AXF Group Pty Ltd v AXF Holdings Pty Ltd
[2020] VSC 375
•25 June 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST
S ECI 2020 00991
| AXF GROUP PTY LTD (ACN 116 258 130) (IN LIQUIDATION) | First Applicant |
| and | |
| MALCOLM HOWELL AS LIQUIDATOR OF AXF GROUP PTY LTD (ACN 116 258 130) (IN LIQUIDATION) | Second Applicant |
| v | |
| AXF HOLDINGS PTY LTD (ACN 140 106 457) AND OTHERS (ACCORDING TO THE SCHEDULE) | Respondents |
---
JUDGE: | ALMOND J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 27 May 2020 |
DATE OF JUDGMENT: | 25 June 2020 |
CASE MAY BE CITED AS: | AXF Group Pty Ltd & Anor v AXF Holdings Pty Ltd & Ors |
MEDIUM NEUTRAL CITATION: | [2020] VSC 375 |
---
CORPORATIONS – Company under external administration – Direction issued by creditors of company to convene meeting to remove liquidator – Application by liquidator seeking the Court’s guidance as to whether the liquidator can take certain matters into account – Corporations Act 2001 (Cth) – Section 90-15(1) of the Insolvency Practice Schedule (Corporations) – Rule 75-250(2) of the Insolvency Practice Rules (Corporations) 2016.
---
APPEARANCES: | Counsel | Solicitors |
| For the Applicants | Sam Hay SC and Elle Nikou Madalin | Lander & Rogers |
| For the Respondents | Michael Galvin QC and Daniel Harrison | AHD Lawyers |
| For the Interested Party, Mr Qi Liang Gu | Bart Carew | Dentons |
| For the Interested Parties, Mr Robert Rafaniello and Mr Sean Bennett | Joshua Kohn | Tahota Law Firm |
HIS HONOUR:
By summons dated 6 May 2020 the second plaintiff, Matthew Howell, as liquidator of the first plaintiff, AXF Group Pty Ltd (ACN 116 258 130) (in liquidation) (‘the Company’), seeks an order pursuant to s 90-15(1) of the Insolvency Practice Schedule (Corporations) in sch 2 of the Corporations Act 2001 (Cth) (‘the Insolvency Practice Schedule’), that in forming an opinion pursuant to r 75-250(2) of the Insolvency Practice Rules (Corporations) 2016 (Cth) (‘the Insolvency Practice Rules’) about whether a direction of certain creditors of the Company issued on 28 April 2020 to convene a meeting of creditors (‘the Direction’) is not reasonable because:
(a)complying with the Direction would substantially prejudice the interests of one or more creditors or a third party and that prejudice outweighs the benefits of complying with the Direction; and/or
(b)the Direction is vexatious,
he is justified in taking into account each of the matters enumerated in relevant paragraphs of his supporting affidavit dated 5 May 2020.[1]
[1]The summons referred to paragraph 48 and following, however, it is apparent that the paragraph reference should be to paragraph 49 and following. Paragraph 48 refers to correspondence received from a firm of solicitors and not a matter the deponent relies upon as one of the matters to be considered.
In support of the summons, the liquidator relies on several affidavits dated 26 February, 5 May, 8 May, 23 May and 26 May respectively, affidavits of Patrick Joyce dated 2 April and 12 May 2020, an affidavit of Robert Scott Ditrich dated 22 May 2020 and an affidavit of Phillip Roberts dated 27 May 2020.[2]
[2]Some affidavits relied upon were unsworn at the time of filing due to measures to minimise the spread of the COVID-19 virus. The deponents stated that they would provide the Court with a sworn copy of their affidavits when they were able to do so. In the circumstances the hearing proceeded on the basis that the unsworn or unaffirmed affidavits could be relied upon.
By summons dated 12 May 2020, an interested party, Mr Qi Liang Gu (‘Mr Gu (Snr)’), seeks an order pursuant to ss 90-15(1) and 90-21(2) of the Insolvency Practice Schedule that Mr Howell, as liquidator of the company, be directed to convene a meeting of creditors of the Company for the purpose of considering and voting on resolutions replacing Mr Howell as liquidator of the Company with someone else. Mr Gu (Snr) is the father of Mr Ming Feng Gu (‘Mr Gu (Jnr)’) the sole director of the Company.
At the hearing of these two applications submissions were also made on behalf of two other interested parties, Robert Rafaniello and Sean Huntley Bennett.
The interested parties rely on the affidavits of Thien Hock Soon, sworn 12 May and 21 May 2020 respectively, an affidavit of Robert Rafaniello, affirmed on 22 May 2020, and an affidavit of Sean Huntly Bennett, sworn 22 May 2020.
The respondents support the application made by Mr Gu (Snr) and rely on the statement of Mr Gu (Jnr) dated 2 April 2020, the affidavits of Mr Gu (Jnr) affirmed 6 April, 22 April, 1 May, and dated 25 May 2020, and the affidavits of Vincent Zhi Qing Zhu dated 12 May and affirmed 22 May 2020.
Background
The Company was formerly trustee of the Australian Xiang Fu International Trust (‘the Trust’).[3]
[3]Affidavit of Malcolm Kimball Howell dated 26 February 2020, [3] (‘first Howell affidavit’).
On 19 November 2019, the Court appointed the second plaintiff, Mr Howell, as liquidator of the Company. The winding up orders were stayed on five occasions during November 2019 to early February 2020.[4]
[4]First Howell affidavit, [16], [17].
On 3 February 2020, the Company filed a Notice of Appeal and summons to appeal the winding up orders. On 5 February 2020, I dismissed the summons and refused any further stay. The liquidation of the Company commenced on 5 February 2020.[5]
[5]First Howell affidavit, [19].
On 27 February 2020, the liquidator filed an application seeking freezing orders against the respondents and an order appointing Mr Howell as receiver and manager without security over the assets and undertakings of the Trust.[6]
[6]Affidavit of Malcolm Kimball Howell sworn 5 May 2020, [8] (‘second Howell affidavit’).
On 28 February 2020, the Court made freezing orders which included ancillary orders requiring the respondents to file and serve an affidavit setting out the Trust assets and giving directions regarding the filing and service of affidavit material relied upon in relation to the receivership application.[7] The freezing orders remain on foot. The receivership application is presently listed for hearing on a date to be fixed pending the hearing and determination of these applications.
[7]Second Howell affidavit, [9]–[10].
The liquidator has received directions from purported creditors of the Company pursuant to ss 75-15(1) and 90-35 of the Insolvency Practice Schedule as follows:
(a)on 24 February 2020, the liquidator received a proof of debt from Wanli Zhang for $10,349,988 plus interest and a direction to the liquidator to call a meeting of creditors to consider a resolution that he be removed as liquidator and that Mr Danny Vrkic of DV Recovery Management be appointed as liquidator of the company;[8]
(b)on 8 April 2020, the liquidator received a proof of debt from Mr Gu (Snr) for $85,972,556.34 (inclusive of interest) and a direction to the liquidator to convene a meeting of creditors to consider a resolution that he be removed as liquidator of the company and in his place Danny Tony Vrkic and Daniel O’Brien be appointed as joint and several liquidators of the company;[9] and
(c)on 28 April 2020, the liquidator received a direction on behalf of Mr Gu (Snr) and 15 other creditors (including Wanli Zhang) directing the liquidator to convene a meeting of creditors of the Company for the purpose of considering and voting on a resolution that he be removed as liquidator of the company (the Direction).[10]
[8]Exhibit MKH53 to the first Howell affidavit.
[9]Exhibit MKH56, 173 to the second Howell affidavit.
[10]Exhibit MKH56, 318 to the second Howell affidavit.
The liquidator is of the preliminary opinion that the Direction is not reasonable on the basis that:
(a)calling a meeting of creditors for the purpose of voting on a resolution to remove him as liquidator at this juncture would substantially prejudice the interests of one or more creditors or a third party, and that prejudice outweighs the benefits of complying with the Direction; and/or
(b)the Direction is vexatious.
Before forming a concluded opinion, the liquidator seeks direction from the Court in relation to the legitimacy of taking various matters into account when forming his opinion of the reasonableness of the Direction in accordance with the Insolvency Practice Rules.
Insolvency Practice Schedule and Rules
Section 75-15 of the Insolvency Practice Schedule provides:
External administrator must convene meeting in certain circumstances
(1)The external administrator of a company must convene a meeting of the creditors if:
(a)where there is a committee of inspection—the committee of inspection directs the external administrator to do so; or
(b)the creditors direct the external administrator to do so by resolution; or
(c)at least 25% in value of the creditors direct the external administrator to do so in writing; or
(d) both of the following are satisfied:
(i)less than 25%, but more than 10%, in value of the creditors direct the external administrator to do so in writing;
(ii)security for the cost of holding the meeting is given to the external administrator before the meeting is convened; or
(e) all of the following are satisfied:
(i)the company is being wound up under a creditors' voluntary winding up;
(ii)less than 25%, but more than 5%, in value of the creditors direct the external administrator to do so in writing;
(iii)none of the creditors who give the direction is a related entity in relation to the company;
(iv)the direction is given no more than 20 business days after the resolution for the voluntary winding up of the company is passed.
(2)However, the external administrator need not comply with the direction if the direction is not reasonable.
(3)The Insolvency Practice Rules may prescribe circumstances in which a direction is, or is not, reasonable.
(4)For the purposes of paragraphs (1)(c), (d) and (e), the value of the creditors is to be worked out by reference to the value of the creditors’ claims against the company that are known at the time the direction is given.
…
It can be observed that s 75-15(2) permits an external administrator to not comply with a direction if the direction is not reasonable.
Rule 75-250 of the Insolvency Practice Rules prescribes when a direction is reasonable or not reasonable. Rule 75-250 provides:
Directions to external administrator to convene a meeting—when reasonable and not reasonable
(1)This section is made for the purposes of section 75‑15 of the Insolvency Practice Schedule (Corporations).
Unreasonable directions
(2)A direction to the external administrator of a company to convene a meeting of the creditors is not reasonable if the external administrator, acting in good faith, is of the opinion that:
(a)complying with the direction would substantially prejudice the interests of one or more creditors or a third party and that prejudice outweighs the benefits of complying with the direction; or
(b)there is not sufficient available property to comply with the direction; or
(c) a meeting of the creditors dealing with the same matters covered by the direction has already been held, or will be held within 15 business days after the direction is given; or
(d) the direction for the meeting is vexatious.
(3)Without limiting paragraph (2)(d), a direction may be taken to be vexatious if it is given within 20 business days after a similar direction was given.
Reasonable directions
(4)A direction to the external administrator to convene a meeting of the creditors is reasonable if subsection (2) does not apply to the direction.
(5)Despite paragraph (2)(b) or (c), a direction to the external administrator of a company to convene a meeting is also reasonable if:
(a)the creditors agree to bear the cost of complying with the direction; and
(b)if required to do so by the external administrator—security for the cost of complying with the direction is given to the external administrator before the meeting is convened.
Rule 75-255 prescribes notice requirements for unreasonable directions. Rule 75-255 provides:
(1)This section is made for the purposes of section 75‑15 of the Insolvency Practice Schedule (Corporations) and applies if:
(a)a direction to convene a meeting of the creditors is given to the external administrator under Division 75 of the Insolvency Practice Schedule (Corporations); and
(b)under the Act or these Rules, it is not reasonable for the external administrator to comply with the direction.
(2) The external administrator must:
(a)notify the person or body giving the direction that it is not reasonable for the external administrator to comply with the direction, and of the reasons why it is not reasonable; and
(b)make a written record in the books required to be kept under section 70‑10 of the Insolvency Practice Schedule (Corporations) of the fact that the direction was not complied with, and of the reasons.
Unless at least one of the prescribed circumstances under r 75-250(2) of the Insolvency Practice Rules applies, the direction is reasonable.[11] There is no provision setting out a list of matters which an external administrator may take into account in forming an opinion that a direction under s 75-15(1) of the Insolvency Practice Schedule is not reasonable, on the basis that:
(a)compliance with the direction would substantially prejudice the interests of one or more creditors or a third party and that prejudice outweighs the benefits of complying with the direction under r 75-250(2)(a); or
(b)the direction for the meeting is vexatious, under r 75-250(2)(d).
The liquidator makes this application to the Court to determine whether he is justified in taking into account each of the matters enumerated at paragraphs 49 and following in his supporting affidavit dated 5 May 2020.
[11]Rule 75-250(4), Insolvency Practice Rules.
It is clear from the text of r 75-250(2) that the liquidator needs to be satisfied that there would be (not that there could or might be) substantial prejudice for the purpose of s 75‑250(2)(a) and must be satisfied that the direction for the meeting is (not that it might or could be) vexatious for the purpose of s 75-250(2)(d).
In terms of the issue of vexatiousness for the purpose of s 75-250(2)(d), the liquidator should be cognisant of the change in the law brought into effect by the Insolvency Law Reform Act 2015 (Cth) including the second reading of the Insolvency Law Reform Bill 2015 where David Coleman MP made the following observation:
At the moment there are a range of problems with the way that creditors interact with insolvency practitioners; but it seems to me that the most problematic aspect is that, once an insolvency practitioner of the various kinds is in place, it is very, very difficult for creditors to remove that insolvency practitioner. Generally creditors are required to go to court to make that happen, and of course there is cost involved in that, a whole time issue and a complexity… As a consequence this gives the insolvency practitioner perhaps an unreasonable degree of leverage over creditors and an unreasonable degree of power in the whole situation. This legislation says: if creditors in number and in value in terms of the debts that they are owed decide to replace an administrator—who, after all, is there to represent their interests—they can do so. So, without going to court and all of the cost and formality and time that that involves, a majority of creditors can remove an insolvency professional who they do not feel is representing their interests as effectively as they should. That is a very common sense change—as indeed the entire bill is—and I am pleased to see that is being supported by the opposition.[12]
[12]Commonwealth, Parliamentary Debates, House of Representatives, 9 February 2016, 1128-1129 (David Coleman).
Further, I note that the liquidator has referred to the case of Re FW Projects Pty Ltd (in liq) (‘FW Projects’),[13] which involved among other things an application to remove a liquidator. In that case, a direction to convene a meeting of creditors had been issued and refused by the liquidator on the grounds that it was vexatious, citing the very early stage of the liquidation and the short period that had elapsed since its commencement and the lack of available funds. Less than four weeks had elapsed from the date of the appointment of the liquidator and the request to call a meeting of creditors; there was in existence a pending application to remove the liquidator, the liquidator was unfunded and there were insufficient resources to comply with the direction to call a meeting.
[13][2019] NSWSC 892 (Black J).
FW Projects can be contrasted with this case, where almost three months had elapsed (from the practical commencement of the liquidation on 5 February) at the time the Direction was given (now almost 5 months have elapsed), where the liquidation is now funded and where the principal creditor is offering $10,000 towards convening the meeting in the absence of financial support from other creditors. In the circumstances FW Projects is a very different case and does not offer much guidance for present purposes.
Finally, rule 70-15 of the Insolvency Practice Rules deals with the right of an individual creditor to request information from an external administrator. Under this rule, as is the case under r 75-250, an external administrator can refuse a request for information if the administrator, acting in good faith, is of the opinion that the request is vexatious.[14]
[14]Rule 70-15(2)(g), Insolvency Practice Rules.
The meaning of ‘vexatious’ in the context of r 70-15 is considered in Secatore, in the matter of Last Lap Pty Ltd (in liq).[15] In his Honour’s judgment, Anderson J considers that a request for information will be vexatious where:
[the request is] made for an improper purpose “in the sense of a purpose that was unrelated to the creditor’s claims in, or the conduct of, the external administration or was made for a purpose of harassing or annoying the external administrator or causing delay or detriment to the external administration”.[16]
[15][2020] FCA 627.
[16][2020] FCA 627, [50] citing In the matter of 1st Fleet Pty Ltd (in liquidation) [2019] NSWSC 6, [43].
The Liquidator’s application
In his affidavit dated 5 May 2020, the liquidator lists various matters upon which he has based his preliminary opinion. These are reproduced verbatim below. The liquidator seeks direction from the Court as to whether these matters can be taken into account in forming an opinion pursuant to r 75-250(2):
49.In respect of the Direction, my preliminary opinion is that the direction given to me to convene a meeting of creditors to remove and replace me as the liquidator of AXF Group to be unreasonable given the following matters:
(a)I believe that some of the creditors listed in Annexure A of the letter from Dentons, referred to at paragraph 45 above are either related to Mr Gu Jnr, appear to be friendly towards or are aligned with Mr Gu Jnr, or may be subject to voidable claims under the Act (collectively, the Related/Friendly Creditors) for the following reasons:
(i)Qi Liang Gu: as previously noted, Mr Gu Snr is the father of Mr Gu Jnr, the sole director of AXF Group and of the new trustee of the Trust, AXF Holdings Pty Ltd. Mr Gu Snr is also one of two primary beneficiaries of the Trust, the other being Mr Gu Jnr.
(ii)Fortune Capital Fund Pty Ltd (ACN 604 847 270): has not lodged a proof of debt.
(iii)Fortune Capital Investments Pty Ltd (ABN 43 602 996 823): disclosed by Mr Gu Jnr in the ROCAP, but has not lodged a proof of debt.
(iv)Jinxia Liu: claims to be an employee of AXF Group. Her proof of debts notes her capacity/occupation as ‘accountant’. During a meeting on 24 March 2020, Mr Gu Jnr told me and my staff, Travis Marchione, that the employees of AXF Group had been transferred to AXF Holdings. He further told me that the entitlements of those employees had not been transferred to AXF Holdings.
Now produced and shown to me and marked “MKH56-338” is a true copy of Mr Marchione’s and my file note of that meeting.
(v)Qi Hua Mei: also claims to be an employee of AXF Group. Her proof of debt notes her capacity/occupation as ‘accounts’.
(vi)Rob Rafaniello: was the Chief Financial Officer of AXF Group, and remains a co-directors with Mr Gu Jnr of AXF Gold Ridge Pty Ltd, Australian Solomon Gold Pty Ltd, JV Mine (Australia) Pty Ltd and Solomon Islands International Pty Ltd.
(vii)Sean Bennett: also claims to be an employee of AXF Group, and provided the statement exhibited as MFG2 to the affidavit of Mr Gu Jnr sworn 6 April 2020 and filed on behalf of the respondents in this proceeding.
(viii)Sue Gui Zhi Shi t/as Suewin Business Associates (ABN 71 218 I349 057): is the former accountant at AXF Group. Despite numerous requests by me for the books and records of AXF Group from her, I still have not been provided with the full financial accounts of the AXF Group. I have only been provided the 2015 financial statements and tax returns via email dated 20 February 2020.
Now produced and shown to me and marked ”MKH546-343” is a true copy of a bundle of correspondences passing between me and Sue Gui Zhi Shi t/as Suewin Business Associates.
(ix)Shane He: claims to be owed $314,312.33 pursuant to a oral loan agreement on 2 June 2016.
(x)Wanli Zhang: as previously noted, she is Mr Gu’s mother, and a co-director with him of a related company, Cape Grim Holdings Pty Ltd.
(xi)Ying Deng: is the previous director of AXF Group and recipient of funds as set out in paragraphs 51(b) and (52) of the First Howell Affidavit. In an affidavit sworn on 6 April 2020, in this proceeding, Mr Gu refers to Ms Deng as his ‘partner’.
(xii)Auyeung Hencent & Day Lawyers: are the current solicitors acting for Mr Gu Jnr and other respondents in this proceeding.
(xiii)Asia Pacific Lawyers: was the registered office of AXF Group until 13 June 2019. They acted for AXF Group in proceedings with Mercedes Benz. On 6 February 2020 I requested that they provide me with the books and records of AXF Group, I followed up on 2 March 2020. To date, I have not received any books and records from them nor have I had any response from them.
Now produced and shown to me and marked “MKH56-388” is a true copy of the correspondences sent to Asia Pacific Lawyers.
(b)the very early stage of the liquidation;
(c)there any no funds currently in the liquidation (other than pursuant to the Funding Agreement for the purpose of pursuing this proceeding to realise the Trust Assets);
(d)my appointment as liquidator was a court appointment, rather than an appointment by the director;
(e)my Receivership Application, to be appointed receiver over the assets of the Trust in respect of which AXF Group was formally the trustee, is still to be heard and determined in this proceeding, but is shortly due for final hearing on 13 May 2020;
(f)I have given undertakings as to damages to the Court in respect of the proceeding, by which I am personally bound;
(g)given that the directions for my replacement as liquidator have come largely from Mr Gu Jnr’s parents one of whom is a primary beneficiary of the Trust being the subject of the Receivership Application, and other related/friendly creditors (as set out in paragraph 49(a) above), I am concerned that my proposed removal and replacement may be designed to obstruct this proceeding, the investigations into the affairs of the AXF Group and future recoveries for the benefit of creditors of the AXF Group;
(h)complying with the Direction would substantially prejudice the interests of creditors generally and the prejudice outweighs the benefits of complying with the Direction because:
(i)myself and my staff have spent a great deal of time investigating the affairs of AXF Group, the Trust, the assets of the Trust and Mr Gu Jnr. To date, substantial costs have been incurred in the liquidation and in this proceeding;
(ii)this proceeding has been issued in which certain assets have been frozen and I have given personal undertakings as to those freezing orders;
(iii)if I was replaced, all (or a very substantial part of) the work myself and my staff have completed to date would need to be duplicated by another liquidator and thus unnecessarily increase the costs and expenses of the liquidation;
(iv)there is a serious concern about the true motives behind the proposal to remove me as liquidator, and the mere fact of calling a meeting may delay the resolution of this proceeding to the benefit of creditors. Further, if I were replaced by creditors improperly using their powers (particularly on the vote of related creditors) then it may be necessary and appropriate to apply to have my appointment re-instated;
(v)I am not aware of any benefit to creditors which would flow from complying with the Direction, and no such benefit or anticipated benefit has been provided in correspondence;
(vi)as deposed at paragraphs 12 to 25 above, Mr Gu Jnr has breached, and continues to breach the Court’s orders in this proceeding to file and serve various affidavit material;
(vii)Mr Gu Jnr has not fully disclosed the details of the Trust assets, as required by him by the orders made by the Honourable Justice Almond on 28 February 2020;
(viii)Further, Mr Gu Jnr has not proposed how all debts of the Trust will be paid if not via our client being appointed receiver of the Trust Assets. In fact, in Mr Gu Jnr’s affidavit filed 1 May 2020, he states at paragraph 47, ’Overall, after having considered all of the assets and potential assets of the trust which may be subject to the receivership application, I maintain the view that the receivership all have very little or no utility in realising assets and paying creditors’.
(i)complying with the Direction would prejudice the interests of a third party, being CFA, and the prejudice outweighs the benefits of complying with the Direction because CFA to date has incurred substantial amounts of money to fund this proceeding and the Approval Application. It has also taken on substantial risk under the terms of the Funding Agreement.
50.In my many years of experience, I find the Direction given by Mr Gu Snr and the Related/Friendly Creditors to be unusual. That is because, usually, creditors would welcome the steps I have undertaken in the liquidation of AXF Group, which were and are being undertaken to secure the Trust Assets and to seek to be appointed receiver over those Trust Assets for the benefit of creditors.
51.The complaints made by Mr Gu, Mrs Gu Snr and Mr Gu Snr seem to surround:
(a)the alleged trespass of the Vessel and the alleged damage to the Vessel. I deny that any damage occurred to the Vessel during the period I had possession of the Vessel. Upon taking possession of the Vessel, I caused for Slattery Asset Advisory to take photographs of the Vessel, both its interior and exterior. Further, immediately prior to NAB taking possession of the Vessel, I again caused for Slattery Asset Advisory, to take photographs of the Vessel, both its interior and exterior. I have reviewed the photographs and I deny that there has been any damage done to the Vessel; and
(b)my alleged failure to send required communications to each and every creditor on a timely basis or at all. I deny that I have failed to do so. At all times, I have sent all communications to the known creditors of AXF Group to the address as advised in the ROCAP or in any proof of debt lodged with me, as at the date of sending that communication.
52.Further, I have spoken to a number of creditors to provide updates on the liquidation and those creditors have conveyed that they were very satisfied with the steps I have taken to obtain the Freezing Order, to obtain funding for this proceeding, and in issuing Receivership Application. For example, those creditors include Mr Robert Ditrich, in his capacity as liquidator of AXF Entertainment, the petitioning creditor of AXF Group, and Mr Martin Zhang, in his capacity as the director of RZ Consulting.
53.Having regard to Mr Gu Jnr’s past conduct, as I have previously deposed to in the First Howell Affidavit, and the matters set out in this affidavit, I have genuine concerns about the conduct of Mr Gu Jnr and believe that through the related/friendly creditors he is attempting to replace me as liquidator of the AXF Group to halt or adversely interfere with the Receivership Application, my investigations into the affairs of AXF Group and future recoveries or realisation of Trust assets for the benefit of creditors of the AXF Group. Accordingly, it is my belief that I should take the matters I deposed to herein into consideration in forming my opinion as to the reasonableness of the Direction given to me.
In oral submissions, the liquidator submitted that in addition to the matters referred to in the paragraphs of his affidavit of 5 May 2020 reproduced above, the Court should take into account ‘like matters… traversed in later affidavit material… about the same type of issue’. It is not precisely clear what matters are ‘like matters’ but I will take into account the liquidator’s affidavit material subsequently filed as well as affidavit material subsequently filed on behalf of the respondents and the interested parties.
I shall now deal with each of the matters in respect of which the liquidator seeks direction.
(a) Related creditors
The liquidator deposes as to his belief that the creditors listed in Annexure A to the revised meeting direction are either related, friendly or aligned with Mr Gu (Jnr), namely:
i.Mr Gu (Jnr’s) parents Mr Gu (Snr) (father) and Wanli Zhang (mother);
ii.Mr Gu (Jnr’s) partner, Ying Deng;
iii.Former employees of the company: Jinxia Lui (accountant); Qi Hua Mei (accounts); Robert Raffaniello (Chief Financial Officer); and Sean Bennett (captain and yacht manager of a vessel owned by the Company);
iv.Former accountant of the Company Sue Gui Zhi, trading as Suewin Business Associates;
v.Former and current lawyers: Asia Pacific Lawyers and Auyeung Hencent & Day Lawyers; and
vi.Other individuals or companies: Shane He, Fortune Capital Fund Pty Ltd and Fortune Capital Investments Pty Ltd.
The liquidator submits that:
(a)absent the related creditors, the directing creditors comprise approximately 22.24 per cent in value of the liabilities, less than the 25 per cent required under s 75-15(1)(c) to validly direct Mr Howell to convene a meeting and that that calculation assumes that each creditor’s claim has been adjudicated upon favourably;
(b)the adjudication process has not yet been possible given the failure or refusal by creditors to respond to Mr Howell’s requests to produce the Company’s books and records beyond 30 June 2015;
(c)it may be once the affairs of the Company are disentangled that the value of the directing creditors’ claims is smaller;
(d)assuming all the claimed debts of which the liquidator has knowledge were accepted, the creditors directing the liquidator to convene a meeting total approximately 64 per cent of the total value of the liabilities,[17] with the debt claimed by Mr Gu (Snr) alone comprising approximately 41 per cent of the liabilities;[18]
(e)without the related creditors the other directing creditors could not issue a valid direction to convene a meeting.
[17]Liquidator’s submissions dated 11 May 2020, [8].
[18]See Liquidator’s submissions dated 11 May 2020, footnote 24; Liquidator’s submissions dated 26 May 2020, [5(a)].
The respondents, including the interested parties (Mr Gu Snr, Mr Raffaniello and Mr Bennett), submit:
(a)the liquidation is for the benefit of all creditors and not just unrelated creditors;
(b)there is no real dichotomy between friendly or aligned and hostile creditors for present purposes;
(c)there is no reason why related creditors should be viewed any differently (unless they engage in vexatious conduct);
(d)that the liquidator needs to look at the value of the debts claimed by creditors by value at the time the direction was given and that the liquidator has to use his best endeavours to work out the value of the creditors’ claims at the relevant time. In this case, the liquidator needs to assume that for present purposes the creditors’ claims are reflected by the proof of debt which have been lodged.
The liquidator’s overall submission is to the effect that what is truly being engaged in is a process of obfuscation and delay by people friendly to Mr Gu (Jnr).[19]
[19]Similar concerns appear to be canvassed in paragraphs 50 and 53 of Mr Howell’s affidavit dated 5 May 2020 (quoted above).
In my view this is a less than convincing analysis on the material. It seems to me it is an assessment which risks stereotyping related or friendly creditors as distinct from unrelated creditors. It is true that Mr Gu (Snr) and Mr Gu (Jnr) are father and son but there is no evidence to suggest that Mr Gu (Snr) was involved in the Company’s operations or has had anything to do with withholding financial documents from the liquidator (if that be the fact). Nor is there any evidence that anything has been ‘exchanged by way of promise or representation’ despite the allusion made to possible promises or representations made during submissions. Even though Mr Gu (Snr’s) claim is a relatively large claim (comprising approximately 41 per cent of all liabilities), one cannot assume the claimed amount once adjudicated upon will be substantially reduced, if at all. The claim may prove to be entirely justified. This is so with respect to claims by all related creditors as well as other creditors.
Even if the liquidator were to be sceptical about claims which are unsupported by any documents, that prima facie reservation cannot be levelled with respect to Mr Gu (Snr’s) claim, which is based on an alleged agreement between Mr Gu (Snr) and the Company entered into in 2006 (extended for a further 10 years in 2015) to provide a line of credit for up to $50 million. On the materials, the credit facility has been drawn down to the extent of approximately $40 million. The arrangement appears to have been comprehensively documented by a loan agreement, deed of variation, deed of guarantee, and indemnity and general security deeds.[20]
[20]Second Howell affidavit, [40] Liquidator’s submissions dated 11 May 2020, exhibit MKH56, 87–170; Affidavit of Ming Feng Gu dated 6 April 2020, [84]–[86], Exhibit NFG13; Affidavit of Thien Hock Soon dated 12 May 2020, [12]–[14], exhibit THS1, 30–224.
Further, under the Insolvency Practice Schedule, related creditor claims and unrelated creditor claims are not separately classified or treated any differently for the purposes of a direction under s 75-15(1)(c). No distinction is made with respect to aligned or friendly creditors and other creditors. Each creditor has the same rights.
In my view the fact that a creditor may be related, aligned or favourably disposed to officers or former employees of the company is not a relevant consideration and should not be taken into account for the purposes of rr 75-250(a) or (d).
Furthermore, in the absence of evidence to suggest that the proof of debt of Mr Gu(Snr) is not what it appears to be, the liquidator should reach his concluded opinion on what is currently known, taking into account that a meeting of creditors has been directed in writing by Mr Gu (Snr), being a creditor with at least 25 per cent in value of the creditors (as presently advised).
(b) The very early stages of the liquidation
The liquidator submits, with little elaboration, in his affidavit that the liquidation is at a very early stage. This was amplified in oral submissions principally to the effect that the liquidator has not yet adjudicated on the claimed debts and has not yet had the opportunity to realise assets.
The respondents submit that many of the reasons given by the liquidator for forming the preliminary opinion (evident from the extract from the affidavit reproduced above) are stated at a high level of generality. One of the interested parties submits that the fact that the liquidation is at an early stage supports the proposition that a meeting should be held; that it is not a case where a liquidator has done extensive work and is about to commence litigation or where the liquidation is at such an advanced stage there would be no utility in calling a meeting.
In my view, the fact that the liquidation is at an early stage is a matter which may be taken into account but it is a factor which cuts both ways. Objectively speaking, the fact that the liquidation is at a very early stage (notwithstanding that considerable activity has taken place) means that transfer to another liquidator would be less problematic, involve less duplication, result in lower costs being incurred by creditors, than if the liquidation was at a more advanced stage. In that sense it would be less prejudicial to creditors. This is a matter which should also be taken into account by the liquidator.
(c)There are no funds currently in the liquidation (other than pursuant to the funding agreement)
The liquidator entered into a funding agreement which he maintains was necessary in view of the limited available resources to carry out his work. The liquidator submits that the funding agreement will bind a replacement liquidator.[21] Criticism has been levelled at the liquidator relating to his entering into the funding agreement, including with reference to its terms and in respect of the timing of disclosure to creditors. For present purposes, I make no comment on the merits of this criticism.
[21]The funding agreement defines ‘Liquidator’ to mean ‘Malcolm Howell in his capacity as liquidator of AXF Group Pty Ltd (in liquidation) (ACN 116 258 130) and any other person validly appointed in that capacity upon written notice of such appointment being received by the Funder’. See Exhibit MKH56-65.
In my view this factor is relevant but is likely to be neutral in its effect. If the funding agreement does bind a replacement liquidator, then the status quo in relation to access to funding for the liquidation will be unchanged. In those circumstances, it is difficult to see how the convening of a meeting of creditors even if it did result in a change of liquidator would be productive of any substantial prejudice to creditors (including third party creditors such as the funder) or that it could be vexatious.
(d) The liquidator is a court appointed liquidator
The liquidator submits that he can rely on the fact that he is a court appointed liquidator for the purposes of forming an opinion under r 75-250. The liquidator submits that as the liquidator is an officer of the Court he should not be removed lightly; that he is independent from Mr Gu (Jnr) as compared to a potential alternative liquidator that is being consulted; and that there is a marked benefit in having a liquidator with no connection to Mr Gu (Jnr).
The respondents and the interested parties submit that it is implicit in the submissions of the liquidator that the currently proposed replacement liquidator(s) would not be truly independent. They rely upon the cautionary statements of Street J in Re Allebart Pty Ltd (in liq),[22] in which his Honour stressed the importance of liquidators being on guard lest they compromise their position of independence and impartiality in all respects in the discharge of their functions as officers of the Court in administering the winding up of a company. It was submitted that there was no reason to doubt that the proposed liquidator(s) (or other liquidators) would not conduct themselves in accordance with those principles; and that whether the liquidator has been appointed by court order as opposed to appointment by members’ voluntary resolution is irrelevant, as all liquidators have duties to the Court and to creditors.
[22][1971] 1 NSWLR 24, 28.
Finally, attention was drawn to the statement of independence accompanying the proposed liquidators‘ consent to act.[23]
[23]Exhibit THS-1, 405–9 to the affidavit of Thien Hoc Soon dated 12 May 2020.
In my view, the fact that the liquidator is a court appointed liquidator is not of itself a relevant consideration in this case. The evidence shows that Mr Gu (Jnr) consulted a firm of insolvency practitioners for the purpose of understanding the criteria to request a creditors meeting and the process involved to replace the liquidator.[24]
[24]Exhibit THS-1, 406-7 to the affidavit of Thien Hoc Soon dated 12 May 2020.
On 26 February 2020, two individuals from DV Recovery Management signed a consent to act and made a declaration that:
(a) they had undertaken a proper assessment of the risks to their independence prior to accepting any appointment;
(b) they did not identify real or potential risks to their independence; and
(c) they were not aware of any reasons that would prevent them from accepting the appointment (including a statement that had not provided any professional services to the Company in the previous 24 months).
It seems to me there is nothing untoward about the officers of a company placed in liquidation seeking advice from insolvency practitioners immediately after the appointment of a liquidator, nor with them seeking advice as to the criteria necessary to convene a creditors meeting and the process involved to replace a liquidator.
It does not follow from the facts as deposed to in the material that the proposed substitute liquidators would act in any way other than consistently with their duties owed to the Court. The circumstance that the current liquidator is a court appointed liquidator and that a substitute liquidator may be appointed at the proposed creditors meeting does not, by reason only of that fact, indicate there will be any prejudice caused to one or more creditors, nor does it demonstrate vexatiousness. It might be otherwise if the creditors were intent on convening the meeting solely to remove the liquidator but that does not appear to be the case here.
(e) Application for appointment as receiver
The liquidator submits that:
(a) his application to be appointed receiver over the assets of the Trust has not yet been heard and determined;
(b) there are no means or proposal for the satisfaction of the liabilities other than by his appointment as receiver over the Trust assets;
(c) the hearing of the receivership application would be delayed; and
(d) that one might infer that the Direction is made to stand in the way of having the receivership application heard and determined.
The respondent and interested parties submit:
(a) there is no reason to suppose that if the liquidator is removed and replaced that a new liquidator might not continue with a receivership application;
(b) it is incorrect to say that the revised meeting direction is to ensure ‘things do not go further’ or is part of an orchestrated plan to avoid, among other things, the receivership application;
(c) the winding up would continue under a new liquidator if the motion proposed at the meeting is passed; and
(d) this is not an application to determine the liquidation.
This factor is interrelated with the fact that the liquidation is in its early stages. The fact that the liquidator’s application to be appointed receiver over the assets of the Trust has not yet been heard or determined and thus he has not commenced to deal with assets of the Trust in that capacity is relevant but may well be considered a neutral factor reflecting merely the current state of affairs. A replacement liquidator may apply to become receiver and (if successful) do the same work; it is difficult to conceive of substantial prejudice being caused to one or more creditors following from this fact. No prejudice other than delay or additional costs is shown. Relative to the size and scale of this winding up, these are relatively minor. There is more than one way to wind up a company. The fact that there is also a meeting direction to consider, perhaps reflects different points of view or approaches. Viewed objectively, it does not follow that the meeting direction was made to stand in the way of the receivership application. In this regard, it is important that the liquidator does not act on supposition. Although I was invited to do so, I am not able to infer from the material before me, and I do not infer, that the Direction was given so that ‘things would not go further’. Self-evidently things will go further if a replacement liquidator is appointed.
(f) Liquidator’s undertaking as to damages
The liquidator gave an undertaking as to damages when the freezing orders were made and remains bound by the undertaking.
The respondents and interested parties submit:
(a) there is no reason to assume that a new liquidator will not give an undertaking as to damages to maintain the status quo; and
(b) the liquidator could apply to be discharged from the undertaking at the relevant time if that became necessary.
In my view, this is a point of minimal significance. It is likely that the Court would require a substitute liquidator to give an undertaking as to damages whilst the freezing order is in place, thus protecting the interests of creditors. This position was not seriously challenged by the liquidator. Suffice it to say the issue is not likely to be productive of substantial prejudice or vexation.
(g)Concern that the proposed removal and replacement may be designed to obstruct
The liquidator submits that the Direction has come from Mr Gu (Jnr’s) parents, one of whom (Mr Gu (Snr)) is a primary beneficiary of the Trust which is the subject of the receivership application and other friendly or related creditors and that he is concerned that his proposed removal and replacement may be designed to obstruct the proceeding, the investigations into the affairs of the Company and future recoveries for the benefit of creditors of the Company. Similar concerns also appear to be canvassed in paragraphs 50 and 53 of Mr Howell’s affidavit dated 5 May 2020 (reproduced above) including that the liquidator finds the Direction to be unusual in his experience. In my view these generic ‘concerns’ are, at least at this stage, speculative, and do not without more provide a sound foundation to ground either substantial prejudice or vexatiousness particularly as the Direction appears to be given in conformity with the statutory regime.
(h) Substantial prejudice
This subparagraph essentially contains a submission by the liquidator to the effect that complying with the Direction would substantially prejudice the interests of creditors generally, with no countervailing benefit to creditors, thereby satisfying ground (a) of r 75-250(2) and setting out the reasons why this is so.
To the extent the subparagraph contains submissions, it is unhelpful and inadmissible. Further, subparagraphs (h)(i) – (viii) taken together are somewhat concerning in that they tend to suggest that the liquidator has already made up his mind. I trust that having engaged the process of seeking advice of the Court in order to enable him to reach an opinion on a sound basis, that this is not so. It is necessary to assess the matter objectively. It may be accepted that the liquidator has spent substantial time investigating the affairs of the Company and costs have already been incurred. However that work would not all be wasted: the freezing order has had and will likely continue to have effect and affidavits have been made by relevant individuals. Mr Gu (Jnr) has deposed as to all of the Company’s projects and the status of those projects. Apparently all creditors have lodged proofs of debt with the liquidator. None of this work will have to be duplicated. There is no reason why an experienced, alternative liquidator cannot take advantage of sunk costs and minimise duplication of effort.
Mr Howell will need to revisit his statement/preliminary opinion that he is not aware of any benefits to creditors in light of the affidavits made after his 5 May affidavit and to make allowance for the state of affairs as they exist on the materials at the time he forms a concluded opinion. In particular it appears there are now 19 out of 31 creditors (61% by number) representing approximately $152 million out of approximately $204 million claimed by creditors (75% by value) who support the calling of a meeting of creditors.
Further Mr Gu (Jnr) has stated in his latest affidavit made 25 May 2020 that:
(i)he intends to open up topics for discussion at the proposed meeting of creditors having regard to:
(a)rights of secured creditors who have secured interests over the Trust’s mining interests and the Astbury proceedings but which require Mr Gu (Jnr’s) active participation in order to see value in due course;
(b) funding of debt recovery actions that need to be taken with respect to a number of Trust assets;
(c) the costs associated with liquidation of the company;
(d) the discharge of duties of AXF Holdings as the new trustee of the Trust;
(e) Mr Gu (Jnr’s) role as director of AXF Holdings and each of the AXF asset holding subsidiary entities;
(f) provision of security over Trust assets in lieu of the freezing order for the protection of creditors’ interests; and
(g) ultimate distributions to creditors of the Company.[25]
(ii) he wants to address all interested stakeholders at the same time at a meeting of creditors;[26] and
(iii) he is in the course of preparing a litigation funding proposal for recovery of certain project debts that he would like to put to the creditors of the Company for consideration, including setting up a litigation fund that is open for creditors to join and offering a ‘certain reasonable degree of return on investment’ for any contributors to the litigation fund which is expected to be lower than the ‘market price’ for litigation funding.[27]
[25]Affidavit of Ming Feng Gu dated 25 May 2020, [28].
[26]Affidavit of Ming Feng Gu dated 25 May 2020, [30].
[27]Affidavit of Ming Feng Gu dated 25 May 2020, [62].
These matters should be considered by the liquidator when forming a concluded opinion about substantial prejudice and benefit to creditors and in considering whether the Direction can fairly be said to be vexatious.
During oral argument the liquidator submitted that Mr Gu (Jnr) had not been forthcoming with any concrete proposals and that the recent affidavit dated 25 May 2020 was vague and essentially non-committal. Whilst that may be true the liquidator might, on reflection, consider it may be beneficial to allow the creditors an opportunity to hear from the director of the Company and to ask questions and to facilitate the formulation of a concrete proposal which may provide more options for creditors going forwards.
(i) Prejudice to third parties
The liquidator also submits that complying with the Direction would prejudice the interests of a third party, namely Claims Funding Australia Pty Ltd (‘CFA’) the trustee for the Claims Funding Discretionary Trust, the funder of the litigation funding arrangement in relation to the liquidator’s freezing order application, receivership application and application to seek approval from the Court to enter into the funding agreement under s 477(2B) of the Corporations Act 2001 (Cth).
The interests of third parties are relevant under r 75-250(2)(a), however, as stated above, if the funding agreement does bind a replacement liquidator then it is difficult to see how the convening of a meeting of creditors, even if it did result in a change of liquidator, would be productive of any substantial prejudice to CFA. This factor should be given little if any weight.
Complaints against the liquidator
In paragraph 51 of Mr Howell’s affidavit dated 5 May 2020, Mr Howell denies complaints made by Mr Gu (Jnr), Mrs Gu and Mr Gu (Snr) and Mr Bennett in relation to alleged damage to the vessel owned by the Company, and the liquidator’s alleged failure to communicate with each and every creditor on a timely basis. Provided the complaints genuinely reflect the points of view of the relevant complainants (even if the liquidator is confident that they are unjustified), it is difficult to see that they have the quality of impropriety necessary to be relevant to the liquidator forming the opinion that the Direction is vexatious. Indeed, the liquidator should also objectively consider whether the loss of confidence outlined in the materials evinces a genuine, and not a vexatious, imperative for the holding of a meeting.
The opinions of other creditors
In paragraph 52 of Mr Howell’s affidavit dated 5 May 2020, Mr Howell states that a number of creditors have expressed satisfaction with his conduct as liquidator thus far. In addition to those creditors mentioned in Mr Howell’s affidavits, the material before the court reveals that Phillip Roberts, trading as PCR Law & Associates, and the Australian Taxation Office, have also expressed satisfaction with the current liquidator. The fact that some creditors are satisfied with the liquidator’s conduct will not decide the question of substantial prejudice or vexatiousness. One would expect creditors to have a range of views about the conduct of a liquidator in any external administration.. The fact that some creditors are satisfied would have more significance as a factor if the present enquiry was about whether the liquidator should be removed for misconduct. That is not the question here. It seems to me the fact that some creditors are satisfied neither invalidates the complaints otherwise expressed nor does it suggest that the complainants conduct in giving the Direction is vexatious. In my view this factor should be given minimal if any weight.
Conclusion
In the present context the liquidator’s opinion should be informed by the fact that:
(a) the stated purpose of the proposed meeting is to remove and replace the liquidator not merely to remove the liquidator;
(b) the administration of the winding up will continue by Mr Howell if he is not removed as liquidator or by another officer or officers of the court if he is replaced as liquidator;
(c) the relevant text of the Schedule and the Rules show that related friendly creditors have equal voting rights to unrelated creditors;
(d) the legislation prima facie gives considerable power to creditors with the appropriate percentage stake in value;
(e) the liquidation is at an early stage, although this is a factor which cuts both ways;
(f) while there are no funds currently in the liquidation (other than pursuant to the funding agreement), the funding agreement appears to bind a replacement liquidator
(g) Mr Gu(Snr) appears to be offering to provide $10,000 towards the cost of the meeting in the absence of financial support from other creditors; and
(h) a replacement liquidator would have duties to the Court and to creditors, could itself make an application for appointment as receiver and would likely be required by the Court to give an undertaking as to damages whilst the freezing order is in place.
The application of the interested parties
Senior counsel for the liquidator submitted that the Court is part way through a process for the giving of judicial advice prior to the formation of a concluded opinion by the liquidator. I accept that characterisation. In the circumstances in my view it is premature to make any determination on the summons of the interested parties seeking an order that the liquidator be directed to convene a meeting of creditors of the Company. If the liquidator determines (after further consideration) to accede to the request for a meeting constituted by the Direction it will be unnecessary to determine that summons. For this reason I propose to defer ruling on that summons at this stage.
As some considerable time has elapsed since the Direction was provided to the liquidator, I direct that the liquidator reach a concluded opinion within seven days of the date of these reasons.
SCHEDULE OF PARTIES
AXF GROUP PTY LTD (ACN 116 258 130) (IN LIQUIDATION)
First applicant
MALCOLM HOWELL AS LIQUIDATOR OF AXF GROUP PTY LTD (ACN 116 258 130) (IN LIQUIDATION)
Second applicant
AXF HOLDINGS PTY LTD (ACN 140 106 547)
First respondent
MINGFENG GU (ALSO KNOWN AS RICHARD GU)
Second respondent
AXF RESOURCES PTY LTD (ACN 604 730 181)
Third respondent
AXF PROPERTIES (EYNESBURY) PTY LTD (ACN 168 062 486)
Fourth respondent
1