Algeri and Kanevsky v Koko Black Group Pty Ltd

[2016] VSC 190

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL COURT

CORPORATIONS LIST

S CI 2015 06052

IN THE MATTER OF Koko Black Group Pty Ltd (Administrators Appointed) ACN 113 603 357 (ATF Koko Black Coburg Unit Trust) and the Other Koko Black Group Companies Listed in Schedule 1

BETWEEN

SALVATORE ALGERI AND GLEN KANEVSKY IN THEIR CAPACITIES AS JOINT AND SEVERAL ADMINISTRATORS OF KOKO BLACK GROUP PTY LTD (ADMINISTRATORS APPOINTED) ACN 113 603 357 (ATF KOKO BLACK COBURG UNIT TRUST) AND THE OTHER KOKO BLACK GROUP COMPANIES LISTED IN SCHEDULE 1	First Plaintiff
and
KOKO BLACK GROUP PTY LTD (ADMINISTRATORS APPOINTED) ACN 113 603 357 (ATF KOKO BLACK COBURG UNIT TRUST)	Second Plaintiff

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JUDGE:	SIFRIS J
WHERE HELD:	Melbourne
DATE OF HEARING:	27 April 2016
DATE OF JUDGMENT:	6 May 2016
CASE MAY BE CITED AS:	Algeri & Kanevsky v Koko Black Group Pty Ltd
MEDIUM NEUTRAL CITATION:	[2016] VSC 190

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CORPORATIONS – Winding Up – Group of Companies – Liquidator seeks directions for approval to pool assets and liabilities of associated companies – Section 511 and 477A Corporations Act 2001 (Cth) – Pooling desirable – Directions given and orders made –
Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Dr O Bigos	HWL Ebsworth Lawyers

HIS HONOUR:

Introduction

1. The First Plaintiffs are the liquidators of the Second to Twelfth Plaintiffs (“Koko Black Group companies”). They were previously the administrators of the Koko Black Group companies, and at the second creditors’ meeting of those companies on 15 March 2016, the companies were wound up and the First Plaintiffs were appointed as the liquidators.

1. The liquidators apply for orders and directions that the resolutions of the creditors at the second creditors’ meeting of the Koko Black Group companies, to combine recoveries, costs and distributions to creditors of all the other Koko Black Group companies, be acted upon by the liquidators in the liquidation. The effect of the implementation of the resolutions would be to pool the assets and liabilities of the Koko Black Group companies. The liquidators also apply for ancillary relief.

1. The liquidators rely on the Third Affidavit of Salvatore Algeri dated 14 April 2016 (“Algeri affidavit”), as well as on his previous affidavits (the First Affidavit dated 26 November 2015 and the Second Affidavit dated 3 December 2015).

1. The application is made under ss 511 and 447A of the Corporations Act 2001 (Cth) (Act).

1. Section 511 of the Act relevantly provides:

(1)The liquidator, or any contributory or creditor, may apply to the Court:

(a)to determine any question arising in the winding up of a company; or

(b)to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court.

…

(2)The Court, if satisfied that the determination of the question or the exercise of power will be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the applications as it thinks just.

1. This power in relation to voluntary liquidations, and its counterparts (for example section 479(3), which applies in compulsory liquidations), developed from the practice of the Court of Chancery under the general law in giving directions to those entrusted with the administration of property under the control of the Court.[1]

   [1]Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674, 677.

1. The Court has a discretion as to whether giving directions will be of advantage in the liquidation, and it would give directions where it can summarily solve a difficulty that has arisen in the liquidation in a cheap and efficient manner.[2] A direction given under section 511 will protect the liquidator who acts in accordance with it, but does not give rise to a res judicata as between parties who may have competing interests affected by it.[3]  The Court does not finally determine the rights and liabilities of parties arising out of the subject-matter of the application for directions.[4]

   [2]Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209, 212.

   [3]Meadow Springs Fairway Resort Ltd (in liq) v Balanced Securities Ltd (2007) FCA 1443, 48. .

   [4]Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674, 679-80.

1. Although in giving directions the Court will not pronounce upon the commercial prudence of a particular transaction, it will act in an appropriate case to protect insolvency practitioners from claims that they have acted unreasonably in taking certain action.[5]

   [5]Re Ansett Australia v Mentha (2001) 39 ACSR 355, 66.

1. Section 447A(1) of the Act provides:

The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.

1. Section 447A gives the court very broad powers on how Part 5.3A is to operate.[6]

   [6]Australasian Memory Pty Ltd v Brien (2000) 172 ALR 28, 17.

Discussion of pooling in materials provided to creditors before meeting

1. On 4 March 2016, the then administrators sent to all the known creditors of the Koko Black Group notices calling the second meeting of creditors which enclosed a Report to Creditors pursuant to s439A of the Act dated 4 March 2016 (“the 439A Report”).[7]

   [7]Affidavit of Salvatore Algeri dated 14 April 2016,, paragraph 14.

1. The notice of meeting (Appendix F to the 439A Report) proposed, inter alia, a resolution that the creditors approve combining recoveries, costs and distribution to creditors of each of the Koko Black Group companies.

1. In the 439A Report, the First Plaintiff:

(a)   outlined some of the difficulties and additional costs associated with allocating realisations and creditor claims on a company by company basis;

(b)   included an estimate of the dividend that may be paid to priority creditors and unsecured creditors on a company by company basis compared with on a ‘pooled’ basis; and

(c)    outlined the advantages and disadvantages of pooling recoveries, costs and creditor claims across the Koko Black Group.[8]

[8]Affidavit of Salvatore Algeri, dated 14 April 2016, paragraph 16.

1. Pages 6 – 7 of the 439A Report set out the following in relation to the proposed pooling resolution:

Based on our investigations to date it is evident that the KBG companies under the control of a common director largely were intertwined and operated as one entity. For example the KBG corporate structure was subject to a restructure prior to the Administrators’ appointment. However, we understand that the restructure was not formally completed (i.e. no sale and purchase agreement finalised) to reflect the asset transfers amongst the Companies.  Despite this KBG was trading and management accounts were being prepared to reflect the new corporate structure prior to our appointment.  In addition during the course of our investigations we detected a series of transactions involving a former employee who may have acted dishonestly or fraudulently in the exercise of their powers.  Any recoveries from this investigation would be difficult to allocate across the KBG companies.  Given this potential recovery is a contingent asset we have not included a value for this claim in the estimated dividend available to creditors.

Given the above we believe there are practical difficulties in accurately allocating realisations (actual and future) and creditor claims on a by company basis and the costs of doing so may be significant. In addition further detailed analysis could determine that the estimated creditor dividends on a company by company basis could change from the estimates provided below. According there may be some benefits of combining recoveries and costs for the benefit of all creditors (i.e. pooling creditor claims across the KBG).  Therefore we would recommend pooling recoveries and creditor claims as this would likely provide the best outcome to creditors. 

Subject to the views of creditors, we propose to undertake the following approach:

•        Assess the response from the creditors.

•        Issue instructions to solicitors.

•If deemed appropriate, apply to Court for a pooling application.

•        Convey to the Court to views of the creditors.

•        Write to creditors to confirm the outcome of the Application.

This is discussed more fully at section 8.8.

Estimated priority creditors dividend – cents in the $		Estimated unsecured creditors dividend – cents in the $
Entity	Optimistic	Pessimistic	Optimistic	Pessimistic
Hills	-	-	-	-
Royal	-	-	-	-
Retail	-	-	6.2	1.8
Group	100.0	100.0	5.6	0.8
Doncaster	-	-	-	-
Holding	-	-	-	-
Chocolate	100.0	-	17.2	-
Perth	-	-	-	-
Highpoint	-	-	-	-
Chadstone	-	-	-	-
Canberra	-	-	-	-
Consolidated/Pooled	100.0	22.1	3.2	Nil

1. Pages 52 – 53 of the 439A Report explained the advantages and disadvantages of pooling, as follows:

If the Companies are consolidated (pooled) there may some benefits of combining recoveries and costs for the benefit of all creditors.  In addition given the nature of the recovery claim against the former employee and the impact across a number of entities within the Koko Black Group, the Administrators (or subsequent liquidators) would encounter some practical difficulties allocating the proceeds of the recovery claim to be equitably paid to individual entities within the Koko Black Group without direction from the Court which would not be required if the Companies are consolidated (pooled).

The advantages of consolidating (pooling) are as follows:

•Avoids creditor claims regarding allocation of realisations and disputes concerning which KBG company they contracted with.

•Facilitate a reduction of cost in adjudicating creditor claims and allocating them across the Koko Black Group.

•        Facilitates a faster distribution to creditors.

•        No impact to employees in the optimistic scenario. 

The disadvantages of consolidating (pooling) are as follows:

•Certain creditors (Group, Retail and Chocolate) may receive a reduced dividend under this proposed approach.  This reduction is difficult to estimate at this point in time as creditors will need to clearly articulate which company they were contracting with.

Subject to the views of creditors, we propose to undertake the following approach:

•        Assess the response from the creditors.

•        Issue instructions to solicitors.

•If deemed appropriate, apply to Court for a pooling application.

•        Convey to the Court the views of the creditors.

•        Write to creditors to confirm the outcome of the application.

For the reasons set out above and for the collective benefit of all stakeholders, we therefore recommend that the creditors approve combining recoveries, costs and distribution to creditors of the Companies.[9]

[9]Affidavit of Salvatore Algeri, dated 14 April 2016, paragraph 16, exhibit ‘SA-28’.

Second creditors’ meeting

1. The second creditors’ meeting of the Koko Black Group companies was held, concurrently for all companies, on 15 March 2016.[10] 

   [10]Affidavit of Salvatore Algeri, dated 14 April 2016, paragraph 18.

1. At the meeting the administrator, Mr Algeri, explained:

(a)   the difficulties surrounding allocating realisations (actual and future) on a company by company basis;

(b)   the estimated return to creditors on a company by company basis as opposed to a pooled basis; and

(c)    the administrators’ views regarding the advantages and disadvantages of pooling recoveries, costs and creditor claims across the Koko Black Group.[11]

[11]Affidavit of Salvatore Algeri, dated 14 April 2016, paragraph 18. 

1. The pooling resolutions were discussed in the meeting, as can be seen from p 35 of the minutes:

Mr Algeri proposed to put forward a pooling resolution in respect of combining recoveries, costs and distribution to creditors of the Koko Black Group of Companies and commented as follows:

•Pooling makes sense for ease of process and a more equitable distribution of funds

•The Indicative distributions in the 439A report are heavily qualified

•The process of adjudicating proofs of debt and paying any dividend to creditors is likely to be a quicker process if assets and liabilities are pooled.

Further, Mr Algeri reiterated that he was not in a position to quantify whether any creditors would be better or worse off under a pooling arrangement.

In response to a question from Mr Carbone proxy for Coburg 110 Pty Ltd and Oldday Pty Ltd , Mr Algeri informed the meeting that the pessimistic estimate of 22.1c for the priority dividend in a pooling was net of payments to Deloitte and CBA.

Mr Algeri advised that the purpose of the resolutions was to get a general feel if pooling is something the creditors wished to consider.

Mr Algeri asked if there were any further questions about pooling.

There were no further questions.

Mr Algeri referred to the proposed resolutions relating to pooling shown on the screen and asked the creditors of each company to consider.[12]

[12]Affidavit of Salvatore Algeri, dated 14 April 2016, paragraph  18, exhibit ‘SA-30’.

1. The proposed pooling resolutions were passed in respect of each company unanimously, save for two abstentions (in respect of different companies)[13] and three minor creditors of Group voting against the resolution.

   [13]Affidavit of Salvatore Algeri, dated 14 April 2016, paragraph  21.

Communication with creditors about pooling after meeting

1. On 5 April 2016 the liquidators sent a letter to all the known creditors of the Koko Black Group informing them, amongst other things, that the pooling resolutions had carried.[14]  The liquidators have not received any response to that letter or any response regarding the pooling resolutions generally.[15] 

   [14]Affidavit of Salvatore Algeri dated 14 April 2016, paragraph 23.

   [15]Affidavit of Salvatore Algeri, dated 14 April 2016, paragraph  24.

Application for orders in relation to implementation of pooling resolutions

1. Dr O Bigos, of counsel, who appeared for the liquidators submitted that the application was akin to that made in Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd.[16]

   [16](1997) 42 NSWLR 209.

1. Young J (as his Honour then was) stated in Dean-Willcox v Soluble Solution[17] that in a proper case, the Court could exercise its powers under s 511 on an ex parte application.[18]  The present application is, it was submitted, such an application, where there is no real dispute amongst the creditors as to what should happen on the ‘merits’ of the matter, but the liquidators still seek the Court’s imprimatur to administer the companies on a pooled basis.  It was submitted that there was sufficient disclosure to the creditors about the pooling proposal, in the materials provided before the meeting, and the discussion at the meeting as well as the communication after the meeting, such that it was not necessary to serve the Court documents on them.  I agree.  In these circumstances, I do not consider that there was any need for a contradictor.  It would be a waste of time and expense.

   [17]Dean-Willcocks v Soluble Solution, (1997) 42 NSWLR 209, 213.

   [18]A passage quoted with approval by me in Lewis & Templeton & Warehouse Sales Pty Ltd (in liq) v LG Electronics Australia Pty Ltd (No 2) [2016] VSC 63, 50.

1. In Dean-Willcocks v Soluble Solution,[19] as in the present case, the creditors of several companies passed resolutions that the assets and liabilities of the companies be consolidated. Young J observed that what the creditors did was very sensible.[20] As the resolution was passed in the final throes of administration under Part 5.3A, the Court had power under s 447A to give the liquidator the direction that he should treat that resolution as valid for all purposes and act on it. I agree.

   [19](1997) 42 NSWLR 209.

   [20]Dean-Willcocks v Soluble Solution, (1997) 42 NSWLR 209, 216.

1. Although there are pooling provisions in Part 5.6 of Division 8 of the Act (which were introduced in 2007), it was submitted that they are not a ‘Code’ and accordingly not a reason against the making of the orders sought under other provisions of the Act. I agree. The procedure adopted in the present case does not involve a pooling determination by liquidators, or a court order for pooling (under the pooling provisions), but rather the then administrators sought the approval of the creditors in relation to pooling, and having received that approval in the form of a resolution, seek the Court’s imprimatur to implement it in the liquidation. The application, in my view, properly falls within s 511 of the Act and I am satisfied that the pooling resolutions will be just and beneficial in the winding up of each company essentially for the reasons given by the liquidators, as set out below, and endorsed by all but a small minority of creditors in one company (Group).

1. The orders for the implementation of the pooling resolution are sought because the liquidators, based on their combined professional experience in insolvency, formed the view that it was desirable and in the best interests of creditors for the Koko Black Group to be a pooled group, so that the assets and liabilities of the group companies were pooled together.[21]  In summary, the liquidators’ view is that the combination of recoveries, costs and distributions to creditors of all the other Koko Black Group companies is in the best interest of all of the creditors of the Koko Black Group.

   [21]Affidavit of Salvatore Algeri, dated 14 April 2016, paragraph  7.

1. Based on the then administrators’ investigations, it became clear that the Koko Black Group companies, which were all under the control of a common director Mr Shane Hills, were largely intertwined and operated as one entity.[22]

   [22]Affidavit of Salvatore Algeri, dated 14 April 2016, paragraph  8.

1. Some example of the intermingling of the Koko Black Group companies included:[23]

   [23]Affidavit of Salvatore Algeri, dated 14 April 2016, paragraph  22.

(a)   numerous invoices from creditors having been made out to ‘Koko Black’ rather than a particular company;

(b)   all staff having been treated in the payroll system as employees of either Group or Chocolate notwithstanding that some employment contracts were entered into by other Koko Black Group companies; and

(c)    revenue being allocated arbitrarily between Koko Black Group entities.

1. Furthermore, the Koko Black Group was subject to a restructure prior to the administrators’ appointment. However, while some of the assets had been transferred amongst the Koko Black Group companies, the formalities required to affect such transfers had not been completed.[24]

   [24]Affidavit of Salvatore Algeri, dated 14 April 2016, paragraph  8.

1. Additionally, during the course of the administrators’ investigations, a series of transactions involving a former employee who may have acted dishonestly or fraudulently in the exercise of their powers were detected. This conduct may have contributed to the demise of the Koko Black Group as a whole and accordingly, the other Koko Black Group companies may have suffered loss arising from it.  Proceedings have been initiated to recover the sums that may have been misappropriated. Accordingly, any recoveries from these proceedings would be difficult to allocate across the individual Koko Black Group companies.[25]

   [25]Ibid.

1. In those circumstances, there are clear practical difficulties in accurately allocating realisations (actual and future) to each individual entity. Subsequently, the costs of overcoming those difficulties are likely to be significant, especially given that further directions would likely need to be sought from the Court.

1. In summary, the advantages of consolidating (pooling) are, as submitted, as follows:

(a)   Avoids any disputes with creditors as the allocation of their claims to the respective Koko Black Group company.

(b)   Facilitates a reduction of cost in adjudicating creditor claims and allocating them across the Koko Black Group.

(c)    Facilitates a faster distribution to creditors. [26]

[26]Affidavit of Salvatore Algeri, dated 14 April 2016, paragraph  11.

1. In contrast, the liquidators are of the view that the only disadvantage of consolidating is that certain creditors of Group, Retail and Chocolate may receive a reduced dividend. However, as it was difficult for creditors to articulate which company they had contracted with, this disadvantage is only a possibility.[27] 

   [27]Affidavit of Salvatore Algeri, dated 14 April 2016, paragraph  12.

1. The creditors of each company have resolved to combine recoveries, costs and distributions to creditors of the other 10 companies in the Koko Black Group.[28]  As noted earlier, the resolutions were carried on the votes of all the creditors present at the second creditors’ meeting, which were unanimous, save for two abstentions and three minor creditors of one company voting against the resolution. 

   [28]Affidavit of Salvatore Algeri, dated 14 April 2016, paragraphs 20 and 21.

1. In these circumstances, it was appropriate for the Court to make the orders sought, so as to give the liquidators the imprimatur of the Court to implement the pooling resolutions.  Orders were accordingly made on 27 April 2016.[29]  I indicated that reasons would follow.  These are the reasons.

   [29]Although the orders made included a reference to s 447A of the Act, s 511 of the Act is sufficient to dispose of the application. It is unnecessary to consider the separate application of s 447A of the Act. It is included as a matter of ‘belts and braces’.