Harris Scarfe Ltd (in Liq) & Harris Scarfe Wholesale Pty Ltd (in Liq) (No 3) - [2007] SASC 218

SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
HARRIS SCARFE LTD (IN LIQ) & HARRIS SCARFE WHOLESALE PTY LTD (IN LIQ) (No 3)
[2007] SASC 218
Judgment of The Honourable Justice Gray
14 June 2007
CORPORATIONS - WINDING UP - APPLICATIONS FOR WINDING UP BY COURT
CORPORATIONS - WINDING UP - LIQUIDATORS - APPOINTMENT - IN WINDING UP BY COURT
Application for court order winding up companies, appointing liquidators, and permitting applicants to dispense with notice requirements - companies had previously been wound up and applicants had previously been appointed liquidators by voluntary resolution of the creditors - directors' insurance policy arguably would not cover a claim by a liquidator who has not been appointed by a court - whether the Court has power to order winding up of companies and appointing of liquidators where the companies have already been wound up and liquidators already appointed - whether an insurance policy that would arguably not cover a claim by a liquidator who has not been appointed by a Court provides good reason to order that the companies be wound up and liquidators appointed - Held (allowing the application): the Court has power to order the winding up of companies and appointing of liquidators where the companies have already been wound up and liquidators already appointed - an insurance policy that would arguably not cover a claim by a liquidator who has not been appointed by a Court is a relevant factor in determining whether good reason exists to order that the companies be wound up and liquidators appointed - in the circumstances good reason exists to make the orders sought.
Corporations Act 2001 (Cth) s 439C, s 446A, s 459A, s 465A(b), s 465A(c), s 470(2)(b), s 470(2)(c), s 467(3)(b), s 467B, s 472(1), s 588M, referred to.
Commissioner of Taxation v Tull Reinforcing Pty Ltd (2006) 153 FCR 394; Dean-Willcocks (in his capacity as Liquidator of Austral Pacific Group Ltd (in liq)) [2004] NSWSC 1209; Re Green (as liquidator of Australian Resources Limited (in liquidation)) (2004) 52 ACSR 452; Carter & Anor (as liquidators of New Tel Ltd (in liquidation)) v New Tel Ltd (in liquidation) (2003) 44 ACSR 661, considered.

HARRIS SCARFE LTD (IN LIQ) & HARRIS SCARFE WHOLESALE PTY LTD (IN LIQ) (No 3)
[2007] SASC 218
Civil
GRAY J
Introduction

On 26 March 2007, I made orders winding up eleven entities forming a group of companies is known as the Harris Scarfe Companies.[1] I further ordered that Samuel Charles Davies and Colin McIntosh Nicol, the applicants, be appointed liquidators.
[1] Those entities were: Harris Scarfe Holdings Ltd (Receivers and Managers Appointed) (In Liquidation) (ACN 009 476 073); Harris Scarfe Ltd (Receivers and Managers Appointed) (In Liquidation) (ACN 007 870 886); Harris Scarfe Wholesale Pty Ltd (Receivers and Managers Appointed) (In Liquidation) (ACN 061 092 359); D-store Ltd (Receivers and Managers Appointed) (In Liquidation) (ACN 088 231 789); Camworks Pty Ltd (Receivers and Managers Appointed) (In Liquidation) (ACN 093 265 171); CDL Finance Pty Ltd (Receivers and Managers Appointed) (In Liquidation) (ACN 007 201 603); Direct Fulfilment Pty Ltd (In Liquidation) (ACN 009 480 013); GP Fitzgerald & Co Limited (Receivers and Managers Appointed) (In Liquidation) (ACN 009 475 530); Investment & Merchant Finance Corporation Limited (Receivers and Managers Appointed) (In Liquidation) (ACN 007 531 508); ACN 009 476 153 Limited (In Liquidation); and Tasmanian Retail Services Pty Ltd (Receivers and Managers Appointed) (In Liquidation) (ACN 009 577 511).
On 3 April 2001, Michael Joseph Dwyer and Lindsay Phillip Maxsted were appointed voluntary administrators of the Harris Scarfe Companies. On 3 January 2002, the creditors of the Harris Scarfe Companies resolved, pursuant to section 439C of the Corporations Act 2001 (Cth), that the Harris Scarfe Companies be wound up. By operation of section 446A of the Corporations Act, Mr Dwyer and Mr Maxsted became liquidators. On 11 November 2004, Mr Maxsted resigned as liquidator of the Harris Scarfe Companies. On 21 January 2005, Mr Dwyer was removed as liquidator. On the same day the applicants were appointed liquidators of the Harris Scarfe Companies.
This application concerned the applicants seeking an order of the Court to wind-up the Harris Scarfe Companies, an order appointing the applicants as liquidators of the Companies, and an order permitting the applicants to dispense with notice requirements.
I now provide my reasons for making those orders.
The Report
On 1 May 2005, Mr Davies prepared a report regarding the insolvency of Harris Scarfe Ltd, Harris Scarfe Wholesale Pty Ltd and D-store Ltd. The report was prepared for the purpose of pursuing preference claims. The report sets out material that evidences that Harris Scarfe Ltd and Harris Scarfe Wholesale Pty Ltd were unable to pay their debts as and when they fell due from at least 31 July 2000 and that this continued to 3 April 2001. The report further evidences that D-store Ltd was unable to pay its debts as and when they fell due at 30 November 2000 and that this continued to 3 April 2001.
The Harris Scarfe Companies, excluding Direct Fulfilment Pty Ltd and D-store Ltd, were parties to a Deed of Cross Guarantee and were subject to a class order issued by the Australian Securities and Investment Commission. Under the Deed of Cross Guarantee each guaranteed the debts of the others in the event of winding up. The end effect was that the assets and liabilities of the companies were pooled as though the Harris Scarfe Companies was a single entity.
The report pointed out that the Harris Scarfe Companies, although comprising separate legal entities, may be viewed as the one entity with respect to insolvency. It was said that the Companies were inexorably linked financially, resulting in the solvency of each being linked to the solvency of the others. Further, the Companies were wholly or majority owned by Harris Scarfe Holdings Ltd with largely common management and directorships.
Further reasons were identified in the report to treat the Harris Scarfe Companies as a single entity with respect to insolvency. These include the circumstance that a central overdraft facility was operated by Harris Scarfe Holdings Ltd, which supported the bank accounts of Harris Scarfe Ltd and Harris Scarfe Wholesale Pty Ltd, to which each of the Harris Scarfe Companies had access; that the Australia and New Zealand Banking Group Limited held security over the assets of all of the Companies with the exception of Direct Fulfilment Pty Ltd; and that the majority of the reports prepared and considerations made by management and the directors were focused on the Companies rather than individual entities.
The report identified evidence that the applicants intend to use to establish that Harris Scarfe Ltd and Harris Scarfe Wholesale Pty Ltd traded while insolvent during the period 31 July 2000 up to 3 April 2001 and that D-store Ltd traded while insolvent during the period 30 November 2000 up to 3 April 2001. The report provides evidence to support the conclusion that there were reasonable grounds for suspecting that at that time the Harris Scarfe Companies were insolvent. The report also evidences that the directors and senior management were aware of grounds for suspecting insolvency or alternatively, that a reasonable person in a like position within a company in the Harris Scarfe Companies’ circumstances would have been aware of grounds for suspecting insolvency.
The applicants estimate that the creditors of the Harris Scarfe Companies suffered loss and damage totalling $81.6 million in the period between August 2000 and April 2001.
Consideration of the Application
Section 588M of the Corporations Act provides:
(1)     This section applies where:
(a)     a person (in this section called the director) has contravened subsection 588G(2) or (3) in relation to the incurring of a debt by a company; and
(b)     the person (in this section called the creditor) to whom the debt is owed has suffered loss or damage in relation to the debt because of the company's insolvency; and
(c)     the debt was wholly or partly unsecured when the loss or damage was suffered; and
(d)     the company is being wound up;
whether or not:
(e)     the director has been convicted of an offence in relation to the contravention; or
(f)    a civil penalty order has been made against the director in relation to the contravention.
(2)The company's liquidator may recover from the director, as a debt due to the company, an amount equal to the amount of the loss or damage.
(3)The creditor may, as provided in Subdivision B but not otherwise, recover from the director, as a debt due to the creditor, an amount equal to the amount of the loss or damage.
(4)Proceedings under this section may only be begun within 6 years after the beginning of the winding up.
Having regard to the foregoing circumstances, it is appropriate to conclude that the applicants have made out a prima facie insolvent trading claim against directors of the relevant Harris Scarfe Companies.
Counsel for the applicants submitted that the likelihood of any successful judgment obtained pursuant to section 588M of the Corporations Act being enforced would depend on the success of the present application. This was said to be due to the terms of a directors and officers insurance policy held in relation to the former directors of the Harris Scarfe Companies.
With the exception of D-store Ltd, which was not acquired until 1 December 2000, the directors of the Harris Scarfe Companies were insured between the period 30 September 1999 to 30 December 2001 pursuant to the directors and officers insurance policy. The directors of D-store Ltd were insured by the policy from 1 December 2000, the date on which D-store Ltd joined the Harris Scarfe Companies.
In the event of a successful claim against the directors under section 588M, the applicants intend to seek indemnity from the directors’ insurer under the insurance policy. However, clause 6 of the policy provides:
The Company shall not be liable for Loss on account of any Claim made against any Insured Person:
…
(c) brought or maintained by or on behalf of any Insured…
“Insured” is defined in clause 21 of the policy to include the Insured Organisation and Insured Persons. “Insured Person” is defined as follows:
Insured Person, either in the singular or plural, means any natural person who is or was a past, present or future:
…
(d) liquidator of the Insured Organisation
…
but does not include:
…
(iii) a liquidator appointed by a court.
It follows that if the applicants are not appointed liquidators of the Harris Scarfe Companies by order of this Court, a defence may be raised by the insurer asserting that the applicants’ claim is excluded as a result of the operation of clauses 6 and 21 of the policy.
Making orders to appoint the applicants as liquidators of the Harris Scarfe Companies, pursuant to section 459A of the Corporations Act, will in the applicants’ submission enhance the prospect that the insolvent trading claim can be brought for the material benefit of unsecured creditors of the Harris Scarfe Companies. However, a court cannot appoint a liquidator until an order is made to wind up an insolvent company. Section 472(1) of the Corporations Act provides:
On an order being made for the winding up of a company, the Court may appoint an official liquidator to be liquidator of the company.
The Court has the power to wind up a company pursuant to section 459A of the Corporations Act. That section provides:
On an application under section 459P, the Court may order that an insolvent company be wound up in insolvency.
Section 467B makes it clear that the Court has power to order the winding up of a company even where the company is already being wound up voluntarily. Section 467B relevantly provides:
The Court may make an order under section 233, 459A, 459B or 461 even if the company is already being wound up voluntarily.
In Commissioner of Taxation v Tull Reinforcing Pty Ltd,[2] Besanko J, although declining to make an order in that case, observed:[3]
In my opinion, it is not necessary to make an order terminating the voluntary winding up of the company before making an order winding up the company in insolvency. It seems to me that s 467B contemplates an order winding up a company in insolvency even though the company “is already being wound up voluntarily”.
[2] Commissioner of Taxation v Tull Reinforcing Pty Ltd (2006) 153 FCR 394.
[3] Commissioner of Taxation v Tull Reinforcing Pty Ltd (2006) 153 FCR 394 at [12].
Further, in Dean-Willcocks (in his capacity as Liquidator of Austral Pacific Group Ltd (in liq)),[4] Palmer J noted:[5]
It is clear that the Corporations Act recognises that there may be a good reason for a person who has been appointed liquidator under a voluntary winding up to be appointed liquidator by the Court. That is why a voluntarily appointed liquidator is expressly given standing to seek a winding up order under s.459P(1)(e) and s.462(2)(d).
[4] Dean-Willcocks (in his capacity as Liquidator of Austral Pacific Group Ltd (in liq)) [2004] NSWSC 1209.
[5] Dean-Willcocks (in his capacity as Liquidator of Austral Pacific Group Ltd (in liq)) [2004] NSWSC 1209 at [4].
The existence of a policy of insurance that only covers a claim where a court has appointed the liquidators is a relevant factor in determining whether good reason exists to make an order under section 459A of the Corporations Act.
In Re Green (as liquidator of Australian Resources Limited (in liquidation))[6] a directors and officers’ liability insurance policy was in place, which, arguably, would not cover claims against directors for insolvent trading unless the proceedings were commenced by a court-appointed liquidator. Barrett J observed:[7]
By and large there is little practical difference between a creditors’ voluntary winding up and the form of winding up imposed by order of the court. The basic procedures and principles are the same in each case. Each course of action sees the claims of creditors determined, the assets of the company collected and realised and assets applied towards creditors’ claims. There therefore needs to be some good reason why, in a case where a creditors’ voluntary winding up is already in progress, the court should make an order imposing a different form of winding up.
…
The terms of the insurance policy are such that it arguably would not cover the consequences of claims against directors for insolvent trading unless the proceedings seeking recovery against directors were commenced by a court appointed liquidator. Whether this is so depends upon the proper construction of the terms of the insurance contract. Obviously, I am not called upon in these proceedings to come to a definitive view on that matter. It is sufficient to say that the prospects of arguing successfully that the policy is responsive to claims against directors for insolvent trading appear to be substantially enhanced if the liquidator pursuing those claims is a court appointed liquidator, as referred to in the policy, rather than a liquidator under a creditors’ voluntary winding up. That consideration and the possibility of concomitant benefits to the general body of creditors provide, to my mind, a sufficient reason for making the order that is sought.
[6] Re Green (as liquidator of Australian Resources Limited (in liquidation)) (2004) 52 ACSR 452.
[7] Re Green (as liquidator of Australian Resources Limited (in liquidation)) (2004) 52 ACSR 452 at [5], [8].
Similarly, in Carter & Anor (as liquidators of New Tel Ltd (in liquidation)) v New Tel Ltd (in liquidation), [8] Austin J observed:[9]
It is clear that the court may make an order for the winding up of a company in insolvency, or upon other grounds, if the company is already in voluntary winding up. The Corporations Act assumes the point in various sections. For example, ss 459P(1)(e) and 462(2)(d) give standing to a liquidator to seek a winding-up order. Section 513A explains when a winding up by order of the court is taken to have begun or commenced in circumstances where, inter alia, a winding up of the company was already in progress. Obviously, however, there must be good reasons for the court to intervene by making a winding-up order in the case where the company is already in liquidation.
[8] Carter & Anor (as liquidators of New Tel Ltd (in liquidation)) v New Tel Ltd (in liquidation) (2003) 44 ACSR 661.
[9] Carter & Anor (as liquidators of New Tel Ltd (in liquidation)) v New Tel Ltd (in liquidation) (2003) 44 ACSR 661 at [5].
Austin J considered that one reason that warranted the making of the orders sought was that the directors and officers’ liability insurance policy provided that “the Company shall not be liable for Loss of any Claim made against any Insured Person”, and “a liquidator appointed by a court” was expressly excluded from the definition of “Insured Person”. Austin J made the order: [10]
[w]ithout expressing any concluded view as to whether a claim under the policy is more likely to succeed if a winding-up order is made by the court than if the company is left in a deemed creditors voluntary winding up…
[10] Carter & Anor (as liquidators of New Tel Ltd (in liquidation)) v New Tel Ltd (in liquidation) (2003) 44 ACSR 661 at [19].
In the present case, it was appropriate to make the orders sought. The creditors should not be denied the right to recover from the insurance policy simply because the Companies were wound up voluntarily rather than by an order of this Court. In this circumstance it was appropriate for the Court to order that the Harris Scarfe Companies be wound up and that the applicants be appointed liquidators.
Consequential Matters
Section 467(3)(b) provides:
(3)The Court may, on the application coming on for hearing or at any time at the request of the applicant, the company or any person who has given notice of intention to appear on the hearing of the application:
…..
(b) dispense with any notices being given or steps being taken that are required by this Act, or by the rules, or by any prior order of the Court;
Using these powers it was appropriate to order dispensation with the notice requirements provided by sections 465A(b), 465A(c), 470(2)(b) and 470(2)(c). This order was sought to avoid the cost burden of complying with these provisions. The liquidators have undertaken to advise of the making of the winding-up order on Harris Scarfe’s website.
Conclusion
For these reasons the application was allowed.