Hughes, R.M. v Horn, C.L
[1995] FCA 368
•6 JUNE 1995
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) NG 3618 of 1994
)
GENERAL DIVISION )
IN THE MATTER OF PORI PTY LTD (in liquidation)
ACN 001 518 556
ROBERT MURRAY HUGHES
Applicant
CHRISTOPHER LAWRENCE HORN
as liquidator of Pori Pty Ltd
Respondent
Coram: Whitlam J
Place: Sydney
Date: 6 June 1995
MINUTES OF ORDER
THE COURT ORDERS THAT:
1. The application be dismissed.
2. The liquidator's costs, including any reserved costs, form part of the costs, charges and expenses of the winding up.
3. The applicant pay the costs of the Baulkham Hills Council.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
)
NEW SOUTH WALES DISTRICT REGISTRY ) NG 3618 of 1994
)
GENERAL DIVISION )
IN THE MATTER OF PORI PTY LTD (in liquidation)
ACN 001 518 556
ROBERT MURRAY HUGHES
Applicant
CHRISTOPHER LAWRENCE HORN
as liquidator of Pori Pty Ltd
Respondent
Coram: Whitlam J
Place: Sydney
Date: 6 June 1995
REASONS FOR JUDGMENT
This is an application to terminate the winding up of Pori Pty Ltd ("the company"), which is being wound up in insolvency pursuant to an order made by the Supreme Court of New South Wales on 28 February 1994. That order was made on a creditor's application by the Baulkham Hills Council ("the Council").
The applicant and his wife each hold one of the two issued shares in the company and are its directors. His application was served upon the company's liquidator. It was not served upon the company's creditors. However, leave was granted to the Council to be heard in opposition to the application.
Upon the hearing of the application, the solicitor for the applicant asked that the Court make an order in the following terms:
"1. Subject to paragraphs 2 and 3 below, order that the winding up of the [company] be terminated, such termination to take effect from the date to be determined by the Court on ........ ..... 1995.
2. The order made in paragraph 1 above is conditional upon the applicant making sufficient funds available to the liquidator of the [company] to:-
a. pay in full the claims of the creditors of the [company], and
b. pay in full the liquidator's costs of the winding up.
3. If the payments referred to in paragraph 2 above are not made by ........ ...... 1995 then the order in paragraph 1 above will lapse."
(It may be noted that paragraph 1 of this order would not terminate the winding up "on a day specified in the order" as required by s 482(1) of the Corporations Law.)
As at 31 March 1995 the liquidator had received creditors' claims totalling $917,463. (This sum included a claim by the applicant for $290,000.) Also the liquidator estimated his outstanding costs (excluding legal fees) as at 12 May 1995 at approximately $22,500. This suggests that the payments contemplated by paragraph 2 of the proposed order will amount to at least $939,963.
What funds are presently available to make such payments? The company was the trustee of the Robert Hughes No. 2 Trust ("the trust"). It has no assets of its own beyond its paid up share capital of $2. All the creditors of the company are creditors of the trust. Realisation of trust assets resulted in approximately $236,891 cash being available at the bank as at 12 May 1995. The only significant assets of the trust not yet realised are two properties, one at Castle Hill and one at Mudgee.
In fact, the applicant does not propose his "making" any funds available to the liquidator, notwithstanding the terms of paragraph 2 of the proposed order. Instead, he says in his affidavit sworn on 16 March 1995 that he has "made arrangements" with a finance company called Arkway Pty Limited ("Arkway") to advance $450,000 to the company. Further, he says in the same affidavit that, if the Court terminates the winding up:
"I will cause [the company] to issue to me 290,000 preference shares in accordance with [the company's] articles of association. I will pay for these shares by forgiving the debt of $290,000 due to me from [the company]. I will then not make any claim as a creditor of [the company]."
In addition, Mr John Mladineo, who says that he has known the applicant for about twenty years, deposes in an affidavit sworn on 27 April 1995 that he is prepared to lend the company $30,000 to be used to pay outstanding creditors.
The applicant's proposal envisages, therefore, that the company should borrow $480,000 in order to pay the creditors (other than the applicant) and the costs of the liquidation. What are the terms of the proposed borrowings?
Arkway's solicitors wrote to the applicant's solicitors on 20 September 1994. They offered to advance $380,000 on the security of a first registered mortgage over the Castle Hill property and $70,000 on the security of a first registered mortgage over the Mudgee property. The term of each loan was to be twelve months. Arkway's solicitors indicated that their client reserved "its rights to withdraw its offer of finance should the valuation and/or searches and inquiries prove unsatisfactory".
There is no evidence of Arkway's valuation requirements. However, the letter offering the $380,000 loan states: "We confirm that on completion of the renovation/improvements a further $80,000.00 will be advanced provided the valuation from Preston Rowe Patterson on completion is a minimum of $700,000.00."
Some valuations have been obtained. Mark K. Hopcraft valued the Mudgee property at $170,000 on 6 September 1994 for a mortgage broker retained by the applicant. Patrick James Woods valued the Mudgee property at $180,500 on 12 April 1995 for the liquidator. In addition, on 23 February 1995 the sales manager of the local L J Hooker real estate agency gave a written opinion to the liquidator that the Castle Hill property "would achieve a sale price of approximately $300,000 to $350,000".
Based on this material it would seem extremely doubtful that the Castle Hill property could meet any valuation requirement for a loan of $380,000. The letter from Arkway's solicitors suggests the financier would be looking for a valuation of $700,000 to support total borrowings of $460,000 on the Castle Hill property.
There is another problem too. The title deeds to the Mudgee property are held by one of the company's creditors, Mr Warren Rogan, who is claiming an equitable mortgage. Such a security was not shown in the report as to the company's affairs submitted to the liquidator by the applicant. The liquidator has evidently not yet decided whether to dispute Mr Rogan's claim.
There is no evidence as to the terms upon which Mr Mladineo is prepared to lend $30,000. The applicant's solicitor appears to have assumed that this sum will also bear interest at the 12% rate offered by Arkway. Such a loan must, however, be regarded as repayable on demand.
The borrowing proposals are very vague. The evidence as to how the company could possibly service such loans is unconvincing. In his first affidavit sworn on 16 March 1995 the applicant suggests only two sources of income for the company, were its winding up to be terminated, rent of $550 per week for Castle Hill and $140 per week for Mudgee. In his latest affidavit sworn on 25 May 1995 the applicant attempted to give global estimates of additional income in a rolled-up form that was not admitted into evidence.
The applicant's proposal to forgo his claim as a creditor in exchange for the allotment of preference shares is also ill-considered. First, the company has no such shares. Secondly, the indebtedness is that of the trust and there must be consideration for the allotment of any shares by the company.
In any event, it is by no means clear that the applicant accepts that the only debt for which he could prove is the sum of $290,000. He has tendered in support of his
present application financial statements of the trust prepared by his accountant on his instructions. These accounts include an acknowledgment by the applicant and his wife dated 10 March 1995 that they are owed by the trust $1,677,619.72 as at 30 June 1994. This acknowledgment goes on to record their agreement not to seek repayment of that amount "whilst the trustee is not in a position to repay other creditors".
The applicant accepts that the company is insolvent. Obviously the company cannot at present be fully indemnified out of the trust assets for the debts incurred. However, his solicitor contends that, once the winding up is terminated as proposed, the creditors will have been paid and the company will be solvent. I cannot accept this submission.
The rental incomes of the two properties will be quite inadequate to service the interest payments. At the end of the term of twelve months there is no evidence that the trust will be able to repay the principal of $450,000 then due. Of course, the sum of $30,000 will be repayable at any time. The trust will remain insolvent.
The present position of the company in relation to the trust also complicates matters. This question is touched on in the letter dated 2 May 1995 to the applicant's solicitors from the liquidator's solicitors. The trust deed exhibited to the applicant's first affidavit has not been tendered. However, it appears from the letter that a new trustee has been appointed. The liquidator is still entitled to enforce the company's right of indemnity by an equitable lien over the trust assets, but it may be doubted whether the
company can otherwise deal with trust assets. In the instant case the consideration is not critical since the trust not only is insolvent, but would remain so, even if the re-financing were implemented.
The application will be dismissed. The liquidator's costs will form part of the costs, charges and expenses of the winding up. The applicant must pay the Council's costs.
I certify that this and the preceding six pages are a true copy of the reasons for judgment herein of the Hon. Justice A.P. Whitlam
Associate:
Date: 6 June 1995
Mr James Pope of Pope & Spinks, solicitors, appeared for the applicant.
Mr Justin Kang of Dibbs Crowther & Osborne, solicitors, appeared for the liquidator.
J.T. Johnson of counsel, instructed by Sally Nash & Co., appeared for the Baulkham Hills Council.
Date of hearing: 26 May 1995
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