St Leonards Property Pty Ltd v Ambridge Investments Pty Ltd [2004] NSWSC 851 | Case summary

1 By an interlocutory process filed in court today, the plaintiff seeks an order terminating the administration of the defendant, Ambridge Investments Pty Ltd, and a further order restraining, until determination of the winding up proceedings currently on foot, any further appointment of an administrator pursuant to Part 5.3A of the Corporations Act 2001 (Cth). The plaintiff's contention is, essentially, that the court should be satisfied that provisions of Part 5.3A are being abused and that the administration therefore should end. The relevant jurisdiction is that conferred by s.447A: see s.447A(2)(b). 2 The winding up proceedings commenced on 28 August 2003 with the filing of an originating process by Hayes Personnel Services (Australia) Pty Ltd, based on failure of the defendant to satisfy a statutory demand served on 23 June 2003 in respect of a debt of some $758,000. The presumption of insolvency arose accordingly on 14 July 2003. 3 On 7 October 2003, Hayes withdrew from the proceedings and Jonathan Borster applied to be substituted as plaintiff, relying on a debt of $25,000. The application was scheduled to be heard on 28 October 2003. On that occasion, Borster did not appear and Career Path (Australia) Pty Limited sought to be substituted, relying on a debt of some $316,000. That application was listed for hearing on 18 November 2003 and was subsequently adjourned to 3 February 2004. 4 On the last mentioned date, Career Path was substituted as plaintiff and the hearing of the winding up application was adjourned to 2 March 2004. The life of the originating process (s.459R) was extended to 28 May 2004. The originating process was further adjourned to 6 May 2004. On 18 March 2004, the present plaintiff appeared, claiming a debt of some $758,000. On 6 May 2004, the present plaintiff sought to be substituted as plaintiff and the proceedings were stood over to 13 May 2004 for the hearing of that application. The life of the originating process was extended to 28 August 2004. The present plaintiff was substituted as plaintiff on 17 June 2004. The hearing of the winding up application was adjourned to 8 July 2004. 5 On 8 July 2004, the defendant sought an adjournment of the winding up application with a view to seeking to resolve the matter. There was an adjournment to 15 July 2004 on which day a further adjournment to 22 July 2004 as sought and granted. On 22 July 2004, the defendant sought a further adjournment which was granted (to 5 August 2004). The granting of that adjournment was subjected to an immediate but unsuccessful application for review before the Duty Judge. The defendant was directed to file and serve its evidence by 3 August 2004. 6 At 10.15 am on 5 August 2004, Mr Stanley, the sole director of the defendant, acted under s.436A of the Corporations Act to appoint an administrator. The adjourned winding up application came before the Registrar at 11 am on the same day and two affidavits of Mr Stanley were handed up. The Registrar referred the matter to me as Corporations List Judge and, later on the same day, I made an order, having regard to s.440A and the observations of Santow J in Waste Recycling and Processing Services of NSW v Local Government Recycling Co-operative Ltd (1999) 32 ACSR 194, that the winding up application be adjourned to today. 7 The catalogue of events I have just described may be supplemented by reference to the company search annexed to Mr Rose's affidavit of 5 August 2004 which shows no less than four other winding up applications as having been initiated in respect of the defendant, each of them in the Supreme Court of Victoria. The earliest of these appears to date from November 2002 and the latest from July 2004. Each of the four is shown as current. 8 The position the plaintiff takes now is that it prefers not to press for a winding up order, unless and until the Part 5.3A administration has been terminated. The reason lies in the different consequences that will follow in terms of fixing the "relation back day" for a winding up, depending on whether the company was under administration "immediately before" the making of the winding up order. If a company is under administration "immediately before" the making of a winding up order, s.513A(c) causes the commencement of the winding up to occur on the "section 513C day" in relation to the administration, that is to say, on the day on which the administration began. However, if no administration is in place "immediately before" the making of the winding up order, the combined effect of s.513A(e) and paragraph (a) of the definition of "relation back day" in s.9 is to cause the "relation back day" to be the day on which the application for the order was filed. These matters are dealt with in Commissioner of Taxation v Macquarie Health Corporation (1988) 88 FCR 451, Macquarie Health Corporation Ltd v Commissioner of Taxation (1999) 96 FCR 238; Olsen v Nodcad Pty Ltd (1999) 32 ACSR 118. 9 In the present case, the applicable date, according to the first set of circumstances, would be 5 August 2004 while, in the second set of circumstances, it would be 28 August 2003. Particularly where it may safely be inferred, on the evidence, that a number of persons claiming to be creditors may have been paid out between 28 August 2003 and 5 August 2004, the entitlements of creditors in the winding up could be markedly different, depending upon which of the dates becomes the "relation back day". In addition, there is the important point that moves by a liquidator to pursue uncommercial transactions, as well as unfair preferences, would be governed by different timing considerations in the two alternative eventualities. 10 It has been submitted that the abuse, for s.447A(2)(b) purposes, in the present case, is the continued pattern of what may safely be inferred to be the paying off of pressing creditors and succumbing to administration only when the ability to engage in that practice had been exhausted. The initiation of the administration, at the time it was initiated, should, it was submitted, be seen as a move to maximise the chances of causing the actions of the sole director in paying creditors selectively to escape the scrutiny of a liquidator. 11 There are some puzzling aspects of the evidence of the director, Mr Stanley, viewed in the light of the evidence of one of the administrators, Mr Singleton, who, although only in office for a relatively short time, has had an opportunity to consider some of the matters that Mr Stanley put before the Court. Mr Stanley's thesis in his affidavits of 5 August is that the company was not, at that point, insolvent and would be prejudiced by liquidation because of the effects that liquidation might have under certain contractual arrangements. Mr Singleton's assessment is that the company is insolvent and in particular that certain assets referred to in Mr Stanley's affidavit as having substantial value either have no value or are of minimal value. The supposed assets concerned are described as Chambers Film Partner ($473,000), Ambridge One Film ($380,000), Leasehold Improvements 140 William Street ($295,000), shares in Neighbourhood Cable ($218,000), shares in Powertel Ltd ($25,000) and shares in WMC Ltd ($16,000), out of what Mr Stanley asserts was a total asset base of $4,837,000. 12 Mr Singleton's evidence is to the effect that, on Mr Stanley's own advice, Chambers Film Partner and Ambridge One Film represent no value; that the premises at 140 William Street to which the leasehold improvements relate were vacated some twelve months ago, so that no value can now properly be ascribed to the leasehold improvements; that the shares in Neighbourhood Cable have a very small value only; that the shares in Powertel Ltd also have a very small value only; and that there is no evidence of the company having any shareholding in WMC Limited. 13 On this basis, Mr Singleton's evidence suggests that the $4.837 million of assets represent to the extent of something like $1.4 million assets that are either non-existent or valueless, so that the more reliable figure is probably of the order of $3.437 million compared with acknowledged liabilities of $4.029 million and there is accordingly a substantial deficiency indicative of insolvency, apart altogether from the presumption of insolvency that arose by reason of non-compliance with the statutory demand. 14 The nature of these discrepancies lends credence to the probability that the sole director allowed the company to continue in operation, selectively paying off those creditors whose demands became pressing, and in circumstances where, for some time past, there was, in all likelihood, no reasonable or probable expectation of debts being met as they fell due. 15 I am not in a position to make the kind of definitive findings on these matters that would be relevant to proceedings against the sole director, but the evidence before me does bear out the base proposition that the plaintiff seeks to make, namely, that the administration was put in place for an ulterior purpose of manipulating the "relation back day" and thereby affording some measure of protection to the sole director by whom the administration was initiated. In that respect, the purpose of the director in resorting to Part 5.3A administration is reminiscent of the purpose found to involve abuse in Blacktown City Council v Macarthur Telecommunications Pty Ltd (2003) 47 ACSR 391. 16 I hasten to say that it is not, of itself, reflective of improper purpose for directors faced with a winding up application to cause the company go to into Part 5.3A administration. Indeed, in many cases that will be the proper and responsible thing for directors to do. In some cases, the demands of a creditor and the indication that the creditor will pursue a winding up application will so focus the minds of directors that they become able to take stock of the company's position more critically and, realising that the company is insolvent or likely to become insolvent, to see resort to the Part 5.3A procedure as the appropriate course. In those cases, such action is entirely responsible and proper. 17 Here, by contrast, the Part 5.3A administration can be seen to have been embarked on at a point where, as I have said, insolvency had, on the evidence, probably been in existence for some time and where creditors were being selectively paid off to relieve immediate pressure. The inference is open, and I draw it, that resort to Part 5.3A administration was for the purpose of shifting the "relation back day" in a manner motivated by the sole director's desire to achieve the maximum degree of self-preservation. 18 I propose to stand over the winding up application to 10 o'clock tomorrow before me. I now make, with immediate effect, orders 3 and 4 in the interlocutory process filed in court today, being the orders ending the Part 5.3A administration and restraining the initiation of any further such administration by the sole director. I also make orders 2 and 6 in the interlocutory process. **********

St Leonards Property Pty Ltd v Ambridge Investments Pty Ltd

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