McCa Asset Management Limited v Kamata Homes Pty Ltd
[2019] VSC 512
•24 July 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S ECI 2019 03305
| MCCA ASSET MANAGEMENT LIMITED (ACN 113 728 706) TRADING AS THE MCCA PROPERTY LIST | Plaintiff |
| v | |
| KAMATA HOMES PTY LTD (ACN 130 155 305) (ADMINISTRATORS APPOINTED) & ORS (according to the Schedule attached) | Defendants |
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JUDGE: | McDonald J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 23 and 24 July 2019 |
DATE OF RULING: | 24 July 2019 |
CASE MAY BE CITED AS: | MCCA Asset Management Limited v Kamata Homes Pty Ltd & Ors |
MEDIUM NEUTRAL CITATION: | [2019] VSC 512 |
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CORPORATIONS – Voluntary administration – Deed of company arrangement – Application for interlocutory injunction restraining defendants from giving effect to the deed of company arrangement – Serious question to be tried as to whether grounds exist upon which the Court may terminate the deed of company arrangement – Balance of convenience in favour of granting an injunction – Corporations Act 2001 (Cth) s 445D – Personal Property Securities Act 2009 (Cth) s 8.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Dr M Wolff | Hapgood Legal |
| For the First Defendant | No appearance | |
| For the Second Defendant | Mr N Evans (a solicitor) | Aptum Legal Pty Ltd |
| For the Third Defendant | Ms A M Flanagan (a solicitor) | Nerlich Lawyers Pty Ltd |
HIS HONOUR:
On 26 June 2019, a meeting of creditors of the first defendant, Kamata Homes Pty Ltd, resolved to approve the second defendant, the company’s administrators Andrew Schwarz and Benjamin Conrad, entering into a Deed of Company Arrangement (‘DOCA’) with the company. The outcome of the resolution to execute the DOCA was 57 votes in favour, 10 against, with two abstentions.[1] The respective value of the creditors voting for and against was $6,359,173 in favour, $12,202,336 against, with $11,653 abstaining.[2]
[1]Exhibit APS-3 to the affidavit of Andrew Schwarz sworn 23 July 2019, 10.
[2]Ibid.
The plaintiff, MCCA Asset Management Limited, was one of the creditors who voted against the DOCA. Originally, its accepted proof of debt was $11,500,000.[3] As at 26 June 2019, its accepted debt stood at $4,522,000.[4] The value of the creditors voting against the DOCA was almost double the value of the creditors voting in favour. The administrators exercised a casting vote and voted in favour of the DOCA. The DOCA was executed on 17 July 2019.[5]
[3]Affidavit of John Goulding sworn 23 July 2019, [139].
[4]Ibid.
[5]Exhibit APS-2 to the affidavit of Andrew Schwarz sworn 23 July 2019.
By summons filed 22 July 2019, the plaintiff seeks an order that the defendants, by their officers, servants and/or agents, including any administrators appointed by them, be restrained from relying upon, acting on or giving effect to or in any way enforcing the DOCA or any part thereof until such time as the plaintiff’s claims are heard and determined by the Court.
The Court has power, pursuant to s 445D(1) of the Corporations Act 2001 (Cth) (‘Act’), to make an order terminating the DOCA. Dr Wolff, who appeared for the plaintiff, submitted that there is a serious issue to be tried that the DOCA be terminated pursuant to the grounds set out in ss 445D(1)(a), (c) and (f) of the Act. Those sections provide as follows:
445D When Court may terminate deed
(1)The Court may make an order terminating a deed of company arrangement if satisfied that:
(a)information about the company’s business, property, affairs or financial circumstances that:
(i) was false or misleading; and
(ii)can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed;
was given to the administrator of the company or to such creditors; or
…
(c) there was an omission from such a document and the omission can reasonably be expected to have been material to such creditors in so deciding; or
…
(f)the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be:
(i)oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or
(ii)contrary to the interests of the creditors of the company as a whole;[6]
[6]Corporations Act 2001 (Cth) s 445D(1).
In support of this submission, Dr Wolff pointed to two matters which, he submitted, were likely to have misled creditors voting on 26 June 2019.
First, he pointed to the further report which was prepared by the administrators, dated 19 June 2019 (‘further report’).[7] Annexure B of the further report contains an ‘Updated Administrators’ Statement’.[8] In annexure B under the heading ‘Whether it would be in the creditors’ interests for the Company to execute a Deed of Company Arrangement’, the following statement appears:
It is our opinion that it is in the best interests of creditors that the company execute a DOCA in accordance with the DOCA proposal because:
·Creditors are likely to receive a greater return in a DOCA scenario as opposed to a liquidation scenario;[9]
[7]Exhibit JG-20 to the affidavit of John Goulding sworn 23 July 2019.
[8]Ibid Annexure B.
[9]Ibid.
Dr Wolff submits that this statement was misleading. He points to the affidavit of Andrew Schwarz sworn 23 July 2019 and, in particular, to paragraph 24, which states:
Given my view that outstanding debtors are likely to total between zero at the lower end and $200,000 at the upper end (as set out in Annexure F in my report to creditors dated 14 June 2019 and Annexure C in my second report to creditors dated 19 June 2019), that is unlikely to be a substantive difference between DoCA and liquidation, although in my experience debtors are more difficult to recover in a liquidation scenario.
Mr Evans, who appeared for the second defendant, submitted that, read in context, there is no inconsistency between paragraph 24 of Mr Schwarz’s affidavit and the administrators’ statement in the further report that creditors would be likely to be better off financially under the proposed DOCA.
First, he pointed to annexure C of the further report.[10] This shows an estimated dividend under liquidation ranging from zero to 3.60 cents and under the DOCA from 3.00 to 4.30 cents.[11]
[10]Ibid Annexure C.
[11]Ibid.
Annexure C includes an item, ‘Collection of non-factored debts’ ranging from nil to $200,000 under both the liquidation and DOCA scenarios.[12] That amount is a reference to outstanding debtors in the range of zero to $200,000, as referred to in paragraph 24 of Mr Schwarz’s affidavit. As such, the entry in annexure C of the further report is consistent with paragraph 24 of Mr Schwarz’s affidavit, and the contents of paragraph 24 do not lend support to Dr Wolff’s submission that the statement that creditors would be better off under the DOCA proposal was misleading.
[12]Ibid.
I now turn to the second matter which was relied upon by Dr Wolff which concerned the nature of the security to be provided by the third defendant for a contribution he is to make under the DOCA.
Under the DOCA, the third defendant is required to make a contribution totalling
$1 million over a 12-month period in three instalments.[13] The further report contains a statement that the funds to be provided by the third defendant will be supported by real property security.[14]
[13]Exhibit APS-2 to the affidavit of Andrew Schwarz sworn 23 July 2019, cl 3.2.
[14]Exhibit JG-20 to the affidavit of John Goulding sworn 23 July 2019, 1.
Further, at the meeting of 26 June 2019, Mr Schwarz read out the terms of a letter from the third defendant’s solicitors dated 24 June 2019, which included as follows:
We are instructed that our client:
1. Is unable to increase the Director’s Contribution;
2. Is unable to provide a statement of his personal assets and liabilities; and
3. The security offered for the Director’s Contribution will be in the form of guarantees from the following entities and secured by charges over the assets, including any real property, held by those entities:
a. Capital K Property Group Pty Ltd; and
b. H & M Custodians Pty Ltd as Trustee of the H & M Family Trust.[15]
[15]Exhibit JG-21 to the affidavit of John Goulding sworn 23 July 2019.
Dr Wolff submits that these statements are misleading. He points to cl 3.4 of the DOCA which states:
3.4 Security for the Director’s Contribution
Subject only to any reasonably required or necessary consent of the Director’s own secured creditors (of which the Director must provide evidence on the reasonable request of the Deed Administrators):
(a) the Director will, within 14 days of the Commencement Date, procure the granting of the following securities to the Company and the Deed Administrators (in their capacity as such) to secure the Director’s Contribution:
(i) a security over the fixed and floating assets of Capital K Property Group Pty Ltd ACN 160 921 924 in a form that is registerable on the Personal Properties Securities Register; and
(ii) a security over the fixed and floating assets of H&M Custodians Pty Ltd ACN 619 109 063 (as trustee for the H&M Family Trust) in a form that is registerable on the Personal Properties Securities Register.
(b) the Director will, at his own cost, cause to be prepared and executed all necessary documents to provide such security.[16]
[16]Exhibit APS-2 to the affidavit of Andrew Schwarz sworn 23 July 2019, cl 3.4.
He submits that there is inconsistency between cl 3.4 and the statements made prior to and at the meeting of 26 June 2019 because a security interest over real property is not able to be registered under the Personal Property Securities Register.
Mr Evans submits that the issue of the security to be provided in respect of the director’s contribution was canvassed by Mr Schwarz during the course of the meeting on 26 June 2019. He points to an exchange recorded in the minutes of the meeting (‘minutes’).[17] A question was asked by Shiraz Patel, representing Patel and Patel Developments:
[17]Exhibit APS-3 to the affidavit of Andrew Schwarz sworn 23 July 2019.
In a DOCA, you stated NAB was a secured creditor. Would we be a secured creditor with secondary preference to NAB?[18]
[18]Ibid 5.
Mr Schwarz responded as follows:
Not to the level of NAB. However, the director is proposing security over personal entities such as Capital K Property Group and H&M Custodians as part of his deed proposal. So, if there is equity in those companies after payment of the Nab [sic] debt the deed administrator would have a priority to those funds over unsecured creditors.[19]
Mr Evans submits that there is no inconsistency between this statement as recorded in the minutes and cl 3.4 of the DOCA.
[19]Ibid.
I am satisfied that there is a serious issue to be tried as to whether the statement in the further report that the $1 million contribution to be provided by the third defendant is to be supported by real property security was misleading. I have referred to cl 3.4(a) of the DOCA. Pursuant to cl 3.4(a), the security to be provided is not security over the real property of Capital K Property Group Pty Ltd (‘Capital K Property Group’) and H&M Custodians Pty Ltd (‘H&M Custodians’).
The Personal Property Securities Act 2009 (Cth) (‘Personal Property Securities Act’) does not apply to an interest in land.[20] Prima facie, the security provided pursuant to cl 3.4 of the DOCA does not extend to assets of Capital K Property Group and H&M Custodians constituted by any real property which they own.
[20]Personal Property Securities Act 2009 (Cth) s 8.
Putting to one side the issue of whether an interest is registrable under the Personal Property Securities Act in respect of interests in land, a question arises as to what information, if any, was provided to creditors regarding the extent of the equity held by Capital K Property Group and H&M Custodians in respect of real estate which was owned by those companies.
It does appear from the minutes that information was provided to creditors that National Australia Bank is a first mortgagee in respect of properties owned by those companies. Absent information regarding the extent of Capital K Property Group’s and H&M Custodian’s equity in the property which they owned, it is questionable whether creditors could have made any assessment as to the value of the security being offered.
This consideration applies equally to the administrators who exercised a casting vote in favour of the approval of the DOCA. The reasons why the administrators did so are recorded in the minutes.[21] The casting vote was exercised in circumstances where the value of the creditors voting against the DOCA was approximately double the value of the creditors voting in favour.
[21]Exhibit APS-3 to the affidavit of Andrew Schwarz sworn 23 July 2019, 4–7, 10.
It is arguable that in order for the administrators to have had a proper basis for the approval of the DOCA by way of casting vote, they needed to have information as to the nature and value of the security which was being offered by the third defendant in respect of his $1 million contribution.
The statement in the further report that the director’s contribution would be supported by real property security must be considered in light of the fact that:
(a) all of the properties owned by H&M Custodians are currently on the market; and
(b) all of the properties owned by Capital K Property Group, save for one, have either already been sold or are currently on the market.[22]
[22]Email from the solicitors for the third defendant to Chambers on 24 July 2019.
I have already referred to the letter dated 24 June 2019 which was prepared by the third defendant’s solicitors and which was read out at the meeting of 26 June 2019.[23] That letter contained a statement:
The security offered for the Director’s Contribution will be in the form of guarantees from the following entities and secured by charges over the assets, including any real property, held by those entities:
a.Capital K Property Group Pty Ltd; and
b. H & M Custodians Pty Ltd as Trustee of the H & M Family Trust.[24]
[23]Exhibit JG-21 to the affidavit of John Goulding sworn 23 July 2019.
[24]Ibid.
It is strongly arguable that this information takes on a very different complexion in light of the steps which, I infer, if they had not already commenced to be taken on 24 June 2019, must have been taken in the immediate aftermath of that date to dispose of the real property assets of the Capital K Property Group and H&M Custodians.
There is a serious issue to be tried that the failure to inform creditors at the 26 June 2019 meeting that the companies providing the security for the director’s $1 million contribution were either, at that time, in the process of, or soon thereafter to be in the process of, selling almost the entirety of their property portfolios, was a material omission impacting upon the approval of the DOCA.
Three questions arise. First, if the administrators were aware of the property sales, why were the creditors not informed of that fact? Second, if the administrators were not aware of the pending sales, what effect did that lack of knowledge have upon their decision to cast a vote in favour of the approval of the DOCA? Third, do Capital K Property Group and H&M Custodians have any assets other than the properties that they have been in the process of disposing of since 26 June 2019?
I am satisfied that the plaintiff has established a serious issue to be tried that there are grounds for the Court to make an order terminating the DOCA pursuant to s 445D(1) of the Act.
I consider that the present application falls into a category of cases where considerations of the balance of convenience are closely interrelated with the Court’s finding that there is a serious issue to be tried. In circumstances where the Court has found that there is a serious question to be tried as to whether a number of grounds exist upon which the DOCA may be terminated, the balance of convenience strongly favours the making of orders restraining any party from giving effect to the DOCA. If at trial, which is to commence on 19 August 2019, the Court concludes that the DOCA should be terminated, it would be inappropriate if any steps were to have been taken prior to that point in time to give effect to the DOCA.
The course which ensures minimal prejudice to all parties is to make an order restraining the defendants from giving effect to the DOCA until the hearing and determination of the plaintiff’s application for termination. I note in this regard that the order proposed by the plaintiff does not restrict the second defendants from taking any action necessary to collect debts due to the company, or to sell motor vehicles currently in the second defendant’s possession. I am fortified in concluding that the balance of convenience favours the course which I have proposed, by the fact that the final hearing in this matter will take place in less than four weeks’ time.
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SCHEDULE OF PARTIES
S ECI 2019 03305
BETWEEN:
| MCCA ASSET MANAGEMENT LIMITED | Plaintiff |
- and -
| KAMATA HOMES PTY LTD | First Defendant |
| ANDREW SCHWARZ AND BENJAMIN CONRAD IN THEIR CAPACITIES AS JOINT AND SEVERAL ADMINISTRATORS OF KAMATA HOMES PTY LTD (ACN 130 155 305) (ADMINISTRATORS APPOINTED) | Second Defendant |
| HISHAM KHARTABIL | Third Defendant |
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