Heron Abbey Pty Ltd (in liq)
[1999] VSC 226
•22 June 1999
SUPREME COURT OF VICTORIA
CORPORATIONS JURISDICTION Do not Send for Reporting Not Restricted
No. 5177 of 1999
| HERON ABBEY PTY LTD (IN LIQUIDATION) | Plaintiff |
| and | |
| IN THE MATTER OF SECTION 479(3) OF THE CORPORATIONS LAW |
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JUDGE: | Gillard J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 8 and 18 June 1999 | |
DATE OF JUDGMENT: | 22 June 1999 | |
CASE MAY BE CITED AS: | Heron Abbey Pty Ltd (in liq) | |
MEDIA NEUTRAL CITATION: | [1999] VSC 226 | |
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Corporations Law – Section 479(3) – Liquidator seeking direction from court concerning proposed sale of shares – Principles – Value of shares – Disputed – Direction refused
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APPEARANCES: | Counsel | Solicitors |
For the Applicant | Mr A. Phillips | Ponte Earle Harrick |
| For the Mr and Mrs Leslie Dobson (by leave) | Mr T. Jacobs | Deacons Graham & James |
HIS HONOUR:
This is the return of a notice of motion wherein the applicant, the liquidator of Heron Abbey Pty Ltd (in liquidation) seeks an order pursuant to s.479(3) of the Corporations Law that he be directed to enter into an agreement on behalf of the company to sell shares it owns in a proprietary company.
Parties
The applicant is John Malcolm Perrins ("the liquidator") who is the official liquidator of the company Heron Abbey Pty Ltd ("Heron Abbey"), having been appointed by the Federal Court of Australia on 17 June 1996.
Heron Abbey owns a 20% shareholding in a company called Queensland Aged Care Pty Ltd ("Queensland Aged Care") which carries on the business of a nursing home in Burpengary in the State of Queensland.
The liquidator wishes to sell the shares to Nicholas and Sergio Masinello for $100,000. Mr Leslie and Mrs Rose Dobson are directors of Heron Abbey. Their son, Mr Keith Dobson, was formerly a director of the company.
The present shareholders of Heron Abbey are Mrs Dobson and Mr Keith Dobson. It would appear that Mr Leslie Dobson at some time held shares in Heron Abbey.
Messrs Nicholas and Sergio Masinello each own 40% of the shares in Queensland Aged Care.
Mr and Mrs Dobson and their son oppose the sale on the ground that the sale of the shares in Queensland Aged Care is at a substantial undervalue.
Proceeding
The notice of motion first came on for hearing before me on 30 April 1999 and Mr Keith Dobson attended and sought leave to address the court on behalf of his parents. He is an undischarged bankrupt. I permitted him to do so.
I ordered that the documents be served on Mr and Mrs Leslie Dobson and also their son. I gave directions with respect to the filing of affidavits.
Mr A. Phillips of counsel appears for the liquidator and Mr T. Jacobs of counsel appears for Mr and Mrs Dobson.
Mr Jacobs sought and was granted leave by the court for, Mr and Mrs Dobson as contributories and officers of Heron Abbey to be heard without becoming parties. I granted leave pursuant to Rule 3.17 of the Corporations Rules. Mr Phillips on behalf of the liquidator did not oppose that course. On being asked by the court whether it was proposed that an application would be made to join Mr and Mrs Dobson as parties neither counsel sought to do so.
In support of the notice of motion the liquidator filed an affidavit which he swore on 9 April 1999 before a Consul in the Australian Embassy in Bangkok. Because there was some doubt concerning the attestation I granted leave to the deponent to re‑swear the affidavit on 4 June 1999 which he did.
At the hearing the liquidator relied upon three affidavits sworn by him and Mr and Mrs Dobson relied on an affidavit sworn by their son on 3 June 1999.
Neither deponent was cross-examined.
Application under s.479(3) of the Corporations Law
The liquidator's notice of motion seeks an order as follows –
"An order pursuant to s.479(3) of the Corporations Law that the liquidator be directed, to enter into an agreement with Nicholas and Sergio Masinello, for the sale of Heron Abbey's shares in Queensland Aged Care Pty Ltd for $100,000."
It was accepted by counsel for the liquidator that the direction sought was in the form of permission to enter into the sale or approval of the sale.
The dispute over the sale price of the shares has existed from at least 2 June 1998 in a tentative form and as at 15 September 1998 in a concrete form.
During the latter part of 1998 the Dobsons retained Messrs Minter Ellison, Lawyers at their Brisbane office to look after their interests and in correspondence passing between the firm and the liquidator there is an intimation of possible litigation over the sale of the shares.
There is a clear dispute between the parties as to the value of the shares and accordingly the liquidator makes application for directions under s.479(3) for authority to proceed with the sale to avoid being accused of acting unreasonably if he makes the sale.
Counsel on behalf of Mr and Mrs Dobson submit that because there are factual matters in dispute the court should refuse to give directions because it is not a matter for the court to make a commercial decision for the liquidator.
The authorities with respect to the exercise of the court's power to give directions under s.479(3) were considered and summarised by McLelland J in Re G.B. Nathan and Co Pty Ltd (in liq) (1991) 24 NSWLR 674.
At p.679 his Honour said –
"The historical antecedents of s.479(3), the terms of that sub‑section and the provisions of s.479 as a whole combine to lead to the conclusion that the only proper subject of a liquidator's application for directions is the manner in which the liquidator should act in carrying out his functions as such, and that the only binding effect of, or arising from, a direction given in pursuance of such an application (other than rendering the liquidator liable to appropriate sanctions if a direction is mandatory or prohibitory form is disobeyed) is that the liquidator, if he has made full and fair disclosure to the court on the material facts, will be protected from liability for any alleged breach of duty as liquidator to a creditor or a contributory or to the company in respect of anything done by him in accordance with the direction.
Modern Australian authority confirms the view that s.479(3) 'does not enable the court to make binding orders in the nature of judgments' and that the function of a liquidator's application for directions 'is to give him advice as to his proper course of action in the liquidation; it is not to determine the rights and liabilities arising from the company's transactions before the liquidation': see Re Security Provident Fund Ltd (1984) 73 FLR 264 at 265."
His Honour referred to a number of authorities. However, in appropriate circumstances a court may convert the proceeding into another proceeding and make an order declaratory of substantive rights.
Nevertheless, a court will give directions to a liquidator to avoid an allegation that he has acted unreasonably and to avoid any claim being made against him. I refer to Sanderson v. Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 at 117 and Re Addstone Pty Ltd (1997) 25 ACSR 357 at 363.
In Sanderson's case Young J at p.117 said –
"Essentially, then, though there is wide jurisdiction given to the court under s.379(3) of the code, it is usually only proper to exercise that power where the matter involves guidance to the liquidator on matters of law or principle or to protect him against accusations of acting unreasonably. The court does not usually consider it proper to intervene and make the liquidator's commercial decision for him. Indeed the court is always reluctant to credit itself with any degree of competence in this field at all."
In Re Addstone Pty Ltd, supra, Mansfield J at p.363 said –
"While the court may be reluctant to give directions when purely commercial considerations are relevant to the liquidator's decision, even in relation to the conduct of litigation, there will be circumstances where it is or may be appropriate to do so. Some of those circumstances may be where the liquidator's proposed decision is the subject of criticism by a particular creditor or creditors as being unreasonable or mala fides.
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Although the procedure is not one appropriate for the resolution of disputed significant matters of fact, the mere fact that some creditor or other person appears at the application and opposes it is not per se a reason not to grant directions if they are otherwise appropriate;"
The Corporations Law entrusts to the liquidator, subject to very few controls, the entire conduct of the liquidation. He is empowered to do what he considers is in the best interest of creditors as a whole and this may involve making a commercial judgment.
In my opinion it is appropriate for the liquidator here to seek directions of the court with respect to the sale of the shares. However, whether or not the court should give directions will depend upon all the circumstances. If there is a real dispute with respect to the valuation of the shares the court should not give directions pursuant to s.479(3) unless resolution of the dispute is obvious and does not involve the court making findings of fact in respect of which there is a dispute.
No doubt, if the parties desired the proceeding could be amended to enable the dispute to be resolved but the parties before me did not seek that course. I sense that because the dispute involves factual matters concerning a business in Queensland this court would not be the appropriate forum to decide the dispute.
It therefore becomes necessary to consider the valuation of the shares and whether the proposed sale is in the interests of the company and the creditors.
I accept Mr Phillips' submission that in the end result it is a question of considering the commercial judgment of the liquidator and whether it would be appropriate for him to sell but in so doing the valuation of the shares is clearly an important element.
Facts
At the hearing before me there was no dispute between the parties with respect to the facts save and except for the value of the shares as at today.
At the outset it is important to emphasise that the sale of shares has not taken place and their value must be as at today.
After I had reserved, the liquidator sought leave to re-open the proceeding and rely upon an affidavit of Sergio Guido Masinello sworn 9 June 1999.
I granted leave to the liquidator to re-open his case and rely upon the affidavit, granted leave to Mr and Mrs Dobson to rely upon an answering affidavit by their son, Keith Dobson sworn 17 June 1999, and I heard counsel on behalf of the liquidator and Mr and Mrs Dobson.
Mr Masinello's affidavit reveals two important facts. First, that he and Nicholas Francis Masinello have each increased their shareholding in Queensland Aged Care Pty Ltd from 20% to 40% and secondly, that the number of low care beds for which Queensland Aged Care had a provider licence was 46 less beds than Mr Dobson had sworn in his affidavit which was before the court at the first hearing.
It will be necessary to further consider the further affidavits of Messrs Masinello and Keith Dobson.
I now turn to the facts.
On 25 March 1996, Heron Abbey was placed in liquidation by order of the court. Reginald Robert Eustace was appointed liquidator and he was removed by order on 17 June 1996. The present liquidator, Mr Perrins, has been unable to gain possession of the books and records of Heron Abbey. The only record that he has in his possession is the statutory register for Heron Abbey. There is a dispute as to whether the books were handed over to Mr Eustace.
The only asset of Heron Abbey is the 20% shareholding in Queensland Aged Care.
On 3 April 1997 Mr and Mrs Dobson signed the statement verifying the report as to the affairs of the company. The only asset which was revealed was the said shares which were valued by them at $140,000. It was asserted by the Dobsons that the company owned a one-third ownership in Queensland Aged Care. In fact, Heron Abbey owns 20%.
Mr Keith Dobson, as a former director, also signed a statement verifying the report as to the company's affairs and he estimated the value of the shares at $140-200,000.
Both reports reveal nil liabilities. However, creditors' claims to date total $229,539.86. The liquidator has been unable to determine the veracity of the claims made because of the lack of books.
The proposed purchasers, Messrs Nicholas and Sergio Masinello, own 80% of the shares in Queensland Aged Care having increased their shareholding by each purchasing 20% from other shareholders for $50,000 on 8 May 1998 according to the recent affidavit of Sergio Masinello. He was not cross-examined on his affidavit.
In order to determine the value of the shareholding in Queensland Aged Care a valuation was obtained to assess the market value of the hostel business conducted by the company.
A qualified valuer, Robert Lister, was retained to carry out the valuation. He was appointed on the recommendation of the solicitors then acting for the Dobsons.
On 1 July 1997 Mr Lister valued the business at $500,000 which means that if the shares in Queensland Aged Care are to be valued by reference to the value of the business then the interest of Heron Abbey was in the vicinity of $100,000.
I interpolate to note that Mr Lister's valuation was not the subject of an affidavit by him and is clearly hearsay. No objection was taken to its use on this application, no doubt because the Dobsons have exhibited through the affidavit of Mr Keith Dobson a valuation which is also not the subject of sworn evidence.
Two observations of substance can be made about the Lister valuation which results in the valuation having very little relevance as at today.
The first observation I make about Mr Lister's valuation is that it is dated 1 July 1997 and relates to an inspection of the hostel on 14 April 1997. Some 23 months have now passed and in my opinion the liquidator would not be acting reasonably to rely upon it.
However, there is a more substantial criticism. In order to operate an aged care hostel it is necessary to obtain permits from the Federal Government and to be registered with it. In January 1996 when the hostel known as Burpengary Gardens commenced its operation, Queensland Aged Care had permits for 47 beds. Each permit carries a value and can be freely sold. When Mr Lister carried out his valuation he put the value per bed at somewhere between $5,000 to $6,000.
On the evidence provided by another valuer, Paul Anthony & Co Pty Ltd, specialising in nursing homes, private hospitals and private hostels, the value per bed as at 5 May 1999 is put at some $30,000.
There is no contest between the two valuations because one is speaking as at 1 July 1997 and the other is speaking as at 5 May 1999.
Even allowing for difference of opinion in relation to the valuation of the bed permits the difference between $6,000 and $30,000 is substantial. It translates into a value of between $282,000 to $1,410,000 for the permits.
But an event of significant importance has occurred since 1 July 1997.
To understand it, it is necessary to go back in time. Mr Keith Dobson, who is a nurse, entered into a joint venture agreement on 8 March 1995 with Mr Nick Masinello for the purpose of establishing the aged care hostel in Queensland. Mr Keith Dobson nominated Heron Abbey as his nominee to the agreement. According to Mr Dobson it was a term of the agreement that the parties would seek to obtain approval for the provision of additional beds. Arguably the agreement contemplates expansion of the business.
Queensland Aged Care operates the business but does not own the freehold. The business has a lease of the land for 15 years.
In his affidavit sworn 3 June 1999, Mr Keith Dobson deposed that in 1998 Queensland Aged Care obtained approval for an additional 42 beds from the Federal Government. This increased the number of beds from 47 to 89. Based upon the valuations this valued the bed permits between $534,000 and $2,670,000.
That was the state of the evidence at the conclusion of the hearing.
In the affidavit of Sergio Guido Masinello sworn 9 June 1999, the deponent swore that in 1998 the hostel was extended to include a further 46 low care beds, the cost of the extension was borne by a company of which he and Nicholas Masinello were directors and majority shareholders. He stated that Queensland Aged Care did not have an interest in a company known as Burpengary Aged Care Limited which applied for and received the provider licence to operate 46 low care beds in the extension.
He provided a letter from the Commonwealth Department of Health and Family Services dated 24 September 1998 noting the provision of a provider licence for 46 low care beds to Burpengary Aged Care Pty Ltd. The contention is that Queensland Aged Care owns 47 permits and not 89 as deposed to by Keith Dobson.
This revelation apparently was a surprise to Mr Keith Dobson who swore in his later affidavit that he understood Queensland Aged Care was the company that had obtained the additional beds. His understanding was based on the fact that applications were made in late 1996 by Queensland Aged Care for additional beds. He has produced some documents which support his contention.
He stated that he had never heard of Burpengary Aged Care Pty Ltd until he had read Mr Masinello's affidavit and produced a company extract of Burpengary Aged Care Pty Ltd which revealed the directors and shareholders of that company were Nicholas Francis Masinello and Sergio Guido Masinello. They are the persons who are the proposed purchasers of Heron Abbey's interest in Queensland Aged Care.
An area of potential dispute between Heron Abbey and Nick Masinello arguably arises out of the terms of the joint venture agreement. The dispute relates to whether Mr Masinello has breached that joint venture agreement by causing another company to obtain the permits for the additional beds.
Decision
Plainly, there are areas of potential dispute.
Mr Lister valued the business based upon 47 beds and he was of the view that the value of the permits were $5,000-6,000 each. There is evidence, admittedly untested, that the value of the permits is $30,000 each which would put the value of the bed permits alone at $1,410,000. If the additional permits were owned by Queensland Aged Care the value is far greater. However, as Mr Phillips submits there is the argument that Heron Abbey has repudiated the joint venture agreement and it has been rescinded or can be rescinded. The fact that Heron Abbey is in liquidation and has been for some years may provide some support for the contention. In my opinion it is largely speculative whether Heron Abbey has any possible claim in respect of the additional permits. Further, the joint venture agreement does not clearly give any right to Heron Abbey to claim that the additional permits should have been granted to Queensland Aged Care.
In my opinion, in the light of the available evidence the liquidator would not be acting reasonably to rely upon the valuation of Mr Lister because of its age, and the value that he puts on each bed which in my view is unrealistic today. Further, now that it is known the prospective purchasers own 80% there is a prospect they would be prepared to pay more. Negotiation will ascertain that with an indication of a sale to a third party by the liquidator. This was contemplated by the joint venture agreement. Further, the liquidator has not sought to sell the shares to any other prospective purchaser. He has not tested the market which if he did may bring pressure on the proposed purchasers to pay a more realistic price.
In my view he would not be acting reasonably selling the shares to the Masinellos for $100,000. An approach to those who handle sales of bed permits would reveal the value per bed is considerably more than $6,000. The evidence supports that observation.
Mr Phillips relied upon the recent evidence of Mr Sergio Masinello that he and his co‑purchaser had each purchased 20% of the shares for $50,000 in May 1998. This evidence was not subject to cross‑examination. The value of it is questioned by the facts that the vendors reside in Italy, the sale allegedly occurred in May 1998 and the circumstances are not known. The value put on the shares in the alleged transactions does not accord with other valuation evidence.
Mr Phillips on behalf of the liquidator submitted that weight had to be attached to the commercial judgment of Mr Perrins the liquidator. I agree. Mr Perrins did have the valuation checked by a manager of Price Waterhouse Coopers located in Sydney who opined the view that the valuation was reasonable. Nevertheless, that opinion also suffers from the fact that it is out of date.
Mr Perrins, in his later affidavit, identified a number of factors which were relevant to his decision and which would have the effect of reducing the price of the shares.
The first factor which is of substance is that the shares are in a private company, represent a minority shareholding and accordingly will be difficult to sell.
Secondly, he has not received any offer for the purchase from any party other than Messrs Masinello who are 80% shareholders in Queensland Aged Care. He does not give any evidence of any efforts made to sell to any other party.
The Articles of Association do not provide for the sale of shares to existing shareholders or indeed set out any other procedure concerning sale, however, it is noted that Article 22 gives power to the directors to decline to register any transfer of shares without assigning any reason therefore. It is said that that would have a dampening effect upon the value of the shares. It may, but whether the directors could use that power may raise questions concerning oppressive conduct and restraint of trade.
Another factor is that as a minority shareholder Heron Abbey cannot force the other shareholders to purchase the shares and Heron Abbey has limited ability to influence the operation of the business of Queensland Aged Care. But in this respect it cannot be overlooked that Queensland Aged Care was the product of a joint venture which no longer subsists. One joint venturer may be able to influence the future of the company. The other joint venturer could not ignore this possibility.
He also points out that he does have an obligation to sell up the assets of Heron Abbey and distribute the net proceeds to the creditors.
He also emphasises that there are restrictions by reasons of the Corporations Law with respect to selling the 20% interest to the general public. Counsel referred to s.1043B of the Corporations Law and also s.1043D and the Regulation 7.12.08C. He also drew the court's attention to s.1078(1) of the Law which places restrictions on hawking securities. The point is made that he does not have the funds available to him to comply with the necessary requirements of the law concerning selling the shares to the general public. But in my opinion these requirements are not onerous, burdensome or expensive. They are designed to inform prospective purchasers of all relevant matters. That is the Law. I do not see any difficulty or huge expense in complying. The liquidator is protected to some extent by the fact that he knows the shares have real value.
I accept that they are all factors that would have to be weighed up in determining what was a reasonable sale price for these shares. But they have to be weighed with the factors mentioned. Factors which point to a significantly greater value.
Mr Phillips, in the course of submissions, drew attention to the fact that under the joint venture agreement the recent expansion of the hostel has been done without any input from Heron Abbey. The thrust of his submission was that Heron Abbey may be liable to pay compensation to the other party to the joint venture agreement. The other party is in fact one of the proposed purchasers. He submits that the risk of Heron Abbey being obliged to make some contribution should be taken into account in determining the sale price.
I reject the argument. In my opinion the terms of the joint venture agreement are irrelevant to the question of the value of the shares as at today held by Heron Abbey in Queensland Aged Care. If Heron Abbey has breached the joint venture agreement which may have caused Nick Masinello any damage, findings I do not make, the question of damages has no relevance to the value of the shares in Queensland Aged Care.
The fact is that the liquidator's starting point which was the valuation of Mr Lister is not a reliable foundation to value these shares. In light of the evidence of the valuer, Paul Anthony and Co Limited, the shares would be substantially undervalued because the value of bed permits has increased substantially over the last two years.
In my opinion the liquidator would not acting reasonably in the discharge of his duties in selling the assets of the company and accordingly I decline to give any direction with respect to the proposed sale. There is a real dispute with respect to value and arguably a dispute concerning the ownership of the additional permits, issues which cannot be resolved in an application such as the present.
I think there are other avenues to explore. The starting point would be a new valuation based on present day prices, and consideration to selling the shares on the open market. I refer to clause 14 of the joint venture agreement which may be an inexpensive way of resolving the dispute. Further, the liquidator can explore selling to others and also thought to the right to Heron Abbey as a co‑joint venturer bringing pressure on the other joint venturer who is one of the proposed purchasers. In my opinion there are good prospects of obtaining a substantially increased price.
Mr Phillips submitted that instead of dismissing the application the court should adjourn it to enable the liquidator to obtain another valuation and seek a higher purchase price. In my opinion that course is not appropriate. The application has been made. It has failed. In the circumstances it should be dismissed.
One cannot say what the future holds. The liquidator may be able to sell without returning to court. He should be encouraged to do so. He is in charge of the liquidation: not the court.
Subject to any submissions from counsel I propose to make the following orders –
1.That the notice of motion issued on behalf of the liquidator, John Malcolm Perrins, on 22 April 1999 be dismissed.
2.That the applicant, John Malcolm Perrins, pay the costs of Mr and Mrs Leslie Dobson and such costs be costs in the liquidation.
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