Warne v GDK Financial Solutions; Peridon Village Nominees, application of... [2006] NSWSC 464 | Case summary

7 There was no other appearance at the hearing on 17 May, but before the hearing my associate received a copy of the letter from the solicitors for Perpetual Trustee Company Ltd, mortgagee over some properties owned by Nominees and the plaintiff in possession proceedings No 15598 of 2005, saying that their client did not intend to appear, on the basis that the applicants would not seek orders affecting any property mortgaged to their client. I mentioned this letter during the hearing on 17 May and senior counsel for the applicants confirmed that his clients would not seek any such orders. Additionally, a letter was tendered from HBOS Australia Pty Ltd written on behalf of BankWest, stating the bank's understanding that no orders would be sought adverse to its interests and on that basis the bank did not propose to appear. As far as I can see, nothing that is proposed would prejudice the interests of any secured creditor of the Retirement Villages land. Senior counsel for the Liquidators informed me that these mortgages are over parcels of land but not the assets or undertaking of any business conducted on the land. I have proceeded on that basis. Brief history of the litigation 8 The applications are the latest chapter in a very complex process of litigation involving the Retirement Villages and in particular, their management under an unregistered managed investment scheme referred to in the evidence as "the Peridon Scheme". In proceeding No 2226 of 2004, Mr Warne, who is an investor in the Peridon Scheme, seeks various orders with a view to the winding up of the Scheme. The defendants to that proceeding are GDK Financial Solutions Pty Ltd ("GDK", a promoter of the Scheme), Nominees (who became the registered proprietor after 9 March 2000, the former owner being Peridon Group Pty Ltd), Peridon Management Pty Ltd ("Management", which managed the Retirement Villages from 9 March 2000 until 9 June 2005), and Condor Asset Management Ltd (trustee of the Peridon Retirement Villages Trust). 9 In proceeding No 4462 of 2005 the Liquidators, initially as administrators, seek various orders concerning the priority of their costs. The defendants in that proceeding are Stephen Parbery (an insolvency practitioner who was appointed by the court as an independent accountant to investigate the Peridon Scheme), David Winterbottom (an insolvency practitioner who was appointed by the court to wind up the Peridon Scheme), and Management. 10 On 16 November 2004 there was a preliminary hearing before Gzell J, who made various orders and noted undertakings. The principal thrust of the orders was for the appointment of an independent accountant who would investigate and report to the court on various matters concerning the Peridon Scheme, which was declared to be a managed investment scheme required to be registered under s 601ED of the Corporations Act. Mr Warne gave the usual undertaking as to damages and in return, the defendants in proceeding No 2226 of 2004 gave a series of undertakings to the court, recorded in para 13 of the orders of the court. The undertakings included the following: "the Defendants ... will not, themselves, or by their directors, officers, servants or agents ... (d) otherwise than in a transaction in the ordinary course of the Business [the business of the Peridon Scheme], deal with or dispose of the assets of the Peridon Scheme." 11 Mr Pogroski and Mr Billingham were appointed administrators of Nominees on 28 April 2005. On 15 August 2005 the creditors of Nominees resolved that the company be wound up, and consequently Mr Pogroski and Mr Billingham became liquidators. 12 On 6 July 2005 the matter came before Young CJ in Eq, who made various consent orders under s 601EE. He ordered that the Peridon Scheme be wound up and he appointed David Winterbottom as "Appointee" to perform functions in the winding up. He directed Mr Winterbottom to provide Mr Parbury's report confidentially to members of the Peridon Scheme and ordered that any party to the proceedings or member of the Scheme was to serve on Mr Winterbottom and ASIC details of any proposal it wished to make for the future of the Scheme. He ordered Mr Winterbottom to convene a meeting of members to consider any such proposal and to file a report on the outcome of the meeting. 13 The defendants in proceeding No 2226 of 2004, including Nominees, gave an undertaking to the court, recorded at para 11 of the orders, relevantly in the following terms: "until further order each of the Defendants will not itself, or by directors, officers, servants or agents ... (d) otherwise than in a transaction in the ordinary course of the Business [the business of the Peridon Scheme], deal with or dispose of the assets of the Peridon Scheme, other than entering into leases with incoming residents or surrendering, terminating or releasing leases with outgoing residents, without first giving 7 working days notice in writing to the Plaintiff and ASIC." 14 Later, Young CJ in Eq observed that on 6 July 2005 "the parties had sensibly agreed on a commercial solution as to the way forward" (Warne v GDK Financial Solutions Pty Ltd [2006] NSWSC 259 (7 April 2006), at [62]). Evidently the so-called commercial solution was reached on an assumption that it would be possible to resolve the outstanding issues between the parties swiftly. That proved not to be so. Significantly for present purposes, the arrangements reflected in the undertakings and orders of 6 July 2005 implied or assumed that the Retirement Villages would continue to function. The functioning of retirement villages includes turnover of unit occupation, as residents die or go to nursing home accommodation or leave the units for other reasons, and are replaced by new residents, processes that involve payments by incoming residents and payments to outgoing residents. 15 It will be seen that the undertaking given on 16 November 2004 prevented Nominees (and, subsequently, the Liquidators) from entering into any new leases of units in the Retirement Villages unless the granting of leases was "in the ordinary course" of the business of the Peridon Scheme. It may also have prevented dealings with outgoing residents by way of termination of their leases and payment of refunds and capital gains. The undertaking given on 6 July 2005 expressly permitted entry into leases with new residents and termination of leases with outgoing residents unless the requisite notice was given, but left some uncertainty about payment of refunds and capital gains to outgoing residents unless those "transactions" were in the ordinary course of business. 16 The meeting of members was held on 6 September 2005, and the outcome is described in Young CJ in Eq's judgment at [64]-[71]. The majority of the members supported a proposal by TEYS Property Funds Ltd, but as his Honour noted, there is controversy about certain aspects of the meeting. 17 The trial of proceedings No 2226 of 2004 and 4462 of 2005 took place before Young CJ in Eq on 27, 28 and 29 September and 5 October 2005. In proceeding No 2226 of 2004 his Honour had to decide a complex series of questions relating to the precise definition of the Scheme and further steps in its winding up. In proceeding No 4462 of 2005 he had to decide a series of questions, also complex, about the remuneration claims of, respectively, the Liquidators, Mr Parbery and Mr Winterbottom. He listed the issues in a summary way in his judgment at [80]. 18 His Honour delivered judgment on 7 April 2006, and made orders on 20 April 2006. The two proceedings were listed before me for directions in the Corporations List on 15 May 2006, when I heard some limited applications by Mr Warne and stood both proceedings over to 22 May, for further directions and the hearing of applications. I arranged for the Liquidators' application for variation of undertakings to be heard on 17 May, together with proceeding No 2559 of 2006. The application was heard as arranged, and is addressed in the present judgment. 19 By a statement of claim filed on 29 November 2005 in proceeding No 15598 at 2005, Perpetual Trustee Company sought orders for possession of certain parcels of land (not the Retirement Villages properties), against Nominees as defendant. By a notice of motion filed on 21 April 2006, Perpetual sought leave to continue the proceedings against Nominees under s 471B of the Corporations Act (but since the liquidation is a creditors' voluntary winding up, the correct section is s 500(2)). The application for leave was heard and determined by me on 15 May 2006. Mr Warne appeared, by leave. I granted leave to Perpetual to continue the possession proceeding, but I suspended the operation of my order for a short period of time. That matter has been sent back to the Possession List. 20 The Liquidators commenced proceeding No 2559 of 2006 for leave to enter into leases and for judicial advice and directions (as summarised above) on 1 May 2006. That proceeding was heard by me on 17 May and is addressed in the present judgment. Lease and licence arrangements for residents 21 Since it is being asked to authorise and give directions about payments and contractual arrangements, it is a matter of some importance that the court be provided with clear and complete evidence about the arrangements in question. This is particularly so when the arrangements are quite complicated. I have had some difficulty working out the contractual arrangements in the present case, and the payment obligations in particular, because the affidavit evidence of Mr Pogroski is expressed in general terms not obviously correlating with the documents that have been tendered, and because the documentary tender appears to be incomplete. 22 I have decided that there is enough evidence before me to permit a decision to be taken and orders to be made in the urgent circumstances that have been presented to the court. But I cannot emphasise too strongly that the court will expect, in future, that all applications in this matter must pay meticulous attention to detail. The account presented below relies on an amalgam of affidavit and documentary evidence, stitched together by some inferences that should really have been addressed expressly. 23 There are 164 residential units at the Peridon Retirement Village, according to the annexures to Mr Pogroski's affidavit (although Mr Teys has given evidence that there are 104 units). At least some of the current residents occupy their units under long-term lease agreements entered into between the resident and the Owner/licensor (a position occupied by Nominees). These arrangements are governed by the Retirement Villages Act and, subject to that Act, the terms of the individual contracts. 24 The land upon which the Retirement Villages have been constructed is vested in Nominees as registered proprietor. It appears from the judgment of Young CJ in Eq, at [153]-[165], that Nominees holds the land as trustee, presumably for the purposes of the Peridon Scheme, though there is controversy as to whether Nominees is or is not a "bare trustee". It also appears from his Honour's judgment (at [4]) that the company appointed to manage the Peridon Retirement Village, namely the company I have called "Management", ceased to occupy that role on 9 June 2005. This appears to have left Nominees (then in voluntary administration) in a position in which it had or could assume management functions. There is an issue as to whether Nominees is an "operator" having statutory duties as such under the Retirement Villages Act. After Mr Pogroski and Mr Billingham were appointed administrators, the Office of Fair Trading (which administers that Act) wrote to them expressing the view that Nominees, the registered owner of the land on which the Peridon Retirement Village is located, is an "operator" of a retirement village as defined in s 4 of the Act. Be that as it may, it seems appropriate to conclude that there is no impediment in the structure of the Peridon Scheme to the Liquidators assuming a management role to the extent of granting new leases, receiving ingoing contributions, paying entitlements to outgoing residents and paying expenses for the administration of the Retirement Villages. 25 The sample lease that is in evidence is for a term of 99 years from 27 September 2004, for a unit in the Peridon Retirement Village. The lessor is Nominees, and the lease defines "the Owner" as the lessor or the Manager, depending on the context. There is provision for the lessor to appoint a manager to whom "the rights and obligations of the Owner" may be delegated. 26 Essentially the resident pays the Owner a large ingoing contribution ($310,000 in the sample) at the commencement of occupation. The lease is terminated upon the death of the resident or by the resident giving the Owner notice of intention to permanently vacate the unit, or through a process of application to the Consumer Trader and Tenancy Tribunal. These provisions seem to be consistent with Part 9 of the Retirement Villages Act. When the lease is terminated, the outgoing resident becomes entitled to an "ingoing contribution refund", which the lease agreement describes as repayment of a loan. The amount of the refund depends on the amount received from a new resident upon resale, by a process which involves the Owner estimating the resale value and the marketing of the unit by the Owner or the resident. The resident is entitled to 80% of any capital gain and is responsible for 80% of any capital loss on resale (it appears from other evidence that the percentage shares of capital gain vary from lease to lease). On departure the resident must pay to the Owner various amounts including a departure fee calculated as 3.25% of the resale price adjusted by a factor that takes into account the length of occupation of the unit, so that the fee is 3.25% per annum for a minimum of 3 years and a maximum of 10 years (apparently some leases provide for different percentage rates). There are provisions for refurbishment of the unit upon the outgoing resident's departure and for the resident to pay recurrent charges. The Owner undertakes to manage and operate the village as a retirement village of good standard and keep it in a reasonable state of repair. 27 On another application heard on 15 May, I was told about a "vendor mortgage" which is not in evidence before me on the present applications. 28 There seemed to be 71 residential units at the Wamberal Gardens Retirement Village, according to the annexures to Mr Pogroski's affidavit (although Mr Teys has given evidence that there are only 59 units). Some of the residents are in occupation under leases, apparently of the kind outlined above, and some are in occupation under "loan/licence" contracts not fully documented in the evidence. The sample licence agreement that is in evidence for Wamberal Gardens is a much less elaborate document than the leases for the Peridon Retirement Village. The licensor is not Nominees but I infer that Nominees has assumed that position (note Retirement Villages Act, s 40). Under the licence agreement the resident is granted the right of occupation of the unit from month to month, terminable on one month's notice by either party or the death of the licensee. The licensor is at liberty to terminate only if the licensee fails to comply with the rules and regulations of the village after a request to rectify non-compliance. The licensee pays a weekly occupation fee, and the licensor covenants that the fee will never exceed 27.6% of the single weekly rate Commonwealth aged pension. The licensee covenants to comply with the rules and regulations, a rather more detailed document. 29 I infer that there is also a loan agreement but that is not in evidence before me. The evidence of Mr Pogroski is that the resident pays an ingoing contribution upon entering the village. That is apparently governed by some documentation not provided to me, but it appears from Mr Pogroski's evidence that the terms of payment of that contribution are equivalent to the terms of payment under the leases. Apparently there is also an obligation for the residents of Wamberal Gardens to pay a departure fee like the fee payable by outgoing residents at Peridon Retirement Village, which Mr Pogroski describes (using the outdated terminology of the Retirement Village Industry Code of Practice 1989) as a "deferred management fee". 30 In summary, it appears that if the occupation arrangements are validly terminated: (a) the outgoing resident is contractually liable to pay a departure fee; (b) in some cases, where there is a long-term lease, the outgoing resident and Nominees share the capital gain by which the price paid by the incoming resident exceeds the price paid by the outgoing resident; (c) the outgoing resident is entitled to receive his or her refund under the terms of the lease or licence arrangements (that appears to be an unsecured contractual entitlement) within the timeframe set by the Retirement Villages Act. 31 The Retirement Villages Act reinforces the contractual entitlement of an outgoing resident to receive payments or refunds. Under Part 10 an "owner" of residential premises in a retirement village includes a person whose residence contract is in the form of a registered long-term lease (for a term of at least 50 years) which contains a provision entitling the resident to at least 50% of any capital gains in respect of the premises. It appears that residents of the Peridon Retirement Village who occupy their units under 99 year leases equivalent to the sample lease are taken for the purposes of the Act to own their residential premises because, under the lease, their entitlement is to more than 50% of capital gains (80% in the sample). It appears that residents of Wamberal Gardens under loan/licence arrangements may not be owners of residential premises for the purposes of Part 10, though in the absence of full documentation I cannot be sure. Part 10 gives a resident of a retirement village who owns his or her residential premises certain additional rights, including rights under Division 5 relating to the sale or letting of the premises, and the right under Division 6 to receive any payment required to be made following the sale of the premises within 14 days after (approximately) completion of the sale. Division 6 also prescribes a timetable for a refund of the ingoing contribution required under a village contract, in the case of a former resident who does not own the residential premises, which allows payment to be deferred for 6 months if there is no incoming resident. 32 The Liquidators have prepared tables, based on estimated current sales prices, outlining actual and estimated figures for entitlements to receive capital gain amounts and refunds for each current and former resident of the Retirement Villages. The table for Peridon Retirement Village shows the amounts of unrealised capital gains and "equity" that Nominees has in the units as owner, totalling some $9.6 million. It does not calculate the equity of residents. The table for Wamberal Gardens is more complex because of the variety of occupation arrangements. It shows that the total equity of residents is some $12.602 million after deducting departure fees, while the "owner's equity" including departure fees is approximately $2.97 million. Current position of residents 33 During the period of the administration and liquidation of Nominees (that is, from 28 April 2005 to date), no residential premises in the Retirement Villages have been re-leased. Eight units in the Peridon Retirement Village and five units in the Wamberal Gardens Retirement Village are currently vacant. The Liquidators have prepared a table of "Departed Residents", as at 28 April 2006, for each village. The tables indicate that money has fallen payable to 12 of the 13 outgoing residents, with the remaining payment becoming due on 6 September 2006. In some cases money has been outstanding for many months. For some reason the amounts payable to individual outgoing residents are not shown in the tables, but they appear to amount to many thousands of dollars. 34 One can expect that, in the normal course, more residents will wish to depart. For example, correspondence is in evidence indicating that a married couple occupying one of the units at the Peridon Retirement Village wish to begin the marketing of their unit so they can move to another town where their children and families are residing. The wife is frail and her condition is rapidly deteriorating. The husband is her carer. 35 The Liquidators' solicitors have advised Village Care to tell residents who are contemplating departure that the proceeds of re-leasing a unit will be paid to the liquidator of Nominees, and their claim to receive a refund payment will be an unsecured debt ranking with all the other debts of Nominees, eventually receiving such pro rata distribution as the assets of Nominees allow. The solicitor observes that this situation will dissuade departing residents from assisting the village owner to sell their units. 36 It appears that some expressions of interest to lease the units that had been vacated have been received by Village Care and by the former occupants themselves. Current and former residents are said to be extremely concerned about their inability to make progress with selling and re-leasing units, and the uncertainty regarding payment of the refunds that are now owed or will come to be owed. 37 The delay in re-leasing units and paying refunds to outgoing residents is also detrimental to the ongoing businesses of the Retirement Villages. The delay is preventing the generation of income from departure fees and capital gains sums, and harming the goodwill of the businesses, as well as causing considerable concern and financial uncertainty to current and former residents. The Liquidators are concerned that their continuing inability to ensure that outgoing residents will receive refunds following re-sale is likely to hinder the progress of sales and depress the market prices of Village premises. 38 As registered proprietor of the land, Nominees is the only party with the power to enter into leases or licences for units in the Retirement Villages, but the Liquidators need the approval of the court under s 477(2B) of the Corporations Act, or of a resolution of creditors, before entering into new agreements for a term of more than three months. Payment of Village Care 39 Nominees and Management entered into a management agreement under which Nominees engaged Management to assist with the day-to-day management and operation of the Retirement villages. This management agreement was terminated on 9 June 2005, in circumstances that need not presently be explored. On 10 June 2005 Nominees engaged Village Care Ltd to assist with the management and operation of the Retirement villages. According to Mr Pogroski, this was made possible by funding given to the administrators by Mr Warne. He says that Mr Warne has ceased to make funds available, and the fees of Village Care for all the services they have provided from November 2005 to date are unpaid. The total amount stood at a little over $76,000 up to 9 March 2006 and appears to be accruing at over $15,000 per month. Mr Warne says, according to the correspondence in evidence, that he agreed to provide only short term funding and has discharged his obligation. 40 I was informed from the bar table that the work done by Village Care includes things such as cleaning, mowing lawns and other maintenance. It is essential work for the ongoing operation of the Retirement Villages. Village Care does not deal with more complicated matters such as outgoing residents and dealings with vacant land, which are currently matters left for the Liquidators (Transcript page 3.20). This supports the conclusion reached above, that it is open to Nominees by its Liquidators, under the structural arrangements of the Peridon Scheme, to carry out the management functions proposed in the applications, if the orders sought in the applications are made. The Liquidators' proposals 41 The Liquidators wish to use money provided out of ingoing contributions by new residents to pay the amounts due to outgoing residents and Village Care. Mr Pogroski says that part of the ingoing contribution paid by a new resident of a unit is to be used as the source of funds to pay the refund due to the former resident of the unit that is to be occupied by the new resident. That does not appear to be correct, because it does not take into account the proposed payment to Village Care. Doing the best I can to understand the proposal, I take it to be that, out of the total ingoing contributions to be received if the 13 vacant units are re-leased, an amount will be deducted by the Liquidators sufficient to pay all monies owing to the outgoing residents (whether they became entitled to be paid before or after the commencement of the administration) and owing to Village Care. 42 Mr Pogroski has expressed the opinion in evidence that it would be prudent, from an economic point of view, to pay out all outgoing residents in full, notwithstanding that at the date of the commencement of the administration those residents were unsecured creditors. He draws attention to s 40 of the Retirement Villages Act, according to which a village contract between a resident and a former operator of a retirement village may be enforced against any subsequent operator. Although proceedings do not lie against the owner of the land in the retirement village, the purchaser of a retirement village business will become an operator and be subject to liability under existing contracts by force of s 40. Therefore, says Mr Pogroski, any future purchaser and operator of the Retirement Villages is likely to pay a higher price if those liabilities are discharged than would be paid if the liabilities remained. 43 The Liquidators have made their proposals in circumstances where, according to their submissions, the financial position of Nominees is uncertain. Although there is no direct evidence of this, I was informed in submissions that the Liquidators have not yet completed their determination of the position of creditors, owing to the ongoing litigation and uncertainty as to the legal position. I was told that they had undertaken some work disclosed in their report as voluntary administrators (not in evidence on the applications), but it was not submitted that this report would be of any particular use to the court in determining the financial position of Nominees at this stage. Particulars of proposed payments 44 For the purposes of the applications, the Liquidators rely on an affidavit by Michael Teys, chief executive director of Teys Property Funds Ltd, which is proposing to acquire the Peridon Scheme. He has caused valuations to be prepared for the properties that are the subject of the Scheme. The total valuation of the owner's interest in the units at Peridon Retirement Village and other land held by Nominees is said to be $9.49 million. The owner's interest in Wamberal Gardens is said to be $2.3 million. These figures are a little lower than the figures given in the annexures to Mr Pogroski's affidavit. It is not necessary for me to make any precise finding as to the value of the owner's interest in the Retirement Villages. 45 According to Mr Teys, "departed residents" of Peridon Retirement Village are entitled to be paid $1,713,195 "less 80% finance available on these properties" (a deduction not explained to me), leaving a net figure of $342,639. In the case of Wamberal Gardens, the amount payable is $191,500 "less 80%", leaving a net figure of $178,200. Taking those figures at their face value, the Liquidators need $531,139 to pay departed residents. The amount needed to pay Village Care till the end of May 2006 is estimated by Mr Teys to be $107,000. Therefore $641,139 is needed to make the payments proposed in the application. All of this money is intended to be paid out of ingoing contributions. Application for approval of leasing 46 The Liquidators propose to procure new residents for the 13 vacant units in the Retirement Villages and, in some or all cases, to grant long-term leases to them in the same or similar terms to the sample leases in evidence. I infer that they may wish, in some cases, to enter into other occupation arrangements of the kind illustrated by the evidence, and that those arrangements would also fall within s 477(2B). Their proposal raises four legal issues: first, whether the Liquidators have the power to grant leases or make the other occupation arrangements; secondly, whether the court should approve such agreements under s 477(2B); thirdly, whether an order should be made having the effect of removing any obstacle to leasing contained in Nominees' undertakings to the court; and fourthly, whether (assuming there is power) the court should give the Liquidators advice or directions about what they propose to do.

47 A liquidator in a creditors' voluntary winding up is empowered by s 506(1)(b) of the Corporations Act to exercise any of the powers that the Act confers on a liquidator in a winding up in insolvency or by the court. A court-appointed liquidator has the powers conferred by s 477. Section 477(1) includes the following powers: "(a) carry on the business of the company so far as is necessary for the beneficial disposal or winding up of that business …" 48 Section 477(6) provides that "the exercise by the liquidator of the powers conferred by this section is subject to the control of the court, and any creditor or contributory, or ASIC, may apply to the court with respect to any exercise or proposed exercise of any of those powers." 49 The liquidator's power to carry on the company's business extends only so far as is necessary for the beneficial disposal or winding up of the business. This permits the liquidator to carry on the business so that it can be sold as a going concern at a higher price than would be received for the assets in a liquidation sale: see Re Skay Fashions Pty Ltd (in liq) (986) 10 ACLR 743. In the present case, if the granting of new leases and occupation agreements occurs in carrying on the businesses of the Retirement Villages, and those businesses are the businesses of Nominees, s 477(1)(a) would authorise that those steps be taken because they are, in the appropriate sense, necessary for the beneficial disposal or winding up of the businesses, for the following reasons. 50 The winding up of Nominees has been delayed by the process of transferring the Peridon Scheme and the associated complex litigation. The litigation, to the extent that it involves allegations of wrongdoing in the administration of the Peridon Scheme and claims challenging the availability of Nominees' right of indemnity as trustee against the assets of the Scheme, and competing contentions about the priority of various claims for payment out of the assets, has not yet been resolved and the resolution of the issues may take a substantial time. 51 The evidence indicates that: · 13 residential units are vacant; · more residential units may become vacant; · large amounts of money are owing to outgoing residents and Village Care, and more debts will accumulate; · non-payment of outgoing residents is causing uncertainty for those residents who are planning on departure; · the non-payment of outgoing residents and village administration expenses is preventing the businesses from generating income, harming the goodwill of the businesses and raising the concern that the market prices of village premises will be depressed; · non-payment to outgoing residents will reduce the price payable by an acquirer of the businesses because of s 40 of the Retirement Villages Act; · there are proposals, including the one by TEYS Property Funds Pty Ltd, for the transfer of the Peridon Scheme that are to be addressed in the near future. 52 These difficulties can be alleviated, pending resolution of the problems that are delaying the winding up, if the Liquidators are permitted to grant new leases over the vacant units and use the ingoing contributions to meet expenses. The granting of new leases or the making of other occupation agreements will preserve the businesses and enhance their value for the purposes of sale, rather than inhibit their disposal in the course of winding up. The Liquidators will incur costs in doing so but Mr Warne informed the court that there would be no challenge by him to the recovery of such costs out of the ingoing contributions. 53 Since, therefore, the granting of new leases or the making of new occupation agreements appear to be necessary steps for the beneficial disposal or winding up of the businesses of the Retirement Villages, the remaining questions are whether they are steps in the carrying on of those businesses, and whether those businesses are businesses of Nominees. 54 As to the first question, ss 18-21 of the Corporations Act provide a partial definition of the concept of carrying on business, but those provisions are unhelpful in the present case. Here the position is that the conduct or operation of each Retirement Village is undoubtedly a business. Revenue is derived by the owner/operator in the course of those businesses in various ways, including through departure fees and participation in capital gains. That revenue will not be derived unless the company carrying on the businesses performs its functions with respect to the granting of leases or the making of other occupation agreements, the receipt of ingoing contributions, and the payment of entitlements to outgoing residents, after deduction of departure fees and the owner's share of capital gains. Transactions which might in other contexts have the flavour of dealings with the non-current assets of the business acquire the character of acts of carrying on the business once the nature of the business and the sources of business revenue are properly understood. 55 As to the second question, I have referred to Young CJ in Eq's findings about the termination, in June 2005, of the management agreement with the company I have called "Management", and to the evidence before me regarding the engagement of Village Care in that month, and the residual responsibilities of the Liquidators for matters to do with the arrival and departure of residents. In my view the evidence is sufficient for me to conclude, for the purposes of the applications, that the granting of leases and the making of other occupation arrangements are steps in the carrying on of a business, with respect to each Retirement Village, which is a "business of the company" (ie Nominees) for the purposes of s 477(1)(a). 56 The consequence of this reasoning is that the granting of long-term leases as proposed by the Liquidators, and the making of other occupation arrangements of the kind referred to in the evidence, is authorised by their power under s 477(1)(a) to carry on the businesses of Nominees so far as is necessary for the beneficial disposal or winding up of those businesses. It is unnecessary to rely on s 477(2)(m), which permits the liquidator do all such other things as are necessary for winding up the affairs of the company and distributing its property. In my view, however, the granting of leases and the making of other occupation agreements would fall within subparagraph (m) if s 477(1)(a) did not apply. Approval under s 477(2B) 57 Section 477(2B), which applies to a creditors' voluntary winding up by virtue of s 506(1A), provides that, except with the approval of the court, a committee of inspection or a resolution of creditors, a liquidator must not enter into an agreement on the company's behalf (for example, but without limitation, a lease or a charge), if the term of the agreement may end more than 3 months after the agreement is entered into. 58 Generally speaking, the court grants approval under s 477(2B) only where the transaction is the proper realisation of the assets of the company or otherwise assists in the winding up of the company: Re GA Listing & Maintenance Pty Ltd (1994) 15 ACSR 308; Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 29 ACSR 107 at 118; Ford's Principles of Corporations Law (LexisNexis, looseleaf) at [27.170]. Professor Ford points out that the granting of leases solely to generate income is unlikely to be approved, but leases may be authorised in order to assist beneficial winding up, for example where market conditions would make it disastrous to force the whole of a property company's freeholds onto the market at once, and the granting of leases would assist orderly marketing and the preservation of properties against vandalism. 59 Here, there is a broad analogy with Professor Ford's example. The winding up has been delayed and problems have arisen that I have summarised at [50] - [51] above. They would be alleviated by the proposed course of action involving granting of leases or the making of other occupation agreements, requiring approval under s 477(2B) (see [52] above). 60 When considering an application for approval under s 477(2B), the court does not reconsider the matters addressed by the liquidator, on their merits, in isolation from the liquidator's opinions. The court's role is "to review the liquidator's proposal, paying due regard to his or her commercial judgment and knowledge of all the circumstances of the liquidation, satisfying itself that there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene in terms of the 'expeditious and beneficial administration' of the winding up": Corporate Affairs Commission v ASC Timber Pty Ltd, 29 ACSR at 118. Here I can see no suggestion of error of law or bad faith or impropriety. Mr Pogroski has given evidence of the Liquidators' commercial judgment which is, on its face, compelling. 61 In light of these considerations, my view is that the court should grant approval to the Liquidators for granting long-term leases substantially in the form of the sample lease or making other occupation arrangements with new residents of the kind to which the evidence refers. The court's power to approve extends to giving a general permission (Re GA Listing & Maintenance) and it seems to me appropriate that a general permission be granted in this case, in the interests of efficiency and reduction of costs. "Variation" of undertakings 62 I have explained that the undertakings given on 16 November 2004 and 6 July 2005 might inhibit the Liquidators in the implementation of their proposals. The considerations that have led me to conclude that the granting of leases and the making of occupation arrangements are within power under s 477(1)(a) and that those transactions should be approved, as a class, under s 477(2B) provide ample grounds for making orders that would have the effect of removing any obstacle caused by the undertakings, though preserving the undertakings in every other respect. Advice or directions 63 The originating process in proceeding No 2559 of 2006 seeks the advice or direction of the court as to whether, by entering into long-term leases of residential units, the Liquidators would be carrying on the business of Nominees so far as is necessary for the beneficial disposal or winding up of the business in accordance with the powers granted to the Liquidators. As I have said, I assume that this prayer for relief seeks to invoke s 479(3), extended to a creditors' voluntary winding up by ss 506(1)(b) and 511. Having regard to the considerations explained by McLelland J in Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 694, I doubt whether the appropriate course is to grant "advice and directions" as to a proposition of fact and law such as proposed. The application for this relief arises by notice of motion in proceedings inter partes. The other parties have had the opportunity to appear and oppose the granting of that relief. I see no reason why I should not give effect to this judgment by making a declaratory order in terms equivalent to the proposed "advice and directions". 64 Additionally, I think it would be appropriate, in the litigious circumstances that I have observed, to give the Liquidators some protection, not only by declaring that their proposal is within their power, but also by giving a direction under s 479(3) that they would be justified in exercising their power in the manner that they propose, in light of the evidence that has been presented to the court. In my view, relief of that sort is encompassed by the originating process. Application for directions as to payments to outgoing residents and Village Care 65 As well as making new occupation arrangements for the vacant units, the Liquidators wish to pay existing "departed" residents and new outgoing residents their entitlements under their occupation arrangements, and to pay Village Care the amount owing to that company for its work in managing the Retirement Villages. The source of these payments will be ingoing contributions by the new residents. 66 The applications have been argued on the basis that the departed and outgoing residents and Village Care are unsecured creditors. It would not be appropriate for me, on these applications, to make a binding determination against those persons to the effect that they are unsecured creditors. But that conclusion is plausible on the evidence adduced on the applications, and I accept it for the limited purposes of the applications. 67 In s 477(1)(b), the power of a liquidator to pay any class of creditors in full is expressed to be subject to the provisions of s 556. Section 555 is also relevant. Section 555 says that "except as otherwise provided by this Act, all debts and claims proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately". That provision reflects the general policy of Part 5.6 of the Act that unsecured creditors are to be treated equally and rateably in the distribution of the company's assets in liquidation, subject to the priority classes in s 556. Then s 556(1) states that "subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims", and then a list of priority classes is set out. Read together, ss 477(1)(b) and 556(1) imply that the liquidator's power is not to be used to the prejudice of the creditors who enjoy priority under s 556 (Ford's Principles of Corporations Law, at [27.501]). 68 There are two overlapping questions, to be considered in light of these principles: first, whether the Liquidators are empowered by s 477(1)(b) to pay in full the outgoing residents and Village Care; and second, if so, whether they should exercise their power in the manner proposed. The latter question arises because the Liquidators seek the court's directions as to their proposed course of action. It may be necessary to distinguish between outgoing residents whose entitlements arose before the appointment of the administrators, and those whose entitlements arose subsequently. 69 Re Walker Hare Pty Ltd (in liq) [1968] VR 447 was a case decided under s 236(1)(b) of the Companies Act 1961 (Vic), substantially the same as s 477(1)(b) of the present Act except that the exercise of the power required the authority of the court. In that case there was a meeting of creditors, at which a committee was elected to examine the affairs of the company, then in financial difficulty, and to express an opinion on whether it should be sold or made the subject of a scheme of arrangement or put into liquidation. The company continued to trade. Some months later the company went into liquidation and was found to be insolvent. The liquidators applied to the court for authority under s 236(1)(b) of the 1961 Act to pay in full the debts incurred by the company in the period from the meeting of creditors to the appointment of the liquidators. The ground of the application was that payment of those creditors was required by general principles of fairness or commercial morality. 70 Newton J's judgment was, for the most part, directed towards showing that s 236(1)(b) was not to be used to authorise payment in full in reliance on some such general principle. He summarised his view of the law (at 454) thus: " I consider that the power 'to pay any class of creditors in full' which is given to liquidators by s 236(1)(b) is limited to two classes of cases, namely: (1) where the class of creditors in question, although not falling within s 292, has a claim which is recognised by law as entitled to priority over the claims of other classes of creditors also not falling within s 292; and (2) where payment in full of the class of creditors in question is beneficial to the winding up of the company in that the collection and distribution of the company's assets for the general benefit of its creditors will be, or is likely to be, thereby facilitated." 71 His Honour's class (1) is not relevant here. It is noteworthy that the principle underlying class (2) is closely related to the principle underlying the scope of the liquidator's power to carry on business under s 477(1)(a) and its predecessors, a relationship noted by Newton J at 455. His Honour gave some examples: where full payment of a number of unsecured debts would reduce administrative expenses; where the liquidator needs to continue the company's occupation under a lease for the purposes of the winding up, but the lessor threatens to re-enter unless all arrears of rent owing when the winding up order was made are paid in full; where the liquidator validly decides to carry on the company's business but trade creditors refuse to supply goods unless pre-liquidation trade debts are paid in full. Professor Ford (at [27.501]) offers another example, namely where there has been an arrangement acquiesced in by all unsecured creditors of a building company before the company went into liquidation, that its operations be wound down with a view to efficient winding up, but that in the interests of the creditors rather than the company, tradesmen be engaged to complete a nearly completed project and that they be given priority over existing unsecured creditors (citing Re Barrington and Associates Pty Ltd (in liq) [1989] VR 940). 72 Although the statutory context was somewhat different, in my opinion the principles enunciated by Newton J continue to apply: see Ford's Principles of Corporations Law, at [27.501]. The question to be considered is whether payment of a class of creditors in full will be beneficial to the winding up by facilitating the collection and distribution of the company's assets for the general benefit of creditors. Here, the implementation of the steps proposed by the Liquidators will preserve the value of the businesses and facilitate their sale on a going concern basis, for the reasons given at [50] - [52] above. To achieve these results, it is necessary according to the evidence that some unsecured creditors, namely the outgoing residents, be paid in full. The evidence indicates, in my view, that the same is true with respect to Village Care. The continued day-to-day management and maintenance of the Retirement Villages is necessary to preserve the value of the businesses for the purposes of sale. There is a risk that Village Care will not continue in its present role unless paid. The situation is analogous to the example given above, where it is necessary for a liquidator to continue to conduct the company's business but its trade creditors refuse to continue to supply the business unless they are paid. 73 There is an obvious distinction between debts incurred before the commencement of the winding up and debts incurred by the Liquidators in their capacity as administrators or as liquidators after they assumed those respective offices. The latter are debts and claims entitled to priority payment under s 556(1)(a). But in my opinion that distinction does not affect the matters for decision. Both pre- and post-administration debts incurred to outgoing residents and to Village Care may be paid by the Liquidators in full under the power conferred on them by s 477(1)(b), as payments in class (2) identified by Newton J in the Walker Hare case. 74 Re Sydney Appliances (1998) 27 ACSR 725 might appear to be contrary to these conclusions. That case was decided under the Corporations Law, the provisions of which are relevantly identical with the provisions of the present Act. The liquidator of an insolvent company whose business had been to sell white goods and kitchen and bathroom products applied to the court for authorisation to pay "customer creditors" in priority to trade creditors and all other unsecured creditors of the company. The customer creditors were retail customers who had agreed to purchase goods well in advance of the expected date of delivery and had paid some or all of the price. The company had been in voluntary administration and during that time, a deed of company arrangement under which customer creditors would be paid in priority to trade creditors had been proposed but withdrawn, after opposition from major creditors. The creditors resolved that the company be wound up. They also purported to resolve that customers be treated as preferential creditors ranking above ordinary unsecured creditors but below employees. 75 By the time the matter came before Bryson J, the company had ceased trading and its business had come to an end. He said (at 727) "there is no prospect of selling off the business, so that there is nothing for the company to gain from maintaining the goodwill of customers". That is sufficient to distinguish the decision from the present facts. Here, according to the evidence, the payment of the outgoing residents and Village Care in full is necessary to preserve the value of the businesses and enhance realisations in the winding up, ultimately for the benefit of all unsecured creditors. 76 There are some observations in the judgment (at 727) suggesting a principle that claims of unsecured creditors must rank equally and be paid proportionately, and that s 477(1)(b) does not empower a liquidator to make creditors such as customer creditors into a class for the purpose of payment in full, or to differentiate between them and other unsecured creditors. In my opinion, however, the Sydney Appliances case should not be seen as authority for any such general propositions. Such a position would be inconsistent with the Walker Hare case, which has not been challenged since it was decided in 1968 (see Ford's Principles of Corporations Law at [27.501]). It appears that the Walker Hare case was not cited to Bryson J. Bryson J's observations were a response to the proposition that the creditors had the power to authorise the liquidator to prefer one group of unsecured creditors to the rest, not intended as an answer to the question whether the liquidator had the statutory power to pay a class of creditors in full, and ought to do so, according to principles enunciated by the courts. 77 I see no reason why the outgoing residents (a description I use to identify those residents who left their residential units in either of the Retirement Villages and became entitled to payment before the appointment of the voluntary administrators, those who did so after the appointment of the voluntary administrators, and those who may do so during the continuation of the liquidation in future) should not be treated as a class of creditors for the purposes of s 477(1)(b). Nor do I see any reason for not treating the day-to-day manager of the Retirement Villages as a class of creditors for that purpose. 78 It follows that, in my view, the Liquidators' plan to pay the outgoing residents and Village Care is authorised by s 477(1)(b), notwithstanding the provisions of ss 555 and 556. The funds from which they propose to make those payments, namely ingoing contributions from new residents, do not appear to be impressed with any trust that would prevent their use, or otherwise to be unavailable to the Liquidators for these purposes. It does not seem to me necessary to limit the use of the ingoing contribution for a particular residential unit to the payment of the outgoing resident of that unit. 79 The correct course, to reflect these reasons, is to give a direction to the Liquidators that they would be justified in paying outgoing residents (in the sense in which I use those words) their full entitlements under their respective occupation arrangements and the provisions of the Retirement Villages Act regardless of whether their entitlements to payment arose before or after the appointment of the administrators, and that they would be justified in paying Village Care the full amount owing to it. I do not believe there is any reason for the court to give Nominees judicial advice as trustee under s 63 of the Trustee Act. 80 I received submissions to the effect that the directions sought in the originating process could be supported, alternatively, under s 477(1)(a), or s 601EE(2), or s 447A(1). In view of the conclusions I have reached about s 447(1)(b), it is unnecessary for me to address these issues. "Variation" of undertakings 81 The undertakings given by Nominees to the court on 16 November 2004 and 6 July 2005 appear to prevent it from making the proposed payments to outgoing residents and Village Care. The Liquidators having made out a convincing case for allowing the payments to be made, orders should be made having the effect of removing any obstacle in the undertakings to the making of these payments (as well as the granting of leases or the making of other occupation arrangements). Conclusions 82 The Liquidators have persuaded the court that relief should be granted to them, both under the originating process and the notice of motion, substantially though not precisely as sought. I shall direct them to prepare draft short minutes of orders to give effect to these reasons for judgment.

Warne v GDK Financial Solutions; Peridon Village Nominees, application of Billingham

At a glance

Court

Decision date

Before

Source

Judgment (16 paragraphs)

Parties

Legislation Cited (4)

Cases Cited (2)

Cited By (9)