Lo Pilato, in the matter of Peter O’Brien Constructions Pty Ltd (in liq)
[2020] FCA 1531
•13 October 2020
FEDERAL COURT OF AUSTRALIA
Lo Pilato, in the matter of Peter O’Brien Constructions Pty Ltd (in liq) [2020] FCA 1531
File number: NSD 896 of 2020 Judgment of: MARKOVIC J Date of judgment: 13 October 2020 Date of publication of reasons: 23 October 2020 Catchwords: CORPORATIONS – application for orders under s 588FF(3)(b) of the Corporations Act 2001 (Cth) (Act) extending the time for making an application under s 588FF(1) of the Act – application allowed Legislation: Corporations Act 2001 (Cth), s 588FF Cases cited: Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher (2015) 254 CLR 489
Vaughan v Catanzariti, in the matter of Italian Prestige Jewellery Pty Limited (In Liq) [2018] FCA 1403
Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 35 Date of hearing: 13 October 2020 Counsel for the Plaintiffs: Ms E L Beechey Solicitor for the Plaintiffs: Dentons Australia Limited ORDERS
NSD 896 of 2020 IN THE MATTER OF PETER O’BRIEN CONSTRUCTIONS PTY LTD (IN LIQUIDATION) ACN 123 451 409
MR FRANK LO PILATO AND JONATHAN COLBRAN IN THEIR CAPACITY AS JOINT AND SEVERAL LIQUIDATORS OF PETER O’BRIEN CONSTRUCTIONS PTY LTD (IN LIQUIDATION) ACN 123 451 409
First Plaintiff
PETER O’BRIEN CONSTRUCTIONS PTY LTD (IN LIQUIDATION) ACN 123 451 409
Second Plaintiff
ORDER MADE BY:
MARKOVIC J
DATE OF ORDER:
13 OCTOBER 2020
THE COURT ORDERS THAT:
1.Pursuant to s 588FF(3)(b) of the Corporations Act 2001 (Cth) (Act), the date by which the first plaintiffs are required to file any application for orders that a transaction of the second plaintiff is voidable pursuant to s 588FF(1) of the Act be extended for 18 months, being an extension until 18 February 2022.
2.Liberty to apply for any person who can demonstrate sufficient interest to modify and discharge these orders, upon appropriate notice being given to the plaintiffs and the Court.
3.The costs of this application be costs in the liquidation of the second plaintiff.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
MARKOVIC J
On 13 October 2020 2020 I made orders including an order pursuant to s 588FF(3)(b) of the Corporations Act 2001 (Cth) (Act) extending the time in which the first plaintiffs are required to file any application under s 588FF(1) of the Act to 18 February 2022. These are my reasons for making those orders.
The first plaintiffs, Frank Lo Pilato and Jonathan Colbran (Liquidators), were appointed as joint and several liquidators of the second plaintiff, Peter O’Brien Constructions Pty Ltd (in liquidation) (Company) on 28 May 2018. They replaced David Iannuzzi and Steven Naidenov (Previous Liquidators) who had been appointed as liquidators of the Company on 16 March 2018.
In support of their application, the Liquidators relied on an affidavit sworn by Mr Colbran on 7 October 2020, an affidavit sworn by Mr Lo Pilato on 9 September 2020 and an affidavit sworn by Delano Leen, a solicitor in the employ of the Liquidators’ solicitors, on 7 October 2020.
There are no defendants to the proceeding. A number of parties (see [20] below) were notified of the application but no party appeared at the hearing.
BACKGROUND
The Company operated a construction business and undertook commercial and residential developments primarily in regional New South Wales and the Australian Capital Territory.
On 18 August 2017, B&J Nuss Constructions Pty Ltd filed a winding up application against the Company.
On 14 September 2017, the Company appointed the Previous Liquidators as voluntary administrators of the Company.
On 26 October 2017, the Company entered into a deed of company arrangement with the Previous Liquidators becoming deed administrators of the Company.
On 16 March 2018, the deed of company arrangement was terminated and the Company entered into liquidation pursuant to a creditors’ voluntary winding up. The Previous Liquidators became liquidators of the Company.
On 28 May 2018, the Liquidators were appointed by the creditors of the Company to replace the Previous Liquidators.
The Liquidators’ investigations to date
On 28 August 2018, the Liquidators reported to creditors their preliminary findings in relation to the affairs of the Company. That report records that unsecured creditors’ claims total in excess of $6.3 million and, as at the date of the report, more than 100 formal proofs of debt had been lodged with the Liquidators.
According to the Liquidators, their investigations to date have been undertaken in circumstances where:
(1)the Company has failed to maintain adequate books and records;
(2)the Previous Liquidators’ investigations into the affairs of the Company were incomplete and there are limited books and records of the Company in the files obtained from them;
(3)the Liquidators have been unable to secure the books and records of the Company, in particular, the source documentation that would ordinarily assist in explaining the transactions of the Company. As a result of not having access to source documents, the Liquidators have reviewed the creditors’ ledger and transactions detailed in the MYOB file and reconciled these to bank statements, where available, to confirm the existence of the transactions and consideration paid following the liquidation of the Company;
(4)the Liquidators have not had access to the Company’s email server or any correspondence files during the six month period from the filing of the winding up application to the date the Company entered into liquidation;
(5)the Company’s relevant officers and professional advisors have failed to produce books and records, even under compulsion pursuant to a liquidator’s notice issued under s 530B of the Act; and
(6)the Company has very limited assets, all of which are subject to first and second ranking general security agreements over all present and after acquired property in favour of the National Australia Bank (NAB) and the Australia and New Zealand Banking Group Limited (ANZ) respectively.
The Liquidators’ evidence is that these circumstances have hampered their ability to investigate the affairs of the Company and made the task of identifying potential claims arduous and time consuming.
Funding
On 13 September 2018 at a meeting of creditors, none of the creditors were willing to fund further investigations but it was resolved that the Liquidators were authorised to enter into litigation funding agreements for the purpose of s 477(2B) of the Act.
On 8 March 2019, the Liquidators submitted a funding request to the Federal Entitlements Guarantee scheme (administrated by the Attorney-General’s Department) (FEG).
Between 8 March 2019 and 28 May 2020, the Liquidators submitted multiple iterations of the funding application and supporting documentation to FEG to satisfy its funding criteria.
On 29 June 2020, FEG issued a funding agreement in favour of the Liquidators and the Company to support the Liquidators in conducting further investigations and public examinations. The Liquidators say that, prior to that date, they had not been in a position to pursue any claims.
Potential claims
The Liquidators have identified the following potential voidable transactions in respect of the Company:
(1)payments totalling approximately $1.64 million made by the Company during the six month period from the filing of the winding up application to the date the Company entered into liquidation to the following eight creditors:
(a)Ace Kerb Landscaping;
(b)ACT Paint & Dec Pty Ltd;
(c)B&J Nuss Constructions Pty Ltd;
(d)Ciani Pty Ltd;
(e)Steve and John Fencing Pty Ltd;
(f)Trussme Pty Ltd;
(g)Westlake Plastering Pty Ltd; and
(h)Wired Electrical Services;
(2)payments totalling $425,000 made to Constantinidis Accountants Pty Ltd and Mr Socrates Kitas of ML Group Pty Ltd for the purported purpose of securing funding for the Company;
(3)work in progress of the Company that may have been transferred to MPH Construction Group Pty Ltd (MPH Construction);
(4)the potential novation of certain construction contracts to MPH Construction;
(5)payments of $52,549.27 to MPH Construction and $26,478.18 to Peter O’Brien Property Group Pty Ltd (POPG) for purported consulting and accounting fees;
(6)related party dealings with the Company director’s spouse, Melissa O’Brien, and mother, Mary O’Brien, for which the Company may have received no benefit; and
(7)transactions totalling $10,873,487.23 that took place after the Company entered into a purported loan agreement and a related security agreement in July 2017. The parties to some of these transactions have not yet been identified.
Given the state of the current books and records available to the Liquidators and their incomplete investigations, the Liquidators have not been able to identify with sufficient certainty the extent of voidable transactions or the recipients of those transactions in order to commence proceedings under s 588FF(1) of the Act, or to name all of the potential defendants to such proceedings.
Notice
The Liquidators notified the following persons and entities who it identified as likely to be affected by the orders sought in this application:
(1)Ace Kerb Landscaping;
(2)ACT Paint & Dec Pty Ltd;
(3)B&J Nuss Constructions Pty Ltd;
(4)Ciani Pty Ltd;
(5)Steve and John Fencing Pty Ltd;
(6)Trussme Pty Ltd;
(7)Westlake Plastering Pty Ltd;
(8)Wired Electrical Services;
(9)Constantinidis Accountants;
(10)Peter O’Brien;
(11)MacPherson Property Holdings Pty Ltd;
(12)O’Brien Wash Group Pty Ltd;
(13)Peter O’Brien Property Group Pty Ltd;
(14)MPH Construction Group Pty Ltd;
(15)Melissa O’Brien;
(16)Mary O’Brien; and
(17)Socrates Kitas.
The Liquidators received no response from any of those parties, save for Wired Electrical Services, and none of those parties sought to appear at the hearing of the application.
LEGAL PRINCIPLES
Section 588FF of the Act relevantly provides:
(1) Where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:
(a)an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;
(b)an order directing a person to transfer to the company property that the company has transferred under the transaction;
(c)an order requiring a person to pay to the company an amount that, in the court’s opinion, fairly represents some or all of the benefits that the person has received because of the transaction;
(d)an order requiring a person to transfer to the company property that, in the court’s opinion, fairly represents the application of either or both of the following:
(i) money that the company has paid under the transaction;
(ii)proceeds of property that the company has transferred under the transaction;
(e)an order releasing or discharging, wholly or partly, a debt incurred, or a security or guarantee given, by the company under or in connection with the transaction;
(f)if the transaction is an unfair loan and such a debt, security or guarantee has been assigned—an order directing a person to indemnify the company in respect of some or all of its liability to the assignee;
(g)an order providing for the extent to which, and the terms on which, a debt that arose under, or was released or discharged to any extent by or under, the transaction may be proved in a winding up of the company;
(h)an order declaring an agreement constituting, forming part of, or relating to, the transaction, or specified provisions of such an agreement, to have been void at and after the time when the agreement was made, or at and after a specified later time;
(i)an order varying such an agreement as specified in the order and, if the Court thinks fit, declaring the agreement to have had effect, as so varied, at and after the time when the agreement was made, or at and after a specified later time;
(j)an order declaring such an agreement, or specified provisions of such an agreement, to be unenforceable.
…
(3) An application under subsection (1) may only be made:
(a) during the period beginning on the relation‑back day and ending:
(i) 3 years after the relation‑back day; or
(ii)12 months after the first appointment of a liquidator in relation to the winding up of the company;
whichever is the later; or
(b)within such longer period as the Court orders on an application under this paragraph made by the liquidator during the paragraph (a) period.
In this case, the period for commencement of any proceedings pursuant to s 588FF(1) of the Act would have expired on 18 August 2020, three years after the date upon which the winding up application was filed against the Company, unless an order was made under s 588FF(3)(b) extending the period in which such proceedings could be commenced.
The Liquidators sought an order in the form of what is described as a “shelf order”. That is, an order enabling proceedings to be brought under s 588FF(1) of the Act within the period as extended under s 588FF(3)(b) of the Act. In Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher (2015) 254 CLR 489 the High Court (French CJ, Hayne, Kiefel, Gageler and Keane JJ) accepted the availability of such orders. At [24] the High Court noted that the function of s 588FF(3)(b) is to confer a discretion to mitigate, in an appropriate case, the rigours of the time limit imposed by s 588FF(3)(a) of the Act. The Court referred to the policy behind Pt 5.7B of the Act and said (at [24]):
… That policy included the avoidance of transactions by which an insolvent company has disposed of property in circumstances that are regarded by the legislature as unfair to the general body of unsecured creditors. It is, however, a policy qualified in its application by the requirement that liquidators be placed under a reasonable time limitation for taking action under the voidable transaction provisions. A purpose of that qualification, expressed in “clear and emphatic” terms, is to favour certainty for those who have entered into transactions with the company during the periods in respect of which designated transactions may be voidable. There is, however, no independent basis for the assertion that any extension of time which does not identify a particular transaction or transactions must be an unreasonable prolongation of uncertainty militating against a construction which would allow such an order to be made. The section provides for the exercise of discretion by the court. Questions of what is a reasonable or an unreasonable prolongation of uncertainty and the scope of such uncertainty are more appropriately considered case-by-case in the exercise of judicial discretion than globally in judicial interpretation of the provision.
(Footnote omitted.)
In Vaughan v Catanzariti, in the matter of Italian Prestige Jewellery Pty Limited (In Liq) [2018] FCA 1403 at [31]-[32] I set out the following principles relevant to the exercise of the discretion to extend time under s 588FF(3)(b) of the Act:
31Section 588FF(3)(b) of the Act confers a discretion on the Court. In Marsden (liquidator) v CVS Lane PV Pty Limited, in the matter of Pentridge Village Pty Limited (in liq) (receiver and manager appointed) (controller appointed) (2018) 124 ACSR 100; [2018] FCA 102 at [54]-[55] Gleeson J set out the principles which guide the exercise of that discretion:
54The Court is required to consider what is fair and just in all the circumstances: BP Australia Ltd v Brown (2013) 58 NSWLR 322; [2003] NSWCA 216 (BP Australia) at [187]. The applicant for the extension must satisfy the Court that it should be granted: BP Australia at [183].
55The matters that ordinarily inform the exercise of the Court’s discretion are:
(1)the liquidator’s explanation for the delay in taking action within the three year period provided for by the statute;
(2)the merits of the foreshadowed proceeding, assessed by a “preliminary review”; and
(3)any likely prejudice that would be suffered if the extension of time is granted: Parker, Re Worldwide Specialty Property Services Pty Ltd (in liq) v Worldwide Specialty Property Services Pty Ltd (in liq) [2017] FCA 687 at [15]-[16]; Walker and Moloney v CBA Corporate Services (NSW) Pty Ltd [2012] FCA 328 (Walker) at [43].
32In Walker and Moloney v CBA Corporate Services (NSW) Pty Limited (2012) 88 ACSR 153; [2012] FCA 328 at [44] Nicholas J said the following about the issue of the assessment of the merits of a proposed action in circumstances where an extension is sought to permit further investigation:
The preliminary review of the merits of the proposed proceedings is “an investigation as to whether such proceedings would be so devoid of prospects that it would be unfair, by granting an extension, to expose the other party to the continuing prospect of suit”: Green v Chiswell Furniture Pty Ltd (in liq) [1999] NSWSC 608 at [15] (Green) per Austin J. However, a review of the merits may be unnecessary if the purpose of the application for an extension of time is to allow the liquidator time in which to properly decide whether or not to bring the proposed proceedings: Green per Austin J at para [15]; see also the summary of the relevant principles of White J in New Cap Reinsurance Corporation Ltd (in liq) v Reaseguros Alianza SA (2004) 186 FLR 175; [2004] NSWSC 787 at [52]-[55].
CONSIDERATION
Given the evidence before me and the circumstances faced by the Liquidators, I was satisfied that I should make the orders sought pursuant to s 588FF(3)(b) to extend the time within which they can commence proceedings under s 588FF(1) of the Act.
In coming to that view I had regard to the following matters.
First, the delay in commencing proceedings under s 588FF(1) of the Act was brought about by the aborted winding up application and failed deed of company arrangement, which resulted in time passing after the date of the filing of the winding up application and before the Liquidators’ appointment. That is, the Liquidators were appointed approximately 10 months into the three year statutory time period provided for liquidators to commence proceedings under s 588FF(1) of the Act. That delay effectively reduced the period the Liquidators would otherwise have had to investigate the affairs of the Company had they been appointed as liquidators on the original petition.
The deficiencies in the books and records of the Company and the state of the files obtained from the Previous Liquidators has meant that the Liquidators have faced further delay in assessing potential voidable transactions and bringing any proceedings under s 588FF(1) of the Act.
The Liquidators have also been hampered by a lack of funding. None of the creditors were willing to fund further investigations and the Liquidators undertook a lengthy and intensive process to obtain funding from the FEG, which took some 10 months.
Secondly, as to merits, the Liquidators have identified potential unfair preference claims with a prima facie case that the named creditors ought to have had knowledge of the financial difficulties of the Company. As to potential uncommercial transactions and unreasonable director-related transactions, the Liquidators consider that they have sufficient findings to warrant public examinations to confirm whether the identified transactions are voidable. As to related party transactions and transactions entered into for the purpose of defeating creditors, the Liquidators have indicated that further investigations are required.
Unsecured creditors are owed in excess of $6.3 million based on the Company’s available books and records. Given the security held by the NAB and ANZ, voidable transactions are likely to be the only source of returns to unsecured creditors. Those creditors would benefit from the orders sought in this application being granted to enable the recovery of voidable transactions.
Thirdly, the Liquidators are not aware of any prejudice, other than the usual factors associated with remaining subject to the possibility of legal proceedings, that any potential defendants of the prospective claims would suffer should an extension be granted. None of the parties who were notified of the application sought to appear at the hearing and I was satisfied that any prejudice caused by the extension of time was minimal.
A final matter which was raised in the course of submissions was the length of the extension of time sought by the Liquidators, namely a period of some 18 months. While this is a relatively lengthy extension, given the apparent complexity of the matter, the breadth of investigations yet to be undertaken and the state of the books and records of the Company, I was satisfied that an extension of that magnitude was justified. The Liquidators also submitted that the length of the extension of time sought takes into account the ongoing effect of the COVID-19 pandemic on business operations and Court operations and allows sufficient time to serve potential witnesses with summonses and hold public examinations.
CONCLUSION
For those reasons I made the orders sought by the Liquidators.
I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Markovic. Associate:
Dated: 23 October 2020
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