Australian Growth Managers Ltd v WA Forest Management Pty Ltd (in liq) - [2008] WASC 96

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: AUSTRALIAN GROWTH MANAGERS LTD -v- WA FOREST MANAGEMENT PTY LTD (in liq) [2008] WASC 96

CORAM: NEWNES J

HEARD: 5 DECEMBER 2007 & 12 FEBRUARY 2008

DELIVERED : 4 JUNE 2008

FILE NO/S: COR 107 of 2007

BETWEEN: AUSTRALIAN GROWTH MANAGERS LTD (ACN 054 715 972)
Plaintiff
AND
WA FOREST MANAGEMENT PTY LTD (in liq) (ACN 054 715 972)
First Defendant
ORAN ZOHAR
Second Defendant
VERNON GREY EGERTONWARBURTON
Third Defendant
JEANNIE LUCY EGERTONWARBURTON
Fourth Defendant
VIRGINIA SOUTHWELL
Fifth Defendant
CORA DAY
Sixth Defendant
GEORGE GREY EGERTONWARBURTON
Seventh Defendant
KANDALEE PTY LTD (ACN 062 097 527)
Eighth Defendant
WAFM PTY LTD (ACN 094 259 524)
Ninth Defendant
KANDALEE GRAZING CO
Tenth Defendant
PINE GROWTH PTY LTD (ACN 009 180 885)
Eleventh Defendant
P G FINANCE PTY LTD (ACN 009 221 201)
Twelfth Defendant
WA PLANTATION TREE PROCESSORS PTY LTD (ACN 083 716 830)
Thirteenth Defendant
POMPILIA NOMINEES PTY LTD (ACN 008 827 889)
Fourteenth Defendant
AUSTRALIAN TAXATION OFFICE
Fifteenth Defendant
RSM BIRD CAMERON
Sixteenth Defendant

Catchwords:

Corporations - Insolvency - Claim by liquidator against directors - Offer of settlement by directors - s 600A of Corporations Act - Application by nonrelated creditor that related creditors not be permitted to vote on resolution to accept offer - Turns on own facts.

Legislation:

Corporations Act 2001 (Cth), s 479(3), s 600A

Result:

Application dismissed

Category: B

Representation:

Counsel:

Plaintiff:     Mr A Metaxas
First Defendant             :     Mr N P Gentilli
Second Defendant         :     Mr N P Gentilli
Third Defendant           :     Mr G D Cobby
Fourth Defendant          :     Mr G D Cobby
Fifth Defendant            :     Mr G D Cobby
Sixth Defendant            :     Mr G D Cobby
Seventh Defendant        :     Mr G D Cobby
Eighth Defendant          :     Mr G D Cobby
Ninth Defendant           :     Mr G D Cobby
Tenth Defendant           :     Mr G D Cobby
Eleventh Defendant      :     Mr G D Cobby
Twelfth Defendant        :     Mr G D Cobby
Thirteenth Defendant     :     Mr G D Cobby
Fourteenth Defendant     :     Mr G D Cobby
Fifteenth Defendant      :     No appearance
Sixteenth Defendant      :     No appearance

Solicitors:

Plaintiff:     Metaxas & Hager
First Defendant             :     Jackson McDonald
Second Defendant         :     Jackson McDonald
Third Defendant           :     Christensen Vaughan
Fourth Defendant          :     Christensen Vaughan
Fifth Defendant            :     Christensen Vaughan
Sixth Defendant            :     Christensen Vaughan
Seventh Defendant        :     Christensen Vaughan
Eighth Defendant          :     Christensen Vaughan
Ninth Defendant           :     Christensen Vaughan
Tenth Defendant           :     Christensen Vaughan
Eleventh Defendant      :     Christensen Vaughan
Twelfth Defendant        :     Christensen Vaughan
Thirteenth Defendant     :     Christensen Vaughan
Fourteenth Defendant     :     Christensen Vaughan
Fifteenth Defendant      :     No appearance
Sixteenth Defendant      :     No appearance

Case(s) referred to in judgment(s):

Ravenswood Resort Pty Ltd (in liq) v Kammal [2006] WASCA 217

NEWNES J: The plaintiff has, by originating process filed on 19 July 2007, applied for, among other things, orders under s 479(3) and s 600A of the Corporations Act2001 (Cth) (the Act) that:
•the second defendant seek directions from the court as to whether he should accept a settlement offer made by the directors of the first defendant (WAFM);
•the resolution of the creditors of WAFM made on 12 July 2007 to accept the settlement offer be set aside;
•the second defendant (the liquidator) convene a meeting of creditors to consider the settlement offer and that the third to fourteenth defendants be precluded from voting on the resolution at the meeting of creditors.
The effect of an order precluding the third to fourteenth defendants from voting on the resolution would be to limit the creditors entitled to vote to the plaintiff, the fifteenth defendant (the ATO) and the sixteenth defendant (Bird Cameron).
In the meantime, the plaintiff has brought this application for an order that the liquidator be restrained from accepting the settlement offer pending the determination of the substantive application. It was, as I understood it, accepted by all parties that the effect of a refusal to grant the restraint requested would be that the liquidator would accept the settlement offer before the plaintiff's substantive application could be heard.

The parties

Before turning to the particular facts which give rise to the present application, it is necessary to identify the position of the relevant parties.
WAFM was the trustee of the WAFM trust and in that capacity carried on business in silviculture management. At the material times, the third and fourth defendants (who are husband and wife) were the directors of WAFM. The fifth, sixth and seventh defendants are children of the third and fourth defendants. The eighth to fourteenth defendants are companies controlled by the third defendant. The third to fourteenth defendants were beneficiaries of the trust.
The plaintiff is an unsecured creditor of the WAFM. It is owed the sum of $1,191,133 by WAFM pursuant to an award made in arbitration proceedings between them. I will come to those proceedings shortly.
The second defendant is the liquidator of WAFM. He was appointed liquidator on 18 April 2005, in place of Mr Nilant, the original liquidator. Mr Nilant has since acted as a consultant to the second defendant.
Bird Cameron is the former accountant for WAFM. Bird Cameron and the ATO are unsecured creditors of WAFM. Bird Cameron is owed the sum of $16,164.60. The ATO is owed the sum of $62,807. Apart from the third to fourteenth defendants, the only unsecured creditors of WAFM are the plaintiff, Bird Cameron and the ATO.
The eleventh defendant (Pine Growth) holds a fixed and floating charge over the assets of WAFM, having paid a debt owed by WAFM to BankWest and obtained the benefit of BankWest's security. Pine Growth is the only secured creditor.

The facts

In 2000, the plaintiff entered into a contract with WAFM by which WAFM agreed to establish eucalypt plantations on land on Kangaroo Island for the plaintiff. WAFM commenced planting in about May 2000. The plaintiff says that by July 2000 it was apparent that the plantings on Kangaroo Island had failed due to vermin damage, and re‑planting of the plantation was commenced.
On 21 August 2000, the ninth defendant (WAFM 2) was incorporated. WAFM ceased to trade in or about September 2000 and WAFM 2 assumed WAFM's contracts and commenced to use WAFM's plant and equipment. I will come back to that later.
In November 2000, the plaintiff gave notice to WAFM of a claim against it for the failure of the plantings on Kangaroo Island. Subsequently both parties purported to terminate the contract by reason of the breach of it by the other.
In 2001, the plaintiff and WAFM agreed to submit their claims to arbitration. The arbitration hearing took place between December 2001 and January 2002.
On 15 April 2002, the arbitrator awarded to the plaintiff damages in the sum of $1,191,133, plus interest and costs. The damages were not paid. On 26 August 2002, WAFM was wound up in insolvency on the plaintiff's application.
On 7 March 2003, Pine Growth paid to BankWest the sum of $1,066,151 in discharge of a debt owed by WAFM to BankWest. At that time, BankWest held a fixed and floating charge over the assets of WAFM and an equitable mortgage over shares WAFM held in a listed public company, Australian Plantation Timber Limited (APT). Upon payment of the debt, Pine Growth took an assignment of, or was subrogated to, BankWest's securities. In November 2003, Pine Growth realised some $594,000 from the sale of APT shares secured by the equitable mortgage. The existence of the charge over the assets of WAFM now held by Pine Growth is a significant factor in the present application. The current value of that security is some $800,000.
On 3 January 2005, the liquidator entered into a litigation funding agreement with Hillcrest Litigation Services Ltd (Hillcrest) to enable the liquidator to pursue claims against the directors of WAFM or third parties. Under that agreement, Hillcrest was to receive 40% of any amounts received in proceedings by way of settlement, judgment or order.
On 26 June 2007, the liquidator commenced proceedings in this court against the third defendant, the fourth defendant, WAFM 2 and the twelfth defendant (PG Finance). The liquidator claimed against the third and fourth defendants damages for breach of statutory and fiduciary duties in allegedly causing WAFM to transfer its plant and equipment to WAFM 2 for no consideration, and in transferring shares held by WAFM in Atlantic Ltd (a listed public company) to PG Finance for inadequate consideration. The liquidator claimed against WAFM 2 and PG Finance as being knowingly concerned in the alleged breaches. It is, I think, evident that those proceedings were filed at that time in order to prevent such claims being time-barred.
Shortly before that, on 5 June 2007, the liquidator had provided a report to creditors pursuant to s 473 of the Act. In his report, the liquidator informed the creditors that he had conducted an investigation into the affairs of WAFM and its officers. As a result of those investigations, the liquidator considered there were potential claims against WAFM's directors arising out of the disposal of the assets of WAFM, as follows:
(a)[WAFM] allowed its contract with APT for plantation maintenance for the period 1 January 1998 to 31 December 2000 to end prematurely on 31 August 2000. [It] allowed [WAFM 2] to enter into new plantation maintenance agreements with APT Forestry Services Pty Ltd with effect from 1 September 2000, in lieu of its own contract, thereby divesting itself of the income from that contract from 1 September 2000 onwards.
(b)[WAFM] allowed [WAFM 2] to use WAFM's plant and equipment, free of charge, to carry out those contracts and on 31 July 2001 transferred the plant and machinery to [WAFM 2] for no value in purported satisfaction of a distribution to it as a beneficiary of the WAFM Trust. This plant and machinery was transferred to [WAFM 2] as a beneficiary of the WAFM trust. [WAFM's] records indicate that amongst this plant and equipment was plant and equipment with the value of approximately $350,000 purchased by [WAFM] between November 2000 and February 2001 and never used by it, but only by [WAFM 2]
(c)[WAFM's] records show that shares in Atlantic Ltd, purchased between February 2000 and June 2001 with a value of $2,215,479, were transferred to [PG Finance].
The liquidator reported that those matters had been investigated, including by an examination of the third defendant under the Act and discussions with WAFM's accountants. The liquidator said that both the third defendant and the accountants said that until shortly prior to the appointment of administrators and receivers to APT in late July 2001, it was expected that APT's bankers would continue to support it and the substantial shareholding of WAFM in APT would continue to have significant value. Accordingly, based on the value of that shareholding WAFM was solvent until late July 2001.
The liquidator said that the quantum of the claim in relation to the APT plantation management contract was difficult to estimate, as was any claim in respect of the Atlantic shares. Only the claim in relation to the transfer of the plant and machinery had a certain value. He said he had considered the prospect of an insolvent trading claim under s 588G and s 588M of the Act, but such a claim could only relate to trading after the known insolvency of APT (at the end of July 2001) as prior to that date WAFM had a valuable shareholding in APT. It appeared that WAFM did not trade after the end of July 2001.
The liquidator also informed the creditors that the directors of WAFM had put forward a settlement proposal. In effect, the directors proposed that in consideration of WAFM relinquishing its position as trustee of the trust (and releasing its right of indemnity from the trust assets) and agreeing not to commence or continue any action against the directors or any of the creditors associated with them for any alleged debts, liabilities or claims:
•the directors would pay to the liquidator the sum of $150,000;
•WAFM 2 would withdraw a competing proof of debt in the liquidation of APT, resulting in a further sum of approximately $122,000 being paid to WAFM;
•none of the related creditors would prove in the liquidation of WAFM; and
•all related creditors would be excluded from participating in any dividend to be paid by WAFM.
In other words, only the plaintiff, the ATO and Bird Cameron (the non‑related creditors) would be entitled to participate in any dividend.
The liquidator estimated that, if accepted, the proposed settlement would result in a return to the non-related creditors of 2.3 cents in the dollar. The liquidator said he was unable to provide an accurate estimate of the potential return (if any) to unsecured creditors if the proposal was rejected, due to uncertainty about the timing of any future judgment that might be obtained and its quantum, the future costs that would be incurred in pursuing claims, the status of the charge held by the Pine Growth over the assets of WAFM, and the amount of the claims of the related creditors. The related creditors had substantial unsecured claims and the liquidator pointed out that if they were entitled to participate in any dividend, that would lead to a very substantial reduction in the amount of the dividend payable to the non-related creditors.
In a circular of 4 July 2007, the liquidator informed creditors that the settlement proposal, if accepted, would result in the non-related creditors receiving $13,263. That was approximately half the amount previously estimated. The liquidator also informed creditors of an offer by Hillcrest to acquire the rights to any actions against the directors for the sum of $168,237. The liquidator said he considered that the non-related creditors would receive nothing under that proposal, as all of the funds would go to Pine Growth under its security.
At a reconvened meeting of creditors on 12 July 2007, it was resolved by a majority of creditors in both number and value that the settlement proposal put by the directors should be accepted. The plaintiff voted against the resolution. The related creditors voted in favour of it. Bird Cameron and the ATO gave proxies to the chairman who did not use the proxies for the resolution. Neither Bird Cameron nor the ATO has taken any part in this application.
In these proceedings, the plaintiff seeks, in effect, to set aside the resolution and for another meeting of creditors to be convened to consider the directors' offer, at which meeting the related creditors would not be permitted to vote. By way of interlocutory relief, the plaintiff seeks to restrain the liquidator from accepting the offer. An interim injunction has been granted.

The plaintiff's case

The plaintiff says that, from about mid 2000 to late 2001, WAFM, under the third defendant's direction, caused WAFM to be stripped of its assets. It says that the settlement proposed by the directors should be rejected and claims pursued against the directors and the recipients of the assets. The specific claims the plaintiff says should be pursued by the liquidator relate to:
(a)the transfer to WAFM 2, for no consideration, of a profitable contract between WAFM and its main client, APT, and plant and equipment used by WAFM to carry out silviculture management contracts;
(b)various distributions made to beneficiaries of the trust in 2000 and 2001;
(c)the sale of land to the sixth defendant at an undervalue; and
(d)the transfer to PG Finance of shares held by WAFM in APT.
It is convenient to outline each of the transactions about which the plaintiff complains.

The transfer of the APT contract and WAFM's plant to WAFM 2

WAFM, as trustee of the WAFM Trust, carried on the business of providing management services to entities involved in commercial tree growing, or silviculture. Its clients included the plaintiff and APT. APT was listed on the Australian Stock Exchange (ASX) in 2000. When APT was listed, WAFM was its largest shareholder, holding some 14.77% of APT's issued capital.
WAFM provided forestry management services to APT. The contract between WAFM and APT was due to expire on 31 December 2000. On 1 September 2000, a subsidiary of APT, APT Forestry Services Pty Ltd, entered into a contract with WAFM 2 to provide those forestry management services and WAFM relinquished its contract with APT. The third defendant had caused WAFM 2 to be incorporated a few days previously, on 21 August 2000. As at 1 September 2000, the contract with APT had, of course, had only a few months to run. It is not clear how profitable that contract was, although it appears to have been profitable.
The plaintiff says that the third defendant caused WAFM to give up the value of the contract with APT for no consideration.
At about the same time, WAFM ceased operations altogether and WAFM 2 took over WAFM's other forestry management contracts. It seems that, apart from APT, the client in each case was unaware of the change, the work under the existing contracts simply being carried out by WAFM 2, which received payment for it.
The plaintiff alleges that WAFM allowed WAFM 2 to use WAFM's plant and equipment, free of charge, to carry out the contracts and, on 31 July 2001, transferred the plant and equipment to WAFM 2 at no cost, purportedly in satisfaction of a distribution to WAFM 2 as a beneficiary of the WAFM Trust.

The sale of land by WAFM at an undervalue

Two parcels of land purchased by WAFM in 1998 for $620,000 were sold to the sixth defendant in 2002 for $580,000. While the contract of sale to the sixth defendant was entered into in July 2002, the settlement took place in September 2002, after WAFM had gone into liquidation. The plaintiff says that the sale to the sixth defendant was at an undervalue. The plaintiff has obtained a valuation which indicates that in July 2002 the land was worth $703,500. It was therefore sold for $123,500 less than its actual value. The plaintiff says that that amount is recoverable.
I should add at this point that WAFM also has a half interest in another piece of land (apparently at Bridgetown), which it still holds. In the report as to affairs of 26 August 2002, the value of WAFM's half interest in the land was estimated to be $130,000. The sum of $32,250 was owing by WAFM to a third party who held a registered mortgage over the land. The plaintiff says that the land should have been sold some years ago as, even if the net proceeds would have gone to Bankwest under its charge, that would at least have stopped some interest accruing on WAFM's debt to Bankwest. In any event, it is an asset that can be sold for the benefit of the creditors of WAFM. The plaintiff has obtained a current valuation of the whole land at $475,000, indicating that WAFM's half interest is worth $237,500.

Distributions to beneficiaries of the trust

In respect of the financial years ended 30 June 2000 and 30 June 2001, it appears that WAFM made distributions to the value of several million dollars to beneficiaries of the trust and, in particular, distributed a declared profit of $2.9 million for the financial year ended 30 June 2001. The plaintiff says there was no basis for such a profit to be declared.
The plaintiff says that in light of its claim in relation to the Kangaroo Island contract, there should have been a provision in WAFM's accounts for the financial year ended 30 June 2001 of at least $1 million in respect of that claim.

The plaintiff further says that in April 2001 the directors of WAFM knew that APT's bankers would not renew APT's funding facilities and they therefore knew that the real value of the APT shares held by WAFM was less than both the prices then being quoted on the ASX and their historic cost as recorded in WAFM's accounts. In light of the financial position of APT, the value of the APT shares should have been written down by at least $3 million in WAFM's accounts.
The plaintiff says that once provision was made for the plaintiff's claim and the APT shares were written down, far from showing a profit, it was evident that WAFM was insolvent. The distributions were therefore unfair preferences and/or constituted breaches of fiduciary duty by the third and fourth defendants, and/or were insolvent transactions.

The transfer of assets to PG Finance

On or about 19 July 2001, WAFM transferred to PG Finance a total of 14,769,862 shares which WAFM held in Atlantic Ltd. Prior to the transfer, an amount of $2,287,013 appeared in WAFM's accounts (as at 30 June 2001) as a debt owing by WAFM to PG Finance. The effect of the transfer of the Atlantic shares was to reduce that indebtedness to some $88,700. The plaintiff says that the transfer constituted a preference.

The insolvency of WAFM

A central issue on this application was the date upon which WAFM was insolvent. The plaintiff contended that WAFM was insolvent by late 2000. The defendants contended that it was not insolvent until an administrator was appointed to APT on 28 July 2001 and the value of WAFM's shares in APT collapsed.
In mid‑2000, WAFM was apparently in a sound financial position. As at 30 June 2000, its financial position as reported in the accounts was follows:
(a)cash of $4,728,702;
(b)receivables of $2,645,717;
(c)non-current assets of $8,834,565, making total assets of $16.2 million;
(d)current liabilities of $15.38 million, which included undistributed beneficiary entitlements totalling $14 million. All of the beneficiaries were related persons or entities;
(e)non-current liabilities of $827,510.
Although WAFM had ceased to trade in September 2000, on or about 30 June 2001 it borrowed $1.35 million from BankWest, that borrowing being secured by, among other things, a guarantee from the eleventh defendant (Pine Growth).
WAFM's accounts as at 30 June 2001 reported a trading profit for the financial year of $2.9 million. The accounts reported its financial position as follows:
(a)cash of $653,188;
(b)receivables of $247,590;
(c)non-current assets of $9,955,869, making total assets of $10.8 million;
(d)current liabilities of $8,811,658, including undistributed beneficiary entitlements totalling $8.4 million ($5.6 million less than as at 30 June 2000); and
(e)non-current liabilities of $2 million (the increase being due to the BankWest loan).
WAFM was wound up in insolvency some fourteen months later, on 26 August 2002.
The liquidator's report as to affairs dated 5 June 2007 indicates an estimated deficiency of assets over liabilities of $8,213,841. The unsecured creditors are shown as having total claims of $7,135,856, of which the plaintiff is owed $1,191,133, the ATO is owed $62,807 and Bird Cameron is owed $15,164. The other unsecured creditors are beneficiaries of the trust and related party creditors. The APT shares held by WAFM are estimated to have a realisable value of $5,000.
It was common ground that an important element in the issue as to the date of insolvency of WAFM relates to the APT shares. They made up WAFM's most substantial asset. As I have mentioned, the plaintiff says that WAFM was aware by April 2001 that the APT shares were worth far less than their book value and therefore that by that date WAFM was insolvent. The defendants say that WAFM was not insolvent until the APT share price collapsed following the appointment of an administrator on 28 July 2001.
It appears from a reconciliation of WAFM's accounts that, as at 30 June 2000, WAFM held 13,869,721 APT shares. The APT shares were valued in WAFM's accounts at cost, at $7.29 million out of total assets of some $16.2 million. Their market value, however, was well in excess of $7.29 million. WAFM had sold some APT shares between April and June 2000 at an average price per share of $1.89. As at 30 June 2000, APT shares were trading on the ASX at around $2.00 per share. The total market value of the shares held by WAFM was therefore in the order of $27.75 million.
Between 3 July and 6 October 2000, WAFM sold a further 1,280,000 APT shares at an average price of $2.00. The proceeds, a net sum of some $2.547 million, were deposited in WAFM's bank account. It seems that that sum was used, wholly or in part, to make distributions to beneficiaries of the trust.
The accounts of WAFM as at 30 June 2001 valued, at cost, the shares held by WAFM in APT at $6,526,755. Although there is a minor, unexplained, discrepancy in the reconciliation of the number of shares held at 30 June 2000 and the number sold prior to 30 June 2001, it appears that as at 30 June 2001 WAFM held 12,589,721 APT shares. At that date APT shares were trading at around 78 cents per share on the ASX, giving the parcel of shares held by WAFM a market value of some $9.8 million.
The plaintiff contends, however, that on 30 April 2001 APT was informed by its bank, the Commonwealth Bank of Australia (CBA), that the CBA would not renew its existing lending facility. The subsequent price of APT shares on the ASX therefore simply reflected an uninformed market. But the plaintiff says that WAFM was not uninformed. The plaintiff contends that, by the third defendant as a director of both companies, WAFM was aware at the time that the CBA had declined to renew APT's funding facilities and that APT shares were therefore worth much less than the prices being quoted on the ASX.
There is no evidence to support those contentions. It appears from a statement issued by APT to the ASX on 30 July 2001 that although APT's previous funding facility had expired on 30 June 2001, APT had been in negotiations with the CBA for a renewal of the facility and had been confident that that would be achieved. Late on 27 July 2001, however, the CBA advised APT that it would not complete its consideration of APT's application for at least another 28 days and in the meantime no further working capital would be provided by the CBA.
There was no evidence which contradicted the account of events given in APT's statement to the ASX.
On 27 July 2001, APT shares had been trading on the ASX at around 40 cents per share, giving the shares then held by WAFM a total value of some $5 million.
On the evidence, WAFM would have been insolvent prior to 28 July 2001 only if the related creditors had demanded payment of their debts. No such demands had been made and there is nothing to suggest that any such demands were in contemplation.

The evidence of the liquidator

In opposition to the application, the defendants relied upon two affidavits sworn by Mr Nilant on behalf of the first and second defendants. In an affidavit of 2 August 2007, Mr Nilant said that he had further considered the calculation of the value of Pine Growth's security and, based on information provided to him by BankWest and Pine Growth, and based on his perusal of WAFM's records, he believes that as at that date the value of the security held by Pine Growth under the fixed and floating charge was the sum of $763,000.
In an affidavit of 11 December 2007, Mr Nilant set out the process of reasoning and the information on which he based his view that the creditors should accept the settlement proposal.
Mr Nilant says he was aware that two parcels of land were purchased by WAFM in 1998 for $620,000 and sold to the sixth defendant in 2002 for $580,000. While the contract of sale to the sixth defendant was entered into in July 2002, the settlement took place in September 2002, after WAFM had gone into liquidation. Mr Nilant said he took no steps to prevent the sale because it did not appear to be at a significant undervalue and any resulting proceeds would to go to BankWest under its floating charge. Mr Nilant said had he discussed the matter with BankWest which was happy to proceed with the sale, although it appeared to be at a slight undervalue, because interest would continue to run on WAFM's debt and significant costs would be incurred if the sale was not completed and the land had to be re-sold.
Mr Nilant said that he took no steps to sell WAFM's half share in the Bridgetown land because of the difficulty in selling a half interest and because any proceeds of sale would have to be paid to BankWest (now Pine Growth) as a secured creditor. As reflected in the report as to affairs of 26 August 2002, the value of WAFM's half interest in the land was estimated to be $130,000 and the sum of $32,250 was owing by WAFM under a mortgage over the land. Accepting the valuation of the land conducted on behalf of the plaintiff, as at 20 September 2007 the land was valued at $475,000. Accordingly, WAFM's half interest would be worth $237,500 less the costs of sale ‑ if a buyer for the half interest could be found.
Mr Nilant says that he relied on legal advice which he obtained from Mr K Martin QC in relation to possible actions by WAFM against directors and third parties. Mr Nilant says he agrees with the opinion of Mr Martin that it would be difficult to establish that WAFM was insolvent until APT was placed into administration and receivership (28 July 2001 and 29 July 2001 respectively) because up to that time WAFM held approximately 12.6 million shares in APT which, at a value in late July of about 40 cents each, meant that those shares had a value of about $5 million. Only a month earlier, as at 29 June 2001, APT shares had been trading at 78 cents, giving those shares a market value of about $9.8 million. On the basis of those figures, WAFM was solvent until 28 July 2001.
Mr Nilant concluded that, in view of that, the disposal of the Atlantic shares to PG Finance on 19 July 2001, and the payment of distributions to beneficiaries prior to 30 June 2001, would not be easy to challenge with any reasonable prospects of success.
Mr Nilant concluded that the only potential recoveries were in relation to:

(a)	The sale of WAFM's half interest in the land it held	$237,500
(b)	The claim that the sale of land to the sixth defendant had been at an undervalue	$123,000
(c)	The claim regarding the disposition of WAFM's plant and equipment to WAFM 2	$657,000
Total	$1,017,500

Of that sum, Pine Growth would be entitled to recover under its security up to the sum of $763,000. That would leave a net recovery of $254,500.
On the other hand, the total amount of funds to be paid to WAFM from the proposed settlement is approximately $150,000 in cash, plus an additional sum of approximately $122,500 from the liquidation of APT, making a total amount of $272,500.
Mr Nilant says he has no funds for litigation. There are currently unpaid accounts rendered by Hillcrest in the sum of $72,546.10, and a sum of approximately $185,000 owing to the liquidator and legal fees outstanding of approximately $51,000. Accordingly, outstanding liquidator's and legal fees exceed $235,000 and there is currently a dispute with Hillcrest regarding payment of its fees.
Mr Nilant says that while the settlement proposed by the directors is not particularly generous, it must be viewed in light of the uncertainties of litigation, the present uncertainty as to who would fund any litigation and the significant unpaid costs of the liquidation. Mr Nilant expressed the view that the plaintiff would not recover any sum as an unsecured creditor of WAFM, whether or not the proposal is accepted.

The relevant principles

The relevant principles were not in issue between the parties. They were most recently set out by the Court of Appeal in Ravenswood Resort Pty Ltd (in liq) v Kammal [2006] WASCA 217, by Martin CJ (with whom McLure JA and Buss JA agreed) as follows:
When an application is brought under s 600A on the ground that the passage of the resolution has prejudiced or is reasonably likely to prejudice the interests of the creditors who voted against the proposed resolution (construed, for the purposes of this case, as extending to a creditor who would have voted against the proposed resolution but for the wrongful rejection of his proof of debt), it is clear that the mere identification of prejudice, or the likelihood of prejudice flowing from the resolution will not, of itself, satisfy the pre‑condition for the making of an order under the section. Rather, the question which the Court must address is the question of whether the identified prejudice is unreasonable, and the Court is further required to address that question having regard to two specified factors and any other relevant matter. The two factors which the Court is specifically obliged to take into account are the benefits resulting to the related creditor or creditors and the nature of the relationship between the related creditor or creditors and the company. In this case, it is clear that each of the three alleged sources of prejudice which I have set out above falls within one or other of the two specified factors which the Court is obliged to take into account.
But in addition to taking account of those two specified factors, the Court must, before exercising the powers conferred by the section, arrive at the conclusion that the prejudice which has been suffered or is reasonably likely to be suffered, is 'unreasonable'. Two conclusions seem to me to flow from the adoption of that criterion by the legislature. The first is that the evaluation of prejudice, to be undertaken by the Court, is a qualitative process in which the nature, degree and extent of the prejudice is to be weighed and its significance assessed by the Court. The second conclusion and which is related to the first, is that the process of qualitative evaluation which I have described, will also require the Court to take into account any other matter that is relevant to the qualitative evaluation of whether or not the prejudice is unreasonable. This will require the Court to identify the consequences which the passage of the resolution would have on parties or interests other than those of the related creditor or creditors and the creditor voting against the proposed resolution, including creditors generally, the liquidator, and the public interest, and then to qualitatively weigh and evaluate those interests and to assess the extent to which consideration of those other interests might ameliorate or negate the conclusion that the prejudice which has been or is likely to be suffered by the opposing creditor is properly characterised as unreasonable [27] ‑ [28].

The merits of the application

There is no doubt that the plaintiff's objective by the substantive application is to overturn the resolution of the creditors of 12 July 2007 and for WAFM to pursue claims against the directors and entities associated with them. That was apparent from the approach taken by the plaintiff on this application and it was not suggested that the orders sought on the substantive application would serve any other useful purpose. However, a number of substantial difficulties stand in the way of any successful claim by the liquidator if the course urged by the plaintiff were to be taken.
The first difficulty is that, on the evidence, the plaintiff does not have any reasonable prospect of establishing that WAFM was insolvent before 28 July 2001, when the administrator was appointed to APT.
I do not accept the plaintiff's submission that WAFM was insolvent by April 2001. I do not consider there is any basis in the evidence for that conclusion. As at April 2001, the claim by the plaintiff arising out of the Kangaroo Island plantation had not been determined and liability for it was denied by WAFM. According to the liquidator, both the third defendant and WAFM's accountant had been advised that WAFM was likely to succeed on the arbitration. The liquidator and the plaintiff have both had access to the records of WAFM in that regard and nothing has been put before me to suggest that the defence of the claim was not bona fide. The matter proceeded to arbitration only in December 2001 and the outcome of the arbitration was not known until April 2002. I do not accept the plaintiff's contention that by April 2001, or by 30 June 2001, the directors of WAFM had reason to believe that WAFM was liable to the plaintiff for the failure of the Kangaroo Island plantation and that provision should have been made in WAFM's accounts.
For the reasons I have already given, I also do not accept the plaintiff's contention that WAFM knew in April 2001, or prior to 30 June 2001, that APT's bankers would not continue to provide APT with finance. On the evidence before me, there is nothing to suggest that WAFM had any notice of it before 28 July 2001.
Nothing else of substance has been advanced to make good the plaintiff's claim that WAFM was insolvent before 28 July 2001. In that connection, it is relevant to note that the plaintiff has had access to the transcript of the examination of the third defendant, the internal records of WAFM, and, by way of a subpoena, the records of its bankers.
The second, and in part consequential, difficulty is that if the settlement proposal is not accepted, the avenues of recovery appear to be quite limited.
The sale of the half share in the land held by WAFM has been valued at $237,500, based on the proposition that it is worth half the value of the whole property. That is not self-evident. There are obvious difficulties in selling a half interest in land. As counsel for the liquidator submitted, any sale may require that an order for sale in lieu of petition be obtained, with all the time and cost that that might involve. From the proceeds of sale the costs associated with the sale would also have to be deducted.
The land sold to the sixth defendant was allegedly sold at some $123,000 less than its true value. The alleged undervalue is a relatively modest sum and the outcome of any action against the directors or purchasers of the land is necessarily uncertain because of the prospect of differing views as to the value of the land in 2002. Once again, the costs of recovery must also be taken into account.
The most significant claim asserted by the plaintiff is that substantial distributions were improperly paid to beneficiaries in the financial years ended 30 June 2000 and 30 June 2001, and that the transfer of the Atlantic shares to PG Finance in July 2001 constituted a preference. On the evidence before me, it is very doubtful that either could be established.
Based on the value of the APT shares it then held, the distributions in question were made to the beneficiaries at a time when WAFM was solvent. As at 30 June 2001, the APT shares were worth some $9.8 million based on trading on the ASX. Immediately prior to the appointment of an administrator to APT at the end of July 2001, the APT shares held by WAFM still had a value of about $5 million. On the basis that WAFM held readily saleable assets of that magnitude, there does not appear to be any reasonable prospect of successfully challenging the distributions made by WAFM.
Nor does the transfer of the Atlantic shares to PG Finance appear to offer any greater prospects of recovery for the benefit of WAFM's creditors. On 19 July 2001, WAFM had transferred to PG Finance a total of 14,769,862 shares in Atlantic Ltd, having a value of $2,220,947. PG Finance had been a creditor of WAFM for some years, being owed an amount of some $3.5m between 1997 and 1999. By June 2000, the debt had been reduced to $2.2m. The effect of the transfer of the shares in Atlantic on 19 July 2001, was to discharge the debt, or almost all of the debt, owed by WAFM to PG Finance.

On the evidence WAFM was solvent at that time and there is no evidence to suggest that the transfer itself played a part in the insolvency of WAFM.
In any event, if the transfer was found to be a preference, PG Finance would be entitled to prove for its debt as the debt stood prior to receiving the preference, so that WAFM's creditors would increase by $2.2 million.
The greatest prospect of success appears to be against WAFM 2 in connection with the receipt of the plant and equipment. The claim is estimated by the liquidator to be worth up to $657,000. That, however, would not be enough to satisfy the charge held by Pine Growth. That charge secures a sum of $543,000 plus interest at 11% per annum from mid‑November 2003. The interest accrues at $59,730 per annum and the amount secured therefore now exceeds $800,000. There is nothing to suggest that the validity of that charge or Pine Growth's entitlement under it could be made the subject of a successful challenge.
I should add, too, that there is no credible evidence as to the capacity of any of the potential defendants to meet any claims that the liquidator might be able to establish against them. In addition, I did not understand the plaintiff to contest that any claim under s 588FF of the Corporations Act is now well out of time: s 588FF(3). It is at least arguable that any claim against the directors is also out of time.
A third and very substantial difficulty is the lack of any funds available to the liquidator to pursue claims against the directors or third parties. On the evidence, the relationship between the liquidator and the current litigation funder has broken down and unpaid professional fees now exceed $235,000. No source of funding for litigation has been identified by the plaintiff and there are currently no funds to pay the existing unpaid professional fees. The plaintiff has not offered to provide funds to pursue any of the claims it contends ought to be pursued.
It is also necessary to have regard to the magnitude of any recoveries by the liquidator that would be required if the position of the plaintiff is to be improved. The settlement proposal will result in the total receipt by WAFM of some $272,000. Accordingly, WAFM would need to recover net proceeds in excess of $1 million from recovery actions to be in the same position; that is, to satisfy the charge held by PG Finance and have a surplus of $272,000. Moreover, if the settlement proposal is not accepted the related creditors will be entitled to prove for their debts. The amount of those debts appears to be in the order of $6 million. The amount available to the plaintiff from the net proceeds of any recoveries made by the liquidator would therefore be a relatively small proportion of the amount recovered. The amount payable to the other two non-related creditors, the ATO and Bird Cameron, would be negligible.

Conclusion

I consider that the plaintiff has failed to make out a case for the relief claimed in the interlocutory application. The course proposed by the plaintiff involves the rejection of the settlement offer so that WAFM can embark upon complex litigation:
•despite obvious and substantial difficulties in proving any of the possible claims which have been identified;
•without having any identified source of funding and in circumstances where there are already significant existing professional fees owing by WAFM; and
•with very real prospects that any likely recovery would do more than enable the discharge - and quite possibly not even the discharge ‑ of the existing security held by Pine Growth.
On the evidence before me, there is no reasonable prospect that the position of the plaintiff (or either of the other non-related creditors) would be improved if the course the plaintiff urges were taken ‑ assuming for the moment that the necessary funds could be obtained to enable that to be done. WAFM would become embroiled in costly and time-consuming litigation with, at best, remote prospects of achieving any practical benefit from it. Moreover, if any money was recovered it is highly unlikely that the amount available for distribution to the unsecured creditors would be sufficient to result in any significant return to the plaintiff. Accordingly, it cannot be said that the plaintiff is likely to be prejudiced if the settlement offer is accepted. On the other hand, if the offer is not accepted the creditors who would have been entitled to benefit from the proceeds of the settlement will remain unpaid.
In the circumstances, I consider that the plaintiff has failed to make out a prima facie case for the relief sought and that no purpose would be served by restraining the liquidator from accepting the settlement offer. The interim injunction should be discharged and the interlocutory application dismissed.
That leaves the question of the substantive application. The interlocutory application has been argued over an extended period of time, in the course of which, as I have mentioned, the plaintiff issued a subpoena to BankWest so as to have access to the bank records of WAFM and it has also had access to the records of WAFM in the possession of the liquidator and to the transcript of the examination of the third defendant.
So far as I am aware, anything of assistance to its case that the plaintiff has been able to derive from that material has been put before me. It is not apparent that any further evidence is likely to be available to the plaintiff. Indeed, I think it is fair to observe that this application appears to have been seen by the plaintiff as affording a last opportunity to make further enquiries into the affairs of WAFM. It does not seem to have borne fruit.
It is appropriate that I hear the parties on how the substantive application should now be dealt with.