Sunstate Orchards Pty Ltd ACN 095 659 733 v Citrus Queensland Pty Ltd

REASONS FOR JUDGMENT 1 This is an application made under sections 459A and 459P of the Corporations Act 2001 (Cth) (the "Corporations Act") by a creditor, Sunstate Orchards Pty Ltd ("Sunstate Orchards"), for an order that the defendant Citrus Queensland Pty Ltd ("Citrus") be wound up in insolvency. 2 The background to the application is this. 3 In Federal Court proceeding QUD400 of 2005, Citrus, Mr Peter Michael Tracy, the sole director of Citrus, and another company incorporated by Mr Tracy called Sunstate Citrus Pty Ltd ("Citrus No. 2"), contended, put simply, that in reliance upon a number of representations said to have been made by Sunstate Orchards and its director, Mr Andrew Colin Strahley, to Citrus and Mr Tracy, Citrus as buyer entered into a contract with Sunstate Orchards as seller, to purchase two citrus orchards, one described as the Tiaro Orchard and the other as the Bundaberg Orchard; particular chattels, and, a contract to purchase land located at Maryborough containing a fruit packing shed. Certain implementation steps were said to have been taken in reliance on the representations. The representations were said to concern matters of existing fact such as fruit production and crop yields in a particular year and future matters such as likely costs of production, net profit and production pack‑out rates applicable to fruit crops that were to be grown on the orchard lands in particular periods, among other matters. 4 These representations were said to be misleading when made, on a number of grounds. Citrus, Mr Tracy and Citrus No. 2 claimed against Sunstate Orchards and Mr Strahley (the respondents in the proceeding) damages for the contended losses suffered in reliance upon the representations. The respondents contested the entire content of the claims including the formulation of the principal claim for damages concerning the contended loss of value in the acquisition of the lands. In addition, Sunstate Orchards brought a cross‑claim in the proceeding against Citrus on the footing that Citrus had failed to settle the contract for the acquisition of the packing shed land, had repudiated the contract and had caused Sunstate Orchards to suffer loss and damage. Sunstate Orchards also cross‑claimed against Citrus for payment of an unpaid loan of $150,000 plus interest. The principal controversy on these factual matters was one between Mr Tracy for Citrus and Mr Strahley for Sunstate Orchards. 5 After an 18 day trial and a lengthy judgment, the primary judge on 5 September 2008 dismissed all claims of all applicants. No contended misrepresentation was established. No finding of misleading or deceptive conduct was made against the respondents. The claim against Mr Strahley was dismissed. The applicants having tested at trial each of the propositions they contended for, were wholly unsuccessful. On 17 October 2008, the primary judge ordered the applicants including Citrus to pay the costs of Sunstate Orchards and Mr Strahley of the proceeding excluding the costs of particular interlocutory applications. Sunstate Orchards and Mr Strahley were ordered to pay the costs of four interlocutory applications dealt with in the course of the proceeding. The solicitor for Sunstate Orchards and Mr Strahley, Mr Cotter, contends by his affidavit that the fees and costs of his clients of the proceeding are approximately $1,467,000 although those costs have not yet been assessed. 6 Also on 5 September 2008, the primary judge gave judgment against Citrus in favour of Sunstate Orchards on the cross‑claim for damages in the sum of $385,383 for breach of the Packing Shed Agreement and ordered Citrus to pay Sunstate Orchards the outstanding unsecured debt of $150,000. Citrus was also ordered to pay interest on each amount. On 17 October 2008, the primary judge assessed interest on those amounts up to the date of judgment at $163,409.02. Accordingly, judgment was entered in favour of Sunstate Orchards against Citrus in the sum of $698,792.00. 7 During the course of the proceeding, the Full Court of this Court on 1 June 2006 ordered Citrus to provide security for the costs of the respondents to the proceeding of $150,000. A further order for security was made by the primary judge on 5 December 2006 of $75,000. Total security of $225,000 was paid into Court by Citrus. 8 Citrus, Mr Tracy and Citrus No. 2 (the appellants) have filed a notice of appeal from the whole of the judgment of the primary judge. The appeal, as a result of the matters to be mentioned shortly, is to be heard in the August Sittings of the Full Court commencing on 17 August 2009. On 10 December 2008, the Court ordered that the appellants on or before 9 January 2009 provide security for the costs of the respondents to the appeal in an amount of $105,000 and the appeal be stayed until provision of the security or further order. The appellants were ordered to pay the respondents' costs of the security application. Security was not provided by 9 January 2009. On 6 March 2009, the Court extended the date for provision of the security to 9 March 2009 and security was provided by Citrus by that date. 9 On 10 December 2008, the Court granted an opposed application for a stay of the orders of 5 September 2008 on the cross‑claim for payment by Citrus of $698,792.00, on condition that Citrus pay into Court an amount of $195,782.83 by 9 January 2009. That amount represented the unpaid loan component of the orders together with interest referable to that loan, up to judgment on 5 September 2008, of $45,782.83 (Citrus Queensland Pty Ltd v Sunstate Orchards Pty Ltd [2008] FCA 1867). Citrus did not pay into Court the amount on which the stay was conditioned, by 9 January 2009. It has not been paid since 9 January 2009. Thus, there is no stay of the judgment debt on the cross‑claim. On 25 February 2009, Sunstate Orchards made demand for payment of the judgment debt. No payment has been made. 10 On 18 March 2009, Sunstate Orchards filed this application. The application and supporting affidavits were served at the registered office of Citrus on or about 18 March 2009. Mr Tracy was served with the papers on 21 March 2009. The application was returnable on 17 April 2009. At approximately 4.15pm on 16 April 2009, Mr Tracy as sole director of Citrus resolved in terms of s 436A(1) of the Corporations Actand Mr Jonathan McLeod was appointed administrator of Citrus. On 17 April 2009, Mr McLeod, through counsel on his behalf, sought an adjournment of the winding‑up application on the footing that Mr Tracy had foreshadowed in writing a proposed Deed of Company Arrangement ("deed") to be put to creditors. The administrator sought time to talk to Mr Tracy "to see how good the Deed of Company Arrangement is". Mr Lynch, solicitor, who was given leave to appear on behalf of Mr Tracy, made submissions that Mr Tracy had agreed to fund the appeal proceeding for the benefit of creditors. 11 Citrus which has at all material times acted as a trustee, is manifestly insolvent. During the course of the earlier proceeding Mr Tracy conceded in evidence that Citrus could not pay any judgment if unsuccessful in the litigation or any order for costs. Mr Tracy accepted in evidence that Citrus did not have sufficient assets to provide security for costs as earlier sought in an amount of $87,000. Mr Tracy ultimately provided loan monies to Citrus to fund the provision of security. The amount on which the stay order was conditioned has not been paid. Citrus borrowed $2,210,000 from the National Australia Bank secured by a fixed and floating charge over its assets and undertaking and specific mortgages over land registered in its name. Citrus failed to comply with obligations under those instruments and on 17 August 2006 the bank entered into possession of particular property. On 7 March 2007, the bank appointed receivers and managers of the assets and undertakings secured by the fixed and floating charge. The amount owing to the bank by Citrus at the date of appointment was $2,875,090. 12 The bank realised property under its control on 19 March 2007 and the receivers and managers realised property the subject of the bank's charge. An amount of $2,588,578 was paid to the bank in reduction of the debt. At 15 December 2007, a value of nil was ascribed to assets of Citrus subject to the charge. The charge has not been released. The amount still owing to the bank, the subject of the charge, is estimated at $600,000 which essentially represents accumulated interest on the debt. 13 Mrs Adrienne Tracy in March 2005 made a loan to Citrus of $1,150,000 secured by a second ranking fixed and floating charge over the assets and undertaking of Citrus and mortgages over land owned by Citrus. An amount of $1,994,094 is due and payable to her. The fixed and floating charge has not been released. 14 There are, it seems, only two other creditors of Citrus. Mr Peter Tracy claimed to be owed $330,000 in respect of loans made to Citrus in respect of security although an amount of $1,460,644.95 is now claimed by Mr Tracy according to his Proof of Debt lodged in the administration. Mrs Tracy now claims principal and interest of $1,998,085.61 according to her Proof of Debt. The second creditor is Mr Peter Nichols who claims a debt of $46,774.22 for contract services provided in the year ending 30 June 2005. The company ceased trading in 2005. On 23 June 2005, Mr Tracy resolved that Citrus No. 2 (Sunstate Citrus Pty Ltd) was insolvent or likely to become insolvent and that Mr David Hambleton be appointed as administrator of the company in accordance with Part 5.3A of the Corporations Act. 15 The field of creditors therefore are the bank, Mr Tracy, his wife Mrs Tracy, Mr Nichols and the judgment creditor. 16 On 17 April 2009, the winding up application was adjourned to 29 April 2009 to enable the administrators to isolate and identify with Mr Tracy the terms and conditions attaching to his proposal to establish a Deed of Company Arrangement and how that deed might be funded. Since the field of creditors is very contained and Mr Tracy has the carriage of Citrus's affairs and is the party proposing the deed, the application was adjourned to 29 April 2009 to enable discussions to take place between Mr Tracy and the administrator. Those discussions would necessarily inform the exercise of the Court's discretion on the question arising under s 440A(2) as to whether the Court could be affirmatively satisfied that "it is in the interests of the company's creditors for the company to continue under administration rather than be wound up". 17 The administrator was ordered to provide a report arising out of his discussions with Mr Tracy in relation to the company's affairs and Mr Tracy's proposal for a deed. A report was filed on 27 April 2009. In that report, Mr McLeod confirms the field of creditors of Citrus as discussed in these reasons. He says he has spoken with Mr Tracy. He is to receive the books of account and financial statements of Citrus from Mr Tracy and the company's former accountant shortly. He has not had time to determine whether any other assets might be available to the company arising out of any transactions that might be susceptible of challenge. The company is plainly insolvent. Mr McLeod attaches to his report a deed proposed by Mr Tracy by which he proposes to continue to fund the costs of the appeal, which costs would be repaid to him in priority. Any fruits of a successful appeal would be available to the creditors. Upon approval of the deed, the day to day management, operation, control, supervision and administration of Citrus would be returned to Mr Tracy subject only to the specific reservations expressed in the deed (cl 6.6.1). During the arrangement, Citrus, subject to the overall supervision of the administrator, would be entitled to continue its business and undertaking (cl 6.6.2). That undertaking now involves the acquisition of legal services in the conduct of the appeal and the conduct of consequential proceedings. 18 Clause 7.4 of the deed provides for a discharge of claims against Citrus. By cl 9.1.3, the proceeds of any judgment against Sunstate Orchards or Mr Strahley in the appeal or any subsequent retrial will be paid into the fund established for creditors under the deed. By cl 9.2.1, Mr Tracy shall cause Citrus to prosecute the appeal and shall pay all legal expenses of Citrus in so doing. A monthly report is to be made to the administrator. In the event that the administrator in good faith believes that Citrus is failing to prosecute the appeal with due diligence, he may require Citrus to show cause why he should not convene a meeting of creditors and seek termination of the deed. By cl 9.2.6, Mr Tracy agrees to pay Citrus's costs of conducting any retrial of the primary proceeding and in the event that the administrator forms a good faith belief that Citrus is failing to prosecute any retrial, a meeting of creditors can be convened to consider termination of the deed. 19 On 29 April 2009, the application again came before the Court. The administrator sought an adjournment of the application until a date after the second meeting of creditors on 22 May 2009 at which the deed proposed by Mr Tracy is to be considered. The administrator offers an undertaking not to sign the deed if approved by creditors until the matter has come before the Court again. The administrator says that the creditors should decide the matter. Mr Lynch on behalf of Mr Tracy supports that view. The administrator says that the Court may, in any event, terminate the Deed of Company Arrangement under s 445D(1) of the Corporations Act on any of the grounds identified in that section including a ground that effect cannot be given to the deed without injustice or undue delay (ground 445D(1)(e)) and that the deed should be terminated for "some other reason" (ground 445D(1)(g)). 20 Mr Tracy has not filed any affidavit that gives content to how he would actually fund the deed and the obligations he has assumed under the deed to fund the costs of the appeal and any consequential proceeding. The application was adjourned on 17 April 2009 to enable the administrator to conduct discussions so as to establish the precise basis on which Mr Tracy could and would fund the appeal and any subsequent proceedings, particularly having regard to the insolvency of Citrus and the history of its financial position. Mr Tracy has not filed any affidavit identifying where the funds would come from and how he would propose to provide funds to support the obligations contained in the deed. Mr Lynch seeks a further adjournment to enable such an affidavit to be filed. 21 Mr Tracy has had ample time to prepare an affidavit identifying these central matters. 22 The administrator considers that Citrus should execute the proposed Deed of Company Arrangement. Four factors are identified. The administrator says the estimated return is expected to be higher under the deed than the return to creditors should the company be wound up. Secondly, the deed proposal is made at no direct cost to creditors and provides for a "potential return" to creditors that is well above any potential return under liquidation. Thirdly, the deed is subject to further consultation with creditors and the administrator so as to ensure that there is no exposure with respect to potential adverse costs orders in any proceeding. Fourthly, the administrator says that he has been advised by the director that "he is sufficiently financial to proceed with funding the appeal and the retrial of the matter (should one be ordered by the Court of Appeal)". 23 There is no content recited in the report or in any affidavit from Mr Tracy as to how that funding would be provided or as to the basis upon which a view could be formed that Mr Tracy "is sufficiently financial to proceed" with the obligations he proposes to undertake under the deed. 24 The application ought not be further adjourned. 25 Citrus is to be wound up in insolvency for these reasons. The company is manifestly insolvent. If the appeal is unsuccessful, no creditor will receive anything. If the appeal is successful, the Full Court is likely to order a retrial of the principal proceeding. Mr Tracy must then fund Citrus's costs of that action to trial and judgment and satisfy any security for costs orders likely to be made against Citrus. No funds will be available to creditors unless and until Citrus establishes a judgment in its favour upon a retrial and is successful in any appeal, if filed. The proposed fund to be established for creditors is contingent upon many uncertainties. The principal claim has already been the subject of a determination by a superior Court adverse to Citrus on the merits, after a lengthy trial. Although the appeal cannot be characterised as frivolous or vexatious, the judgment of the Court at first instance ought not to be treated as simply a provisional determination of the issues. The claims made by Citrus have been fully ventilated in a trial and judgment entered. Citrus made an application for a stay which was conditionally successful, yet the condition attaching to the stay was not satisfied. 26 The proposed adjournment of the winding‑up application coupled with the proposal to establish a Deed of Company Arrangement on the terms put forward by Mr Tracy simply defeats the order in relation to the stay application. 27 Should Citrus ultimately be successful in a retrial of its proceeding, the likely award of damages will not exceed the debt due to the bank under its charge, presently assessed at $600,000, together with accumulating interest. On one view, the potential damages may be formulated in this way. The settlement sum paid in acquisition of the orchards was $3,005,986. Miscellaneous expenses were $138,696. The market value based on the case put forward by Citrus, at the relevant date, was $2,800,000 resulting in a loss of $344,682. However, for present purposes, I proceed on the footing that damages in the principal action may be in the range of $600,000 to $1,000,000. The primary judge in the principal proceeding did not assess damages in light of other findings. If an award of damages ultimately made, does exceed the bank's debt, the excess of damages will flow to Mrs Tracy under her charge. The balance of her claim would remain unsatisfied as would the claims of Mr Tracy and Mr Nichols and any claim Sunstate Orchards and Mr Strahley may have based upon unsatisfied costs orders. Thus it follows that the bank may be in a significantly better position under the deed if the contingencies upon which a fund depends all fall in. Mrs Tracy may be partially advanced in recovery of some of the debt owed to her. However, I cannot be satisfied that the creditors as a group are better off by allowing the company to continue in administration rather than in liquidation. The administrator and Mr Lynch contend that the bank has breached its duty to Citrus in respect of the treatment of water licences in relation to particular lands, and any step taken by the bank to recover any further monies under the security (such as the proceeds of a judgment) would be resisted and, if necessary, Citrus would commence proceedings seeking appropriate relief. That action represents another proceeding which Mr Tracy would be required to fund in order to prevent the bank attaching, under its security, any damages awarded as a result of a proposed retrial. 28 The discretion under s 440A(2) is to be exercised having regard to the well known observations of McPherson J (Davies and Pincus JJ concurring) in Creevey v Deputy Commissioner of Taxation (1996)19 ACSR 456 (see also Re First Netcom Pty Ltd (2000) 35 ACSR 615, per Santow J) concerning the closely related question of whether the creditors could hope to get more by way of payment of their debts from administration rather than liquidation and whether there is persuasive evidence of assets which if realised under one form of administration rather than the other would produce a larger or accelerated dividend to the creditors. The hope must however be a real and not remote possibility, unclouded by cascading contingencies all of which must fall in before an asset might become available to the creditors as a group. In Creevey, the Court discounted a contended claim as a possible asset available to creditors. In that case the foreshadowed claim had not been formulated in any concrete way. The claim in this case has been formulated but has already been found to be unmeritorious after a lengthy trial. A liquidator of Citrus could form a view about the merits of the proceeding and conduct discussions with Mr Tracy as to his willingness to fund the liquidator in the conduct of an appeal and any subsequent retrial of the proceeding. 29 In considering the exercise of the discretion under s 440A(2) of the Act, I accept that there is no evidence upon which any transaction entered into by Citrus might be called into question in a way which would produce further funds to a liquidator. The question is whether the Court can be affirmatively satisfied that it is in the interests of creditors that the company continue in administration. Having regard to all of these factors, I cannot be so satisfied. It necessarily follows that the company must be wound up in insolvency. 30 The orders are those recited in the formal orders. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood.