Thomas International Ltd v Humantech Pty Ltd

Background 9 Both proceedings had been set down for a mediation that originally was to take place before 20 November 2015, and was subsequently postponed, by consent, to no later than 30 November 2015. The need for the postponement arose because the expert accountants, appointed by Thomas International and the Schutte parties respectively, needed more time to complete their joint report as to the financial position of the Deed companies in order that an informed negotiation could occur. 10 In the meantime, since the appointment of the administrators in May 2015, the Deed companies have continued to trade in circumstances where the administrators are exposed to personal liability under Div 9 of Pt 5.3A of the Act for certain of those companies' debts incurred while they continue in administration. That exposure arises from, among other sources, s 443B(2) in respect of Humantech continuing to incur liability for its rental of premises consisting of two floors in an office building in Bondi Junction used by the Deed companies and Mr Schutte's other companies, including the South African companies, for their businesses. 11 In Mr Schutte's report as to affairs of the Deed companies, as at 18 May 2015, that he made as their sole director, he set out a table of Humantech's aged receivables that then totalled $2,286,766.58, of which Thomas SA owed $1,920,074.48. Over $1.55 million of that latter sum was more than three months past due. Mr Schutte also reported that a third party debtor, PT NBO Indonesia, owed $49,684.37 of those aged receivables. Mr Schutte's report asserted that the Deed companies had total debtors of about $2.389 million and a surplus of assets over liabilities of about $710,000. 12 In contrast, the administrators advised the Deed companies' creditors in their s 439A report of 15 June 2015 that, if the Deed companies were liquidated, the estimated value of Humantech's recoverable debtors would be only $21,640 and that there would be a deficiency of assets over liabilities of about $2.345 million, while AOC would have a deficiency of about $150,000, approximately twice its realisable assets and only ACT would have a surplus, of about $340,000, principally comprised of the value of the disputed software. JCS had nominal assets and liabilities. The administrators stated: The scenario for the Company in a DOCA is summarised below. PROJECTED RETURN PROJECTED RETURN PROJECTED RETURN PROJECTED RETURN PROJECTED RETURN DOCA LIQUIDATION (HUMANTECH) LIQUIDATION (AONC) LIQUIDATION LIQUIDATION (JCS) (ACT) CREDITOR CLASS Cents/dollar Cents/dollar Cents/dollar Cents/dollar Cents/dollar Secured Creditor N/A Unknown N/A N/A N/A Priority Unsecured Creditors 100 0 7 N/A N/A Ordinary Unsecured Creditors 17 0 0 36 0

• the above figures are estimations only and any change in recoveries or proof of debts received may materially change this figure. 13 The value of the software that Thomas International challenged in the deed proceedings formed part of the administrators' estimated returns of 17 cents in the dollar for all of the Deed companies, if the deed were entered into, and of 36 cents in the dollar for ACT's creditors, if it were placed in liquidation.

The administrators' recent concerns 14 By 3 November 2015, the administrators had formed the view that the total liabilities of the Deed companies were over $2.6 million, while the total value of their assets was about $577,000, of which about $220,000 represented overseas debtors whose debts could be difficult to recover. In their view, the Deed companies were insolvent - their liabilities far exceeded the value of their assets and their income was exceeded by their expenses. 15 This view caused them to take action on 3 November 2015 by attending at the Bondi Junction premises. There is some dispute as to exactly what happened on that occasion, but it appears that the administrators sought to prevent any of the employees, including Mr Schutte, from taking any property from the premises that might be that of the Deed companies, including laptop computers. Some form of physical interaction occurred between Mr Solomons and Mr Schutte, the details of which I do not need to explain, and about which each disputes the other's version. 16 However, in the event, Mr Solomons informed the staff of the Deed companies, including Mr Schutte, that their employment was terminated effective immediately and that they should leave the premises. The administrators arranged for the locks to be changed, and placed a sign on the doors stating that the business had ceased. 17 As noted earlier, on Friday 6 November 2015, the administrators applied to wind up the Deed companies. They relied on Mr Solomons' affidavit sworn that day to establish that the companies were insolvent, and that the administrators no longer wished to be exposed to personal liability under Div 9 of Pt 5.3A of the Act for the debts of the Deed companies incurred by their carrying on business. 18 Mr Solomons gave evidence that, as far as he was aware, and based on the financial and other information that Mr Schutte and Don Stander, the chief financial officer of Mr Schutte's group of companies, had provided to the administrators, Humantech was in the following position. First, Humantech was the lessee of the Bondi Junction premises, and since the date of the administrators' appointment, had paid the full amount of rent for those premises, secondly, it had carried that rent as a cost in its accounts, thirdly, it was the owner of the IT servers and other IT equipment located at the premises, fourthly, it, together with AOC, employed all the employees who worked at those premises, fifthly, at least since the appointment of the administrators, Humantech had received no payment for any services that it may have provided to Mr Schutte, the South African companies or the Asian businesses, and, sixthly, Humantech had no written contractual arrangement with any of the latter for access to, or use of, the premises or the IT equipment, or for the storage of files at the premises. 19 As Mr Schutte explained in his affidavit of 6 November 2015, since the meeting of 3 November 2015, the Schutte parties have sought access to the computers and servers at the Bondi Junction premises, for the purposes of, among other things, running the other businesses associated with him, obtaining financial information necessary for the purposes of supporting their assertions that the Deed companies were solvent, as well as providing further information to the expert accountants for the purposes of the preparation of their joint expert report. Mr Schutte said that the premises contained hard copies of the books and records of the Deed companies, the South African companies, as well as various companies in Asia of which he was a director, and computers and the server that was relied on by all of those companies. He said that some of that material is required for the South African businesses to conduct their internet banking and other operations, and that this includes the receipt of email and telephone communications in Australia. He said that he also had left personal property there to which he no longer has access, but which he wishes to have. 20 On the material before me, there is likely to be a substantial interruption to the orderly conduct of the Schutte parties' other businesses, including the South African and Asian companies, and that interruption is likely to have some inconvenient commercial consequences for them. It is also likely that there is within the premises, and on the computers and servers located in them, material that is the subject of legal professional or client legal privilege that the Schutte parties are entitled to protect. They have a right to keep that material confidential and ensure that it is not released to third parties, including the administrators or any liquidators who may be appointed. 21 Mr Schutte gave oral evidence today that a South African company supplied the servers to the entire group, which had operated harmoniously immediately before the events of 3 November 2015. In his affidavit of 6 November 2015, Mr Schutte said that, following the meeting of 3 November 2015, he and his other businesses effectively had no access to the information stored on computers and servers located in the Bondi Junction premises. He said that the South African and other companies associated with him also conducted their businesses using that equipment and that since being locked out, his businesses had not been able to access or send emails, or access bank accounts or other business records stored on the computer and server equipment. 22 The parties sought to negotiate a compromise during the afternoon of 6 November 2015, but were unable to resolve the matter. At about 6.15 pm, I adjourned the proceedings until today. The negotiations continued, unfortunately unsuccessfully, during the course of the morning today.

The financial position of the Deed companies 23 Mr Solomons stated that at 5 November 2015, the Deed companies had outstanding trading liabilities, incurred during the administration, of approximately $440,000. That sum included sums for legal expenses of the administrators of over $140,000, that the Schutte parties disputed. Nonetheless, the current liabilities for PAYG taxation and payroll tax for the Deed companies total over $185,000, the superannuation liabilities for them total over $60,000 and an amount of about $21,000 is due for Goods and Services Tax. The companies have cash at bank of about $255,000, although it is possible that there is another $26,000 available, as asserted by the Schutte parties. In addition, there are current liabilities of at least $100,000 due to trade creditors, leaving aside the disputed sums for lawyers' fees. There is also a current liability of about $31,000 for annual leave provisions for employees. 24 The Schutte parties prepared a statement of what they asserted was the Deed companies' solvency position as at 7 November 2015. This included, as an asset, $2.2 million worth of aged receivables of Humantech comprising, among other sums referred to in Mr Schutte's report as to affairs as at 18 May 2015, both the $1.92 million due by Thomas SA and the $49,684.37 also due by PT NBO Indonesia. 25 AOC's manager of customer care, Ms Leisel Klokow, gave oral evidence today. She said that on 7 October 2015 she had had a conversation with a woman called Suzanne who was an employee of PT NBO Indonesian. She said that Suzanne had told her that her company had been instructed by Thomas International not to make any payment of moneys due until "the whole legal case has been settled". However, Ms Klokow's account gave no details as to when that "instruction" was given, or of any person at Thomas International who had given it. In any event, by October 2015, the money was at least five months past due. 26 It is apparent that the Schutte parties' solvency position contrasted substantively with the position identified by the administrators.

The Schutte parties' submissions 27 The Schutte parties argued that I ought adjourn the administrators' application for a winding up to occur, so that they could collect more information and provide more detail to be able to demonstrate that the Deed companies are, in fact, solvent. They also argued that they should have access to the computers and servers to enable the experts to be provided with the material that they required to complete their joint report, and that an immediate appointment of liquidators would have a significantly adverse impact on the nature of what could be negotiated in the mediation that is to occur by 30 November 2015. They contended that the solvency position of the Deed companies demonstrated in their version of the accounts supported the maintenance of the current status quo until more investigations could be done with greater detail and precision as to the actual solvency position.

Consideration 28 Under s 436A(1) of the Act, a company may appoint an administrator if its board has resolved to the effect that in the opinion of the directors voting for the resolution, the company is either insolvent, or likely to become insolvent at a future time and that an administrator of the company should be appointed. 29 Based on his report as to affairs and the s 439A report to creditors, it is clear why Mr Schutte, as the sole director of the Deed companies, formed such an opinion. Indeed, the circumstances suggest that the Deed companies were insolvent as at 18 May 2015. Having regard to the then, and current, dispute that the Deed companies and other Schutte parties have with Thomas International as to its entitlement to terminate the provision of its intellectual property the subject of the licence proceedings, the Deed companies are likely to remain in that position unless those proceedings are resolved so as to reverse the position. 30 A liquidator may by writing appoint an administrator to a company, under s 436B, if he or she thinks that the company is insolvent, or is likely to become insolvent at a future time. That provision, at least potentially, may be able to be used for the purposes of reconstructing or resurrecting the Deed companies' businesses if the parties are able to resolve matters at the mediation. 31 There are three normal outcomes of an administration of a company provided under s 435C(2), namely, that a deed of company arrangement is executed by both the company and its administrator, the company's creditors resolve that the administration should end, or the company's creditors resolve that the company be wound up. 32 Ordinarily, where a court sets a deed of company arrangement aside, in the absence of an order under s 447A that varies the application of Pt 5.3A, the company is deemed to have passed a special resolution under s 491 that it be wound up voluntarily (s 446A(2)). 33 While it is in administration, an administrator has control of the company's affairs under s 437A including its business and property, and may carry on that business and manage the property and those affairs, or terminate or dispose of any, or all, parts of the business or property. The powers of all other officers of the company are suspended (s 437C). The only person who can deal with the company's property is the administrator (s 437D). An administrator has personal liability for certain debts of the company, under Div 9 of Part 5.3A of the Act. 34 Brennan CJ, McHugh, Gummow, Kirby and Hayne JJ explained the nature and extent of the Court's powers, and the balance between those powers and the control that the Act gives an administrator of a company in administration under the analogue of Pt 5.3A of the Act in Patrick Stevedores Operations No. 2 Pty Ltd v Maritime Union of Australia (1998) 195 CLR 1. Their Honours said (195 CLR at 37-38 [51]-[52]: Although an administrator has power to conduct the business of the company during administration (s 437A(1)) the administrator is personally liable under s 443A for debts he or she incurs in doing so. The administrator then has a right of indemnity against the company's assets (ss 443D, 443E), ranking in priority to unsecured debts and, generally speaking, debts secured by a floating charge (s 443E(1)). The administrator has a lien over the company's property to secure that right (s 443F). But if an administrator forms the view that the company is and is likely to remain insolvent, it is unlikely that a decision would - or ought - be taken to continue trading. Personal liability of the administrator for the debts incurred would be the price of unsuccessful trading by an insolvent company. If the employer companies are indeed insolvent and if there be no prospect of supplying their employees' labour to a stevedore under a profitable contract, the administrators are not likely to incur debts in carrying on trading, without a third party indemnity. An administrator has the power to carry on trading though the company is insolvent, the personal liability of the administrator being the protection given by the Corporations Law to the company's creditors. But the statutory protection of the creditors generally cannot be set aside by a court's order in litigation between a plaintiff party and the company purporting to suspend s 443A of the Corporations Law [cf the provisions relating to liability for rent: s 443B(2), (8)]; nor can a court order an administrator to incur, or to run the risk of incurring, a personal liability under s 443A in order to preserve the rights of a plaintiff against the company. The administrator must act impartially as among all parties having or claiming to have an interest in the present or future assets of the company and must make those decisions which, in the light of contemporary circumstances, best serve those interests. It is for the administrator, in exercise of the discretionary powers conferred by s 437A, to decide whether or not to carry on the company's business and the form in which it should be carried on during the administration. (emphasis added) 35 Their Honours rejected an argument that if an administrator wanted to exercise one of his or her powers, he or she could apply to the Court, saying in relation to relevantly identical statutory provisions to those in Pt 5.3A and elsewhere in the Act (195 CLR at 41 [62]-[63]): The administrators cannot be deprived of the discretion which the Corporations Law reposes in them. True, they must obey the general law in exercising their discretions [Waters v Public Transport Corporation (1991) 173 CLR 349 at 413], including the law governing the dismissal of redundant employees, but that is not to say that their discretionary power is subject to court approval. No doubt, a decision made by an administrator may be challenged by appeal under s 1321 of the Corporations Law but there is a radical difference between a challenge to an exercise of discretion under s 1321 and a denial of the administrator's discretionary power without the court's prior approval. Section 447A of the Corporations Law empowers the Court to "make such order as it thinks appropriate about how [Pt 5.3A] is to operate in relation to a particular company". Assuming that the Federal Court could exercise that power, it would not support an order taking away the discretionary powers of the administrators. (emphasis added) 36 The administrators have had responsibility for the conduct of the affairs of the Deed companies for over five months. In that period they prepared a substantial report under s 439A for the creditors to consider, and in the period up to 3 November 2015 were willing to allow the Deed companies to continue to trade in the exercise of their discretions under the Act. The administrators no longer wish to expose themselves to personal liability for any debts of the Deed companies, and consider that each of those companies should be placed into liquidation. 37 However, the Schutte parties wish the administrators to continue the rental of the Bondi Junction premises and the functioning of the computer, server and telephone equipment located there while the Schutte parties conduct other businesses and investigate a basis on which to challenge the administrators' opinion as to the solvency of the Deed companies. The Schutte parties seek orders for adjournment of the administrators' interlocutory application and requiring them to reopen the Bondi Junction premises and provide access to it and the computer, servers and telephone systems there. 38 Such orders, if made, would prevent the immediate winding up of the Deed companies and would protract the administration. Moreover, the administrators would be exposed to incurring further actual, or potential, personal liability under Div 9 of Pt 5.3A. Orders of that nature are outside the contemplation of the Act. I do not consider that it is appropriate to make any order that would have the effect of compelling the administrators to incur expenses on behalf of the Deed companies, or otherwise carry on their businesses that they consider to be insolvent. Indeed, to do so may expose them to liabilities under the Act of a wholly different nature, including, potentially liabilities for trading while insolvent: Patrick 195 CLR at 37-38 [51]-[53], 40-41 [60]-[63]. 39 Accordingly, I reject the Schutte parties' application for an adjournment of the administrators' interlocutory application.

What form of winding up ought be ordered? 40 Having regard to the nature of the substantive disputes between the parties to both current proceedings, I am of opinion that the winding up of the Deed companies should be conducted by the Court, through liquidators acting as its officers. This is not a case where it is appropriate that the deeming provision in s 446A(2) should result in a creditors' voluntary winding up. 41 Accordingly, I reject the administrators' argument that I should vacate order 4 made on 10 July 2015, so that s 446A(2) will operate to deem that there be creditors' voluntary windings up. 42 In the alternative, the administrators applied, in the names of the Deed companies pursuant to their powers under Div 3 of Pt 5.3A, and, in particular, ss 437A(1) and 437B, for an order that each Deed company be wound up in insolvency under s 459P(1)(a). 43 It is important, having regard to the substantive conflicts that have emerged between the various interests in both proceedings, that the Court should have control of the windings-up. This will provide some assurance to all of the parties that the liquidations will be conducted independently and impartially under the auspices, and by officers, of the Court. 44 I am satisfied that the administrators have standing to apply in the names of the Deed companies under s 459P(1)(a) of the Act. I also consider that they could apply under ss 459P(1)(b) and 459P(2)(a) as persons who are creditors, even if only in respect of a contingent or prospective debt, in the circumstances that they could have personal liability for the debts incurred by the Deed companies in conducting their businesses, such as for rent and the provision of services to the Bondi Junction premises, including the costs of running the computer, server and telephone equipment. In those circumstances, I am of opinion that the Court has power to grant an application made by the Deed companies, through the administrators, and independently, by the administrators as creditors, to wind up each of the Deed companies in insolvency. 45 I am not persuaded that there is a substantive basis to consider that the Deed companies have receivables of a value different from those ascribed by the administrators. In particular, I am of opinion that Thomas SA, a company controlled or run by Mr Schutte, and of which he is one of its three directors, has not been either willing or able to pay over $1.55 million that, as at 18 May 2015, had been past due for over 90 days or the subsequently incurred amount of about $370,000 due at that date, both of which remain unpaid to this time. 46 There is no evidence before me that the South African companies, or the other companies within the Schutte parties, have sufficient assets to discharge the debts owed to the Deed companies reflected in the aged receivables current asset totalling $2.325 million asserted in the Schutte parties' solvency position statement. Moreover, the Schutte parties did not even put into evidence a set of historic or recent accounts of any of the Deed companies, or the South African companies that are their debtors, to demonstrate that any or all of them is or are solvent, or to demonstrate collectability of those debts by the Deed companies. 47 I appreciate that the unavailability of material on the computers and servers in the Bondi Junction premises may have made it difficult for the Schutte parties to produce immediately current information. However, I do not accept that the Schutte parties have been unable to have access to any material capable of demonstrating some historical substance to their assertion that the very large amount of aged receivables is collectible, or to cause me to doubt the correctness of the administrators' assessment that these receivables are effectively worthless in a liquidation. 48 Moreover, Mr Schutte has given no explanation as to why none of those aged receivables has been paid. The Schutte parties gave no explanation in relation to this history of non-payment beyond Ms Klokow's hearsay account as to why, as at October 2015, the Indonesian debtor had not paid a small part of the total aged receivables due. 49 For the reasons I have given, each of the Deed companies is insolvent. There is no evidence that they have received any substantive income during the administration, let alone that they can meet their current liabilities for tax and trade creditors as and when they fall due.

Conclusion 50 I am satisfied that each of the Deed companies is insolvent. In all of the circumstances, I do not see that I have any choice other than to order that each of the Deed companies be wound up in insolvency. I will appoint the administrators as their liquidators. 51 Given the urgency, and what would otherwise have been the deeming effect of s 446A(2), I will also order, pursuant to s 467(3), that any notices required to be given or steps required to be taken by the Act, the Rules or by any prior order of the Court in relation to the making of the winding-up orders, be dispensed with. I will also order that the administrators' costs, including reserved costs, of their amended interlocutory application be taxed and reimbursed out of the property of the Deed companies in accordance with s 466(2), but reserve all other costs for later argument. I certify that the preceding fifty-one (51) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.

Associate: Dated: 26 November 2015 SCHEDULE NSD 751 of 2015 ASSIGNMENTS ON CONTRACT INT PTY LTD (FORMERLY KNOWN AS THOMAS INTERNATIONAL (AUSTRALIA) PTY LTD) (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 103 702 978 Second Defendant ASSESSMENT CENTRE TECHNOLOGIES PTY LTD (SUBJECT TO DEED OF ARRANGEMENT) ACN 142 139 743 Third Defendant JCS HUMAN DYNAMICS PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 121 807 752 Fourth Defendant ANTHONY DE VRIES Fifth Defendant DAVID SOLOMONS Sixth Defendant