 'during the three months ending on the date the application was made or after [the day the application was made]'. Such an interpretation avoids patent absurdity because otherwise the words 'or after', would give no sense to the three months limitation. It would mean that in reality there was no time limitation at all - that a winding up application could be brought even years after the relevant event."

8 Counsel for the plaintiffs contended that the case was wrongly decided and that the construction rejected by Santow J is to be preferred. The argument was not taken any further than that.

9 I respectfully agree, however, with the construction of the section by Santow J, for the reasons stated by his Honour. Accordingly, I do not consider that s 459C(2) has any application on the facts of this case.

10 It is therefore necessary to turn to the second ground relied upon by the plaintiffs, actual insolvency.

11 The plaintiffs say that the defendant has outstanding unpaid debts and that it is insolvent. Accordingly, it was submitted, the plaintiffs are entitled to a winding-up order ex debito justitiae: Laucke Flour Mills (Stockwell) Pty Ltd v Fresjac Pty Ltd (1992) 8 ACSR 59.

12 It was not in issue that an amount of $246,989.18 is due and owing by the defendant by way of water rates, land tax, and council rates and charges as follows:

13 There is, in addition, an affidavit of Paul See Yiing Yii, sworn on 3 April 2003, on behalf of the first plaintiff in which Mr Yii deposes to an amount of $4735.50 due and owing by the defendant to the first plaintiff for accounting services. In none of the affidavits filed in opposition to this application was it sought to answer that claim specifically. There is simply a general statement in Mr Lao's affidavit of 27 May 2003 to the effect that the only creditors of the defendant whose debts are due and owing are the secured creditors. Nothing is said in answer to Mr Yii's evidence that the first plaintiff provided accounting services and has rendered accounts for fees which remain due and owing. In the circumstances, subject to a question of tender raised by Mr Lao and Mr Palaniappan, I am satisfied that an amount of $4735.50 is due and owing by the defendant to the first plaintiff. I will come back to the issue of tender shortly.

14 There was an issue between the parties as to whether or not there was evidence of other unsecured creditors. The position is by no means clear.

15 An affidavit of Simon Andrew Read, sworn on 21 May 2003, was filed on behalf of the plaintiffs. Mr Read is currently one of the receivers and managers of the defendant. He was appointed, together with Normal Mel Ashton, by the Commonwealth Bank of Australia pursuant to the terms of three fixed and floating charges over the assets of the defendant. Mr Read and Mr Ashton are partners in the chartered accounting firm PPB Ashton Read and are well-known insolvency practitioners.

16 In his affidavit, Mr Read says that, as at the date of their appointment as receivers and managers, the assets of the company consisted of land, work in progress and plant and equipment. The assets are the subject of the three charges pursuant to which the receivers and managers were appointed. The amount owing to the Commonwealth Bank by the company, which is secured by the charges, exceeds $6,000,000 with interest continuing to accrue on it.

17 According to Mr Read, the current realisable value of the company's assets is uncertain. He says he is in the process of selling the assets and believes there may be a surplus available to preferential and unsecured creditors after the payment of all amounts due to the secured creditors. He says that, because no offers for the assets have been received, he is not in a position to estimate the amount of any surplus or whether the surplus will be sufficient to meet all of the company's liabilities.

"The books and records of the Company show that there are debts due and payable to various preferential and unsecured creditors which have not been paid. The debts have been outstanding since the date of our appointment. In particular there are amounts due and owing to preferential creditors for water, rates, land tax and council rates and charges which total $246,989.18 (as at 5 November 2002). The Company currently has no funds available to pay any of these debts. I also believe that the Company may have other liabilities as explained in paragraph 6 below."

19 In par 6 of his affidavit, Mr Read say that the company's books and records indicate that, prior to the appointment of receivers and managers, there were a significant number of intercompany transactions between the defendant and RRCM. He says that the state of both companies' books and records is confused and is difficult to determine the amounts that may be owing by each company to the other.

20 Significantly on the question of unsecured creditors, Mr Read goes on:

"In addition, because of this confusion, it is not clear from the records of the respective companies whether all of the creditors have been recorded and whether, if they have been recorded, the recording is accurate. I believe these issues can only be resolved through an appropriate process of investigation, such as interviews with the Company's directors and the calling of proofs of debt."

21 A report as to the affairs of the defendant was submitted to the Australian Securities and Investments Commission on 23 December 2002 by Mr Ashton on behalf of the receivers and managers. In that document specific reference is made to the preferential creditors which I have mentioned above, but unsecured creditors are noted as "Nil".

22 In an affidavit sworn on 3 April 2003, the second plaintiff says that, in addition to the preferential creditors, "there are also amounts due to unsecured trade creditors which I believe total $136,889.75". The second plaintiff provides no further details in the affidavit of the unsecured debts referred to.

23 There was, however, in evidence before me a handwritten statement of affairs of the defendant, dated 22 November 2002, which was prepared by the second plaintiff and lodged with the Australian Securities and Investments Commission. That document sets out some seven unsecured debts totalling $8,656,623.93, although against three of those debts, namely "trade creditors" of $136,889.75, "Other" of $19,132.00 and "JV interest" of $2,883,304.26 ("the joint venture debts"), there is a notation "25%". It was put to me by counsel for Mr Lao and Mr Palaniappan that that reflected the fact that under the joint venture agreement the defendant was only liable for 25 per cent of the development costs. The real liability in respect of the joint venture debts, it was submitted, was therefore 25 per cent of the amount shown.

24 Mr Lao and Mr Palaniappan did not, however, accept that the defendant had any unsecured creditors to whom moneys were due and owing. In their affidavits dated 16 May 2003 each said that the unsecured creditors referred to in the second plaintiff's handwritten statement would "need verification and may include contingent liabilities and some liabilities which may not be payable at all or are not due and payable". However, Mr Palaniappan, in his affidavit sworn on 27 May 2003, and Mr Lao, in his affidavit sworn on 26 May 2003, denied that any of the amounts set out in the second plaintiff's statement of affairs were due and owing by the defendant. Apart from the joint venture debts, they said that the other amounts consisted of contingent liabilities which were not yet due and payable and amounts which were not payable at all.

25 In respect of the joint venture debts, Mr Lao and Mr Palaniappan said these were not debts of the defendant but of RRCM. Their counsel said, however, his clients acknowledged that, whilst RRCM was liable for the joint venture debts, RRCM had a right of indemnity against the defendant under the joint venture agreement for 25 per cent of those debts, once the precise amount - about which there was some doubt - was established. He said Mr Lao and Mr Palaniappan thought that the defendant's liability was more likely to be 25 per cent of the amount of some $874,000 shown in RRCM's books, rather than the amount shown in the second plaintiff's handwritten document. But, whatever the correct amount, no claim had yet been made by RRCM against the defendant for any sum, although Mr Lao and Mr Palaniappan accepted it was inevitable that such a claim would be made.

26 The explanation as to the apparent conflicts in the evidence regarding unsecured creditors may well lie in the confused state of the defendant's books and the resulting difficulties in ascertaining creditors, referred to by Mr Read. For the present, however, I think I must proceed on this application on the basis that the only unsecured creditors whose debts are proved to be due and owing are the preferential creditors and, subject to the issue of tender, the first plaintiff.

27 Turning to that issue, it was acknowledged by the first plaintiff that, on the day before this hearing, the amount of the debt had been tendered to it by a company, Rustic Haven Pty Ltd. That is a company in which Mr Palaniappan is a shareholder. The payment was apparently tendered expressly on the basis that there was no acknowledgement that the defendant was indebted to the first plaintiff. The tender was refused by the first plaintiff, principally, I was told by its counsel, out of a concern that in the event of a liquidation of the defendant, the payment could be treated as a preference or something of like nature.

28 In any event, counsel for the first plaintiff contended that the tender of the amount of the debt was irrelevant. He submitted, first, that the first plaintiff was entitled to reject the tender and, secondly, whether or not the first plaintiff was entitled to reject it, the rejection of the tender meant that the debt was not extinguished.

29 I was referred to Australian Mid-Eastern Club Ltd v Yassim (1990) 1 ACSR 399. In that case, after a winding-up application had been lodged, but before it was heard, the defendant delivered to the plaintiff's solicitors a cheque for the amount of the alleged debt on a "without admission" basis. The cheque was banked by the plaintiff's solicitors but, after taking instructions from the plaintiff, a cheque in the same amount was returned to the defendant. The question in issue was whether the plaintiff had lost his standing as a creditor of the defendant. It was held at first instance that, although made "without admission", the payment constituted a valid tender, but because it was refused the debt had not been extinguished. That decision was affirmed by the New South Wales Court of Appeal. The Court of Appeal held (at 403) that even where a valid tender is made, a refusal of that tender (whether for good, bad or no reason at all) does not eliminate the debt in question. The relationship of debtor and creditor still subsists. The tender is no answer to a claim for the debt unless there is a continued readiness to pay, coupled with an actual payment into court. See also Occidental Life Insurance Co of Australia v Life Style Planners Pty Ltd [1992] FCA 549; (1992) 9 ACSR 171 and Acatel Australia Ltd & Anor v PRB Holdings Pty Ltd (1998) 27 ACSR 708.

30 It follows, in my view, that it is irrelevant whether, as contended by counsel for Mr Lao and Mr Palaniappan, the first plaintiff's concerns as to the tender were, as a matter of law, unfounded. It was not in issue that the tender was rejected and there was no suggestion that the money had been paid into court. Accordingly, an amount of $4735.50 remains due and owing by the defendant to the first plaintiff.

31 Counsel for Mr Lao and Mr Palaniappan conceded that an amount of $246,989.18 was due and owing to the preferential creditors. He did not take issue with the statement of Mr Read that the defendant had no money to pay those debts. He submitted, however, that once the receivers and managers effected a sale of the land owned by the defendant the preferential creditors would be paid. That was necessarily the case because the debts stood as charges against the land and had to be paid to enable the receivers and managers to give good title to a purchaser. As the preferential creditors would necessarily be paid when the land was sold, it was not appropriate to make a winding-up order on the basis of those debts

32 Counsel said that the receiver and manager had already received a tender from Rustic Haven in an amount of some $6,000,000 for the land. However, it appears from the affidavit of Mr Palaniappan sworn on 26 May 2003 that what the receivers and managers have, in fact, received is only an expression of interest by Rustic Haven and that expression of interest is on terms that have not been disclosed in the affidavit. It is not suggested that any offer capable of acceptance has been made for the land by Rustic Haven, or any other party.

33 I am satisfied the plaintiffs have established that the defendant has debts which are due and owing and that the defendant does not have the funds to meet those debts. If the defendant is able to meet those debts at all, it will only be able to do so after the receivers and managers have sold the land owned by the defendant. It appears from the evidence that the land is the defendant's only substantial asset and the development on that land is its only significant undertaking. Mr Read is unable to say when it is likely the land will be sold, or whether, when sold, there will be any surplus to pay any unsecured creditor. He is also unable to say, because of the state of the defendant's financial records, whether there are other unsecured creditors, currently unaccounted for.

34 In the circumstances, I am satisfied that the defendant is insolvent and that it is appropriate that a winding-up order be made.

35 It was submitted on behalf of the plaintiff that, if a winding-up order were made, it would be appropriate for a common liquidator to be appointed to the defendant and RRCM. An order that RRCM be wound up was made on 5 June 2002.

36 Mr Lao and Mr Palaniappan opposed a common liquidator being appointed and contended that, if a winding-up order were made, separate liquidators should be appointed to the defendant and RRCM.

37 I accept that, in appointing a liquidator, the wishes of the creditors, whilst not binding on the Court, are to be taken into account and little or no weight is to be given to the wishes of the company in that respect: Re Midland & Investment Corp [1887] WN 58; Re Bruton Pty Ltd (1990) 2 ACSR 277; Re Pacific Acceptance Corporation Ltd (1977) 2 ACLR 528. I also accept that in a liquidation of several companies within a group, the liquidation of the companies should be undertaken by the same liquidator unless serious conflicts of interest are bound to arise: Re Bruton Pty Ltd; Re Nida Pty Ltd & Ors (1992) 10 ACSR 195 at 198

38 It was submitted on behalf of Mr Lao and Mr Palaniappan that the defendant and RRCM were not companies within a group, so that principle had no application in the present case.

39 I do not consider, however, that the issue of whether or not a single liquidator should be appointed is to be approached so narrowly. In his affidavit of 21 May 2003, Mr Read says:

"The company's books and records indicate that prior to our appointment there were a significant number of intercompany transactions between the Company and RRCM ... As explained in my affidavit filed in COR 99 of 2003, RRCM ... also has significant debts which are due and owing but it does not have funds or readily realisable assets to pay those debts. The state of both companies' books and records in this regard is confused and it makes it difficult to determine the amounts which may be owing by each company to the other. Accordingly the issues relating to the state of the intercompany account will require detailed investigation in order to arrive at the true state of the account between them. In addition, because of this confusion, it is not clear from the records of the respective companies whether all of the creditors have been recorded and whether, if they have been recorded, the recording is accurate. I believe these issues can only be resolved through an appropriate process of investigation, such as interviews with the Company's directors and the calling of proofs of debt."

40 I accept the plaintiffs' submission that the affairs of the two companies are so closely interwoven that it is clearly appropriate for one person to have control over, and access to, all of the books and records so that the companies' affairs may be properly and efficiently sorted out. There is no inevitability that a conflict of interest will arise, but if one does arise, the appropriate time to deal with it is then: Re Nida Pty Ltd & Ors op cit at 202.

41 I therefore consider that the defendant should be wound up in insolvency and that, subject to his consent, the liquidator appointed to RRCM should be appointed as liquidator of the defendant.

42 In view of my finding on the insolvency ground, it is unnecessary to consider the alternative ground relied upon.

43 I will hear the parties on the appropriate form of orders and on costs.