Eco Heat (Vic) Pty Ltd v Syndicate Forty Four Pty Ltd (Subject to Deed of Company Arrangement)
[2018] VSC 156
•13 April 2018
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2017 00040
| IN THE MATTER OF THE SYNDICATE FORTY FOUR PTY LTD (FORMERLY KNOWN AS THE SYNDICATE TWO PTY LTD) (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (ACN 126 943 048) AND OTHERS | |
| BETWEEN | |
| ECO HEAT (VIC) PTY LTD (ACN: 108 686 040) | Plaintiff |
and
| THE SYNDICATE FORTY FOUR PTY LTD (FORMERLY KNOWN AS THE SYNDICATE TWO PTY LTD) (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (ACN 126 943 048) and others according to the attached schedule. | Defendants |
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JUDGE: | SIFRIS J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 5 February 2018 |
DATE OF JUDGMENT: | 13 April 2018 |
CASE MAY BE CITED AS: | Eco Heat (Vic) Pty Ltd v the Syndicate Forty Four Pty Ltd (Subject to Deed of Company Arrangement) & Ors |
MEDIUM NEUTRAL CITATION: | [2018] VSC 156 |
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CORPORATIONS – Application to set aside Deed of Company Arrangement (DOCA) – Whether DOCA contrary to the interests of creditors as a whole – Whether DOCA should be terminated for some other reason – Public interest and commercial morality considerations – Whether discretion should be exercised to terminate DOCA – Section 445D(1)(f) and (g) Corporations Act 2001 (Cth).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr A. W. Sandbach RFD | Sackville Wilks |
| For the Defendants | Mr J. Evans QC | Robert James Lawyers |
For the Administrators | Mr. D. Trickey, Solicitor | JHK Legal |
HIS HONOUR:
A Introduction
On 28 October 2016 David Michael Stimpson (‘Stimpson’) and Michael Carrafa (‘Carrafa’) were appointed Administrators of the Syndicate group of companies comprising each of the thirty eight defendants (‘Syndicate Companies’).
On 24 November 2016 the Administrators circulated their Report to Creditors under s439A of the Corporations Act 2001 (Cth) (‘the Act’) (‘the Report’).
Despite a clear recommendation in the Report that ‘creditors resolve to wind up the Companies’[1] and that ‘it would not be in the interests of creditors for the Companies to execute the proposed DOCA…’[2], the creditors, as was their right, voted overwhelmingly, at a meeting held on 2 December 2016, to accept the Deed of Company Arrangement (DOCA).
[1]Exhibit AS-10: Second Report to Creditors, Page 610.
[2]Exhibit AS-10: Second Report to Creditors, Page 610.
The plaintiff (‘Eco Heat’) voted against acceptance of the DOCA. The DOCA was executed on 23 December 2016 and amended shortly before the trial of the proceeding which commenced on 5 February 2018.
By Originating Process filed 24 February 2017, Eco Heat seeks to set aside the DOCA, essentially on the grounds that it is contrary to the interests of the creditors as a whole and contrary to the public interest and commercial morality.
B Background
The relevant background is taken largely from the Report.[3]
[3]Exhibit AS-10: Second Report to Creditors, Page 595.
The Syndicate Companies provided credit finance, primarily to fund the purchase of used motor vehicles in Queensland. The Syndicate Companies were first registered around 2001 and continued in operation through numerous and successive Syndicate Companies until the appointment of Stimpson and Carrafa as Administrators on 28 October 2016.
The Syndicate Companies sourced the funds for the loans from a range of investors, who were primarily clients of an accounting firm of the director, Allan Walker (‘Walker’). A standard ‘Letter of Offer and Explanation’ (‘LOE’) provided to the investors of a particular Syndicate Company at the time (e.g. The Syndicate Eleven Pty Ltd) stated that funds totalling approximately $250,000 would be pooled to bank roll the loans. Approximately 80% of funding was to be provided by the investors and the remaining 20% was to be provided by Peter Barratt Pty Ltd. In return for investing in a Syndicate Company, the investor was allocated shares in the relevant Syndicate Company.[4]
[4]There is an issue as to whether the ‘investors’ are creditors or shareholders or both. In view of the findings and approach set out in these reasons, it is not necessary to resolve this issue.
Once the Syndicate Company had received the required investment amount, it would be closed and a new Syndicate Company was established to receive further amounts in order to fund the next tranche of car loans. The LOE stated that the investors were to receive their capital investment back within 66 to 78 weeks of the last car loan, which was to be paid by the Syndicate Company when it had enough money from collecting the repayments of the car loan debtors. The LOE indicates that the Syndicate Companies operated high interest loans with interest rates of over 40%. Based on the books and records, it appeared the Syndicate Companies’ policy was to return 100% of the amount contributed by investors plus interest equal to the original amount invested.
The Reasons for Financial Difficulty which led to the appointment of the Administrators is set out in paragraph 3.2 of The Report, as follows:[5]
[5]Exhibit AS-10: Second Report to Creditors, Page 595.
3.2 Reasons for Financial Difficulty
The Director, Allan Walker (“the Director”) advised the Companies’ current financial difficulties could be attributed to cash flow shortages from the non-payment of multiple debtors in each Syndicate.
Based on our investigations of the Companies, our opinion on the reasons for the Companies’ current insolvent position are:
•Bad debts resulting from customers not repaying their car loans. In some instances the loans defaulted on the first repayment and were never recovered;
•As a result, the promised returns to investors were unsustainable and unrealistic; and
•Legal action brought against the Companies by one of the investors.
The legal action referred to in the last dot point was a proceeding commenced by Eco Heat against the current defendants and others essentially for payment by each Syndicate Company of the promised returns. The proceeding was due to commence before a Judge of this Court on 7 November 2016. However the appointment of the Administrators on 28 October 2016 had the effect of staying that proceeding.
Further relevant background is set out in the Report which is dealt with and referred to in detail below. Other background facts will be referred to where relevant.
C The Claim
Paragraph 8 of the Points of Claim sets out the basis on which it is contended that the DOCA ‘ought to be terminated’ and is in the following terms:[6]
[6]Points of Claim, [8].
The DOCA ought to be terminated pursuant to s 445D of the Corporations Act 2001 (C’th) [sic] on the grounds that:
(a) the deed is contrary to the interests of each of the Defendant companies as a whole;
(b) the deed is contrary to the public interest, and
Ithe deed is contrary to commercial morality.
Particulars
(i)The DOCA does not provide any funds surplus to the funds that would be recovered if the Defendants were wound up and the assets realised by a liquidator.
(ii) The likely costs of continuing to trade will dissipate any funds from the collection of the car loan ledger.
(iii)Returning the Defendants to the control of the directors is likely to cause them to experience the same difficulties they experienced before the commencement of the administration.
(iv)The creditors are deprived of the benefit of an independent investigation of the conduct of the directors and potential recoveries from them whether for insolvent trading or otherwise.
(v)It is contrary to public policy and commercial morality to return the Defendant companies to the control of the director who has:
(A) operated the business as a form of Ponzi Scheme;
(B)repeatedly promised returns that were unrealistic and unattainable;
(C)promised interest at rates of between 20% and 50% per annum, most of which was never paid;
(D) failed to operate the business in the manner represented to investors in the Letters of Offer;
(E) failed to maintain adequate books and records;
(F)mixed the funds of the Defendant companies without keeping any adequate records;
(G)operating the business as an unregistered managed investment scheme;
(H)continually set up new companies and invited investment into them when it was clear that the business model was failing;
(I)lost approximately $15 million of investors’ funds most of which was sought and obtained by him from superannuation funds knowing that much of it would never be repaid;
(J)improperly resisted the inspection of the books and records of the Defendant companies by their members and investors, and
(K) improperly caused the Defendant companies to defend Supreme Court proceeding no SCI 2014 02386 when he knew that there was no proper basis for any defence.
The Points of Defence pleads as follows in relation to paragraph 8 of the Points of Claim:[7]
They deny each and every allegation contained in paragraph 8 and say further that the creditors of the defendants are likely to derive a substantially greater benefit and return under the DOCA than they would derive were the defendants to be wound up.
[7]Points of Defence, [8].
D The Report
Pursuant to s439A(4)(b) of the Act (as it was prior to its repeal by the Insolvency Law Reform Act 2016 (Cth)), the Administrators were required to provide their opinion as to whether the Syndicate Companies should execute a DOCA, or whether the administration should end, or whether the company should be wound up.
The Administrators were of the opinion that the Syndicate Companies should be wound up. Paragraphs 7.2 to 7.4 of the Report are as follows:
7.2 Deed of Company Arrangement
In our opinion it would not be in the best interests of creditors for the Companies to execute the proposed DOCA for the following reasons:
·The legal action against the Companies which was on foot at the date of our appointment may potentially be recommenced as the stay on proceedings against the Companies ends once the Deed is executed. The $218k paid in Court may be lost in a DOCA, but may be recoverable in a liquidation.
·Based on our investigations into the affairs of the Companies and actions of the Directors, we have concerns that the business operated by The Syndicate Group of Companies constitutes either and [sic] Unregistered Managed Investment Scheme or a form of Ponzi Scheme, or both.
·We have doubts as to the viability of the business and the ability of the Unit Trust to generate profits in the future.
·Apart from “potential future profits”, the DOCA does not provide any funds surplus to the funds that would be recovered if the Syndicates were wound up and the assets realised by a Liquidator. On the contrary, we believe it is likely the costs of continuing to trade the Unit Trust will dissipate any funds from the collect-out of the car loan ledger.
7.3 Administration to End
In our opinion a resolution that the Administration end would not be in the best interests of creditors. The Director placed the Companies in Administration to deal with the financial difficulties they are experiencing and we do not believe this position has been rectified.
To end the Administration would return the Companies to the control of the Director and it would potentially experience the same difficulties going forward.
7.4 Liquidation
For the reasons outlined in paragraphs 7.2, we believe this is the only viable option available to creditors at the meeting. Accordingly, it is our recommendation that the creditors resolve to wind up the Companies.
It is as well to set out in full the relevant paragraphs of the Report that inform the opinion expressed by the Administrators in paragraphs 7.2 to 7.4.
Paragraph 3.4 deals with the Financial Position of The Companies and is in the following terms:
3.4 Financial Position of the Companies
3.4.1 Asset and Liability Position
Below is our estimate of the overall asset and liability position of the Companies as at the date of appointment:
Reference Notes Administrators’ Estimated Value ($) ASSETS Cash At Bank 1 40,000 Debtors: - Collectible Car Loans 2(a) 278,743 - Assigned to HAVX 2(b) 1,700,000 - Second Mortgage secured over real propertyI(c) 387,000 TOTAL ASSETS $2,405,743 LIABILITIES Secured Creditor – ANZ 3 0 Unsecured Creditors 4 900,299 Deferred Creditors (Shareholders) 5 15,196,410 TOTAL LIABILITES $16,096,709 ESTIMATED SURPLUS/(DEFICIENCY) ($13,690,966) Notes
1. Cash at Bank
The Companies [sic] bank accounts with National Australia Bank Limited held approximately $40,000 in total; these funds have been transferred to our bank account. Other banking institutions were notified of our appointment and we are not aware of any other accounts in the Companies’ names.
2. Debtors
a. Collectible Car Loans
The Companies’ debtors consist of numerous customers who borrowed money to purchase motor vehicles. The Director has advised that these debtors have not been assigned to the related part, H.A.V.X. Pty Ltd (“HAVX”) (see Note 2(b)), and should be collectible.
b. Assigned to H.A.V.X. Pty Ltd (“HAVX”)
Allan Walker is the sole director of HAVX and Yvonne Walker is the sole shareholder. The company was incorporated on 22 December 2010.
The Director has advised that prior to our appointment, defaulting car loans were assigned to Allan Debtors Pty Ltd, Peter Barratt Pty Ltd & Peter John Barratt, who in turn assigned the defaulting car loans to HAVX to commence debt collection action. We have sighted one signed copy and a number of unsigned copies of the assignment agreements to Allan Debtors Pty Ltd, however, we have not sighted any copies of the assignment between Allan Debtors Pty Ltd and HAVX.
The original agreement assigns certain defaulting loan contracts to Allan Debtors Pty Ltd, Peter Barratt Pty Ltd & Peter John Barratt in return for payment of the difference between the principle [sic] loan to those debtors and the amount already received on those loans. That particular syndicate company assigning its debtors would then have no right to the collections from those debtors.
The director has advised that the debtors with HAVX total approximately $1.7 million and a large proportion of this is expected to be written off as uncollectible.
In our opinion, each Syndicate company has a claim against HAVX for the balance of the defaulting loans outstanding plus any repayments received by HAVX which have not been accounted to investors. We cannot at this point determine how much those loans might be.
c. Second Mortgage over Real Property
Title searches and property records show that Syndicate Forty Five Pty Ltd has a second mortgage over a property at Tennyson securing a debt of $387,000 owed by the owner. We have been advised that the value of the property exceeds the bank’s first registered mortgage and the second mortgage should therefore be collectable if the enforcement action is taken. We have requested mortgage documentation to be supplied, but are yet to receive same.
The weekly mortgage payments are $850 and we confirm that they continue to be received into the bank account of Syndicate Forty Five Pty Ltd.
3. Secured Creditor – ANZ
ANZ Bank are shown as having a General Security Interest (“GSI”) over The Syndicate Forty Two Pty Ltd. The director advises that there is no debt owing. We have contacted ANZ for verification, but as yet they have declined to provide documentation or a release. We are pursuing same.
4. Unsecured Creditors
The Company’s unsecured creditor balance is made up as follow:
Unsecured Creditor Type Total Amount
$Lagan Pty Ltd 23,106 The Syndicate Forty Six Pty Ltd 877,193 TOTAL $900,299 ASIC searches show the above two creditors are related parties as follows:
·Lagan Pty Ltd – Allan Walker is the sole director and the shareholders are made up of Allan Walker (Class A Shareholder) and Clem Court Pty Ltd of which Allan Walker and Yvonne Walker are the shareholders (Class B Shareholder); and
·The Syndicate Forty Six Pty Ltd – Allan Walker is the sole director and Yvonne Walker is the sole shareholder.
These claims have not been adjudicated on or admitted for dividend purposes.
5. Deferred Creditors (Shareholders)
The Companies [sic] deferred creditors are made up of Investors/shareholders who are owed $15,196,410 according to the Companies [sic] records. Many of the investors are owed amounts from multiple Syndicate companies….This position may change as further information and documentation is compiled.
The treatment of investor monies by the Syndicate Group over time has been inconsistent. Initially, it appears one $1 share was allocated by the Companies in exchange for $1,000 invested, thus giving rise to a share premium reserve of $999 per share issued.
Over time that treatment changed to the point where it appears that The Syndicate Forty Five Pty Ltd issued 2,039 shares for $1,919,420.
Some investors/shareholders were given Letters of Offers and Explanation’s [sic], some weren’t. Investment/shareholding monies were repaid in some ceased, in other cases those investments were rolled into new Syndicate companies.
Investors were promised interest at various rates between 20% - 50% and some interest was paid, most wasn’t. Most investors are owed substantial interest (and some capital).
Based on our own review of the Companies [sic] affairs we believe $15,196,410 owing to investors is a subordinate claim as defined in section 563A of the Act and therefore can only claim after all ordinary unsecured creditors are paid.
Paragraph 4 deals with Investigations and is in the following terms:
4 Investigations
4.1 Possible Ponzi Scheme
Part of our investigations have been regarding whether the Companies were operating a Ponzi scheme.
The definition of a Ponzi scheme according to ASIC is an investment scheme where returns are paid to investors entirely out of the incoming funds of new investors entering into the scheme (i.e. there is no real investment into a business or product). ASIC identifies the warning signs of a ponzi scheme to be:
· the rate of return on investment is sometimes suspiciously high;
· the person who tries to recruit you is someone you think is trustworthy; and
· the recruiter may have already invested in the scheme and received great dividends.
Based on our summary of the business model in Section 3.1 of this report and our own investigations, the Companies do exhibit some of these warning signs. We have conducted further sample analysis into the receipt and distribution of the invested funds for each of the Syndicates. To help explain our findings, the Companies [sic] business model is further explained.
Each Syndicate company was established with two bank accounts:
1. One account was to receive the investment monies to be utilised as car loans to the general public. This account will be referenced as the “investment account”; and
2. The other bank account would then receive the car loan repayments from debtors. This account will be referenced as the “debtors account”.
By reviewing the bank statements of the Companies, it appears that in the early Syndicates, the funds being paid or rolled over from earlier investments into the investment accounts were primarily used to fund the car loans and associated costs for which the Syndicate was established.
From each Syndicate after The Syndicate Seventeen Pty Ltd, the bank statements show large amounts ranging from $20,000, to in excess of $200,000 per company going back to pay capital and interest owing to investors of earlier syndicate companies.
In theory, the funds being collected in the debtors account should have been allowed to grow over the period of the car loans and used to pay back the investors their capital and interest. This would have been consistent with the Letter of Offer and Explanation provided to the investors.
However, in all of the Companies, the funds being paid into the debtors account were not being accumulated. From as early as The Syndicate Eleven Pty Ltd, funds were being swept out of the debtors accounts of the earlier syndicate companies and transferred into the investment account of a new syndicate company. This had the effect of mixing genuine new investor funds with funds which were being collected from the debtors of older Syndicates. The Director has explained this was done because the investors wanted to rollover their capital investment into a new Syndicate. However, we have not sighted any paperwork documenting the agreements of the investors to have their funds treated this way.
Whilst there is an argument there is a genuine business being operated by the companies, in our opinion, there are grounds to maintain that attributes of a Ponzi type scheme are present.
Our findings are being reported to ASIC pursuant to section 438D of the Corporations Act.
4.2 Managed Investment Scheme
According to the Australian Securities and Investments Commission (“ASIC”), the general features of a managed investment scheme (“MIS”) are:
· a scheme where people are brought together to contribute money to get an interest in the scheme;
· money is pooled together with other investors or used in a common enterprise; and
· a responsible entity operates the scheme. Investors do not have day to day control over the operation of the scheme.
Based on the above definition and our investigations into the Companies’ business model (described in Section 3.1 of this report), it is our opinion that the Companies were operating a MISs.
MISs are legislated by Chapter 5C of the Corporations Act 2001 (Cth) (“the Act”) and pursuant to s601ED of the Act, are required to be registered with ASIC if the units in the scheme are to be offered to retail clients either:
1. above a $2 million combined investment threshold, or
2. above a 20 investors within a 12 month period threshold.
Our investigations indicate that at least from The Syndicate Twenty Nine Pty Ltd, the scheme should have been registered with ASIC as a registered MIS.
If the above is correct, two of the other requirements of running a MIS which the Companies appear to have failed to adhere to, are that the responsible entity of a registered scheme must be a public company that holds an Australian Financial Services Licence (“AFSL”) authorising it to operate a MIS (s601FA of the Act). Searches conducted with ASIC show that neither the Companies nor the Director held a valid AFSL and the Companies were not publicly listed.
These breaches of the Act are being reported to ASIC.
4.3 Compliance History
Credit Licence
As a provider of finance to customers purchasing motor vehicles, each of the Companies were required to have an Australian Credit Licence.
QED Risk Services (“QED”) were engaged by the firm to manage all its compliance matters. QED has confirmed that each of the Companies had a valid credit licence to lend to consumers. QED also advised they conducted two audits annually of the Companies [sic] lending activities and practices as a whole to ensure they were compliant. The compliance history reports provided to us by QED indicate the Companies were complying with their regulatory obligations.
Australian Financial Services Licence
An Australian Financial Services Licence (“AFSL”) is required by ASIC for companies / individuals to legally carry on a financial services business dealing in financial products, such as a MIS. We understand that the Companies and Director received advice that they did not need to apply to ASIC for an AFSL.
We have not yet sought our own legal advice as to whether the Companies or Director should have held an AFSL. However, we do believe that once the number of investors in the Companies grew to over 20 members within a 12 month period, which it had done so by at least The Syndicate Twenty Nine Pty Ltd, it should have been a registered MIS and therefore the Companies should have held an AFSL.
4.4 Cash Flow Forecast
The Companies maintained a cash flow forecast for each individual syndicate which outlined who the loans were issued to, the repayment schedule and various other details. The forecast cash flows predicted that there would be ample funds collected to repay all investors their capital investment plus a return of interest equal to the amount originally invested. We have conducted sample investigations into the bank accounts of three Syndicates which shows the following:
Syndicate Number Sampled Principle Financed to Debtors
($)Forecast Debtors to be Collected (Principle plus Interest)
($)Actual Debtors Collected
($)Bad Debts
($)Nine 327,197 596,555 460,698 135,857 Nineteen 345,502 595,944 363,911 232,033 Thirty Six 811,765 1,611,680 868,668 706,988
N.B. The figures used for the ‘actual debtors collected’ and the ‘bad debts’ columns are approximate figures we have calculated from reviewing the entire collection of bank statements for that syndicate company and adding up the amounts received by that company from its debtors. The figures used in the other columns come straight from the Companies [sic] cash flow forecast spreadsheets.
The results of our sampling confirms what the Director identified as the main reason for the failure of the business, being the non-collectability of debtors. The amounts actually collected from debtors by the three sampled syndicate companies were sufficient to repay the principle [sic] lent to customers, but insufficient to then repay the interest on the shareholders [sic] investments.
4.5 Shareholder Loan Book
The Director has provided us with spreadsheets which document what each shareholder has invested into each Syndicate and what amount, if any, remains outstanding. That schedule is summarised at Attachment G.
4.6 Report to ASIC
Pursuant to s438D of the Act, we are lodging a report with ASIC outlining our concerns detailed in sections 4.1 and 4.2 of this report.
4.7 Related Party – H.A.V.X. Pty Ltd (“HAVX”)
Allan Walker is the sole Director of HAVX. According to Mr Walker, once a debtor of the Companies defaulted on their loan repayments, the relevant car loan was assigned to HAVX who then acted as debt collectors and if necessary, recovery agents.
We have not seen a formal contract which sets out the terms and conditions of these assignments and Mr Walker advises that he does not have possession of any executed agreements. We have sighted draft unsigned assignment agreements. Further details of this relationship is explained in note 2(b) of Section 3.4.1 of this report.
4.8 Related Party Transactions
The Companies’ records are insufficient for us to be able to extract all related party transactions, however we have reviewed the bank statements for the past 12 months and have identified the following payments to related parties:
Related Party Amount
($)Yvonne Walker 53,400 Allan Walker 55,544 TOTAL $108,944
The payments made appear to be reasonable remuneration for the work undertaken by Mr and Mrs Walker.
4.9 Court Case – Eco Heat (Vic) Pty Ltd
At the date of our appointment, there was legal action on foot against the Companies, and four other defendants (The Syndicate Eight Pty Ltd, National One Automotive Finance Pty Ltd, Peter Barratt Pty Ltd and Peter Barratt) in the Supreme Court of Victoria. The matter was due for trial on 7 November 2016.
Pursuant to s440D of the Act, all proceedings against the Companies were stayed. At a directions hearing held on 3 November 2016, it was confirmed that the trial date would be vacated due to the majority of the defendants being placed into Voluntary Administration.
We are liaising with the solicitors for Eco Heat to resolve this matter. At this point, it appears that Eco Heat is reserving its rights to further pursue its claim pending the outcome of the voluntary administration.
We have been advised that the Syndicate Group of Companies have paid $218,000 into Court in relation to this claim. We believe these funds may be recoverable into the Voluntary Administration.
4.10 Offences
Directors or Officers, as defined in section 9 of the Act, can be held accountable for offences when they fail to discharge their duties in accordance with the Act. A shadow director has the same obligations and is identified as a person that acts in the position of a director of a company.
Our inquiries indicate the Director may have committed an offence under the following sections of the Act:
1. s180 – Failure to act with a degree of care and diligence. It is our opinion that based on the findings of our preliminary investigations outlined above, the Director may not have exercised his duties with reasonable care and diligence; and
2. s184(1) – Intentional or reckless failure to act in good faith. It is our opinion that the Director’s actions in continually setting up new companies when it was clear that the business model was failing, could constitute reckless decision making which was not in good faith and in the best interests of the company.
Pursuant to section 438D of the Act, we have reported all possible misconduct and offences to the Australian Securities and Investments Commission (ASIC).
4.11 Voidable Transactions
If the Companies are placed into Liquidation, the Liquidator can seek to:
· recover payments that were made by the Companies to a creditor prior to being placed into Administration, known as preference payments;
· reverse transactions that are considered uncommercial in so much that a reasonable person in the Companies’ circumstance would not have entered into the transaction having regard to the benefits and detriments to the Companies and the other party (related or unrelated), known as uncommercial transactions;
· overturn any unfair loans where the terms are considered extortionate
· reverse transactions between the Companies and a related party to the Companies that are considered unreasonable, known as unreasonable director-related transactions.
Preference payments, uncommercial transactions and unfair loans must have:
· occurred prior to the appointment of an administrator;
· been entered into within the specific relation back periods specified in section 588FE of the Act; and
· given effect to the Companies either being or becoming insolvent as a result of entering into the transaction.
In such instances, a Liquidator appointed to the Companies can commence recovery action pursuant to section 588FF of the Act.
The requirement to prove insolvency at the time or as a result of entering into the transaction is not a requirement for unreasonable director-related transactions.
We have not identified any material voidable transactions recoverable by a liquidator.
The investigations have been conducted to a moderate degree considering there does not appear to be any voidable transactions of substance that would materially affect projected outcomes in a DOCA or a Liquidation of the Companies.
Prior to commencing the above actions, a liquidator would consider each action commercially based on the likelihood of success, the costs of litigation and any defences available to the defendant. In the circumstances, we think it unlikely a Liquidator will recover any material net funds from preference actions.
4.12 Insolvent Trading
A Director of a Company has a duty to prevent the Company from trading whilst insolvent. Section 95A of the Act specifies an entity is considered insolvent when it cannot pay all its debt as and when they become due and payable.
Provided the Liquidator is satisfied that a reasonable person in the Director’s position should have suspected the Company was insolvent, a Liquidator can pursue the Director personally for incurring debts after the Company became insolvent.
The debts incurred by the Companies consisted primarily of the capital repayments and interest repayments owed to shareholders. Pursuant to a decision made by Connolly J in John Graham Reprographics Pty Ltd v Steffens (1987) 5ACLC 904, interest payable for the purposes of calculating an insolvent trading claim, is deemed incurred at the date of the relevant agreement being entered into.
As the debts of the Companies were incurred around the same time as the issue of car loans, the Companies could be deemed to be technically solvent at that time. For this reason, we think it is unlikely that a Liquidator would pursue an insolvent trading claim, or that any material recoveries would be made from an insolvent trading claim.
Paragraph 6 deals with The DOCA and is in the following terms:[8]
[8]Exhibit AS-10: Second Report to Creditors, Page 606-608.
6. Proposal for a Deed of Company Arrangement (DOCA)
The Director has submitted a proposal for a DOCA. He will be in attendance at the meeting held pursuant to section 439A to provide further details on the DOCA and answer any valid queries. In the event the Director fails to attend, we may seek an adjournment of the meeting for a period of up to forty-five business days to enable a supplementary report to be issued prior to reconvening the meeting. At this stage, we do not consider this to be necessary.
6.1 A summary of the DOCA’s key features
1. David Stimpson and Michael Carrafa shall be the Deed Administrators;
2. There will be one single Deed which binds all Syndicate Companies whose creditors approve the Deed (known as the “Participating Syndicates”)
3. The following funds of the Participating Syndicates will be paid into a pool of funds (“the Deed Fund”) to be administered by the Deed Administrators until disbursement of those funds in accordance with paragraph 7:
ofunds from the collection of debtors owing as at the date of the Voluntary Administration;
ofunds from the collection of debtors currently being collected by HAVX;
ofunds from the recovery of the loan secured by a second mortgage over the property at Tennyson;
oany funds recoverable from the $218,000 held in Court; and
ofunds from the realisation of any other assets of the Participating Syndicates.
4. Any Syndicate Companies whose creditors vote against the Deed Proposal will be placed into liquidation (“the Non-Participating Syndicates”). The assets of the Non-Participating Syndicates will not be available to the Deed Fund.
5. In addition to the pool of funds, Allan Walker will create a Unit Trust which will in the future engage in the operation of a finance business. A third party will provide a loan in the amount of $200,000, to be paid to the Trustee of the Unit Trust for the purposes of being used as capital for future investments;
6. Allan Walker will control the Trustee of the Unit Trust. The Deed Administrators will have no control over the affairs of the Unit Trust;
7. Any surplus of the pool of funds described in paragraph 3 after paying the priority costs of the Administration in accordance with section 556 of the Act will also be paid by the Deed Administrators to the Trustee of the Unit Trust to be used as capital for future investments;
8. Deferred creditors of each Participating Syndicate will be entitled to receive units in the Unit Trust proportionate to the value of their preference shareholding;
9. The deferred creditors of the Participating Syndicates will benefit from any profits distributed to unit holders in the Unit Trust;
10. Control of the Participating Syndicates will revert to its director upon the Deed being executed by all parties;
11. All creditors and deferred creditors bound by the Deed will release the Participating Syndicates from all debts or claims that would have been provable in the winding up of each Participating Syndicate;
12. The Deed will be fully effectuated upon payment of the Deed Fund to the Trustee of the Unit Trust;
13. Should the terms of the DOCA fail to be met, the Deed Administrators will call a meeting of creditors pursuant to section 445F of the Act to consider whether to vary or terminate the DOCA. If the DOCA is terminated, the Companies will be placed into Liquidation.
The main contributions pledged are from a third party, however we have not been provided a guarantee from the third party binding them to the DOCA to make the payment or evidence of their capacity to make the payment.
The profits from investments which will be used to pay distributions to the Participating Syndicates [sic] unit holders, according to the Director, are forecast to be accumulated over four years and will range from $2.7 million to $7 million depending on the amount of capital invested. We have not seen a copy of the forecasts to date and cannot comment on whether the projected profits are achievable.
A condition of the proposed DOCA is that all creditors of the Participating Syndicates will be transferred from the Companies to a special Trust called a Creditors’ Trust. In order for you to adequately consider the DOCA, we summarise ASIC’s regulatory guide 82 on how a Creditors Trust will affect you.[9]
…
6.1.3 Administrators’ opinion on the Creditors Trust
The Director believes using a [Creditor’s Trust (“CT”)] will enable the Companies to satisfy the financial obligations of the regulatory body so as to enable the Companies to overcome one of the major hurdles for obtaining a credit licence.
We consider that if the DOCA is accepted, the CT is an appropriate and reasonable vehicle in the circumstances essentially as the Companies would not be able to trade under a DOCA. For this reason, we do not consider the proposal by the Director as an abuse of part 5.3A of the Act or contrary to the public interest as it is the preferred option to enable continued trading to potentially allow a distribution to deferred creditors.
If the business is not able to trade the Companies would be placed into Liquidation with no return likely to be made to deferred creditors (all distributions would be to the related party unsecured creditors).
The current deferred creditor liabilities will be transferred to the CT however, the Companies will be a contingent creditor of the CT under the proposal equivalent to the value of those deferred creditor liabilities.
Therefore, in these circumstances, we consider a CT is an appropriate mechanism for achieving both a better return to creditors as a whole and will enable the continued trade of the businI.[10]
...
[9]Paragraphs 6.1.1-6.1.2 of the Report have been omitted. 6.1.1 is general information explaining what a creditor’s trust is. 6.1.2 explains how the trust affects creditors. Those paragraphs largely summarise ASIC RG 82.
[10]The remainder of paragraph 6.1.3 has been omitted as it contains general information on the advantages and disadvantages of CT, as well as statutory DOCA timeframes. Paragraph 6.2 is omitted as it is a simplified comparison of the return from liquidation against the DOCA which is otherwise covered by paragraph 21 of these reasons.
Attachment F to the Report is a comparison of the returns under the proposed DOCA and a liquidation. Attachment F is set out below:[11]
[11]Exhibit AS-10: Second Report to Creditors, Page 695. The notes to Attachment F have been omitted.
Notes DOCA Liquidation High
$Mid
$Low
$High
$Mid
$Low
$Cash at Bank 40,000 40,000 40,000 40,000 40,000 40,000 Debtors (pre-appointment) 1 278,743 150,000 100,000 278,743 150,000 100,000 Debtors (HAVX) 1 170,000 120,000 85,000 170,000 120,000 85,000 Loan – Garry Tierney 387,000 325,000 250,000 387,000 325,000 250,000 DOCA Contribution Section 6 200,000 200,000 200,000 - - - Profits from investments 2 7,000,000 3,500,000 - - - - Funds held in Court - - - 200,000 200,000 - Insolvent trading claim - - - - - - Preference Claims - - - - - - Uncommercial transactions - - - - - - Unfair loans Section 4 - - - - - - Total available assets 8,075,743 4,335,000 675,000 1,075,743 835,000 475,000 Less: Administrators’ costs, remuneration and disbursements 3 124,683 115,000 100,000 99,625 90,000 80,000 OR liquidators’ costs, remuneration and disbursements 75,033 70,000 60,000 99,951 75,000 50,000 Amount available for unsecured creditors 7,876,028 4,150,000 515,000 876,168 670,000 345,000 Unsecured creditors 4 - - - 900,299 900,299 900,299 Amount available for deferred creditors 7,876,028 4,150,000 515,000 - - - Deferred creditors (shareholders) 16,096,709 16,096,709 16,096,709 15,196,410 15,196,410 15,196,410 Estimated return to unsecured creditors (cents in the dollar) 0.0000 0.0000 0.0000 0.9732 0.7442 0.3832 Estimated return to deferred creditors (cents in the dollar) 0.4893 0.2578 0.0000 0.0000 0.0000 0.0000
E The Deed of Variation
On 9 January 2018 the defendant Syndicate Companies, seeking to address ‘what might be seen as legitimate concerns on the part of the plaintiff’,[12] circulated a proposal to vary the DOCA.[13] At a meeting held on 24 January 2018 the creditors resolved to accept the variation, and on 1 February 2018 the deed administrators executed a deed of variation (‘Deed of Variation’). The Deed of Variation has two major features.
[12]Which concerns related to returning the Syndicate Companies to the control of Walker. (T25.14-25.)
[13]Whilst the variation was proposed by a creditor of the Syndicate Companies, Norgro Pty Ltd, evidence from its director, Mr Grosvener, indicates that the proposal originated from Walker. See footnote 89. (T193-194.)
First, the Deed of Variation replaced Walker with Tiziano Rosati (‘Rosati’) as Proponent of the Creditor’s Trust, and inserted the following clause 7.3(h):[14]
The Director acknowledges and confirms that he will have no role in the management of the Trustee, or otherwise in respect of the activities of the Unit Trust…
[14]Exhibit MR-4 to Affidavit of Marijana Rados, sworn 1 February 2018.
Secondly, by clause 7.3(g), Walker’s $200,000 cash contribution to the deed fund was to take the form of a non-repayable capital contribution, rather than a loan secured by a general security interest over the assets of the Creditor’s Trust.
F Plaintiff’s Submissions
Eco Heat submitted that the interests of creditors as a whole and commercial morality and public policy issues necessarily required the DOCA be set aside and the Syndicate Companies be placed into liquidation.
Under the first ground, it was submitted that the Court should take into account the Administrators’ opinion that the Syndicate Companies be placed into liquidation, and that liquidation would be in the interests of creditors as a whole.[15] The creditors’ resolution to enter the DOCA should be overruled, as their decision was not based on an objective consideration of their own financial interests but rather the decision was based on a desire to look after Walker, as a friend, and to heed his advice to enter the DOCA.[16]
[15]T306.16-31, T307.1-8.
[16]T307.9-19.
In addressing the latter two grounds, Eco Heat relied heavily on the findings of the Administrators at paragraph 4 of the Report, submitting that the Syndicate Companies had satisfied the elements of a managed investment scheme (‘MIS’) pursuant to s9 of the Act.[17] It was submitted that if the Court finds that the Syndicates Companies were MISs and as such ought to have been registered, winding up orders should be made.[18] Eco Heat further submitted that Walker had acted as the promoter of a Ponzi scheme, whereby the later-in-time Syndicate Companies collected moneys which were then used to pay out the earlier Syndicate Companies in an effort to satisfy the unrealistic returns promised to the investors.[19] It was these considerations that informed the commercial morality and public policy issues associated with the business conducted by the Syndicate Companies, the gravity of which, it was submitted, outweighed principles of ill-informed creditor democracy.[20]
[17]T315-316.
[18]T317.19-31, T318.1-2.
[19]T313.11-31, T313, T314.1-7.
[20]T10.20-31.
On the basis of these matters and the conclusions reached by the Administrators, it was submitted that further investigation is warranted, and is likely to lead to a very substantial claim against Walker.[21] Accepting the evidence of Stimpson, the business trading proposal put forward by the DOCA is, it was submitted, ‘likely to be a money pit which will run the risk of consuming more money than it will make.’[22] Proceeding to liquidation would provide all creditors with a greater return than they would receive from the DOCA.
[21]T22-31.
[22]T331.1-4.
G Defendant’s Submissions
The Syndicate Companies submitted that the prospect of recoveries from further investigation in a liquidation was speculative at best. It was submitted that the plaintiff was required to establish: (a) what the claims were; (b) what the costs of pursuing those claims might be; and (c) whether the potentially liable parties had sufficient assets to satisfy the potential claims. The plaintiff had not, it was submitted, presented evidence of the involvement of persons other than Walker, and had not presented evidence as to any assets held by Walker able to satisfy such claims.[23]
[23]T300.26-31, T301, T302.1-11.
Further, the Administrators had reported the potential operation of a Ponzi scheme and unregistered MIS to ASIC. As ASIC was not interested in pursuing these matters, and as the Administrators had formed the opinion that there was no prospect of recoveries under Pt 5.7B of the Act, there was, it was submitted, no obvious purpose which could be served by further investigation.[24]
[24]T277.3-14.
Putting aside the speculative investigations, it was submitted the DOCA was in the interests of creditors in terms of the likely return as well as the individual impact on creditors. Were the Syndicate Companies to proceed to liquidation, by virtue of the investors’ position as shareholders, s563A of the Act subordinated any claim they may have in liquidation to a position below that of related-party creditors, Lagan Pty Ltd and The Syndicate Forty Six Pty Ltd, which together were creditors for the amount of $900,299.[25] Were recoveries to be made against Walker in liquidation, until Walker or the related parties had received this $900,929 there would be no benefit to the other creditors at all.[26] By contrast, a substantial benefit of the DOCA is, it was submitted, that it would allow the investors to rank pari passu with those related-party creditors.[27]
[25]T292.3-13.
[26]T292.18-24.
[27]T293.27-31.
The Syndicate Companies identified the tangible benefits to these creditors, specifically the $200,000 contribution pledged by Walker and the positive cash flow to be generated by the ongoing business of the Creditor’s Trust.[28] Considerable evidence was adduced from the investors of the Syndicate Companies to the effect that they would get nothing in a liquidation, and the effect of getting nothing would be extremely negative upon them.[29]
[28]T273.18-31.
[29]T48.3-20.
H The Law
Section 445D(1)(f) and (g) of the Act provides as follows:
Section 445D – When Court may terminate deed
(1)The Court may make an order terminating a deed of company arrangement if satisfied that:
…
(f)the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be:
(i)oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or
(ii)contrary to the interests of the creditors of the company as a whole; or
(g) the deed should be terminated for some other reason.
(2) An order may be made on the application of:
(a) a creditor of the company; or
(b) the company; or
(ba) IC; or
(c) any other interested person.
The inquiry under s445D(1) involves two stages, though they are not unrelated.[30] The plaintiff bears the onus of establishing each stage.[31] First, whether any of the grounds referred to in s445D(1) are established; and second (which arises only if the first is established) whether as a matter of discretion[32] the deed should be terminated. Ultimately, each case will depend upon its own particular facts and circumstances.[33] The plaintiff’s primary focus was on s445D(1)(g), a broad ground that overlaps with and perhaps includes s445D(1)(f).
[30]Re Recycling Holdings Pty Ltd [2015] NSWSC 1016, [29].
[31]Mediterranean Olives Financial Pty Ltd & Others v Loaders Traders Pty Ltd (ACN 069 549 042) (subject to deed of company arrangement) & Others (No 2) [2011] FCA 178, [179] (‘Mediterranean Olives’); TiVo Inc v Vivo International Corporation Pty Ltd [2014] FCA 789 (‘Tivo Inc’).
[32]Emanuele v Australian Securities Commission (1995) 19 ASCR 1, 17.
[33]Mediterranean Olives [2011] FCA 178, [197]; TiVo Inc [2014] FCA 789, [69].
In TiVo Inc, Gordon J noted at [54]:
In deciding whether a DOCA is…contrary to the interests of the creditors as a whole, the courts have regard to factors including:
1. The object of Pt 5.3A
2. The interests of other creditors, the company and the public;
3.The comparable position of the creditor in the winding-up, compared with their position under the deed; and
4.Other relevant facts such as the relative position of all creditors under the deed (i.e. whether they are better off), the existence of a collateral benefit to the shareholders and the whole of the effect of the deed.
Notwithstanding indications that the interests of creditors form a ‘primary consideration’,[34] it is settled that the discretion is to be exercised having regard not only to the interests of creditors as a whole, but also to the public interest, an interest that includes considerations of commercial morality and the interests of the public at large.[35] Consequently, whilst a comparative assessment of the outcome for creditors may be relevant to the exercise of the discretion under s445D(1)(g),[36] the comparative benefit to creditors under a deed does not preclude exercise of the Court’s discretion to terminate.[37] It does not follow that the deed will be allowed to stand simply because creditors would stand to gain more from the deed compared to a liquidation.[38]
[34]Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510, [272] (‘Bidald Consulting’).
[35]Britax Childcare Pty Ltd v Infa Products Pty Ltd & Others [2016] FCA 848, [95]; TiVo Inc [2014] FCA 789, [60]; Deputy Commissioner of Taxation v Portinex Pty Ltd (subject to deed of company arrangement) (2000) 34 ACSR 391, [105].
[36]Bidald Consulting (2005) 226 ALR 510, [276].
[37]Joseph Khoury & Sons v Zambena Pty Ltd (1999) 217 ALR 527, [80].
[38]Australian Securities and Investments Commission v Midland Highway Pty Ltd & Another [2015] FCA 1360, [70] (‘Midland Highway’); Bidald Consulting (2005) 226 ALR 510, [286].
It has been observed that the breadth of s445D(1)(g) is such that the public interest may justify the termination of a DOCA even where it is not established that this would necessarily be in the interests of creditors.[39] This may include circumstances ‘where the proposal for the [deed of company arrangement] has a fraudulent or wrongful purpose or the [deed of company arrangement] offers an unconscionable premium, contrary to public policy, as a bribe to creditors to support an arrangement under which the conduct of the directors will not be investigated’.[40]
[39]Midland Highway [2015] FCA 1360, [73].
[40]Fleet Broadband Holdings Pty Ltd v Paradox Digital Pty Ltd (subject to a deed of company arrangement) (2005) 8 ALR 598, 609.
Similarly, where there has been ostensible misconduct in the affairs of a company requiring investigation by a liquidator, it would be detrimental to commercial morality to prevent such an investigation through the operation of a DOCA propounded by entities and individuals who ought be the subject of investigation and the target of such proceedings.[41]
[41]Midland Highway [2015] FCA 1360, [68]; Bidald Consulting (2005) 226 ALR 510, [290]; Re Data Homes Pty Ltd (in liq) [1972] 2 NSWLR 22, 26.
The Court’s responsibility to have regard to the public interest in this context is well established. In TiVo Inc Gordon J referred to statements in Re Hester[42] and Re Flateau[43] and observed they were equally applicable to the exercise of the discretion under s445D.[44] In Re Hester, Lord Justice Fry observed:
The Court has far larger and more important duties to perform than merely to consider whether the creditors have consented….We are not only bound to regard the interests of the creditors themselves, who are sometimes careless of their best interests, but we have a duty with regard to the commercial morality of the country.[45]
[42](1889) 22 QBD.
[43][1893] 2 QB 219.
[44]TiVo Inc [2014] FCA 789, [62].
[45]Re Hester (1889) 22 QBD 632, 641.
In Re Flateau, Lord Esher MR noted:
The cases are clear that the Court is not bound by the consent of all the creditors. Although the consent of all the creditors has been obtained, the Court will still consider whether what they have agreed to (that is, all the creditors) “is for the benefit of the creditors as a whole,” that is, for their benefit, although they have consented. The Court will protect them against their own carelessness and folly, because we know perfectly well that over and over again the creditors of a debtor are quite willing to write off their debts as bad, to write off the whole thing, and let the debtor begin again, and incur fresh debts…[46]
[46]Re Flateau [1893] 2 QB 219, 222-223.
It follows that where the particular circumstances of the case give rise to a need for further or a more intensive investigation of the company’s affairs, termination of the DOCA may be justified. This is all the more so where those circumstances involve a negligible return to creditors under the DOCA, and the potential for a greater return on winding up after an independent and more thorough investigation.
In Mediterranean Olives, the plaintiffs were the major independent unsecured creditors of two defendant companies subject to a single deed of company arrangement, Loaders Traders Pty Ltd (‘Loaders’) and Lederberger Investments Pty Ltd (‘Lederberger’). The plaintiffs sought orders terminating the DOCA pursuant to s445D(1)(c) and (g) of the Act, alleging that the administrators’ investigation of potential avenues of recovery was inadequate. Consequently, it was ‘contrary to the interests of the creditors as a whole’ that the major independent creditors’ preference for further investigation on liquidation should be defeated by the votes of related creditors.[47] Dodds-Streeton J declined to find material inadequacy or omissions in the administrators’ investigations or reports,[48] nor any prospects of greater recovery on winding up,[49] and refused to terminate the DOCA.[50]
[47]Mediterranean Olives [2011] FCA 178, [7].
[48]Ibid [250].
[49]Ibid [251].
[50]Ibid [253].
Despite declining to terminate the DOCA on the facts before her, Her Honour observed at [196]:
…where, for example, the dividend or other benefits to creditors under, or as a result of, a DOCA are small; there are potential claims which, on a preliminary view, warrant further investigation because they afford reasonable prospects of greater returns on winding up; funding is probably available for an investigation; there are reasonable prospects that litigation or other necessary steps to prosecute the claims can be funded; and the defendants appear capable of satisfying their liability; termination of the DOCA may be in the interest of the creditors as a whole.[51]
[51]Ibid [196].
Her Honour distinguished these circumstances from the case before her which involved ‘a major creditor’s curiosity or preference for further exploration of speculative claims’.[52]
[52]Ibid [195].
In Canadian Solar v ACN 139 535 832 Pty Ltd,[53] the plaintiff was a creditor of the first defendant, formerly Redset Group Pty Ltd (‘Redset’). Canadian Solar sought orders terminating a Deed of Company Arrangement entered into by Redset. Perry J granted the application, noting the potential for further recovery proceedings and observing ‘a number of deeply troubling aspects’ surrounding the circumstances in which the DOCA was approved.[54] These included the making of secret side deals between the controlling director, Mr Young, and individual creditors in order to procure their support, without which the resolution approving the DOCA would not have been passed.[55]
[53]Canadian Solar v ACN 138 535 832 Pty Ltd, In the Matter of ACN 138 535 832 Pty Ltd (Subject to a Deed of Company Arrangement) [2014] FCA 783 (‘Canadian Solar’).
[54]Ibid [22].
[55]Ibid [38].
Perry J considered the effect of the DOCA was to ‘…preclude further investigations into suspect and potentially voidable transactions which may result in a considerably better outcome for creditors….it leaves many creditors with their claims recoverable only against an empty shell and any dividend that might be received under the DOCA would be very small indeed.’[56]
[56]Ibid [36].
Her Honour also noted:
It is not necessary in this regard for me to be satisfied that a winding up would, on the balance of probabilities, produce greater dividends being returned to creditors. It is the loss of the investigation into those transactions themselves and the opportunity for greater returns that renders the DOCA contrary to the creditors’ interests.[57]
[57]Ibid [37].
Perry J concluded, at [40]:
In short, a deed of company arrangement which would preclude further investigation into serious questions regarding director misconduct, colourable transactions and preferable arrangements, and was produced through a corrupt voting process, is contrary to Part 5.3A of the Act and is properly to be set aside under s 445D(1).[58]
[58]Ibid [40].
In TiVo Inc, Gordon J terminated a DOCA entered into by Vivo International Corporation Pty Ltd pursuant to s445D(1)(g) of the Act, holding that the public interest demanded that the DOCA be terminated and an independent third party (i.e. a liquidator) conduct an inquiry in respect of legitimate concerns.
Considering the case before her, her Honour stated at [68]:
What then is the position here? Vivo is not trading. Vivo is insolvent. The Section 439A Report recorded 10 instances of non-disclosure or lack of essential information. There were legitimate concerns at the time of the Section 439A Report. Those concerns remain. At the time of the Section 439A Report, there was no proper disclosure by those in charge of Vivo. It is unnecessary to determine whether that non-disclosure was deliberate. The fact is that there was no proper disclosure and that non-disclosure concerned facts and matters which underpin the legitimate concerns. By reason of those facts, there was a serious risk that creditors may have been materially mislead.[59]
[59]TiVo Inc [2014] FCA 789, [68].
That a majority of creditors voted in favour of the DOCA on two occasions was ‘but an element in the exercise of the discretion under s445D(1)’.[60] Her Honour observed such consent must be viewed in the context of a number of factors, including the connections those creditors had with Vivo and its directors.[61] Consequently, these factors required ‘less weight to be accorded to the votes of creditors’.[62]
[60]Ibid [70].
[61]Ibid.
[62]Ibid.
In Public Trustee (Qld) v Octaviar Ltd (subject to a deed of company arrangement (recs and mgrs apptd) (No 8),[63] McMurdo J terminated deeds of company arrangement entered into by Octaviar Ltd and Octaviar Administration Pty Ltd. The Public Trustee of Queensland sought to have the companies wound up in lieu of the deeds, arguing a liquidation would be in the best interest of creditors. Her Honour observed that information given to creditors as to the intended benefits of the DOCA to creditors was misleading and omitted information about the company’s financial circumstances which could reasonably be expected to have been material to creditors.[64] Consequently, grounds for termination under s445D(1)(b) and (c), or alternatively s445D(1)(g), were established.[65]
[63]Public Trustee (Qld) v Octaviar Ltd (subject to a deed of company arrangement) (recs and mgrs apptd) (No 8) (2009) 73 ACSR 139 (‘Octaviar’).
[64]Ibid [112].
[65]Ibid.
McMurdo J further noted the potential dividend to creditors under the DOCAs would be ‘on any view, small, and it can now be said that there are prospects of preference or uncommercial transaction or insolvent trading recoveries’.[66] Her Honour went onto observe:
…the termination of the DOCAs would be beneficial also for the fact that it would permit some investigation of transactions and conduct which could lead to at least some of the persons responsible for some of the group’s demise being brought to account. The public interest is therefore a consideration in favour of terminating the deeds.[67]
[66]Ibid [181].
[67]Ibid.
In Promoseven Pty Ltd v Prime Project Development (Cairns) Pty Ltd,[68] the appellant successfully appealed a decision at first instance refusing the termination of a deed of company arrangement entered into by the first respondent company.
[68][2015] 2 Qd R 317 (‘Promoseven’).
At [84], Morrison J (with whom Holmes JA and Fraser JA agreed) stated:
…the circumstances surrounding Prime’s transfer of its interest in the mortgage to Refund is such that an investigation by a liquidator should not be prevented by the related parties to Prime forcing a deed of company arrangement on the other creditors. The apparent lack of commerciality in that transaction, particularly where the the true worth of the consideration is something that will be determined by Refund according to its own priorities without reference to Prime, are such that a public examination of the affairs is warranted, and the institution of claw back litigation may prove to be warranted. It would, in the sense of the terms used in Emanuele and Bidald, be detrimental to commercial morality to dispense with the opportunity which the winding up law provides for the investigation of the affairs of Prime.[69]
[69]Ibid [84].
Analysis
As the authorities clearly demonstrate each case must be decided according to its own peculiar facts and circumstances. This is particularly so in relation to the public interest and commercial morality issues. The identification and weight to be attached to these issues and how and to what extent they interrelate with the best interests of creditors, particularly where the DOCA offers a greater return than a liquidation, is often a difficult balancing exercise. Ultimately all relevant factors need to be considered and a judgment made.
As a general proposition if the return under the DOCA is not insubstantial or token and the public interest and commercial morality issues are unlikely to translate into a cause of action realistically worth investigating and pursuing, the scale may tip in favour of retaining the DOCA. However and by contrast if the return under the DOCA is nominal or token or not much more than on a liquidation, and there are or may be available causes of action which could result in a greater return or otherwise ought be investigated, the scale may tip in favour of setting aside the DOCA. Of course in this event, as the authorities demonstrate proper consideration needs to be given to the basis and nature of any cause of action and satisfaction that any such cause of action is not fanciful or speculative or without foundation. In addition funding issues and prospects of recovery may also be relevant. However, it should also be emphasised that in suitable cases it may not only be about the return to creditors.
In my opinion the DOCA should be set aside. I consider that the anticipated return to creditors under the DOCA is overstated, and in the case of the anticipated mid to high range is not only overstated but extravagant, unsubstantiated and entirely misleading. The possible small return, in respect of which I have little confidence, is outweighed by the benefits that a liquidation may bring. I do not consider that these benefits, which are not only financial, are illusory, speculative or fanciful. They have a sufficient basis to conclude that liquidation is desirable. I am not attracted by the submission that the suggested financial benefits are simply expectation damages arising out of very high promised returns, which creditors (other than Eco Heat) have, by voting for the DOCA, elected in essence to forego. Again, it must be emphasised that there are also non-financial benefits. Finally by way of overview there are two related matters that cannot be ignored. First, and unlike most cases the Administrators clearly and unequivocally recommended against accepting the DOCA and have not changed their position. Secondly, the obvious relationship between Walker and the investors cannot be ignored.
I propose to deal with the following matters, which as noted above inform my conclusion as to why the DOCA cannot stand.
·The return under the DOCA (modest, token and negligible);
·The position under a winding up (sufficiently realistic prospects);
·Creditor democracy, commercial morality and the public interest (investigation required and desirable whatever the financial benefits).
Position under the DOCA
Attachment F, reproduced at paragraph [21] above sets out a range from Low to High, with a Mid-point. The suggested estimated returns in the Mid and High range are, as noted, fanciful, entirely speculative and not only not supported by the evidence but against the weight of the evidence.[70] The figures are nonsense, nonsensical and troublesome. Although not a ground relied upon they are entirely misleading. Not surprisingly the figures were provided by Walker. In fact the figures are so preposterous that it is difficult to decide where to start or indeed if any analysis is even necessary.
[70]See footnote 82 below.
The $0.48 (High) and $0.25 (Mid) ‘estimated returns to deferred creditors’, which assumes a pari passu distribution with [other] unsecured creditors[71], is based almost entirely on ‘Profits from investments’ of $7 million (High) and $3.5 million (Mid). As noted this forecast was provided by the director, Walker. The forecast is entirely dependent upon funds available for capital investment in order to generate such returns. The only problem is that there is very little available for such investment. There is not surprisingly given the nature and operation of the Syndicate Companies, no evidence of fresh investment and it is therefore necessary to look at funds available from the Syndicate Companies, namely its remaining assets and source of funds.
[71]I am not attracted by the pari passu point (see paragraph [31] above). First, the status of the ‘investors’ is not entirely clear. The better view is that they are both shareholders and creditors (see attachments G and H to the Report - the reference to deferred creditors is peculiar). Further, the LOE is ambiguous and unhelpful. If anything it tends towards the investors being creditors. Secondly, and in any event, for the reasons given it does not matter. The offer to rank pari passu with the investors is in the context of this case and the circumstances referred to, irrelevant and a seductive diversion from what I have found to be the true position. Finally the status of Lagan Pty Ltd and The Syndicate Forty Six Pty Ltd as creditors and the suggested loans made and the source of funds needs to be investigated.
There are five categories of assets. I accept categories one and five, namely $40,000 at bank and $200,000 by way of capital injection by Walker. The figure for debtors, the second item, being $278,743 (High) and $150,000 (Low) is far too high. According to Stimpson and after fees and expenses the amount collected and presently available (but presumably reducing) is about $20,000. The third item is even more precarious. HAVX have not paid anything to the Administrators and there is no evidence at all about the status of these debtors and the estimated return of $170,000 (High) and $120,000 (Mid). The figures obviously bear no resemblance to reality. There being no evidence, I am not able to attribute anything to this asset item. The final item, item four is the loan to Garry Tierney in the sum of $387,000. This is being repaid at the rate of $825 per week and there is no evidence of any default. However, given the payment schedule there is no lump sum available for immediate investment.
Accordingly, doing the best I can there is at most an amount of $260,000 available for investment and perhaps further amounts from time to time given the Tierney repayments. How exactly this will generate $7m (High) or $3.5m (Mid) is not clear.[72] The Low column suggests an ‘estimated return’ of $0.03.[73] This figure needs to be adjusted for debtors and HAVX which as stated is $100,000 and $85,000 respectively. The correct or more accurate figures are $70,000 and NIL respectively. This reduces any ‘estimated return’ to about $0.02, accepting the full amount from the Tierney loan was available for immediate investment which is not the case. If this amount is removed the figure is almost nothing. With ongoing administration costs the return will probably be nothing.
[72]The evidence of Michael William Barratt was that ‘we would probably make 25 per cent’ on a loan book of $200,000. To make millions he said that you would need ‘a lot of other money’ (T238).
[73]The figure in Attachment F is $0.0 but Stimpson agreed during cross-examination that on the figures set out it should be $0.03.
For the above reasons, which are by no means exhaustive I consider that any return under the DOCA will at best be negligible. Finally the return is expected to be over a period of four years. How this can possibly be in the best interests of creditors was not explained and is hard to understand. Even harder to understand is the mantra of several investors to the effect that termination of the DOCA would be disastrous. I do not accept any of this and such a self-evidently ridiculous position highlights even further the need to terminate the DOCA. More about this later.
Position under a winding up
There are two aspects that are not entirely unrelated. The first is the estimated returns to creditors and the second is an investigation into the establishment and operation of the Syndicate Companies and what happened to the funds.
I will deal with the second point first. It seems to me that there does need to be an investigation and examination of the Syndicate Companies. Liquidation of the Syndicate Companies would provide such an opportunity, given the unwillingness on the part of ASIC to investigate the matter. There are serious issues as to whether the Syndicate Companies were MISs and/or involved the operation of a Ponzi scheme. It is unnecessary and undesirable to make such findings at this stage. It is sufficient to say that the Administrators are and remain[74] of the view that ‘there are grounds to maintain that attributes of a Ponzi type scheme are present’ and ‘it is our opinion that the Companies were operating a MIS’.[75] In my opinion there is a sufficient basis for the opinion of the Administrators. Whatever the return to creditors and shareholders these matters and others require investigation. The loss of this right is itself a serious matter.
[74]Despite cross examination Stimpson was not shaken and remained of the view expressed in the Report.
[75]Exhibit AS-10: Second Report to Creditors, Page 599-601.
In relation to the first matter, I am not satisfied that creditors would be worse off. At worst they would not receive their $0.01 to $0.02 cents in the dollar over four years. So what! In context this is a negligible amount that is hardly worthy of consideration, particularly in light of the extravagant returns they were promised. Even if they did get nothing the necessity of an investigation would outweigh the paltry returns under the DOCA, which in any event I have reservations about.
Finally, and in any event I am not satisfied that they will be worse off financially. The Administrators have identified causes of action against Walker which have a sufficient basis or foundation.[76] Again it is unnecessary and undesirable to undertake an assessment of the strength of any such claim. There is no evidence to suggest that in the event of a successful proceeding against Walker less than $0.02 cents in the dollar would be recoverable. Even if it was this case is not only about the derisory and paltry return to creditors. It is also about commercial morality and ultimately the public interest. Of course the return may well be greater. Walker was an accountant with his own practice for many years.
[76]See paragraph 4.10 of the Report referred to above on page 15.
Ultimately the evidence relating to any return in the event of a winding up is speculative but not entirely without foundation. However as stated above it does not matter. In my opinion even if it were demonstrated conclusively that there would be a nil return I would still find that an investigation is, in the peculiar circumstances of this case, more important than a negligible return over a period of four years, notwithstanding the desire of the creditors, who for the most part are friends, acquaintances or supporters of Walker.
Creditor democracy, commercial morality and the public interest
There is no doubt that the wishes of informed creditors is ordinarily a matter that should be taken into account. It is clearly a matter of some importance. However, as the authorities point out, it is not the only matter and in suitable cases other considerations may outweigh the wishes of the creditors. This is clearly such a case.
There are some curious features about the creditors’ consent to the DOCA. First it was against the specific recommendation of the Administrators. This is most unusual. This may well be explained by the close connection between the creditors and Walker. Certainly the two witnesses who gave evidence for the Defendants supported the decision of Walker because he was a friend and advisor of long standing and they were inclined to go along with him whatever the decision. I suspect this was the case with most of the others although it is hardly necessary for me to make, and I do not make such a finding. The same may be said of the last minute Deed of Variation. It was proposed by a friend of Walker’s because Walker suggested it be done.[77]
[77]Robert Spencer Grosvener has been a friend of Walker for about 55 years. Walker was his (and Norgro Pty Ltd., the Trustee of his family trust) accountant for 30 years. He has maintained close contact with Walker and has discussed the matter with Walker but could not recall the gist of Walker’s response. Later in cross-examination he recalled discussing the matter with Walker and concluding that ‘our best chance of retaining some money was via a DOCA’ (T187.17). He then said that ‘it would be better to have a DOCA because if it went into liquidation, Allan was quite convinced that there would be nothing for anybody’ (T187.24–26). Later Grosvener said ‘I have always had good advice from Allan. He has never led me astray in the past, so I accepted his advice’ (T188.26-28). The advice referred to was that ‘it would be in the best interests of creditors to execute the DOCA’ (T188.22–23). Finally and most importantly, in giving evidence in relation to putting forward the Deed of Variation at the request of and after discussion with ‘Allan and the solicitors’ (T193.9). Grosvener said ‘it seemed to make sense for the creditors who have a better chance of getting some money back. Allan said we would be likely to be between 40 and 60 cents in the dollar. That to me is better than losing the company’ (T194.18–22).
Lance William Gardiner invested in the Syndicates through the Selby Superannuation Fund. Callum Walker, the son of Allan Walker, is the trustee of the Fund and has been for many years (T200). The bulk of the fund’s investment is in the Syndicates (T200.28). He gave evidence that he has always trusted Allan and still trusts him ‘absolutely’ (T202.6). He gave evidence that although he discussed the DOCA with Allan he did not ask for his opinion and said ‘listen Allan, I trust you. We will just keep going’ (T202.15). He said that his affidavit was prepared by Walker and that he was happy to accept the figure given by Allan because he trusted him (T203). The Selby Super Fund invested in 27 Syndicates constituting about 80 per cent of the capital of the Fund. He gave evidence that the proof of debt submitted to the Administrators was prepared by Walker (T207.24). Most importantly he said that his choice to sign the DOCA was based on discussions with Allan (T211.12–13) and that ‘I have trusted Allan for 40 years and I wasn’t going to deviate from that point. You don’t jump ship halfway through. I thought let’s see how we go, continue on. Even now, still trust him’ (T211.15–19). Gardiner recollects Walker saying that if the DOCA was not executed they would lose everything (T211.24).
The second curious feature is their insistence that they had read the Report and the termination of the DOCA would cause them serious loss and trauma. I do not accept this evidence. They may have read the Report and ignored the advice and opinion of professionals for reasons already mentioned and perhaps others but (subject to the analysis below) I do not accept the suggested devastation. A few cents over four years when most have received huge returns is hardly devastating. Rather I suspect that they are doing everything in their power to assist Walker. Again it is hardly necessary for me to make a finding to such effect. The suggested devastation can only relate to the foregoing of $0.25 to $0.48 cents in the dollar forecast by Walker as the Mid to High range. However, there is nothing devastating about this as the figures are illusory, misleading, totally unsupported and nonsense. Setting aside the DOCA will not, when compared with a winding up, have any of the suggested consequences whether based on these figures or at all.
The critical matter and finding is that even assuming the genuineness of the vote (against the recommendation of the Administrators) and the suggested effect of setting aside the DOCA (which I very much doubt), the interests of justice in this case clearly must prevail. There are in my view serious commercial morality issues that require investigation in the public interest and in the interests of the creditors despite their position. As pointed out these considerations far outweigh what I have found to be the negligible returns under the DOCA. Of course there are other matters that have not been raised or discussed. One is the desirability of investigating why it was simply assumed that pooling of the investors in each of the Syndicate Companies was desirable.
In my opinion the matter cannot simply be reduced to a case of Walker over promising and under delivering extravagant and unrealistic returns and such under delivery (and the consequences thereof) essentially being assented to by the creditors. There is far more at stake. It is not simply a private matter between Walker or the Syndicate Companies and the creditors.
The operation of a Ponzi scheme and/or an unregistered MIS are serious matters. They require investigation. As pointed out there is a sufficient basis for such investigation. The existence of this basis is in my view sufficient given the very small return. If the returns were much higher, the position may be different when the required balancing act is undertaken. However this is not the case.
There is an obvious public interest in ensuring that funds advanced to promoters for investment purposes are protected and safe. In the last ten to twenty years investors have lost substantial funds and the law has developed in such a way so as to afford as much protection as possible. There were forty five Syndicate Companies and millions of dollars. The loss is over $16m. What went wrong and why are important issues affecting the public, public policy, regulation, commercial morality, and indeed the Investors despite their position. These issues cannot simply be ignored or swept under the carpet. The loss of the right to investigate is a very important matter in the circumstances of this case.
Although not part of my finding, I have a most uncomfortable feeling about this matter which I intend to express. The conduct of Walker, in numerous respects may fairly be criticised. This conduct paints a picture of wishing to avoid the winding up of the Syndicate Companies at all costs. Although, and I repeat again not a part of my decision, the following matters are worthy of note. First, a few days before the trial of a claim brought by the plaintiff for compensation, the Syndicate Companies went into voluntary administration. How convenient! Second, a few days before the trial before me, the Deed of Variation was executed removing Walker from any future position and in effect requiring him to pay the sum of $200,000, both critical matters to the case and the continued operation of the DOCA. No notice and no explanation were given. How convenient! Walker’s footprints are all over every aspect of the case yet he declined to give evidence. How convenient! Walker estimated returns reflected in the Mid and High ranges on attachments F to the Report – figures that he intended others to rely on and which they presumably did[78] - were unsubstantiated, misleading (and deceptive) and without any foundation. Finally the decision of the creditors in the face of a clear contrary opinion from the Administrators is peculiar to say the least.
[78]They all said they read the Report which included the extravagant returns in the Mid to High ranges and of course notwithstanding this range the opinion of the Administrators not to vote in favour of the DOCA. However the evidence of Grosvener and Gardiner (as set out in footnote 89) is that they did, in addition to the Report, rely on discussions and advice from Walker.
In summary, the matters and circumstances referred to are such that ‘the deed should be terminated for some other reason’ pursuant to s445D(1)(g) of the Act.[79] In the exercise of my discretion and for the reasons given the DOCA should be terminated. The negligible return to creditors (if any return at all) is far outweighed by the compelling need to investigate whether or not there will be a return to creditors although it can hardly be much less than the DOCA.
[79]To the extent that s445D(1)(f) constitutes a separate ground, I would for the reasons given terminate the DOCA on this ground. However, I have included this ground as part of the broad ground provided in s445D(1)(g).
J Disposition
The DOCA cannot and should not stand. It will be set aside. I will hear from the parties as to appropriate orders and costs.
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Schedule of Parties
| Eco Heat (Vic ) Pty Ltd (ACN 080 844 677) | Plaintiff |
| - And - | |
| The Syndicate Forty Four Pty Ltd (formerly known as The Syndicate Two Pty Ltd) (ACN 126 943 048) (Subject to Deed of Company Arrangement) | First Defendant |
| The Syndicate Forty Eight Pty Ltd (formerly known as The Syndicate Six Pty Ltd) (ACN 126 184 478) (Subject to Deed of Company Arrangement) | Second Defendant |
| The Syndicate Seven Pty Ltd (ACN 095 634 825) (Subject to Deed of Company Arrangement) | Third Defendant |
| The Syndicate Nine Pty Ltd (ACN 007 363 733) (Subject to Deed of Company Arrangement) | Fourth Defendant |
| The Syndicate Eleven Pty Ltd (ACN 121 115 348) (Subject to Deed of Company Arrangement) | Fifth Defendant |
| The Syndicate Twelve Pty Ltd (ACN 132 678 794) (Subject to Deed of Company Arrangement) | Sixth Defendant |
| The Syndicate Thirteen Pty Ltd (ACN 132 679 399) (Subject to Deed of Company Arrangement) | Seventh Defendant |
| The Syndicate Fourteen Pty Ltd (ACN 133 207 280) (Subject to Deed of Company Arrangement) | Eighth Defendant |
| The Syndicate Fifteen Pty Ltd (ACN 133 207 299) (Subject to Deed of Company Arrangement) | Ninth Defendant |
| The Syndicate Sixteen Pty Ltd (ACN 133 207 306) (Subject to Deed of Company Arrangement) | Tenth Defendant |
| The Syndicate Seventeen Pty Ltd (ACN 135 095 288) (Subject to Deed of Company Arrangement) | Eleventh Defendant |
| The Syndicate Eighteen Pty Ltd (ACN 135 095 760) (Subject to Deed of Company Arrangement) | Twelfth Defendant |
| The Syndicate Nineteen Pty Ltd (ACN 135 096 132) (Subject to Deed of Company Arrangement) | Thirteenth Defendant |
| The Syndicate Twenty Pty Ltd (ACN 135 096 409) (Subject to Deed of Company Arrangement) | Fourteenth Defendant |
| The Syndicate Twenty One Pty Ltd (ACN 136 703 065) (Subject to Deed of Company Arrangement) | Fifteenth Defendant |
| The Syndicate Twenty Two Pty Ltd (ACN 136 703 074) (Subject to Deed of Company Arrangement) | Sixteenth Defendant |
| The Syndicate Twenty Three Pty Ltd (ACN 136 703 083) (Subject to Deed of Company Arrangement) | Seventeenth Defendant |
| The Syndicate Twenty Four Pty Ltd (ACN 137 998 059) (Subject to Deed of Company Arrangement) | Eighteenth Defendant |
| The Syndicate Twenty Five Pty Ltd (ACN 137 998 086) (Subject to Deed of Company Arrangement) | Nineteenth Defendant |
| The Syndicate Twenty Six Pty Ltd (ACN 137 998 102) (Subject to Deed of Company Arrangement) | Twentieth Defendant |
| The Syndicate Twenty Seven Pty Ltd (ACN 140 182 387)(Subject to Deed of Company Arrangement) | Twenty-first Defendant |
| The Syndicate Twenty Eight Pty Ltd (ACN 140 182 449) (Subject to Deed of Company Arrangement) | Twenty-second Defendant |
| The Syndicate Twenty Nine Pty Ltd (ACN 140 182 501) (Subject to Deed of Company Arrangement) | Twenty-third Defendant |
| The Syndicate Thirty Pty Ltd (ACN 140 182 618) (Subject to Deed of Company Arrangement) | Twenty-fourth Defendant |
| The Syndicate Thirty One Pty Ltd (ACN 136 703 038) (Subject to Deed of Company Arrangement) | Twenty-fifth Defendant |
| The Syndicate Thirty Two Pty Ltd (ACN 143 440 626) (Subject to Deed of Company Arrangement) | Twenty-sixth Defendant |
| The Syndicate Thirty Three Pty Ltd (ACN 143 440 635) (Subject to Deed of Company Arrangement) | Twenty-seventh Defendant |
| The Syndicate Thirty Four Pty Ltd (ACN 143 440 644)(Subject to Deed of Company Arrangement) | Twenty-eighth Defendant |
| The Syndicate Thirty Five Pty Ltd (ACN 144 885 996) (Subject to Deed of Company Arrangement) | Twenty-ninth Defendant |
| The Syndicate Thirty Six Pty Ltd (ACN 144 886 000) (Subject to Deed of Company Arrangement) | Thirtieth Defendant |
| The Syndicate Thirty Seven Pty Ltd (ACN 144 886 019) (Subject to Deed of Company Arrangement) | Thirty-first Defendant |
| The Syndicate Thirty Eight Pty Ltd (ACN 144 886 037) (Subject to Deed of Company Arrangement) | Thirty-second Defendant |
| The Syndicate Thirty Nine Pty Ltd (ACN 144 886 046) (Subject to Deed of Company Arrangement) | Thirty-third Defendant |
| The Syndicate Forty Pty Ltd (ACN 144 886 055) (Subject to Deed of Company Arrangement) | Thirty-fourth Defendant |
| The Syndicate Forty One Pty Ltd (ACN 132 483 517) (Subject to Deed of Company Arrangement) | Thirty-fifth Defendant |
| The Syndicate Forty Two Pty Ltd (ACN 099 193 183) (Subject to Deed of Company Arrangement) | Thirty-sixth Defendant |
| The Syndicate Forty Three Pty Ltd (ACN 125 934 223) (Subject to Deed of Company Arrangement) | Thirty-seventh Defendant |
| The Syndicate Forty Five Pty Ltd (ACN 127 128 545) (Subject to Deed of Company Arrangement) | Thirty-eighth Defendant |
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