Weriton Finance Pty Ltd v P.N.R. Pty Ltd

12/268787 R.K. Newton (Plaintiff) S.A. Wells (Defendant) Solicitors: 12/284738 Bransgroves (Plaintiff) Farrar Lawyers (First and Second Defendants) 12/268787 Townsends (Plaintiff) Farrar Lawyers (Defendant) File Number(s): 12/284738 12/268787

Judgment 1Two proceedings and three applications were heard together before me. By its Originating Process filed 12 September 2012, Weriton Finance Pty Limited ("Weriton") brings an appeal under s 1321 of the Corporations Act 2001 (Cth) from the decision of Mr Louttit, the administrator ("Administrator") of P.N.R. Pty Limited (administrator appointed) ("PNR"), at the first meeting of PNR's creditors held on 29 August 2012 to refuse to admit for voting purposes its proof of debt dated 28 August 2012 in the sum of $15,501,615.68, but rather to admit its proof of debt only in the sum of $1. 2The second application is brought by Australian Residential and Commercial Finance Pty Limited ("ARCF") which seeks orders winding up PNR under s 459A of the Corporations Act on the ground of insolvency and that a liquidator be appointed to PNR. The third application is brought by Weriton by Interlocutory Process filed on 1 November 2012, which seeks an order under s 440A(2) of the Corporations Act adjourning the hearing of ARCF's winding up application until 30 November 2012. 3ARCF also applied, by interlocutory application, for an order under s 600A of the Corporations Act that votes cast by Mr Graham Werry and companies associated with him are to be excluded at a second meeting of creditors of PNR on the basis that Weriton, DTC No 1 Pty Limited ("DTC") and Werry & Associates are related entities of PNR. ARCF did not press that application at the hearing before me, recognising that s 600A of the Corporations Act would be applicable after a resolution had been passed at the second meeting of creditors and did not permit an anticipatory order excluding particular persons from voting. It is therefore not necessary to deal with that application. 4ARCF also sought an order that the Court appoint Mr Jamieson Louttit, who is presently the administrator of PNR, as provisional liquidator of PNR or as liquidator of PNR. It will not be necessary to deal with the former application if the Court determines that PNR should be wound up and a liquidator should be appointed. The second application will be determined as part of determining whether a liquidator should be appointed to PNR and, if so, whom. Factual background 5I should first set out something of the factual background to the matter. PNR was trustee for the Muswellbrook Residential Property Trust and was involved in the development of townhouses in Muswellbrook New South Wales. It appears that assets were owned by the Trust although PNR had a right of indemnity against the Trust. Mr Werry was a director of PNR from February 2004 until February 2007 and from 4 June 2010 to 28 February 2012, approximately 6 months prior to the Administrator's appointment, and is presently a shareholder in PNR. Mr Werry does not presently hold a formal appointment as director of PNR. The question whether Mr Werry is a de facto or shadow director of PNR, within the extended definition of that term in s 9 of the Corporations Act, was raised in the course of submissions before me but it is not necessary or appropriate to determine that question for the purposes of these applications. 6Mr Werry's evidence is that DTC, of which Mr Werry is sole director and secretary, in its capacity as trustee of Australian Residential Financial Trust ("ARFT") entered into an agreement with PNR in respect of a loan facility of $1 million on or about 23 September 2004, comprising a loan agreement dated 23 September 2004, a second mortgage over a property situated at Muswellbrook (ranking behind a mortgage granted by PNR to Kingsway Group Limited ("Kingsway Mortgage")) and a Deed of Charge dated 23 September 2004 over PNR's assets ("Charge"). Mr Werry's evidence is that DTC advanced $500,000 to PNR on 23 September 2004, $5,000 on 29 July 2005, $2,500 on 1 May 2006, $300,000 on 8 June 2006 (although it appears that amount was repaid) and $30,000 on 3 December 2007. Mr Werry's second affidavit exhibits bank statements for the account held by DTC for the period August 2004 to December 2007 which appear to show advances by DTC to PNR totalling $1,580,000 during the period with repayment of an amount of $300,000 on 18 July 2006, and bank statements in respect of the account of PNR as trustee for the Muswellbrook Residential Property Trust showing corresponding receipts. 7The interest rate of the DTC mortgage was varied from 30% per annum to 37.5% per annum on 14 July 2006, by variation of mortgage signed by Messrs Werry and McMillan who were each directors of both PNR and DTC. 8About 1 October 2008, DTC acquired a debt owed by PNR to Kingsway Group and the first ranking mortgage previously given by PNR to Kingsway was transferred to DTC; Mr Werry's evidence is that a further sum of approximately $600,000 was lent by Weriton to PNR as at 27 March 2009, and added to the amount owing under the Kingsway Mortgage. Also on 27 March 2009, Weriton replaced DTC as trustee of ARFT; the loan was assigned to Weriton under a Deed of Assignment of Debts and Other Assets; the mortgage was transferred to Weriton and that transfer was registered on the title of the property; and Weriton lodged a Form 311A with the Australian Securities and Investments Commission to notify it of an assignment of the Charge to Weriton. 9On 7 March 2011, by an enforceable undertaking provided to the Australian Securities and Investments Commission under s 93AA of the Australian Securities and Investments Commission Act 2001 (Cth), Mr Werry, DTC and Weriton acknowledged that certain entities were entitled to be repaid principal and interest owing under promissory notes issued to them by specified dates. 10ARCF issued a statutory demand dated 14 February 2012 to PNR. It appears that statutory demand was served on Mr Werry on 9 March 2012. 11It appears that properties owned by PNR at Muswellbrook were sold for a stated value of approximately $12,277,000 pursuant to a Power of Attorney granted by PNR to Mr Werry and DTC and Mr Werry or DTC signed the relevant transfer forms in their capacity as attorney. It appears that five properties were transferred in May 2012 for a claimed value of $1,200,000 to creditors of Weriton and other properties transferred in May 2012 and June 2012 for a claimed value of $3,318,000. The Administrator's second report to creditors indicates that sale proceeds from the sale of properties totalling $3,758,000 were forwarded to promissory noteholders of Weriton on sale of the properties and that other properties with notional sale proceeds of $3,300,000 were transferred "in specie" to Weriton's promissory noteholders. Mr Werry's evidence is that Weriton offered promissory note investors the option to acquire unsold townhouses, with the purchase price of the townhouse being applied so as to reduce the debt owing by PNR to Weriton. Mr Werry subsequently clarified that evidence, in his third affidavit, to indicate that 25 on-sold townhouses were subject to options to purchase by the promissory noteholders; 11 promissory noteholders exercised such options, resulting in contracts for sale of those townhouses being exchanged; and the remaining 14 townhouses were, Mr Werry contends, "sold on the open market to arms length purchasers". Weriton contends that the transfer of the 11 unsold townhouses to the promissory noteholders took place in exchange for Weriton reducing PNR's indebtedness under the Kingsway mortgage for each townhouse transferred in the amount of $300,000 less the costs of sale for that townhouse. 12The Administrator was appointed voluntary administrator of PNR on 17 August 2012 under s 436A of the Corporations Act. 13The Administrator's report to creditors dated 12 September 2012 noted that he had requested Weriton to provide agreements in relation to loans provided to PNR; agreements in relation to the increase of interest rates plus risk fee from a total of 30% per annum to 37.5% per annum; and reconciliation of loan accounts including details regarding the application of proceeds from the sale of properties to set off the loan balance, but no documentation had been provided in that regard. The Administrator's report identifies the possibility that the loan by Weriton could be avoided on the basis that the interest on the loan was extortionate when the loan was made or became extortionate because of the variation in its terms. The Administrator's report also expresses the opinion that the interest rate charged on loans at 30% and subsequently increased to 37.5% appears to be relatively high and may be uncommercial and unfair in nature. At that time, no proposal for a DOCA had been received, and the Administrator noted that it was unlikely that ordinary unsecured creditors would receive a return subject to the possible recovery of preferences, uncommercial transactions and unfair loans and/or recovery in respect of insolvent trading (if applicable) and that he was of the opinion that it was in creditors' interest for the Company to be placed in liquidation. The reference to "uncommercial transactions" and "unfair loans" is respectively to categories of voidable transactions specified in ss 588FB and 588FD of the Corporations Act. Section 588FF permits the Court to make appropriate remedial orders on the application of a liquidator in respect of such transactions. 14On 8 November 2012, the Administrator completed a supplementary report to creditors in anticipation of a second creditors meeting convened under s 439A of the Corporations Act. The Administrator's second report indicates an estimated return to ordinary unsecured creditors on liquidation of between nil and 8¢ in the dollar, the latter representing a "best case scenario". In particular, the Administrator identified an issue requiring further investigation as to whether the power of attorney which was relied upon to transfer the relevant properties authorised the transfer of those properties, having regard to the terms of s 12 of the Powers of Attorney Act 2003 (NSW). Mr Young SC, who appears for Weriton, in turn contended that other powers of attorney and other documents in favour of Weriton would authorise that transfer. It is not necessary to determine that matter for the purposes of this proceeding. That second report again recommended that PNR be wound up and, in his affidavit dated 13 November 2012, the Administrator indicates that that remains his recommendation. Weriton's application for adjournment of ARCF's winding up application 15It is convenient first to deal with Weriton's application for an adjournment of a winding up application brought by ARCF and, if not adjourned, with that application. Weriton's second application in respect of the admission of proofs of debt at the first creditors' meeting of PNR will be of lesser practical significance if ARCF's winding up application is successful, other than in respect of the question of the identity of any liquidator appointed to PNR. 16Section 440A(2) of the Corporations Act provides that: "The Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up." That section requires the Court to adjourn the proceedings if the relevant pre-condition is satisfied: Deputy Commissioner of Taxation v Polcarp Pty Ltd [2011] FCA 1142 at [4]. Generally, an adjournment under s 440A(2) of the Corporations Act requires that the Court is satisfied that it is in creditors' interests to continue the administration in all the circumstances, and this requires that there be sufficient possibility, as distinct from mere optimistic speculation, that creditors' interests will be accommodated to a greater degree in an administration than in a winding up: Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456 at 457; TCS Management Pty Limited v CTTI Solutions Pty Ltd [2001] NSWSC 830 at [15]; Australian Securities and Investments Commission v Storm Financial Ltd (recs and mgrs apptd) (admins apptd) (2009) 71 ACSR 81; Deputy Commissioner of Taxation v C-Change Cairns Pty Ltd [2011] FCA 1372. 17In Creevey v DCT above, McPherson JA, speaking for the Queensland Court of Appeal, said that the question of whether an administration should continue, rather than that there be a winding up, was "closely related to the further question of whether the creditors could hope to get more by payment of their debts from one form of process or administration than from the other". His Honour observed at 457: "In order to satisfy the court of the matter referred to in s 440A(2) of the Corporations Law, one would expect that there would have to be some persuasive evidence to enable it to be seen that there were assets which, if realised under one form of administration rather than the other, would produce a larger dividend, or at least an accelerated dividend for the creditors." 18In Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd [2003] NSWSC 47; (2003) 44 ACSR 377, Campbell J, as his Honour then was, said (at [18]): "Ultimately what the court needs to do is to be persuaded. The amount of proof which can result in persuasion, differs with the circumstances in which litigation comes before the court. It is common enough, in applications under s 440A, for an administrator to need to seek an adjournment very soon after his or her appointment, at a time when he or she knows very little about the affairs of the company. In that sort of situation, comparatively little material might be needed to justify a short adjournment. As time goes on, however, and the occasion that there has been for the collecting of evidence increases, so the amount of material which might need to be put before the court before it is persuaded, will increase." 19In Lubavitch Mazal Pty Ltd v Yeshiva Properties No 1 Pty Ltd [2003] NSWSC 535; (2003) 47 ACSR 197 at [77], Austin J observed that: "The requirement for "persuasive evidence", if considered in isolation from the facts and decision in that case, could set the barrier fairly high. In Waste Recycling, Santow J (at 199) noted that a less stringent formulation has been adopted in an unreported case in the Federal Court, although he later applied the Creevey dictum in Re First Netcom Pty Ltd (2000) 35 ACSR 615. Campbell J applied the Creevey test in Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd (2003) 44 ACSR 377. For present purposes, it is not necessary to decide upon the precise standard of proof. Whatever be the correct formulation, it is plain that if the evidence points to nothing more than "mere optimistic speculation" that a proposal might emerge (to use Santow J's words), the case has not been made out." 20The principles applicable to the exercise of the discretion under s 440A(2) was also summarised by Greenwood J in Sunstate Orchards Pty Ltd v Citrus Queensland Pty Ltd [2009] FCA 452 at [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 DCT(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." 21In Re Offshore and Ocean Engineering Pty Ltd [2012] NSWSC 1296 at [6], Brereton J observed that: "What is required by s 440A(2) is satisfaction that it is in the interest of the company's creditors for the company to continue under administration, rather than be wound-up, as distinct from satisfaction that it may be so. That reinforces the view that a substantial degree of persuasion that administration rather than liquidation is in the interests of the company's creditors is required to invoke the section." Leave to appeal from that decision was refused in Offshore and Ocean Engineering Pty Ltd v Greenwich Contractors Pty Ltd [2012] NSWCA 371, where Campbell JA also noted at [16] that it is "of general public importance that the Court system can provide remedies concerning unpaid debts with speed and certainty", although there is a public policy in the provisions of the Corporations Act concerning administration that creditors be given the opportunity to consider a DOCA when it appears that creditors will do better under a DOCA than under a liquidation". 22In support of the application for adjournment of the winding up application, Weriton relies on a proposal that it has advanced for a Deed of Company Arrangement ("DOCA") with PNR that includes terms that, relevantly: