El-Saafin v Franek (No 2)

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT
TECHNOLOGY, ENGINEERING AND CONSTRUCTION LIST

S CI 2018 01685

HASSAN EL-SAAFIN	First Plaintiff
MOHAMAD EL-SAAFIN	Second Plaintiff
v
MARK FRANEK and others according to the schedule	Defendants

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JUDGE:	LYONS J
WHERE HELD:	Melbourne
DATES OF HEARING:	24, 25 and 26 October 2018
DATE OF RULING:	9 November 2018
CASE MAY BE CITED AS:	El-Saafin & Anor v Franek & Ors (No 2)
MEDIUM NEUTRAL CITATION:	[2018] VSC 683

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CORPORATIONS – Application by administrators of company for directions of Court - Section 90-15 of schedule 2 to the Corporations Act 2001 (Cth) – Extent of power – Principles to be applied

CORPORATIONS – Application to bring proceedings in name of company – Statutory derivative action - Part 2F.1A of the Corporations Act 2001 (Cth) – Section 237 – Company in administration – Not available – Inherent jurisdiction of Court

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr I Upjohn QC with Mr B Mason	Hicks Oakley Chessell Williams
For the First and Fourth Defendants	Mr J Evans QC with Mr P Miller	Mark J Halse
For the Second and Third Defendants	–	Capstone Koroneos Legal
For the Administrators	Dr A Trichardt	Charles Fice Solicitors

HIS HONOUR:

INTRODUCTION AND SUMMARY OF CONCLUSIONS

There are two applications for determination in this proceeding. They arise as a consequence of the reasons for judgment I delivered on 15 August 2018 on the plaintiffs’ application for an interlocutory injunction: El-Saafin & Anor v Franek & Ors [2018] VSC 450 (‘Earlier Judgment’)[1].
[1]In these reasons, I will use the terms defined in the Earlier Judgment. However in these introductory paragraphs, I will refer to the terms already defined in the Earlier Judgment in parenthesis for convenience.

As the Earlier Judgment records, the plaintiffs are the directors of Saafin Constructions Pty Ltd (the Company). The first defendant (Franek) was from 18 April 2018 until 27 July 2018 the sole director and shareholder of the fourth defendant (MAG). On 27 July 2018, Franek resigned as a director of MAG and transferred the shares in MAG to Mekkya and Mekkya became to sole director of MAG.

One of the principal issues in this proceeding is the amount of debt subject to the security interest of MAG. In early May 2018, MAG appointed the second and third defendants as the receivers and managers of the Company (the Receivers). In late June 2018, MAG and the Receivers asserted that the debts of the company secured in favour of MAG totalled $8 million and included debts assigned to MAG of approximately $3.6 million on 20 June 2018 (the 20 June debts). The 20 June debts were assigned to MAG by Mekkya or his companies, and by Sacca. The plaintiffs have at all times accepted that the debts of the Company due, payable and secured total approximately $4.4 million but have disputed that the 20 June debts are secured or that they are due and payable.

On 20 July 2018, MAG sold the substantial asset of the Company (the North Melbourne property) for $4.5 million to AAGG by private sale. The sole director of AAGG is Mekkya: its shareholders are Mekkya and Sacca. The proceeds of sale were applied by MAG to satisfy the 20 June debts rather than the debts which are acknowledged by the plaintiffs to be due and secured. The plaintiffs seek to challenge that sale in this proceeding.

On 3 August 2018, MAG appointed Messrs Glavas and Kucianski as administrators of the Company (the ‘Administrators’).

On 7 August 2018, I made interlocutory orders restraining the defendants from taking further steps to enforce any securities and restraining AAGG from dealing with the North Melbourne property (the ‘restraining orders’). I adjourned the further hearing of the proceeding to enable the Administrators to consider whether they wished to pursue this proceeding and, if not, whether they would consent to the plaintiffs pursuing the proceeding under s 440D of the Corporations Act 2001 (Cth) (the ‘Act’). My reasons for doing so are contained in the Earlier Judgment.

The first application is by the plaintiffs. By summons dated 30 August 2018, amended on 26 October 2018, they seek leave to:

(1)bring this proceeding on behalf of the Company pursuant to s 237 of the Act, the inherent jurisdiction of the Court or alternatively s 90-15 of the Insolvency Practice Schedule (Corporations), being Schedule 2 to the Act (‘Schedule 2’);
(2)join the Company as a party to the proceeding;
(3)prosecute the proceeding pursuant to ss 198G and 440D of the Act (the ‘plaintiffs’ application’).

The second application is by the Administrators. By summons dated 11 September 2018, amended on 25 October 2018, the Administrators seek that, pursuant to s 90-15 of Schedule 2, the Court direct that the Administrators may properly and justifiably enter into and give effect to:

(1) the Deed of Assignment and Release executed on 7 September 2018 (the ‘September Deed’); and

(2) the Deed of Release executed on 24 October 2018 (the ‘October Deed’) (together, the ‘Deeds’) (the ‘Administrators’ application’).

In summary, pursuant to these Deeds, the Administrators assigned to Trade On International Pty Ltd, whose directors and shareholders are Mekkya and Sacca (‘Trade On’), for $100,000 all claims made in this proceeding available to the Company and all claims now or in the future available to the Company against MAG, AAGG or Trade On. Releases were also given in respect of claims not able to be assigned. This is in circumstances where counsel for the defendants[2] acknowledged that one of the purposes of appointing the Administrators was to seek to obtain such an assignment for the MAG parties to prevent the plaintiffs or the Company from continuing with any other claims against them and to validate the exercise of MAG’s sale of the North Melbourne property to AAGG.
[2]The legal advisers for the first and fourth defendants also act for, Mekkya, Sacca, AAGG and Trade On, collectively the ‘MAG parties’

Given the interrelationship between the two applications, they were heard together. A number of legal and factual issues were raised in these applications. The legal issues included the nature of the power under s 90-15 of Schedule 2 and whether s 237 of the Act applies to companies in administration. These are complex issues.

In summary, the defendants submitted that:

(1) the Court should exercise its power to make a direction in accordance with the Administrators’ application in circumstances where:

(a) the Company was insolvent and had no prospect of trading out of its financial difficulties even if the proceeding was successful; and

(b) there was no challenge to the propriety of the Administrators entering into the Deeds: what was obtained was a fair value of the causes of action;

(2) the Court did not have power to make orders pursuant to s 237 of the Act when the Company is in administration; even if the Court does have power under s 237, s 90-15 of Schedule 2 or its inherent jurisdiction, the Court should not make the orders sought in the plaintiffs’ application given the matters set out in paragraph (1)(a) above.

The Administrators adopted these submissions.

In summary, the plaintiffs submitted:

(1) the Court does not have power under s 90-15 of Schedule 2 to make the orders sought in the Administrators’ summons: those orders fall outside the scope of directions the Court can make;

(2) even if the Court does have such power, it ought not exercise its discretion here as:

(a) the assignment is not consistent with the purpose and object of the administration, and it is not for the advantage of the administration, particularly given the breadth of the claims assigned; and

(b) MAG has embarked upon a process, equivalent to an abuse of process, to frustrate the plaintiffs’ rights by a series of steps culminating in the purchase (by assignment) of the causes of action sought to be pursued from the Administrators, which MAG appointed;

(3) under s 237, s 90-15 of Schedule 2 or its inherent jurisdiction, the Court should make the orders sought in the plaintiffs’ application for a number reasons, including paragraph (2) above and as they had established that there are reasonable prospects of the Company obtaining sufficient finance to enable it to complete the North Melbourne development and to satisfy all of its debts.

There is a need for a decision to be delivered as soon as possible in light of the fact that the next creditors meeting is to be held on 12 November 2018.

For the reasons that follow, I have concluded in respect of the Administrators’ application that:

(1) the Court does not have power under s 90-15 of Schedule 2 to make the orders sought in the Administrators’ application; and

(2) even if the Court had power, in the exercise of my discretion under s 90-15 of Schedule 2, I decline to make the orders sought in the circumstances of this application.

Further, I have concluded in respect of the plaintiffs’ application that:

(1) s 237 of the Act does not apply to a company in administration;

(2) I am not presently minded to exercise my discretion under the inherent jurisdiction of the Court to grant the plaintiffs leave to bring this proceeding. I consider that the plaintiffs’ application should be adjourned pending the outcome of the creditor’s meeting to be held on 12 November 2018; and

(3) as a result of the conclusion I have reached in (2) above, I will also adjourn the plaintiffs’ application for leave to bring the proceeding pursuant to s 90-15 of Schedule 2.

BACKGROUND AND EVIDENCE
Material Relied Upon

The plaintiffs relied upon:

(1)the affidavits of Harish Nair sworn 5 September 2018, 14 September 2018 and 15 October 2018;

(2)       the affidavit of Dr Mahmoud Hegazy sworn 14 September 2018;
(3)       the affidavit of Ahmad Ayad sworn 23 October 2018; and
(4)       the affidavits of Mark Halse sworn 2 October 2018 and 9 October 2018.

The Administrators relied upon:

(1)the affidavits of Ivan Glavas sworn 11 September 2018, 13 September 2018 and 19 October 2018;

(2) the affidavit of Christopher Charles sworn 17 September 2018; and
(3)the affidavit of Mark Halse sworn 16 September 2018 (the ‘16 September Halse affidavit’).

The first and fourth defendants (who I will refer to in this judgment as the ‘defendants’) relied upon:

(1) the affidavit of Mark Franek sworn 2 July 2016 (the ‘Franek affidavit’);

(2) the affidavits of Mark Halse sworn 6 August 2018 and 16 September 2018; and

(3) the documents produced pursuant to:

(a) the subpoena addressed to Black Arrow Developments Pty Ltd (‘Black Arrow’)[3]; and
[3]Exhibit D1. Wael is the plaintiffs’ brother.

(b) the notice to produce to the plaintiffs;

(c) the subpoena to Wael El-Saafin (‘Wael’)[4]; and

(4) the ASIC search of 65-67 Arden Pty Ltd (‘Arden’)[5].

[4]Exhibit D2. As set out below, Arden has been controlled by Wael from June 2018 with the object of completing the development of the North Melbourne property.

[5]Exhibit D3.

The Background Facts to 3 August 2018

The relevant facts leading up to the appointment of the Administrators on 3 August 2018 are set out in the Earlier Judgment. For convenience, I set out [7]-[25] of the Earlier Judgment as follows:

The Company owns various properties including the property at 65-67 Arden Street North Melbourne (the ‘North Melbourne property’) on which is being constructed a development consisting of 25 apartments and two commercial units. The Company entered into a building contract with New Concept Homes Pty Ltd (the ‘Builder’) on 19 April 2015 to develop the North Melbourne property (the ‘Building Contract’). The contract price was $4.4 million. The works did not progress in accordance with the Building Contract. On 5 April 2018, the Company wrote to the Builder terminating the Building Contract.
On 28 October 2016,[6] the Company entered into a series of agreements with Balanced Securities Pty Ltd (‘Balanced Securities’) in relation to an advance of up to $6.2 million to develop the North Melbourne property. These included a Facility Agreement and a General Security Deed (‘GSD’). Each of the plaintiffs, Wael El-Saafin (‘Wael’) and Lobna El-Saafin (‘Lobna’) were guarantors under the Facility Agreement. The Company granted a mortgage over the North Melbourne property which was registered. A second ranking mortgage was also granted over the property at 3 Ball Court, Bundoora (the ‘Bundoora property’) which is the family home of Mohamad.
[6]The date was recorded in error as 28 October 2018 in the Earlier Judgment.
On 18 April 2018, Balanced Securities as assignor entered into a Deed of Assignment with Franek or his nominee assigning all its right, title and interest under the Facility Agreement, the GSD and the mortgages (the ‘Balanced Securities assignment’). It recorded that the amount owing under the Facility Agreement as at 18 May 2018 was $2,999,649.30 (the ‘Balanced Securities loan’). Subsequently, Franek nominated MAG (which was incorporated on 26 April 2018) as the assignee.
On 9 April 2018, Franek purported to appoint the second and third defendants as the receivers of the Company pursuant to the terms of a separate General Security Agreement dated 18 May 2017 between Wael, Bayda El Saafin and Franek in relation to an advance from Franek to Wael of $311,000 in January 2016 (the ‘Franek loan’ and the ‘Franek GSA’). The Company granted a mortgage over the property at 2 Lynwood Crescent Lower Plenty in support of the Franek loan (the ‘Lower Plenty property‘ and the ‘Lower Plenty mortgage’). The Lower Plenty property is the former family home of the plaintiffs and where they grew up but has since been rented out.
The plaintiffs challenged the basis upon which the Receivers were appointed under the Franek GSA and raised these issues with both Franek and the Receivers. On 3 May 2018, Franek assigned all his right, title and interest in the Franek GSA (including the Lower Plenty mortgage) to MAG. On 4 May 2018, Franek and/or MAG instructed the Receivers to resign. On 7 May 2018, the Receivers did so. However, on that day, they were re-appointed by MAG as the receivers of the Company under the GSD.
From 9 May 2018, the plaintiffs sought details of the payout figure of the Balanced Securities loan to terminate the Receivers’ appointment under the GSD both from the Receivers and from Franek and MAG. Those details were not provided until 25 June 2018. There has been no explanation as to why the details could not be provided, particularly in light of the figure contained in the Balanced Securities assignment.
On 25 June 2018, the solicitor for Franek and MAG, Mark Halse (‘Halse’), advised the plaintiffs that the payout figure was $8,259,990.83. The reason for the enormous difference between this amount and the Balanced Securities loan (i.e. $2,999,649.30) referred to in the Balanced Securities assignment was threefold. First, the Balanced Securities loan, including interest and costs, had grown to 3,265,742.82. Second, the amount claimed included the Franek loan plus interest, then totalling approximately $1,140,000. Third, it included the 20 June debts of $3,579,105.03. On 20 June 2018, MAG entered into assignments in respect of these debts allegedly owing by the Company.
The 20 June debts were made up as follows:
(1)a debt allegedly owed to Mekkya in his personal capacity of $982,848.22;
(2)a debt allegedly owed to Mekkya trading as ‘New Concept Designs’ of $174,907.59;

(3) a debt allegedly owed to the Builder of $521,349.22; and
(4) a debt allegedly owed to George Sacca of $1,900,000.
On 27 June 2018, the plaintiffs offered to pay out the Balanced Securities loan claimed by MAG on the basis that the North Melbourne mortgage be discharged. MAG and the Receivers maintained that the Balanced Securities loan, the Franek loan and the 20 June debts were all the subject of the security.
On 27 June 2018, on the application by the plaintiffs, I made interim orders restraining the Receivers and Franek (including in his capacity as a director of MAG) from taking steps to realise, sell or otherwise dispose of the ‘Securities’ as that term is defined in the Facility Agreement. At that time, the Receivers were threatening to sell the Lower Plenty property.
The interlocutory application came on for hearing before Kennedy J on 3 July 2018. Her Honour dissolved the interim orders but the Receivers gave an undertaking not to sell the ‘Securities’ as that term is defined in the Facility Agreement until the determination of the interlocutory application.
The interlocutory application came on for hearing again on 17 July 2018 before Kennedy J. On that day, the Receivers gave an undertaking in a similar form until the determination of the interlocutory application which was then fixed for 7 August 2018.
One of the issues before her Honour on 17 July 2018 was whether the Receivers were purporting to exercise powers as mortgagee to sell the assets of the Company. This was because the defendants contended no injunction should be granted unless the plaintiffs tendered the full amount which MAG asserted was secured (including the 20 June debts) based upon Inglis v Commonwealth Trading Bank of Australia[7] (‘Inglis’). Her Honour made orders for Franek and MAG to provide a memorandum setting out the precise basis upon which the Receivers were entitled to sell the North Melbourne property and the Lower Plenty property. Her Honour also made orders for the filing of material and submissions for the interlocutory application to be heard on 7 August 2018.
At the hearing on 17 July 2018, Kennedy J was not informed that, on 9 July 2018, MAG had entered into a contract with AAGG Developments Pty Ltd (‘AAGG’) to sell the North Melbourne property for $4,500,000 with settlement to take place on 20 July 2018. AAGG was registered on 5 July 2018. Mekkya is the sole director of AAGG. The shareholders of AAGG are Mekkya and Sacca. As noted above, Mekkya controls the Builder, and the Builder, Mekkya and Sacca assigned debts alleged owed by the Company to MAG on 20 June 2018 (i.e. the 20 June debts). The circumstances of the sale to AAGG and the relationship between Franek, MAG, AAGG, Mekkya and Sacca have not been explained. I note that counsel for the plaintiffs submitted that “MAG” in fact represents the initial of the first name of each of Franek, Mekkya and Sacca.
On 19 July 2018, Halse filed a memorandum pursuant to the orders of Kennedy J to the effect that the Receivers were in possession of the North Melbourne property and the Lower Plenty property under the terms of the GSD and not under the terms of the mortgages granted pursuant to the GSD. It is now plain that MAG had exercised powers as mortgagee of the North Melbourne property by entering into the contract of sale on 9 July 2018. It has not been explained why MAG and Franek did not inform the court of the contract to sell the North Melbourne property either at the hearing on 17 July 2018 or in the 19 July memorandum. It may be that the court would have had a very different view about the adequacy of the undertakings of the Receivers if it had been informed of these matters.
Settlement of the sale of the North Melbourne property took place on 20 July 2018 when the purchase price was paid. Halse acted as solicitor for both MAG as vendor and AAGG as purchaser. This is evident from the transfer of land signed by Halse for both MAG and AAGG. That transfer is in fact dated 22 June 2018. Mr Halse has deposed this date was ‘human error’ and that the transfer was not prepared until 20 July 2018.

In any event, neither the sale nor the settlement of the sale of the North Melbourne property was known to the plaintiffs. On 19 July 2018, the solicitors for the plaintiffs wrote to Halse stating the plaintiffs were ready, willing and able to settle the Franek loan, the Balance Securities loan and associated costs at 3pm on 25 July 2018 in return for a release of the North Melbourne mortgage. Halse did not reply to that letter until 25 July 2018 when he advised the plaintiffs that MAG had exercised its power of sale over the North Melbourne property for $4,500,000.
As noted above, on 27 July 2018, Franek resigned as a director of MAG and transferred his shares in MAG to Mekkya and Mekkya became the sole director of MAG. The reason for this has not been explained.
On 3 August 2018, MAG appointed administrators to the Company under s 436C of the Corporations Act 2001 (Cth) (the ‘Act’).
[7](1972) 126 CLR 161.

New Facts before 3 August 2018

Events that took place before 3 August 2018 relevant to these applications have come to light since the Earlier Judgment was delivered. These are set out in the affidavit of Dr Hegazy. In summary, Dr Hegazy was introduced to the plaintiffs and Wael by Mekkya in 2014. As a result, he invested in the development of the North Melbourne property with a business partner, Dr Atalla. Dr Hegazy deposed about a plan developed by Mekkya and Sacca from about 2018 for them to take control of the North Melbourne property and its development by acquiring and exercising the rights of the Company’s secured creditors (the ‘Plan’).[8] There was no evidence from Mekkya or Sacca disputing Dr Hegazy’s evidence.
[8]In this context I note that Mekkya’s company (New Concept Homes Pty Ltd) had been engaged by the Company as the Builder of the North Melbourne development.

In the course of oral argument, senior counsel for the defendants acknowledged that to achieve the commercial goal of getting the money Mekkya and Sacca alleged they were owed by the Company, Mekkya and Sacca through the MAG parties (as he submitted they were legally entitled to do):[9]
[9]Transcript of proceedings, El-Saafin & Anor v Franek & Ors (Supreme Court of Victoria, S CI 2018 01685, Lyons J, 24-26 October 2018), 137, 143-4, 147.

(1) acquired first mortgage rights in respect of the Balanced Securities loan and the Franek loan that were assigned to MAG (which was set up for this purpose);

(2) assigned the 20 June debts owing to them to MAG;

(3) appointed the Receivers;

(4) appointed the Administrators, one of the purposes of which was to seek to purchase the claims made or which could be made against the MAG parties and to validate the exercise of MAG’s power of sale of the North Melbourne property to AAGG; and

(5) purchased those claims against them by assignment from the Administrators after a process in which the plaintiffs took part.

The evidence of Dr Hegazy about the Plan was as follows. In early 2018, Mekkya told Dr Hegazy and Dr Atalla that:

(1)Mekkya knew of a loan agreement between the Company and Franek (ie the Franek Loan and the Franek GSA) and that Mekkya intended to purchase those agreements from Franek with the help of a solicitor, Omar El-Hissi (‘El-Hissi’);
(2)Mekkya was aware, and had evidence, that the debt owed by the Company under the Franek Loan did not exceed $100,000; and
(3)Mekkya said he wanted to use the Franek agreements to take over the North Melbourne property i.e the Plan.

Dr Hegazy attended other meetings with Mekkya, Sacca and Dr Atalla in about February 2018 to May 2018, where:

(1) Mekkya stated that Dr Hegazy should use the investment document ‘against the Company’ and that there was a possibility of lodging a caveat on the North Melbourne development and sending a letter of demand ‘to derail the project’.

(2) Mekkya and Sacca discussed the Plan regarding the Franek Loan and lodged caveats over the North Melbourne property and asked the doctors whether they wished to be part of the Plan: if so, this would ensure that Mekkya and Sacca could follow through with appointing a receiver to the Company and then subsequently appointing a liquidator to sell the project at an auction at a reduced price rather than the actual value of the property; and

(3)Mekkya and Sacca asked the doctors to contribute towards the cost of executing the Plan and stated that this was the only way to get ‘our investment money back with profits’.

Dr Hegazy made his own inquires and determined the Company has sufficient funds to complete the development. As a result, Dr Hegazy said to Mekkya and Sacca that he did not wish to be part of the Plan. However, Dr Hegazy and Dr Atalla attended another meeting with Mekkya and Sacca on 14 May 2018 at around 3.00 pm at their office at Tullamarine. At that meeting, Mekkya said he had no intention of negotiating a deal with the Company and was very confident in executing his plan to take over the North Melbourne project.

Dr Hegazy deposed to a number of conversations with Dr Atalla on 28 May, 29 May, 12 June, 24 July and 3 August 2018. In these conversations, Dr Atalla informed Dr Hegazy of Dr Atalla’s conversations with Mekkya.

In the 28 May 2018 conversation, Mekkya told Dr Atalla that, if Dr Atalla wished to pursue his investment contract in Court against the Company, then El-Hissi was happy to pursue the matter free of cost. In the 29 May 2018 conversation, Mekkya told Dr Atalla that Dr Atalla should file a proceeding against the Company and that it would cost nothing with the help of El-Hissi.

In the 12 June 2018 conversation, Mekkya offered for Dr Atalla to purchase the Saafin former family home (i.e. the Lower Plenty property) on the condition that Dr Atalla help Mekkya execute the plan to liquidate the Company. Mekkya subsequently provided Dr Atalla with documents regarding the Lower Plenty property in order to obtain bank approval. In the 24 July 2018 conversation, Mekkya told Dr Atalla that the North Melbourne property had been sold to AAGG. Mekkya said that he was very happy ‘as he believed he had found a way to go around the Court’s orders to achieve this’.

On around 30 July 2018, Dr Hegazy was with Dr Atalla when he received a call from Mekkya on a speaker phone which Dr Hegazy overheard. In that conversation, Mekkya said:

(1)he was planning a surprise for the Saafin brothers in Court as he was in the process of appointing an administrator of the Company;
(2)the Company would not be able to continue with the proceedings as the liquidator would take them over and put the Company into liquidation; and
(3)he would sell the El-Saafin’s houses and the rest of their assets to prevent them financially from making any claim against him.

In the 3 August 2018 conversation, Mekkya told Dr Atalla that the administrator had been appointed and that ‘at the next court hearing the judge would not listen to the Saafin brothers and the case would be dismissed’.

Relevant Facts Since 3 August 2018

There are also relevant events since 3 August 2018. As noted, on 7 August 2018 I made the restraining orders and adjourned the further hearing of the proceeding until 10 September 2018 to enable the Administrators to determine whether they wished to pursue this proceeding and, if not, whether they would consent to the plaintiffs pursuing it under s 440D of the Act.

The Administrators and/or their solicitor, Mr Charles, met with the legal advisors of the plaintiffs after the hearing on 7 August 2018 and later on 13 August 2018 to better understand the allegations in the proceeding. As a result, documents relating to the proceeding were electronically provided by the plaintiffs by 10 August 2018. On 21 August, Mr Charles wrote to Mr Nair requesting the plaintiffs’ reasons for contending that either the Administrators should continue the proceeding themselves or provide their consent to the plaintiff to do so.

Meanwhile, on 13 August 2018, Halse, on behalf of the defendants, wrote to one of the Administrators, Mr Kucianski, setting out the reasons why, in his clients’ opinion, the proceeding lacked merit. There was a meeting between Mr Kucianski (one of the Administrators), senior counsel for the defendants and Mr Mekkya on 17 August 2018. This meeting was followed by an email from Halse to Mr Kucianski and others dated 22 August 2018 at 6:48 pm. In that email, the defendants:

(1)advised that the Administrators were entitled to sell all of the causes of action which had been asserted on behalf of the Company in the proceeding pursuant to s 100-5 of Schedule 2;
(2)stated that MAG made an offer to pay $50,000 for the assignment of all legal and beneficial rights, title and interest in the issues raised at any time in the Supreme Court proceeding and to release MAG and AAGG from any claim which the Company has or may have in relation to the North Melbourne property including the exercise of MAG’s power of sale as mortgagee in possession;
(3)stated that the settlement could be made conditional upon it being approved by the Court in the sense of it being subject to the Administrators obtaining a direction from the Court approving the decision to enter into the settlement; and
(4)proposed to provide the sum of $10,000 in the first instance to enable the Administrators to seek their own independent legal advice with a view to entering into the above transaction as pre-payment of part of the settlement sum.

On 23 August 2018, Mr Charles wrote to Halse. He referred to the 22 August email. He noted that, at that time, the Administrators were unable to state whether they intended to take over the proceedings or to consent to the plaintiffs to continue to do so. The letter continued:

Turning to your offer, the Administrators would be willing to accept it, subject to contract, provided that:
(a)the settlement is conditional upon it being approved by the Supreme Court;

(b)       the settlement sum is increased to $100,000;
(c)       the ‘first instance’ amount of $10,000 is increased to $20,000;
(d)      you draft the deed.

The reasons for the Administrators’ willingness at this time to accept this offer with the proposed variation has not been disclosed. I note that at this time the Administrators had yet to receive a response to Mr Charles’ letter to Mr Nair dated 21 August 2018 requesting the plaintiffs’ reasons for contending that either the Administrators should continue the proceeding themselves or provide their consent to the plaintiff to do so.

In relation to the plaintiffs, the 23 August letter to Halse noted that the Administrators were asking the plaintiffs whether they wished to buy the claims in the proposed amended statement of claim in this proceeding (‘PASOC’) from the Administrators and, if so, to make an offer by 27 August 2018. Consequently, on 23 August 2018, Mr Charles wrote to Mr Nair advising that, pursuant to s 100-5 of Schedule 2, the Administrators are entitled to sell all legal and beneficial rights, title and interest in the issues raised at any time in the Supreme Court proceedings (the ‘Proceeding Rights’). He asked whether the plaintiffs wished to purchase the Proceeding Rights and if so, to make an offer by no later than Monday, 27 August 2018.

Mr Glavas deposes that following without prejudice communications between Mr Charles and Mr Halse, on 29 August 2018, the Administrators received an offer from Trade On. However, it appears that Halse, on behalf of Trade On, sent an email to Mr Charles copied to Mr Evans, Mr Glavas, Mr Miller, Mekkya and El-Hissi noting that ‘my client accepts your proposal’ and attached a draft deed of assignment consistent with Mr Charles letter of 23 August set out above. The draft deed was between the Administrators and Trade On.

In summary, the draft deed provided that, in consideration of the assignment price of $100,000 ($20,000 payable on execution of the deed and $80,000 payable one day after Court approval), the Administrators agreed to assign to Trade On all of the legal and beneficial rights, title and interest in the claims made by the directors in the proceeding and all claims now or in the future available to the Company against MAG or AAGG, or any other party.[10]
[10]Exhibit IG-3 to the affidavit of Ivan Glavas sworn 11 September 2018.

On 30 August 2018, Mr Charles wrote to Mr Nair referring to his letters dated 21 and 23 August 2018. In that letter he advised that, absent any responses to those letters, the Administrators had determined that they:

(1) did not consent to your clients proceeding with the proceeding;
(2)did not wish to pursue the proceeding in their capacity as the Company’s administrators; and
(3)wished to accept the offer from Trade On to purchase the Proceeding Rights subject to conditions including Court approval.

Mr Nair replied by email on 30 August 2018 advising that he would provide his clients’ response in the next two days. It appears that, on that day, Mr Nair made an offer to Mr Charles that the plaintiffs would purchase the Proceeding Rights with an initial payment of $25,000 within four weeks of the acceptance of the offer and a further payment of $50,000 upon finalisation of the litigation. The offer was open for acceptance until 4:00 pm on 7 September 2018. The offer was not produced but is referred to in Mr Charles’ letter to Mr Nair dated 6 September 2018 referred to below.

The plaintiffs’ application was issued on 30 August 2018. On that day, the Administrators issued their report to the creditors on the affairs of the Company (the ‘Administrators’ Report’). I will refer to this later in these reasons.

Mr Nair wrote a letter to Mr Charles on 3 September 2018, setting out their detailed reasons for the plaintiffs contending that the Administrators should provide their consent for the plaintiffs to pursue these proceedings under s 440D of the Act. In relation to the Company’s costs and exposure of the proceedings, the plaintiffs agreed to be jointly and severally liable for such costs and indicated that they were willing to give the Administrators a suitably drafted indemnity.

On 3 September 2018, Mr Charles sent an email to Halse attaching an amended draft deed: the email stated that the changes were because the Administrators ‘did not consider it appropriate to give warranties and releases or agree to confidentiality’. In that email, Mr Charles also advised that the plaintiffs had made an offer to purchase the choses in action which Mr Charles advised was ‘not as good or as certain as the offer of your clients’. Later on 3 September 2018, Halse sent a further marked up version of the draft deed with minor changes and a clean copy for execution.

On 4 September 2018, Mr Charles sent an email to Mr Halse copied to Mr Evans and Mr Glavas. It attached a revised draft deed deleting the assignor’s warranties in clause 3.2 and adding item 9 of Special Condition 5. The draft attached was not exhibited. Mr Charles advised that he hoped the deed would be executed on 6 September 2018. Mr Halse replied by email on the evening of 4 September 2018 advising that he was ‘ok’ with the changes, that he had sent them for instructions and would confirm the position tomorrow.

On 6 September 2018, Mr Charles sent a letter to Mr Nair advising that the Administrators had decided to accept the offer from Trade On for the Proceeding Rights because it was superior to the plaintiffs’ offer. A copy of the then current draft deed was attached. In that letter, Mr Charles confirmed that, notwithstanding the matters set out in Mr Nair’s letter of 3 September 2018, the Administrators’ position remained that it did not consent to the plaintiffs pursuing the proceeding and did not wish to pursue the proceeding in their capacity as administrators.

However, at 12:14 pm on 6 September 2018, Mr Charles wrote to Halse regarding the draft deed. He proposed amendments to ensure that the assignment price was received before the hearing of the summons for approval and that the definition in paragraph (a) of ‘Choses in Action’ be amended.

Halse sent an email to Mr Charles on 6 September 2018 at 3:53pm. He advised that the amendment to the definition of ‘Chose in Action’ was accepted. He stated that was always the intention that the $80,000 would be paid on assignment, which was contingent upon the successful Court application. He proposed that $80,000 be paid on filing of the application to be held by Mr Charles in his account and to be released upon Court approval. Mr Halse sent a revised deed incorporating these changes later that day at 4:05pm.

The Administrators did not consider that this proposal was acceptable. I do not know why. However, Mr Charles sent an email to Mr Nair at 5:45pm on 6 September 2018. It attached a draft deed between the Administrators and Trade On. It stated that, in the opinion of the Administrators, the terms of the draft deed were superior to the plaintiffs’ offer contained in the email of 30 August 2018. It stated that the deal with Trade On had ‘fallen through at the 11^th hour because Trade On wishes to withhold $80,000 of the purchase price and pay it only on success, that is upon the Court giving its imprimatur to an assignment of the choses in action’. The letter asked whether the plaintiffs wished to match the offer in the attached version of the deed and invited them to make any necessary amendments overnight for the purpose of it being considered by the Administrators. The letter confirmed again the Administrators’ position that they did not consent to the plaintiffs conducting the proceeding and did not wish to pursue the proceeding on their own behalf.

Before the plaintiffs responded to that offer, on 7 September 2018, at 12:17pm, Halse wrote to Mr Charles stating that his client agreed to the Administrators’ amendments to the deed as set out in the 6 September email. As a result, it appears that on that day the September Deed (in fact dated 4 September 2018) was executed by the Administrators and the directors of Trade On, Mekkya and Sacca. Further, Trade On transferred $20,000 to the Administrators by electronic transfer on that day.

Later, on 7 September 2018, Mr Nair advised Mr Charles (after Mr Nair had been told that Trade On had accepted the Administrators’ offer) that the plaintiffs wished to amend their offer by offering $100,000 payable on 10 September 2018. Mr Charles told Mr Nair that the agreement with Trade On had already been signed.

Mr Glavas’ affidavit sworn 11 September 2018 records that the $80,000 was to be paid one day after the Administrators’ application (and material) was filed. The Administrators did not depose to the reasons why they entered into the September Deed. However, the Administrators acknowledged that, in the time available since their appointment, they were not in a position to properly consider the merits of the Company’s claims in the proceeding before entering into the September Deed.

Steps In The Proceeding Since 10 September 2018

The proceeding returned before me on 10 September 2018. On that day, orders were made for the Administrators to file their summons by 11 September 2018, and for the plaintiffs’ application and the Administrators’ application to be heard on 17 September 2018. In addition, I granted leave for the plaintiffs to serve subpoenas on AAGG, Trade On, Mekkya and Sacca.

On 17 September 2018, some documents were produced in response to those subpoenas and in response to notices to produce to Franek and MAG. Issues were raised about adequacy of production and claims for privilege. As a result, on 18 September 2018, I made orders by consent for these issues to be progressed in late September and early October 2018. A significant number of further documents were produced. As a result, Judicial Registrar Matthews made orders in relation to the claims for privilege on 11 October 2018.

The two applications were then listed for hearing on 24 October 2018. On that day, I raised issues about whether the Administrators were able to assign causes of action personal to the Company, referring for example to Mijac Investment Pty Ltd v Graham.[11]
[11](2009) 72 ACSR 684.

In response, counsel for the defendants advised that Trade On may wish to enter into a deed varying or clarifying the September Deed. As a result, on 25 October 2018, the Administrators filed an affidavit of Mr Glavas informing the Court that they had entered into a variation of the September Deed on 25 October 2018 with Trade On ‘in case any of the Choses in Action purported to be assigned under the [September Deed] are or may not be capable of assignment’. The October Deed was executed not only by the Administrators and Trade On: MAG and AAGG were parties to the October Deed. The reasons for the October Deed were not otherwise explained by the Administrators.

The Terms of the September Deed and the October Deed

The September Deed is between the Administrators, the Company and Trade On. The material clause is clause 3. It relevantly provides that:

In consideration of [Trade On] paying the Assignment Price in accordance with Payment method or otherwise entering into this Deed, [the Administrators] hereby assign[s] and convey[s] to [Trade On] on the Assignment Date, and [Trade On] agrees to receive, all legal and beneficial rights, title and interest in the ‘Chose In Action’ absolutely; …

There are two things to note. First, the definition of ‘Chose in Action’ is very broad. It is defined to mean:

(a) all of the Claims made in the Proceeding available to [the Company] including, without limitation, all claims made by the Directors in the Proceeding against the Defendants which are available to [the Company];

(b) any Claim available, now or in the future, to [the Company] against MAG or AAGG, or any other party, in respect of the [North Melbourne] property… , and [the Lower Plenty property]….

Second, some of the other defined terms particularly relating to timing and conditions are not clear. The Assignment Price is defined as $100,000, with Payment Method relevantly defined as $20,000 payable on the execution of the Deed and $80,000 payable on the Assignment Date.

The Assignment Date is defined as within one business day upon satisfaction of Special Condition 1. The ‘Special Conditions’ is defined to mean those in Item 9. Special Condition 1 of Item 9 provides that the Administrators shall immediately on the signing of the deed take all necessary steps to obtain approval by the court for the Assignment including by filing the Administrators’ application (with material) within 2 business day of execution or payment of the $20,000 and by causing those documents to be served on the other parties to the proceeding. As noted above, the Administrators relied upon this definition to obtain payment of $80,000 shortly after the Administrator’s application was filed and well before that application was determined.

Of course, the Assignment Date is also the date upon which the assignment of the Chose in Action takes place under clause 3. I note that ‘Completion Date’ is also defined as the Assignment Date. That would also have taken place when the $80,000 was paid. But Special Condition 3 provides that the Completion shall take place within one business day of ‘Condition 1’ being satisfied. If this is a reference to Special Condition 1, then that is consistent with clause 3.

However, clause 2.1 provides that the ‘assignment contemplated by this Deed will not occur until all of the Conditions are satisfied’. There is no definition of ‘Conditions’. There is a definition of Special Conditions, which I have set out above. There is also a definition of ‘Condition’, which is defined to mean the conditions precedent set out in Item 7. Item 7 only contains one condition being ‘Approval by the Court of the Assignment as set out in this Deed in accordance with the provision of the [Act]’. Finally, clause 2.3 provides that each party must use all best endeavours within its own capacity to ensure each condition is fulfilled before the Condition Date, which is relevantly defined to mean the date on which the Court gives its approval of the assignment.

I am unsure what, on its proper construction, the word ‘Conditions’ in clause 2.1 means: does it mean the Condition in item 7 or does it also include the Special Conditions. I note that clause 2.4 which refers to termination if ‘a Condition’ is not capable of being fulfilled. The matter is far from clear. For present purposes, however, I will proceed on the basis that Court approval is a condition precedent to the assignment of the Chose in Action occurring.

I then turn to the October Deed. As noted above, Mr Glavas deposed that the purpose of the October Deed was ‘in case any of the Choses in Action purported to be assigned under the [September Deed] are or may not be capable of assignment’. There were additional parties to the October Deed, namely AAGG and MAG. Recital C records that to the extent that the Choses in Action in the September Deed are not capable of assignment, the Administrators intend to provide, and Trade On, AAGG and MAG intend to accept, releases in respect of those Choses in Action.

Clause 2.1 provides that as between the Administrators and Trade On, the October Deed is intended to operate as supplementary and additional to the September Deed.

Clause 2.2 provides that for the avoidance of doubt, as between the Administrators and Trade On, the phrase ‘any other party’ in paragraph (b) of the definition of Choses in Action in the September Deed includes only parties to the September Deed and no other persons. This seems unrelated to the express purpose of the October Deed but arises in light of submissions of the plaintiffs relating to the breadth of the definition in the September Deed.

Clause 2.3 provides that AAGG and MAG acknowledge that the rights conferred on them by the October Deed are conditional upon the coming into effect of the September Deed.

Clause 3.1 provides that to the extent that the Choses in Action as defined in the September Deed which were intended to be assigned by the Administrators or the Company are not capable of being assigned then the Company and the Administrators confirm that:

(1) they release AAGG and MAG from any claims which the Company has against them in the proceeding; and

(2) they agree that the Company will not in any way seek to pursue those claims against AAGG or MAG in the future.

FINANCIAL POSITION OF THE COMPANY

One of the principal issues relevant to both applications is related to the financial position of the Company, namely: whether it was insolvent and whether, even if it was successful in this proceeding, the Company and its creditors would be in a better position. There was a related issue of whether the Company or the plaintiffs on behalf of the Company were in a position to complete the North Melbourne development. As a result, I will consider the relevant evidence in relation to the financial position of the Company now.

The Administrators’ Material

The defendants submitted that the Company is insolvent and that, even if the plaintiffs were successful in this proceeding, there is no realistic prospect of the Company being in a position where it can trade out of that insolvency in order to produce a better return to creditors. The Administrators adopted these submissions.

The defendants relied upon the Administrators’ Report as the main report prepared for the purpose of the meeting of creditors on 7 September 2018. The Administrators’ Report noted that the plaintiffs as directors had not provided the books and records of the Company or a report as to the affairs of the Company. However, the Administrators proceeded to set out the financial position of the Company ‘based on all the information currently available to us’. However, the source of that information is not entirely clear. The Administrators stated in Section 2.1 of their report that, having not received the books and records of the Company or a deed of company arrangement (DOCA) from the directors, they had no option but to recommend the Company be placed in liquidation, noting that if a DOCA was proposed the creditors might wish to adjourn the meeting.

In section 6.2, the Administrators expressed the view, based on the information available to them, that the Company was insolvent in that it had insufficient assets to meet its commitments and should be wound up. They noted that placing the Company into the hands of liquidators would provide powers to conduct further investigations into the affairs of the company.

In section 4.1, the Administrators concluded that based on the available information, the total tangible assets of the Company were $894,991 and the total creditors were $6,858,563. The Administrators’ Report records that the only real property of the Company, in light of the sale of North Melbourne property, as at the date of appointment of the Administrators, was the Lower Plenty property, in respect of which the Administrators obtained a curb side valuation of $800,000-$880,000.

The liabilities of the Company are contained in Schedule 2 to Attachment A of the Administrators’ Report. That Schedule was said to list the ‘advised creditors and proof of debt claims’. The Administrators’ Report listed:

(1) the secured creditors with amounts owing as MAG (claiming $4,139,078 for the unpaid part of the Balanced Securities loan and the Franek loan) and Mekkya (claiming $1,560,000)[12];
[12]It is not clear how this figure was reached in light of the reference to a debt of $982,848 in Note 9 of the Administrators’ Report and the defendants’ submissions dated 22 October 2018 at [11].

(2) the creditors with a real property security over the Lower Plenty property with amounts claimed as:

(a)       Trustworthy Nominees Pty Ltd, claiming $470,000[13],
(b)      Property Capital Pty Ltd, claiming $33,565; and
(c)       National Australia Bank (claim unknown) [14];
(3)the unsecured creditors totalling $655,000 with one proof of debt of $95,920 from the ATO and with the rest owed by the plaintiffs (Hassan claiming $60,000 and Mohamad claiming $500,000).

[13]It is noted elsewhere in the Administrators’ Report that is claimed pursuant to a loan agreement and that proceedings against the Company having been issued.

[14]It is noted elsewhere in the Administrators’ Report that proceedings against the Company having been issued.

The Administrators’ Report notes the proceeds of the North Melbourne property were to be applied to pay the Sacca debt, the New Concept Homes debt and the New Concept Design debt, all of which are disputed as due and payable by the plaintiffs, and enforcement costs of $371,955,.51. The balance of $1,147,419 was applied against the Balanced Securities debt.

Reference was made by the defendants to a creditor list located immediately after the Administrators’ Report in the bundle of documents which made up Exhibit MH to the affidavit of Halse sworn 16 September 2018 (the ‘creditor list’). It appeared to be suggested that this was a schedule to the Administrators’ Report. However, that is not so. Based on the email from Mr Charles to Halse dated 14 September 2018, it appears to be a list of creditors created after the Administrators’ Report ‘with details of either their proof of debt, or the amount that has been identified as owing (per the directors advice or from the incomplete proxy forms provided at the creditors meeting)’.

The Administrators have not commented on the creditor list. It is difficult to know what confidence can be placed in the list. Senior counsel conceded that these proofs of debts are for voting purposes only, not like proofs of debt in a liquidation for the purpose of determining who is entitled to prove as a creditor for the purpose of obtaining a dividend.

The creditor list records ‘proofs of debt’ received totalling $8,545,999 and ‘amounts claimed identified in the proxies’ (which included the proofs of debt) totalling $10,505,064. I note that the amounts claimed by Wael and the plaintiffs total $1,892,000 and the amounts claimed by MAG and Mekkya total $5,699,028. If these amounts were deducted, the amounts claimed in the proxies would be $2,913,986.

The Defendants’ Position

Based upon these two documents and other material before the Court, the defendants submitted that the Company was insolvent and that even if the plaintiffs were successful in this proceeding there is no realistic prospect of it being in a position where it can trade out of that insolvency in order to produce a better return to creditors.

First, the defendants referred to the assets of the Company, namely the Lower Plenty property valued between $800,000 and $880,000.[15] They submitted that if the North Melbourne property was re-transferred to the Company, the evidence disclosed its value was between $3.6 and $4.4 million.[16]
[15]Based on a curb side valuation obtained by the Administrators. It was valued at $825,000 in June 2018 by Chris Rann of AdVal, being Exhibit MF596 of the Franek affidavit.
[16] $3.6 million in June 2018 by Jones Lang LaSalle, being exhibit MH 100 to the 16 September Halse affidavit; $4.2 million in September 2018 by Damian Lynch of LMV, being Exhibit IG 12 to the affidavit of Ivan Glavas sworn 11 September 2018; and $4.4 million in June 2018 by Chris Rann of AdVal, being Exhibit MF550 to the Franek affidavit.

Second, the defendants referred to the liabilities of the Company. They referred to the debts owed to the MAG parties set out in the Earlier Judgment (collectively the ‘MAG debts’), other secured Company debts and unsecured Company debts. I will deal with each of the categories of debt in turn.

In relation to the MAG debts, they were made up as:

(1) the Balanced Securities debt of $3,795,766 (the plaintiffs acknowledge approximately $3.2m);

(2) the Franek debt of $1,219,000 (which the plaintiffs acknowledge is approximately $1.1 million);

(3) the Sacca debt of $1.9 million;

(4) the Mekkya debt of $982,848.22 (which the parties acknowledge is disputed);
(5)the New Concept Homes debt of $521,342.22 (which the parties acknowledge is disputed);
(6)the New Concept Designs debt of $174,907.59 (which the parties acknowledge is disputed); and
(7)enforcement costs of $390,055 (the parties acknowledge the quantum is disputed).[17]

[17]Defendants’ submissions dated 22 October 2018 [11].

In relation to the Sacca debt, the defendants submitted that that this was not truly disputed: rather the plaintiffs asserted that Sacca had agreed to receive 4 lots in the completed development of the North Melbourne property (apparently worth $2.4 million) in lieu of that debt.[18]
[18]Franek affidavit [29]-[32]; Exhibit MF 393-410.

The defendants submitted that, if the transfer of the North Melbourne property were set aside, even on the plaintiffs’ figures, there was still undisputed MAG debts of around $3.6 million, and apparently disputed MAG debts which are in the order of $3.6 million plus enforcement costs.

In relation to the secured Company debts, the defendants relied upon the Administrators’ Report. They submitted that the NAB debt is in fact $540,000 based upon NAB documents produced in Exhibit D1. Further, the defendants submitted that if the North Melbourne property was reconveyed, it would secure the MAG debts. They submitted that caveats which had been lodged to secure debts owed by the Company might also be reinstated. They referred to a caveat which had been lodged by a Mr Ibrahim which secured payment of monies from the Company pursuant to a loan agreement dated 30 June 2014 for the sum of $390,000.[19] It appears that this is the same debt referred to in the creditor list for $306,100.
[19]See [43] of the 2 July Franek affidavit

In relation to the unsecured Company debts, they referred to the creditor list. As noted, the reliability of the list is uncertain.

Third, the defendants submitted that, other than the claims for re-transfer of the North Melbourne property, the allegations in the PASOC in the proceeding sought to be pursued by the plaintiffs would produce little or any financial return for the Company. In this regard the PASOC included the following claims:

(1) a claim for damages for trespass as alleged in PASOC [16]-[21] against the Receivers and/or Franek for the period 9 April to 7 May 2018 while the Receivers were in possession of the North Melbourne property pursuant to the appointment by Franek on 9 April 2018;

(2) claims for damages and for an account against the Receivers, Franek and MAG arising from the fact that the 20 June debts were not secured and/or were not due and damages, and from the failure to accept the tender of the Balanced Securities debt and the Franek debt in July 2018 as alleged in PASOC [22]-[36] and [64]-[65] (which would have led to a release of the securities and which has precluded the defendants from developing the North Melbourne property);

(3) a claim for damages for trespass by AAGG as purchaser from 23 July 2018 as alleged in PASOC [42]-[45] which has precluded the defendants from developing the North Melbourne property; and

(4) claims for damages and an account against MAG and AAGG for breach of duty by MAG (including breach of s 420A of the Act and under s 77 of the Transfer of Land Act 1958), and knowing involvement by AAGG as alleged in PFASOC at [37]-[68] which has precluded the defendants from developing the North Melbourne property.

The Plaintiffs’ Position

The plaintiffs disputed many of the MAG debts and/or the other debts claimed as set out above. Further, the plaintiffs submitted that the Court ought not to conclude the Company was insolvent, relying upon the potential value of the North Melbourne property as completed in light of the finances available or likely to be available to the plaintiffs and the Company to complete the development.

The plaintiffs submitted that the potential value of the North Melbourne property was $15,566,000. This was based on a price list prepared by or for the plaintiffs setting out estimated sales prices of the units and commercial spaces to be built on the North Melbourne property. This price list was attached by Wael in an email to a broker dated 18 June 2018.[20] It was acknowledged by all parties that the development is only 25% completed. To support the estimated sale prices, they also relied upon the valuation of Chris Rann of AdVal, which valued the North Melbourne property ‘as if developed’ at $13,813,000[21]. However, as previously noted, Mr Rann’s ‘as is’ valuation of the North Melbourne property was $4.4 million.
[20]Part of Exhibit D1.
[21]See exhibit MF 550 at 587 to the 2 July Franek affidavit

The plaintiffs then relied upon construction costs to complete in the order of $3.2 million. This was based upon the Construction Progress Payment No 9 from Napier & Blakeley Pty Ltd to Balanced Securities dated 28 March 2018.[22]
[22]Part of Exhibit D1.

As to the finance available, the plaintiffs relied upon agreements between Wael and Black Arrows and Al Baraka Community Group Inc (‘Al Baraka’). I will deal with each in turn. Before doing so, I note that Wael, a shareholder in the Company, controls Arden, which has applied for finance for the North Melbourne property. The defendants submitted that any such funds were not available to the Company. The plaintiffs submitted that Arden was a means to borrow for the benefit of the Company while it was in administration.

However, I note that Arden entered into a joint venture agreement with a company from the Cote d’Ivoire, Topaze Sarl (‘Topaze’) dated 28 June 2018 to complete the construction of the North Melbourne property (the ‘joint venture agreement’).[23] The basis of this joint venture and whether it is to proceed was not made clear to the Court. The terms of the joint venture which form part of exhibit D2 record that Arden has a contract to purchase the North Melbourne property and that Topaz agreed to advance $USD 7 million “being the estimated amount necessary to complete the development”. In oral argument, the plaintiffs said that they did not intend to rely upon any advance by Topaze but relied upon advances by Black Arrow and Al Baraka.
[23]Part of Exhibit D2.

The plaintiffs say Black Arrow has agreed to lend Wael $5 million. That agreement was evidenced by letters from Black Arrow to Wael dated 23 July 2018 and 5 October 2018. The terms of the 5 October 2018 letter are far from certain. It provides:

We confirm that you have agreed to the terms of condition of our Approval Letter for a loan on Advance $5,000,000 (Five Million Dollars) and you are happy to pay the bulk of the fees immediately rather than at settlement as long as we can extend the Valid Date until 19 October 2018. Please be advised that the Approval Valid date expires soon.
Black Arrow Mortgages wish to advise you that after the date that the proposed mortgage funding will be cancelled by the lender and all fees and charges will be considered liquidated damages.

There are a number of observations to be made. First, no Approval Letter was produced either by the plaintiffs or by Black Arrow pursuant to the subpoena served on it. Second, there is no evidence the ‘bulk of fees’ were paid or that the Valid Date (whatever that might be) was extended to or beyond 19 October 2018. Third, there is no evidence that the proposed mortgage funding has not been cancelled before or after that date. Fourth, it is not clear what security is required for this loan or that sufficient security can be provided. The documents produced by Black Arrow (Exhibit D1) indicate the loan would be secured with first or second ranking mortgage security ‘on 5 to 6 properties’.

The plaintiffs then relied upon the provision of funds totalling $10 million from Al Baraka to Arden. Mr Ayad is the chief executive officer of Al Baraka. In his affidavit, he deposed that:

(1) Al Baraka was established in 1992 to serve the Islamic community of Victoria including by providing finance without interest being charged for its members for residential and business purposes;

(2) Al Baraka is a non-bank lender set up having regard to the requirements of Islamic lending and lends money according to Islamic rules;

(3) funds are made available through related entities of Al Baraka but Mr Ayad is the final decision maker when it comes to deciding to whom Al Baraka will lend funds;

(4) as a result of discussions with Dr Hagazy and Wael in relation to this proceeding and the North Melbourne property, he wrote to Wael on 8 October 2018 (the ‘8 October letter’) advising that a line of credit of $5 million would be available to Arden. The purpose of this loan is to finalise the debts which are the subject of this proceeding involving the Company. Al Baraka is and remains capable of lending that $5 million either directly or through a corporate entity; and

(5) he is a director of ASKK Investment Group Pty ltd (‘ASKK’) which is in the process of finalising a contract of sale of lot two, 615 Hume Highway, Beveridge for $120 million with a deposit of $20 million to be received by 30 November 2018. At that time, if requested by Wael, Al Baraka will be in a position to lend a further $5 million to finalise the debts that are the subject of the proceeding involving the Company.

The 8 October letter provides:

We are pleased to inform you that a credit line of $5,000,000 (Five Million dollars) is available to 65-67 Arden Pty Ltd. This credit line is available to the company for a period of one year starting on 3 October 2018 (commencement date) and is not subject to any security of real property. The company is at liberty to draw down from this credit line by giving 14 days’ notice to us. We are in the process of drawing up documents to finalise this credit line.
Please note that this credit line made available to the company, is subject to the satisfactory approval by us prior to every drawdown. We are at liberty to cancel this line of credit without any explanation to the Company.

Al Baraka did not produce any documents relevant to any request for finance by the plaintiffs or Wael other than the 8 October letter.

In his oral evidence, Mr Ayad acknowledged that Al Baraka was incorporated in March 2018 and has not yet made any loans to anyone. That is because it has no assets. The only funds which may be available to Al Baraka are from ASKK and the directors of ASKK have not approved the advance of funds to Al Baraka to on lend to Wael. Mr Ayad said that he is the decision maker within the board of ASKK. Al Baraka does not now have a licence to allow it to lend money to members of the public.

There are a number of observations to be made. First, it is not established that Al Baraka is in a position to provide the line of credit referred to in the 8 October letter. This is because Al Baraka has no current assets. Indeed, the evidence is that the only available funds to Al Baraka are from ASKK. Second, it appears that ASKK will only be in funds if it receives the deposit of $20 million to be paid by 30 November 2018. However, there is no certainty this deposit will be received: parties often fail to meet contractual obligations. Third, there is the issue of whether Al Baraka can lend funds to Arden without the licence to do so.

As a consequence, in light of the evidence in respect of offers from the Black Arrow loan and Al Baraka, I have concluded that the plaintiffs have not established on the balance of probabilities that they, Wael or Arden have any sufficient funds available to complete the development of the North Melbourne property.

THE ADMINISTRATORS’ APPLICATION
The Parties’ Submissions

The Administrators in their written submissions[24] stated that they thought it appropriate to apply to the Court for directions in respect of the Deeds given:
[24]Administrators’ submissions filed 14 September 2018 [15].

(1) the concerns of the Court expressed in the Earlier Judgement at [41];

(2) the matters raised by Mr Nair in his letter dated 3 September 2018 which set out the reasons why the proceeding should be pursued;

(3) the fact that the assignment was to an entity related to and/or affiliated with MAG, Franek, Sacca and/or Mekkya;

(4) that if the sale was pursuant to s 437A(1) of the Act, it had to be in the interests of the general creditors; and

(5) the plaintiffs were seeking leave to pursue this proceeding.

The Administrators focused on the legal rather than factual issues, save for noting that the Company was insolvent and the independent nature of the process which led to the Deeds being executed. The Administrators submitted that the Court has power to make the directions sought pursuant to s 90-15 of Schedule 2 to the Act.

Sections 90-15 and 90-20 of Schedule 2 relevantly provide:

90‑15 Court may make orders in relation to external administration

Court may make orders
(1)The Court may make such orders as it thinks fit in relation to the external administration of a company.
Orders on own initiative or on application
(2)The Court may exercise the power under subsection (1):
(a)on its own initiative, during proceedings before the Court; or
(b)on application under section 90‑20.

Examples of orders that may be made
(3)Without limiting subsection (1), those orders may include any one or more of the following:
(a)an order determining any question arising in the external administration of the company;
(b)an order that a person cease to be the external administrator of the company;
(c)an order that another registered liquidator be appointed as the external administrator of the company;
(d)an order in relation to the costs of an action (including court action) taken by the external administrator of the company or another person in relation to the external administration of the company;
(e)an order in relation to any loss that the company has sustained because of a breach of duty by the external administrator;
(f)an order in relation to remuneration, including an order requiring a person to repay to a company, or the creditors of a company, remuneration paid to the person as external administrator of the company.

Matters that may be taken into account
(4)Without limiting the matters which the Court may take into account when making orders, the Court may take into account:
(a)whether the liquidator has faithfully performed, or is faithfully performing, the liquidator’s duties; and
(b)whether an action or failure to act by the liquidator is in compliance with this Act and the Insolvency Practice Rules; and
(c)whether an action or failure to act by the liquidator is in compliance with an order of the Court; and
(d)whether the company or any other person has suffered, or is likely to suffer, loss or damage because of an action or failure to act by the liquidator; and
(e)the seriousness of the consequences of any action or failure to act by the liquidator, including the effect of that action or failure to act on public confidence in registered liquidators as a group.

…
Section does not limit Court’s powers
(7)This section does not limit the Court’s powers under any other provision of this Act, or under any other law.
90‑20Application for Court order
(1)Each of the following persons may apply for an order under section 90‑15:
(a)a person with a financial interest in the external administration of the company;
(b)if the committee of inspection (if any) so resolves—a creditor, on behalf of the committee;
(c)ASIC;
(d)an officer of the company;
(e)if the application is in relation to a company that is a friendly society within the meaning of the Life Insurance Act 1995 and which may be wound up voluntarily under subsection 180(2) of that Act—APRA.

(2)Paragraph (1)(d) has effect despite section 198G.
(3)If an application is made by a person referred to in paragraph (1)(b), the reasonable expenses associated with the application are to be taken to be expenses incurred by a person as a member of the committee.

The Administrators submitted that:

(1) the power of the Court under s 90-15 is broad and should be construed liberally, informed by decisions relating to the former analogous provisions of the Act, including s 447D;

(2) there a four general categories of cases in which directions of the kind sought will be given, including, relevantly, guidance on matters of law and where there are competing offers for assets during an administration; and

(3) given the nature of the process that led to the Deeds being executed (in particular, where no impropriety was alleged against the Administrators), the Court ought to exercise its discretion to grant the Administrators’ application.

The defendants did not make substantive submissions on the law. Rather, they focused on the facts. In summary, the defendants submitted that:

(1) the Company was insolvent, even if the claims in the proceeding were successful; this was particularly so given that the claims in the proceeding were unlikely to result in any substantial damages. As a result, it would be futile for the proceeding to continue;

(2) there was no challenge to the propriety of the Administrators entering into the Deeds or the process by which the Deeds were entered into: a fair value for the claims was obtained and the plaintiffs, advised by lawyers, took part in that process;

(3) while one of the purposes of the appointment of the Administrators was to purchase the current and future claims of the Company against the MAG parties, at all times, the MAG parties acted in accordance with the law and their legal rights; and

(4)in these circumstances, the Court should exercise its power to make a direction in accordance with the Administrators’ application.

The Administrators adopted these factual submissions of the defendants.

In opposing the Administrators’ application, the plaintiffs submitted that the orders sought are outside the scope of a direction the Court will make on such an application. This is because:

(1) the Administrators are merely seeking approval of a business or commercial decision;

(2) on such applications, the Court will not ordinarily give a direction that a person is acting properly in a particular situation; and

(3) the Court will not generally give a direction retrospectively: here, all of the obligations under the Deeds have been performed subject to Court approval.

Further, the plaintiffs submitted that, even if the Court has power to grant the Administrators’ application, in the exercise of its discretion, the Court should not do so because:

(1) the assignment is not consistent with the object and purpose of the administration;

(2) the direction sought is not for the advantage of the administration, particularly given the breadth of the claims purported to be assigned;

(3) the effect of the assignment is to stultify the Company’s claims in the proceeding in circumstances where the Administrators did not receive proper or independent legal advice in relation to those claims: indeed, they had decided not to pursue them and to assign them to Trade On before receiving the plaintiffs’ reasons as to why the proceeding should be pursued; and

(4) the MAG parties had embarked upon a process, equivalent to an abuse of process, to frustrate the plaintiffs’ rights by a series of steps culminating in the purchase, by assignment, of the Company’s claims from the Administrators (which MAG appointed), which were the very claims sought to be pursued by the plaintiffs in this proceeding.

Analysis: Does s 90-15 empower the Court to make the orders sought?

Section 90-20(1) of Schedule 2 to the Act came into effect on 1 March 2017. Part 3 is headed ‘General rules relating to external administration’. External administration is defined to include liquidation and administration.[25]
[25]Corporations Act 2001 (Cth) sch 2 s 5-15.

Section 90-20(1) permits a range of interested persons (relevantly, an officer of a company, which includes administrators of a company)[26] to apply to the Court for orders under s 90-15(1). Under s 90-15(1), the Court may make ‘such orders as it thinks fit in relation to the external administration of a company’.[27]
[26]Corporations Act 2001 (Cth) sch 2 s 90-20(1)(c), together with the definition of ‘officer’ of a corporation in s 9.
[27]Corporations Act 2001 (Cth) sch 2 s 90-15(1).

The Court’s power under s 90-15 is broad. However, the principles to be applied to the exercise of this power have been very much informed by those that applied to the exercise of the Court’s power to give directions to external administrators under the former analogous provisions of the Act, namely s 447D(1), in the case of administration, and ss 479(3) and 511, in the case of liquidation.[28]
[28] Re Hawden Property Group Pty Ltd (in liq) (2018) 125 ACSR 355 [8] citing Re Walley [2017] FCA 486 (‘Walley’) [41]; see also GDK Projects Pty v Umberto Pty Ltd (in liq) [2018] FCA 541 (‘GDK’) [33]; Re Krejci [2018] FCA 425 (‘Krejic’) [46].

The ability of administrators or liquidators to approach the Court for directions is intended to facilitate their respective functions and so the provision should be interpreted widely to give effect to that intention.[29] This is in a context where one of the effects of seeking such advice or directions is to provide protection to the administrator or liquidator from liability in respect of actions they seek to take. [30] However the authorities state that the directions sought must be just and beneficial to the liquidation or administration.[31]
[29]See, eg, Re Ansett Australia Ltd (No 1) (2001) 115 FCR 376 [49]–[52]; Re One.Tel Ltd (2014) 99 ACSR 247 (One.Tel) [33].
[30]See, eg, Re Ansett Australia Ltd (2002) 40 ACSR 433 (‘Ansett No 2’) [44].
[31]See, eg, Re Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556 [9]; Walley [2017] FCA 486 [41]; Krejci [2018] FCA 425 [47]. Indeed, in GDK [2018] FCA 541, Farrell J noted at [33] that it was difficult to envisage circumstances where the power under s 90-15 would be exercised ‘if the Court could not be satisfied that it would be just and unless the applicant had demonstrated sufficient utility to the external administration’.

As a result, particular principles have developed where an administrator or liquidator applies to the Court for directions. In Ansett No. 2, Goldberg J said:

… the prevailing principle adopted by the courts, when asked by liquidators and administrators to give directions, is to refrain from doing so where the direction sought relates to the making and implementation of a business or commercial decision, either committed specifically to the liquidator or administrator or well within his or her discretion, in circumstances where there is no particular legal issue raised for consideration or attack on the propriety or reasonableness of the decision in respect of which the directions are sought. There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, the decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised.… A court should not give its imprimatur to a business decision simply to alleviate a liquidator or administrator’s own ease. There must be an issue calling for the exercise of legal judgement.[32]

[32](2002) 40 ACSR 433 [65].

The cases in which directions may properly be given by the Court fall into four principal categories (although these categories are not closed):

(1) guidance on matters of law;

(2) guidance on questions of legal procedure;

(3) whether a liquidator should postpone a sale in order to achieve a better price; and

(4) where there are two competing offers for assets and a liquidator wishes to gain the Court’s directions in order to avoid a subsequent allegation that he or she has acted improperly in choosing one over the other.[33]

[33]See, eg, In the matter of AWA Ltd [2014] NSWSC 249 (‘AWA’) [15].

Other restrictions are imposed by courts as to when relief will be granted where a liquidator or administrator seeks directions. First, the jurisdiction ‘is concerned with affording protection … in connection with proposed future action, not with ratifying action … already taken’.[34] Second, a court will not ordinarily give a direction that a liquidator or administrator would be acting ‘properly’ in a particular transaction, distinct from a direction that the liquidator would be justified in taking a particular course of action.[35]
[34]One.Tel (2014) 99 ACSR 247 [55]; Re Kimberley Diamonds [2018] NSWSC 1106 (‘Kimberly Diamonds’) [10]; Re Octaviar Ltd (in liq) [2016] NSWSC 16 [14].
[35]One.Tel (2014) 99 ACSR 247 [61]-[62]; Kimberley Diamonds [2018] NSWSC 1106 [10].

Finally, as noted by Brereton J in One.Tel, the Court should not make a direction in respect of a commercial judgement which may prove contentious, unless satisfied that the decision ‘is in all the circumstances a proper one’.[36] He concluded:

While the court’s function under s 511 does not involve it in reconsidering every factor that has informed the liquidator’s decision, let alone developing alternatives or deciding whether the court would have made the same decision, the court needs to be satisfied, before making a direction, that the decision is proper and reasonable; at least usually, this will necessitate consideration of the liquidator’s reasons, and the process by which the decision has been reached. [37]

[36]One.Tel (2014) 99 ACSR 247 [35].

[37]One.Tel (2014) 99 ACSR 247 [36].

I am satisfied, on balance, that there are real issues raised, both by the plaintiffs and on the material, about the appropriateness or reasonableness of the Administrators entering into the Deeds. Consistent with the comments of Goldberg J in Ansett No 2 above, I have concluded that the Administrators’ application falls within the first of the recognised categories of the kind set out in AWA. Contrary to the submissions of the Administrators, it does not fall within the fourth category.

However, I have concluded that the Court does not have jurisdiction to make the direction sought by the Administrators. This is because I consider that the Administrators are not seeking protection from liability arising out of future actions they may take: rather, they are seeking ratification of actions already taken. Although the Deeds are subject to Court approval, the substantive obligations under the September Deed, executed on 7 September 2018, have been performed including the payment of the Assignment Price. I refer to my comments regarding the September Deed at [49], [51] and [56]-[62] above. Indeed, as set out in [62] above, on one reading of the September Deed, the Assignment Date has already occurred.

Further, the subsequent entry into the October Deed highlights that the Administrators are not seeking directions as to what they might be authorised by the Court to do: the ‘deal’ is a fait accompli subject to Court approval.

I have had regard to the comments of Brereton J in One.Tel[38] to the effect that, in the case of an agreement that is subject to a condition precedent, ‘the distinction between what was done in entering into that agreement and before satisfaction of the condition, and what will be done in performing it, may not always be neatly compartmentalised into past and future’.[39] With respect, I agree with those comments but note that in One.Tel there remained a number of other steps to be taken under the agreement which was the subject of the Court’s orders. That is not so here. As set out above, in substance, everything required to be done under the Deeds has been done, including payment of the Assignment Price. While I note that clause 2.3 of the September Deed provides that each party must use their best endeavours to ensure each Condition is fulfilled by the Condition Date, this obligation does not cause me to doubt my conclusion that, in substance, everything required to be done under the Deeds has been done.
[38](2014) 99 ACSR 247 [56]-[60].
[39]One.Tel (2014) 99 ACSR 247 [60], adopting the comments of Allanson J in Re Bell Group Ltd (in liq) [2013] WASC 409 [43].

As a result, in my view, the Court does not have the jurisdiction to make the orders sought in the Administrators’ application.

For completeness, I note two things. First, the plaintiffs submitted there was a difference between the Condition in Item 7 of September Deed (namely, ‘Approval by the Court of the Assignment set out in this Deed in accordance with the provision of the [Act]’) and the order in fact sought in the Administrators’ application (namely, that the Administrators may ‘properly and justifiably enter into and give effect to’ the Deeds). However, I do not consider that difference of any material substance. The purpose of the Administrators’ application is, in effect, for court approval, albeit framed in accordance with the particular requirements of an application for directions.

Second, based on the authorities I have reviewed, it would not be appropriate for the Court to give a direction that the Administrators may ‘properly’ enter into and give effect to the Deeds. With respect, I agree with the analysis of Brereton J in One.Tel that this is not the kind of order a Court should make on such applications.[40]
[40]One.Tel (2014) 99 ACSR 247 [61]-[62].

Analysis: Should the Court make the orders sought by the Administrators?

Notwithstanding the views above, given that the issues were addressed and the importance of them to the parties, I will now consider whether, if the Court had power, I would make the orders sought on the Administrators’ application.

In the exercise of my discretion, I would not make a direction that the Administrators ‘may justifiably enter into and give effect to’ the Deeds. In summary, this is because I am not satisfied, on the evidence presently before the Court, that the assignment of the Company’s claims to the MAG parties (who are or would be the defendants to such claims) or releases from them, is proper in the all the circumstances and therefore just and beneficial to the administration of the Company. My reasons are as follows.

First, based on the evidence which I reviewed as set out above, it appears that the Company is insolvent. However, the extent of the insolvency is not clear. The position set out in the Administrators’ Report is very different to the position presented by the defendants at the hearing of this application. The defendants have an interest in submitting that the debts of the Company are as high as possible. However, the Administrators have not undertaken an independent analysis of the true extent of the insolvency of the Company.

Second, I do not accept that the claims in the proceeding will produce little or no financial return to the Company. This is in circumstances where, in addition to the re-conveyance of the North Melbourne property, there are claims for damages, equitable compensation and account in respect of breaches of duty by the Receivers, MAG and AAGG, including damages flowing from the Company being prevented from continuing with the development of the North Melbourne project since early May 2018.

As noted in the Earlier Judgement, senior counsel for the defendants conceded that there are serious issues to be tried as to whether the 20 June debts are validly the subject of the MAG security interest and whether the sale and transfer of the North Melbourne property to AAGG should be set aside in light of the circumstances in which the sale was entered into.[41] Further, in the Earlier Judgment, I concluded that:

(1) there appears to be a reasonably strong case that that the 20 June debts are not validly the subject of MAG’s security interests;[42] and

(2) while I was not able to form any view about the strength of the claim in relation to the transfer of the North Melbourne property to AAGG, the circumstances in which this occurred and the 20 June debts were assigned raise serious issues about the conduct of Franek, MAG, Mekkya and Sacca.[43]

[41]Earlier Judgment [34].

[42]Earlier Judgment [37].

[43]Earlier Judgment [41].

The 20 June debts are relevant to the claims in the PASOC. This is because, as set out in the Earlier Judgment, from 9 May 2018, the plaintiffs sought details from the Receivers, and from Franek and MAG, of the amount required to pay out the Balanced Securities loan to terminate the Receivers’ appointment.[44] Those details were not provided until 25 June 2018. There has been no explanation as to why those details could not be provided earlier, particularly in light of the fact that the amount of the Balanced Securities loan was referred to in the Balanced Securities assignment (executed by Franek on 18 April 2018 who nominated MAG as the assignee) as $2,999,648.30 as at 18 May 2018.
[44]At that time, the Balanced Securities loan was the only secured loan to MAG of which the plaintiffs were aware. As noted above, on 3 May 2018, Franek assigned the Franek loan to MAG but the plaintiffs were not informed of this at the time.

It is during this period between 9 May and 25 June 2018 that the assignment of the 20 June debts took place. On 25 June 2018, Halse on behalf of Franek and MAG advised the plaintiffs that the payout figure was in fact $8,259,990.83 as it included, for the first time, the 20 June debts and Franek loan. Since that time MAG and the Receivers sought to exercise their powers on the basis that all of these debts were secured. I consider that there is also a reasonably strong case that MAG and the Receivers, in failing to provide the payout of the Balanced Securities loan during the period when the 20 June debts were assigned, and then exercising their powers based on those assignments, breached their duties owed to the Company. [45]
[45]See generally PASOC [22]-[36].

Third, and as a result of the second point, as noted above, the Administrators acknowledge that, in the time available since their appointment, they have not been in a position to properly consider the merits of the Company’s claims in the proceeding. That is understandable given the limited duration of the administration.

However, I consider this raises very real concerns given that the Company’s claims are one of the main remaining assets of the Company, and it is those claims that are purported to be assigned to Trade On under the Deeds. This is in circumstances where the sale of the Company’s claims in this manner was proposed by Trade On: indeed it seems to be one of, if not the principal, purpose of the MAG parties appointing the Administrators. While I am prepared to accept (without deciding it) that the Administrators have the power to assign or sell these claims,[46] in my view, the sale of one of the main assets of a Company in administration in circumstances such as the present is unusual.
[46]The issue of whether the Administrators had the power to assign the claims was not the subject detailed argument. This was sought to be addressed, in part, by the defendants and the Administrators by the October Deed. But that does not address the power of the Administrators to assign these claims. Indeed, the Administrators brought their application because of concerns about whether s 437A(1) of the Act applied to the assignment: see [100(4)] above. In addition, in notifying creditors of the assignment under the September Deed, they relied upon the power under s 100-5 of Schedule 2: see Exhibit IG 16 to the affidavit of Ivan Glavas sworn 13 September 2016. But, in my preliminary view, there are real doubts whether this section applies.

This is notwithstanding the objects of an administration and the powers of an administrator which I refer to at [150] to [153] below, and section 435A of the Act. That section provides, in summary, that the object of Part 5.3A and Schedule 2 (to the extent it applies to that Part) is to provide for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence, or if it is not possible for the company or its business to continue in existence, results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.

With respect to the Administrators, I do not consider it appropriate for the Administrators to sell the Company’s claims to the defendants to those claims, without undertaking an independent and appropriate analysis, in particular, with the assistance of independent lawyers, of the claims in fact made and their likely worth. In my view, these are the very matters upon which it would be prudent for external administrators to get advice in such circumstances.

Fourth, in these circumstances, I do not accept that $100,000 represents a fair value of the claims made in respect of the Company in the proceeding. The defendants submitted that the involvement of the plaintiffs in the sale process conducted by the Administrators meant that the $100,000 obtained represented a true valuation of the claims. However, why would the plaintiffs pay the fair value of the claims made in the proceeding simply for their right to pursue them? If that amount were paid, they would, in effect, if successful in the proceeding, recover only the amount they had paid for the right to do so.

Fifth, I am conscious that the Deeds are the culmination of a process by which the MAG parties obtained security for unsecured debts owed by the Company, allowing them to obtain the North Melbourne property to develop it. While senior counsel for the defendants contended that all the steps in that process have been lawful, I am not satisfied this is so. I refer to my comments in the second point above regarding the claims made in the proceeding and their strengths.

In addition, there is the evidence of Dr Hegazy in respect of the Plan. I refer, in particular, to his account of the conversation between Dr Atalla and Mekkya on 24 July 2018 in which Mekkya told Dr Atalla that the North Melbourne property had been sold and he was happy as he believed he ‘had found a way to go around the Court’s order to achieve this’. As noted in the Earlier Judgment, Kennedy J was not informed of this purported sale at the hearing on 17 July 2018.

Further, there is the statement of Mekkya which Dr Hegazy heard on 30 July 2018 to the effect that Mekkya was ‘planning a surprise for the Saafin brothers in Court as he was in the process of appointing an administrator’ and he would ‘sell all the El Saafin houses and the rest of their assets to prevent them financially from making a claim against him’. As noted above, there was no evidence from Mekkya or Sacca disputing this evidence.

The plaintiffs submitted that the conduct of the MAG parties in respect of the Plan, but in particular in appointing the Administrators, constituted an abuse of process. This was because they were employing legal processes for a purpose foreign or collateral to the purpose it was designed to serve, so as to make the use of those processes improper. They relied upon the decision of Barrett J in Blacktown City Council v Macarthur Telecommunications Pty Ltd (Administrator Appointed).[47]
[47](2003) 47 ACSR 391 (‘Blacktown’) [17]-[18]. As to the purpose and objects of an administration, I refer to my comments at [132] above.

I have concluded that the evidence before the Court raises real and serious issues about whether the appointment of the Administrators by the MAG parties was for a collateral purpose, namely, seeking to purchase the claims against the MAG parties from the Administrators and thereby preventing the plaintiffs or the Company from prosecuting them. This is in light of the acknowledgement by senior counsel for the defendants that one of purposes of the Administrators’ appointment was to seek to obtain such an assignment for the MAG parties to prevent the plaintiffs and/or the Company from continuing with any other claims against them, and to validate the exercise of MAG’s power of sale of the North Melbourne property to AAGG. Indeed, this appears to be the principal purpose of the appointment.

However, it is unnecessary for me to form a concluded view on whether such an abuse has been established. This is in part because the plaintiffs did not seek orders that the administration end on the basis of the alleged abuse of process. It sufficies to say that there are real and serious issues raised about whether the MAG parties have at all times acted lawfully or for a collateral purpose. I have had regard to these issues in deciding whether the Court should make orders on this application which effectively release the MAG parties from any claims by the Company in relation to that conduct.

For completeness, I do not suggest that the Administrators have acted with impropriety. However, like Barrett J in Blacktown, I am concerned that the MAG parties have sought to secure a ‘compliant administration’, namely to install a regime pursuant to which it obtained the assignment of the Company’s claims as an alternative to the rigours of those claims being pursued in Court or being independently examined by an external administrator, in particular, with the assistance of independent lawyers, and that the Administrators were participants in that process.[48] In these circumstances, in my preliminary view, I consider that the Administrators will need to give serious and careful consideration as to whether it is appropriate for them to have a continuing role in the external administration of the Company beyond the creditors’ meeting on 12 November 2018. This is because their involvement arguably gives rise to at least a perception that they lack the necessary independence to have any continuing role.
[48]Blacktown (2003) 47 ACSR 391 [24]. That was the basis for Barrett J in Blacktown to conclude that the administration should be ended.

In all of these circumstances, I would decline to make the orders sought in the Administrators’ application.

THE PLAINTIFFS’ APPLICATION
Does Part 2F.1A of the Act apply to companies in administration?

Part 2F.1A of the Act is entitled ‘Proceedings on behalf of a company by members and others’. The relevant provisions in respect of the plaintiffs’ application are as follows:

236 Bringing, or intervening in, proceedings on behalf of a company

(1)A person may bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for those proceedings, or for a particular step in those proceedings (for example, compromising or settling them), if:
(a) the person is:
(i)a member, former member, or person entitled to be registered as a member, of the company or of a related body corporate; or

(ii) an officer or former officer of the company; and

(b) the person is acting with leave granted under section 237.
(2)Proceedings brought on behalf of a company must be brought in the company’s name.
(3)The right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished.
Note 1:For the right to inspect company books, see subsections 247A(3) to (6).
Note 2:For the requirements to disclose proceedings and leave applications in the annual directors’ report, see subsections 300(14) and (15).
Note 3:This section does not prevent a person bringing, or intervening in, proceedings on their own behalf in respect of a personal right.

237 Applying for and granting leave

(1)A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings.

(2) The Court must grant the application if it is satisfied that:
(a)it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and

(b) the applicant is acting in good faith; and
(c)it is in the best interests of the company that the applicant be granted leave; and
(d)if the applicant is applying for leave to bring proceedings—there is a serious question to be tried; and

(e) either:
(i)at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or
(ii)it is appropriate to grant leave even though subparagraph (i) is not satisfied.

The Parties’ Submissions

The plaintiffs submitted that Part 2F.1A of the Act applies to a company in administration and, in particular, a secured creditor’s administration, pursuant to s 436C of the Act. In summary, they submitted that:

(1) it is not clear that Part 2F.1A has no application to a company in liquidation. A single judge of this Court should follow the decision of the Court of Appeal in Malhotra v Tiwari and Ors [2007] VSCA 101 (‘Malhotra’) at [75] - [78] which they contended was consistent with Part 2F.1A applying to a company in liquidation.

(2) a single judge of this Court should not follow the decision of the New South Wales Court of Appeal in Chahwan v Euphoric Pty Ltd (2008) 245 ALR 780 (‘Chahwan’) which held that part 2F.1A has no application to a company in liquidation; and

(3) in any event, the reasoning in Chahwan has no direct application to a company under administration.

The defendants and the Administrators submitted that Part 2F.1A has no application to a company in administration. In summary, they submitted that:

(1) the paragraphs of Malhotra relied upon by the plaintiffs are not binding, being obiter dicta and not involving a detailed consideration of the relevant legislation or policy behind Part 2F.1A of the Act;

(2) by contrast, the decision in Chahwan was a considered decision of an intermediate appellate court on national legislation which should be followed unless clearly wrong – and that it is not wrong. Further, Chahwan has been followed by a number of Australian courts;[49] and

(3)the reasoning in Chahwan applies with equal force to a company in administration. It was applied by Brereton J in respect of a company in voluntary administration in Re CGH Engineering Pty Ltd (2014) 104 ACSR 245 (‘CGH’).
[49]See, eg, Oates v Consolidated Capital Services Ltd (2009) 76 NSWLR 69 [21]; Pearl Coast Divers Pty Ltd v Cossack Pearls Pty Ltd (2009) 249 ALR 591 [13]; Viscariello v Macks (2014) 103 ACSR 542 [635], [841].

Analysis

In determining these issues, I have been very much assisted by the recent judgement of Connock J in Pentridge Village Pty Ltd (in liq) v Capital Finance Australia Limited [2018] VSC 633 (‘Pentridge Village’). One of the issues which his Honour had to determine in that case was whether a single judge of this Court should follow Chahwan in light of the decision in Malhorta.

In Pentridge Village, Connock J undertook a thorough analysis of the relevant principles and authorities and, in particular, the issues determined in Malhotra.[50] His Honour concluded that:
[50]Pentridge Village [2018] VSC 633 [292]-[307].

(1) the issue of whether Part 2F.1A applied to a company in liquidation was not considered, addressed or determined by the Court of Appeal in Malhotra with the result that it was not binding on him;[51]

(2) the reasons given in Chahwan to support the conclusion that Part 2F.1A applied to a company in liquidation should be followed unless plainly wrong, given they were of an intermediate appellate court and related to Commonwealth legislation;[52] and

(3) the reasoning in Chahwan was correct and should be followed.[53]

[51]Pentridge Village [2018] VSC 633 [304].

[52]Pentridge Village [2018] VSC 633 [298].

[53]Pentridge Village [2018] VSC 633 [298].

With respect, I agree with the reasons given by Connock J in support of these conclusions. I would only add that Tobias JA in Chahwan (with whom Beazley and Bell JJA agreed) undertook a detailed analysis of the legislative history and language of Part 2F.1A, and of the conflicting authorities on whether that part applied to companies in liquidation.[54] Tobias JA concluded, based on the extrinsic materials, that the mischief which Part 2F.1A was intended to remedy related to the restrictions on the rule in Foss v Harbottle[55] which had no application when a company was in liquidation. He concluded that the statutory context as well as the mischief sought to be remedied were indicative of an intention by the legislature that the statutory derivative action available under s 236 of the Act applies only to a company as a going concern and not to one under the control of a liquidator.[56]
[54]Chahwan (2008) 245 ALR 780 [95]-[125].
[55](1843) 2 Hare 461; 67 ER 189.
[56]Chahwan (2008) 245 ALR 780 [124].

This leads to the next issue: whether that reasoning in Chahwan applies to companies in administration, including a creditor’s administration. In my view, it does.

At the outset, it is important to acknowledge that while both administration and liquidation are forms of external administration, they are different. The purpose of an administration is for the administrator to take control of the company to investigate its financial affairs in order to report to the company’s creditors with a proposal as to the company’s future: to consider whether the company should enter into a deed of company arrangement (DOCA), whether the company should be wound up, or whether the administration should end.[57] This is different to the purpose of a liquidation, which is for the liquidator to assume control of the company’s affairs to discharge its liabilities in preparation for its dissolution.
[57]Corporations Act 2001 (Cth) s 439C.

However, both a liquidator and administrator assume control of all aspects of the company. The provisions in respect of liquidation are well known.[58] Similar provision operate in respect of administration in Division 3 of Part 5.3A. Indeed, s 198G provides that, while a company is under external administration (which includes both liquidation and administration), an officer of the company must not perform or exercise a function or power of that office.
[58]See, eg, Corporations Act 2001 (Cth) s 477(1) in the case of a Court-appointed liquidator.

The powers invested in an administrator under the Act include:

(1) s 437A(1) which relevantly provides that while the company is under administration, the administrator has control of the company’s business property and affairs; and

(2) s 437D which relevantly provides that where a person purports to enter into on behalf of a company under administration a transaction or dealing affecting the property of the company, that transaction or dealing is void unless the administrator entered into it on the company’s behalf or the administrator consented to it in writing before it was entered into.

Further, s 440D provides that during the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except with the administrator’s written consent or with the leave of the Court. The purpose of this provision is to allow the administrator to investigate the affairs of the company without harassment by litigants, including impatient creditors.

In this context, I turn to CGH. It appears to be the first case that considered whether Part 2F.1A applies to a company in administration. In that case, Brereton J concluded that the considerations that informed the conclusion in Chahwan were equally applicable to a company in voluntary administration. This was because, among other things:

(1) the mischief that part 2F.1A was intended to remedy identified in Chahwan, namely, that exceptions to the rule in Foss v Harbottle which do not apply to liquidation, would also not apply to voluntary administration; [59]

(2) the unsatisfactory outcome produced for a company in liquidation by the obligation on the Court to grant leave where the requirements of s 237(2) are made out is equally applicable to a company in voluntary administration;[60]

[59]CGH (2014) 104 ACSR 245 [9].

[60]CGH (2014) 104 ACSR 245 [10]-[12].

As a result, Brereton J concluded that the better view is that s 237 is not available where a company is in voluntary administration.[61] However, his Honour went on to conclude that:

(1) there would be inherent jurisdiction of the Court in respect of a company in administration, analogous to the inherent jurisdiction of the Court in respect of a company in liquidation, to grant leave to a contributory to issue proceedings in the name of the company; [62] and

(2) the appropriate source of statutory jurisdiction to grant leave to bring a proceeding in the name of the company during an administration was (as in force at that time) s 447E(1) which relevantly provided that the Court may make such order as it thinks just if it is satisfied that the administrator of a company has managed or is managing the company’s business, property or affairs in a way that is prejudicial to the interests of some or all of the company’s creditors or members.[63]

[61]CGH (2014) 104 ACSR 245 [15].

[62]CGH (2014) 104 ACSR 245 [16].

[63]CGH (2014) 104 ACSR 245 [20].

With respect, I agree with the reasons given by Brereton J for concluding that part 2F.1A does not apply to a company in administration. I note that Brereton J was of the same view in Re Featherstone Resources Pty Ltd.[64] Featherstone has been followed by Robb J in Beechworth Land Estates Pty Ltd.[65]
[64](2014) 101 ACSR 394 (‘Featherstone’) [31].
[65][2014] NSWSC 1723 [24].

Further, I can see no relevant difference whether the administration commenced as a voluntary administration under s 436A or by a secured creditor under s 436C. This is because the purpose of the administration and the functions and powers of the administrators under the Act are the same regardless of the source of their appointment. As a result, I have concluded that Part 2F.1A does not apply to a company in administration.

For completeness, I note that Black J in ReSundara Pty Ltd[66] expressed the tentative view that part 2F.1A did apply to a company in receivership, as the appointment of a receiver to some or all of the company’s assets did not displace the authority of its officers in the same way as the appointment of a liquidator or administrator.[67]
[66][2015] NSWSC 1694 (‘Sundara’).
[67]Sundara [2015] NSWSC 1694 [118].

Have the requirements of s 237(2) been satisfied?

As a consequence of my conclusion that that Part 2F.1A does not apply to a company in administration, it is not necessary for me to consider whether the requirements of s 237(2) have been satisfied in this case. Given the need for a decision to be given as soon as possible, I will not address that issue in these reasons.

However, I note that the parties relied upon the same factual matters in respect the plaintiffs’ application both under s 237 and the Court’s inherent jurisdiction. As a consequence, I will now deal with the plaintiffs’ application under the Court’s inherent jurisdiction.

Should the Court exercise its inherent jurisdiction to allow the plaintiffs to pursue the proceedings on behalf of the Company?
The parties’ submissions

The parties did not dispute that the Court has inherent jurisdiction to grant leave to a person such as a shareholder to pursue a proceeding in the name of a company in liquidation or administration. The issue between the parties was whether this power should be exercised in favour of the plaintiffs in this case.

In summary, the defendants submitted that the Court should not grant leave given that the Company was insolvent and had no prospect of trading out of its financial difficulties, even if the proceeding was successful. This is in circumstances where they submitted the claims in the proceeding have little or no financial value to the Company.

The Administrators adopted the defendants’ submissions.

The plaintiffs submitted that the Court should exercise its discretion in favour of the plaintiffs given:

(1) the nature of the plaintiffs’ claims and their prospects of success;

(2) the plaintiffs’ willingness to accept liability for the costs of the proceeding and/or their willingness to give an indemnity to the external administrator in respect of any additional costs; and

(3) to the extent it was relevant, the Company was not insolvent due to the ability of the plaintiffs to obtain finance for the Company’s benefit, as set out above.

Analysis: Nature of the Court’s Inherent Jurisdiction

It is appropriate to say something about the nature of the Court’s inherent jurisdiction in respect of the application. It is clear, as the parties agreed, that the Court has inherent jurisdiction to grant leave for an appropriate person to bring proceedings on behalf of that company in liquidation.[68] Those persons include creditors and contributories of a company, and others in whose interest the winding up is carried out and who are entitled to derive benefits from the assets of the company in the winding up, for example, guarantors.[69]
[68]Aliprandi v Griffith Vintners Pty Ltd (1991) 6 ACSR 250 (‘Aliprandi’); Russell v Westpac Banking Corporation (1994) 13 ACSR 5 (‘Russell’); Ragless v IPA Holdings Pty Ltd (2008) 65 ASCR 700 (‘Ragless’).
[69]Russell (1994) 13 ACSR 5 [8].

The inherent jurisdiction arises from the Court’s supervisory jurisdiction over liquidators and survives the enactment of Part 2F.1A.[70] Because the Court also exercises supervisory jurisdiction over administrators, by analogy, the Court has inherent jurisdiction to order that appropriate persons may use the name of a company in administration.[71]
[70]Chahwan (2008) 245 ALR 780 [124(j)]; Aliprandi (1991) 6 ACSR 250 [252]; Ragless (2008) 65 ASCR 700 [44]; Featherstone (2014) 101 ACSR 394 [33].
[71]CGH (2014) 104 ACSR 245 [16]; Featherstone (2014) 101 ACSR 394 [36].

In considering whether the jurisdiction should be exercised, the authorities focus on three principal factors:

(1) whether the proposed claims have some solid foundation in that they exhibit such a degree of merit as to be neither vexatious nor oppressive and present a reasonable prospects of success;

(2) the attitude of the liquidator to the proposed proceedings; and

(3) whether practical considerations support the initiation of the proceeding, with particular reference to the financial protection of the liquidator and the assets of the company by means of indemnity and, if indicated, security.[72]

[72]See, eg, Carpenter v Pioneer Park Pty Ltd (2009) 71 NSWLR 577 (‘Carpenter’) [23]-[34].

As to the third matter, the Court is keen to ensure that the assets of the company in liquidation are not put at risk by the proceeding and that the liquidator is not exposed to personal liability. As a result, the Court may require that the person who conducts the litigation ‘gives an indemnity supported by security for the benefit of the company and the liquidator, and perhaps also security for costs to protect the other party to litigation’.[73]
[73]Carpenter (2009) 71 NSWLR 577 [32] quoting Austin J in Cadima Express Pty Ltd (in liq) v Deputy Commissioner of Taxation (1999) 157 FLR 424 [49].

The three principal factors identified above are not exhaustive: the Court retains a general discretion having regard to all the circumstances of the case.[74]
[74]Re Dungowan Pty Ltd (in liq) [2014] NSWSC 1721 [25], Wu v Li [2018] ACTSC 224 [8-10].

Further, as noted by Brereton J in CGH, the Court might well be more reluctant to grant leave in the context of voluntary administration because it is intended to be a short-term arrangement resulting in either the return to the company to the control of its directors or in it proceeding to liquidation.[75] His Honour concluded that ‘[o]rdinarily, that consideration might weigh heavily against the granting of leave during the short duration of a voluntary administration’. I consider that these comments apply with equal force to administrators appointed by secured creditors under s 436C of the Act.
[75]CGH (2014) 104 ACSR 245 [16].

Indeed, the second principal factor identified above applies with more force to a liquidation than an administration. The attitude of the liquidator to the proposed proceeding is relevant to the exercise of the Court’s inherent jurisdiction because, ordinarily, the liquidator will have carefully considered the basis of the proposed proceeding ordinarily with assistance of independent legal advice. However, during the period of the administration, the administrator may not have sufficient time to obtain and consider independent legal advice on the merits of the proposed claims and their value. As noted above, that is the case here.

Analysis: Whether the Court’s inherent jurisdiction should be exercised in this case

In the present case, the application is brought by the plaintiffs who are shareholders in and creditors of the Company. The plaintiffs are also guarantors of the Balanced Securities loan. As a result, I am satisfied that the plaintiffs have standing to seek the exercise of the inherent jurisdiction of the Court.

The application is brought during the period of the administration; there is creditors’ meeting to determine the future of the Company to be held on 12 November 2018. In my view, this is a factor which weighs heavily in the exercise of my discretion.

This is a context where, in relation to the first principal factor set out above, I have concluded that the claims in the proceeding have a solid foundation, being neither vexatious nor oppressive. Indeed, I have already formed views about the strength of some of the claims based on the material presently before the Court and the serious issues raised about the conduct of the MAG parties in this proceeding. I refer to my comments in [127]–[129] above.

In relation to the second principal factor, the Administrators have made it clear that they do not intend to pursue this proceeding. However, this decision was made in circumstances where they have not properly considered, with the assistance of independent legal advice, the merits of the Company’s claims in the proceeding.

In relation to the third principal factor, the only evidence before me (being the letter from Mr Nair to Mr Charles dated 3 September 2018) was to the effect that the plaintiffs agreed to be jointly and severally liable for the costs of the proceeding and that they were willing to give the Administrators a suitably drafted indemnity. The terms of this indemnity were not further pursed by the Administrators because they had already determined to assign the Company’s claims to Trade On and not to consent to the plaintiffs pursuing the proceeding. However, in argument, senior counsel for the plaintiffs acknowledged that the plaintiffs were ’on the hook’ for the cost of the proceeding and that the plaintiffs remained willing to provide an indemnity to the external administrator in relation to costs.

As a result, I am not presently minded to exercise my discretion, pursuant to the inherent jurisdiction of the Court, to grant leave to the plaintiffs to prosecute the proceeding.

Should the Company be placed into liquidation as a result of the creditors’ meeting, then, no doubt, the liquidator will wish to obtain independent legal advice in order to determine whether it wishes to pursue the proceeding. If the liquidator does not wish to do so, it may wish to consider the terms or scope of an indemnity should the plaintiffs still wish to pursue the proceeding.

I have considered whether to dismiss the plaintiffs’ application under the inherent jurisdiction of the Court or adjourn it until after the creditors’ meeting. In all the circumstances, I have concluded that the appropriate course is to adjourn the plaintiffs‘ application to exercise the Court’s inherent jurisdiction until after the creditors’ meeting, particularly given the history of this proceeding and costs involved to date in this application.

At that time, I will also consider what directions, if any, should now be made in relation to the plaintiffs’ application to restrain Halse and El-Hissi from acting for the defendants.

The application to grant leave to allow proceedings on behalf of a company under s 90-15

As a consequence of my decision to adjourn the plaintiffs’ application in respect of the Court’s inherent jurisdiction, it is also appropriate that I adjourn the plaintiffs’ application pursuant to s 90-15 of Schedule 2 to the Act.

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[2018] VSC 683

9 November 2018