Jekos Holdings Pty Ltd v Australian Horticultural Finance Pty Ltd Australian Horticultural Finance Pty Ltd v Jekos Holdings Pty Ltd

Jekos Holdings Pty Ltd brought an application to wind up Australian Horticultural Finance Pty Ltd (AHF) on the basis of insolvency and inactivity. AHF sought an injunction to restrain Jekos from further prosecuting its winding up application until the outcome of an appeal, currently before the Queensland Court of Appeal, in proceedings between Jekos and other creditors of AHF, on one side, and AHF, on the other. AHF also applied to set aside statutory demands issued by Jekos and those other creditors. The decisive question was whether Drummond J should adjourn Jekos' winding up application until the appeal proceedings were completed.

Jekos sought to wind up AHF on the basis that AHF had not traded for a whole year and that it was insolvent. The relationship between AHF and Jekos arose in the context of a tax avoidance scheme based on a macadamia plantation operation. AHF’s role was to provide finance to persons like Jekos, who were participants, as investors, in the scheme, on terms intended to produce tax and other benefits to those investors. The scheme failed, apparently because of the lack of investor interests. The litigation in the Supreme Court took the form of an action by Jekos and the other 10 persons to recover from AHF pre-payments of interest made by each, to AHF, in respect of its participation in the scheme, as money paid on a consideration that wholly failed. AHF counter-claimed for the amounts it allegedly lent to each, for investment in the scheme. Dowsett J gave judgment for Jekos and the other applicants for a total of about $615,000 and dismissed AHF’s counter-claim.

The appeal before the Queensland Court of Appeal involved a fairly narrow question of law as to whether AHF's role in the “round robin” was sufficient to amount to the performance of its obligations under the loan agreements with Jekos and the other plaintiffs to make the promised loan advances. Even if AHF had not carried on business over the past five years, so that the Court's discretion to wind it up on the ground provided for by s 461(c) was enlivened, having regard to the fact that it was incorporated for this single venture and to its litigation activities that arose out of that venture, there would still be a good discretionary argument that it should not be wound up pursuant to s 461(c). If that were the only ground upon which the petition were based, it would, in Drummond J's opinion, be appropriate to grant an adjournment of the petition until conclusion of the appeal proceedings.

AHF was presently insolvent. However, if it won its appeal, it appeared that it may well become solvent. Moreover, success in the appeal would give it good reason to think that it could recover substantial moneys from other investors in the tax avoidance scheme, apart from Jekos and the other plaintiffs in the Supreme Court proceedings. AHF claimed to have advanced what now amounted to in excess of $9M (with interest) to about 200 investors. It appeared that, apart from the judgment debts the subject of the appeal proceedings, the only other significant indebtedness of AHF was, firstly, to the scheme manager and scheme plantation owner, companies associated with AHF: both had written off the debts owed by AHF and, consistently with that, appeared not to have sought to pursue AHF for repayment, although the debts may not yet be statute barred; and, secondly, in the sum of about $1M in respect of a guarantee AHF gave to a person who appears to have sold to one of the scheme organisations some of the properties around which the scheme was structured. However, the evidence showed that while about three years ago, ie, at the time Jekos and the other plaintiffs commenced the proceedings in the Supreme Court, this person took some steps to recover from AHF the unpaid purchase price of $1M, there is nothing in the evidence before Drummond J to suggest that that person is now, or has for some years past, taken any action to pursue his claim for payment. It was arguable that, apart from the judgment debt the subject of the pending appeal, AHF may not be insolvent in a commercial sense, in view of the apparent lack of interest of its only other creditors in recovering the payments due to them.

AHF contended that, if it were to be wound up now, that would result in its appeal, if well-founded, being rendered nugatory. Jekos' primary contention was that AHF was really seeking a stay from this Court of proceedings before the Court of Appeal to which it was not entitled: as a successful plaintiff, there was no justification for keeping Jekos out of its moneys. AHF's response was to concede that it would be difficult for it to obtain a stay of the Supreme Court judgment notwithstanding the pendency of the appeal. AHF relied on cases in bankruptcy and referred to what was suggested to be the practical improbability of a liquidator pursuing the appeal if winding up was now ordered.

Drummond J did not accept the applicant's submission that the position was equivalent to an unsuccessful defendant seeking to keep a successful plaintiff out of his moneys by a stay until appeal proceedings were over. AHF was, at the moment, plainly insolvent. Jekos acknowledged that. Jekos was not seeking to enforce its right to the payment determined by the judgment. It wished to wind up this insolvent company in circumstances in which it could not expect to receive any significant dividend. This was a case in which there was neither a prospect of a dividend from the liquidation of the debtor company nor uncertainty as to whether a liquidator’s administration might turn up assets capable of producing a dividend: winding up would be appropriate in either situation. Jekos’ true objective was, Drummond J thought, to terminate the appeal proceedings.

There were substantial arguments in favour of both AHF and Jekos. However, Drummond J thought that in view of AHF's diligence since 1992 in pursuing its claims, once Jekos and the other plaintiffs commenced the Supreme Court proceedings; secondly, that the appeal was probably brought bona fide to try to recoup substantial sums AHF alleges to be due to it; thirdly, that the appeal was not inarguably hopeless; fourthly, that AHF appears to be prosecuting it with reasonable expedition; fifthly, the lack of utility of a winding up now as a means of recouping to Jekos what has been adjudged due to it; and, finally, Jekos' probable objective in seeking winding up, to which Drummond J had referred, he would order that the hearing of the Jekos application for winding up be adjourned sine die to the intent that it will not be heard until after the Supreme Court appeal is determined. Both parties will have liberty to apply to bring their respective applications back before the Court if they are so advised.

Therefore Drummond J would adjourn the application by AHF to set aside the various statutory demands sine die, on the same basis, with liberty to apply. As to costs, the order will be that the costs of and incidental to the hearing of the applications will be reserved.