McCa Asset Management Ltd v Kamata Homes Pty Ltd (admins apptd)
[2019] VSC 742
•15 November 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
COMMERIAL LIST
S ECI 2019 03305
| MCCA ASSET MANAGEMENT LTD (ACN 113 728 706) TRADING AS THE MCCA PROPERTY TRUST FUND ARSN 116 851 980 & ORS (according to the Schedule attached) | Plaintiffs |
| 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: | 19 and 21 August and 11, 14 and 15 October 2019 |
DATE OF JUDGMENT: | 15 November 2019 |
CASE MAY BE CITED AS: | MCCA Asset Management Ltd v Kamata Homes Pty Ltd (admins apptd) |
MEDIUM NEUTRAL CITATION: | [2019] VSC 742 |
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CORPORATIONS – Application to terminate Deed of Company Arrangement (‘DOCA’) – Whether there was a material omission in reports provided to creditors – Whether DOCA should be terminated for some other reason – Public interest and commercial morality considerations – Whether discretion should be exercised to terminate DOCA – Corporations Act 2001 (Cth) ss 445D(1)(c) and (g).
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APPEARANCES: | Counsel | Solicitors |
| For the plaintiffs | Dr M Wolff | Hapgood Legal |
| For the first defendant | No appearance | |
| For the second defendant | Mr S Maiden QC | Aptum Legal Pty Ltd |
| For the third defendant | Mr A Silver | Nerlich Lawyers Pty Ltd |
HIS HONOUR:
On 26 June 2019 a meeting of creditors of the first defendant, Kamata Homes Pty Ltd (‘the Company’), resolved to approve the second defendants, who had previously been appointed as the Company’s administrators, Mr Andrew Schwarz and Mr Benjamin Conrad (‘the Administrators’), entering into a Deed of Company Arrangement (‘DOCA’) with the Company. The DOCA was executed on 17 July 2019.[1] At the meeting on 26 June 2019 the plaintiffs voted against the DOCA.
[1]See exhibit APS-2 to the affidavit of Andrew Schwarz sworn 23 July 2019 (Court book ‘CB’ 699–721).
By amended originating motion the plaintiffs seek an order terminating the DOCA pursuant to s 445D and s 447A of the Corporations Act 2001 (Cth) (‘Act’), together with s 75–42 and s 90–15 of sch 2 of the Act, the Insolvency Practice Schedule (Corporations) (‘Insolvency Practice Schedule’).[2]
[2]Plaintiffs, ‘Amended originating motion between the parties’, 30 August 2019.
I have concluded that the DOCA should be terminated. I am satisfied that there were material omissions from the reports to creditors which were provided prior to the meeting of 26 June 2019 at which the DOCA was approved by the majority of creditors. I am also satisfied that public interest considerations strongly favour the termination of the DOCA. In particular, it is in the public interest that further investigations be undertaken by a liquidator into the circumstances which led to the Company’s insolvency. I am also satisfied that the discretionary considerations strongly favour the termination of the DOCA.
The first plaintiff, MCCA Asset Management Limited (‘MCCA’), is the responsible entity of a management investment scheme called the MCCA Property Fund. The second plaintiff, Sandhurst Trustees Limited as custodian for the MCCA Property Fund (‘Sandhurst’), is a creditor of the Company in relation to two separate building contracts. Sandhurst’s proof of debts admitted for the purposes of voting on the DOCA totalled $8.6 million.[3]
[3]Affidavit of Andrew Schwarz sworn 8 August 2019, [38] (CB 829).
The Company was incorporated on 13 March 2008.[4] The third defendant (‘the Director’) is, and always has been, the sole director and shareholder of the Company. The Company carried on business as a domestic building contractor in Melbourne. Mr Schwarz and Mr Conrad were appointed as joint and several administrators on 21 May 2019.[5] At the time of their appointment, the Company was involved in works on 14 separate active building sites around Melbourne.[6] The Company ceased trading shortly after 21 May 2019. The Administrator’s preliminary investigations, as set out in their report to creditors pursuant to s 75-225 of the Insolvency Practice Rules (Corporations) 2016 dated 14 June 2019 (‘the report’),[7] indicated that the Company may have been insolvent since around November 2017.[8] The report records the receipt by the Administrators, as at 14 June 2019, of proofs of debt from 250 creditors totalling $24, 464,678.[9]
[4]Ibid [10] (CB 823).
[5]Ibid [13].
[6]Ibid [12].
[7]Exhibit APS-5 to the affidavit of Andrew Schwarz sworn 8 August 2019, 74–144 (CB 954–1024).
[8]Ibid 99 (CB 979).
[9]Ibid 89 (CB 969).
On 17 June 2019, the Administrators received a letter from the Director’s solicitors setting out the terms of the DOCA (‘the DOCA proposal’).[10] On 19 June 2019, the administrators provided a further report to creditors (‘the further report’).[11] The further report annexed a copy of the DOCA proposal.[12] The further report included a section ‘BENEFITS OF THE DOCA PROPOSAL’.[13] One of the stated benefits was that the DOCA ‘is to be supported by real property security.’[14] Further, at the meeting on 26 June 2019, Mr Schwarz read out a letter to the Administrators from the Director’s solicitors dated 24 June 2019, which included the following:
[10]Affidavit of Andrew Schwarz sworn 8 August 2019, [19.5] (CB 825); Exhibit APS-5 to the affidavit of Andrew Schwarz sworn 8 August 2019, 143–144 (CB 1023–1024).
[11]Affidavit of Andrew Schwarz sworn 8 August 2019, [19.6] (CB 825); Exhibit APS-5 to the affidavit of Andrew Schwarz sworn 8 August 2019, 145–176 (CB 1025–1056).
[12]Exhibit APS-5 to the affidavit of Andrew Schwarz sworn 8 August 2019, 152–153 (CB 1032–1034).
[13]Ibid 148 (CB 1028).
[14]Ibid 148 (CB 1028).
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]Affidavit of John Goulding sworn 23 July 2019, [144] (CB 199); Exhibit JG–21 to the affidavit of John Goulding sworn 23 July 2019, (CB 658).
Clause 3.4 of the DOCA, as executed on 17 July 2019 provided:
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 (CB 710).
The resolution to execute the DOCA was put to a vote of creditors on 26 June 2019. 57 creditors voted in favour, 10 voted against and two abstained.[17] The respective value of the creditors voting for and against was $6,359,173 in favour, $12,202,336 against, with $11,653 abstaining.[18]
[17]Exhibit APS–3 to the affidavit of Andrew Schwarz sworn 23 July 2019, (CB 734).
[18]Ibid.
By summons filed on 22 July 2019, MCCA sought an order that the defendants, by their servants, appointees 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 MCCA’s claims are heard and determined by the Court.[19] The Director filed an affidavit affirmed 24 July 2019 in opposition to the MCCA’s application. The affidavit addressed the issue of the security which was to be provided by the Director pursuant to cl 3.4 of the DOCA:
[19]First plaintiff, ‘Summons’, 22 July 2019, [2] (CB 5).
The security for my contribution to be made pursuant to the terms of the Deed of Company Arrangement (DOCA) is set out in clause 3.4 of the Deed executed by me on 16 July 2019, namely:
(a)A security over the fixed and floating assets of Capital K Property Group Pty Ltd in a form that is registerable on the Personal Properties Securities Register (PPSR); and
(b)A security over the fixed and floating assets of H & M Custodians Pty Ltd (as trustee of the H & M Family Trust) in a form that is registerable on the PPSR.
Capital K Property Group Pty Ltd is the sole registered proprietor of the following properties (Capital K Properties):
(a)15 Tempany Street, North Fitzroy more particularly described in Certificate of Title Volume 11469 Folio 934;
(b)17 Tempany Street, North Fitzroy more particularly described in Certificate of Title Volume 11469 Folio 933;
(c)Buckley Street, Essendon more particularly described in Certificate of Title Volume 09732 Folio 401;
(d)Buckley Street, Essendon more particularly described in Certificate of Title Volume 08406 Folio 397; and
(e)102 Douglas Parade, Williamstown more particularly described in Certificate of Title Volume 08516 Folio 364.
Now produced and shown to me marked ‘HK–1’ are true copies of the Register Search Statements in relation to each of the Capital K Properties.
H & M Custodians Pty Ltd (as trustee of the H & M Family Trust) is the sole registered proprietor of the following properties (H & M Properties):
(a)60 Ferguson Street, Williamstown more particularly described in Certificate of Title Volume 05137 Folio 320; and
(b)3 Coxs Garden, Williamstown more particularly described in Certificate of Title Volume 09875 Folio 729.
Now produced and shown to me marked ‘HK–2’ are true copies of the Register Search Statements in relation to each of the H&M Properties.
Each of the Capital K Properties and the H&M Properties are subject to various securities including, in all cases, first ranking mortgages to the National Australia Bank (NAB mortgages). It is my understanding that these securities are cross–collateralised so that each secures all amounts owed to the National Australia Bank.[20]
[20]Affidavit of Hisham Khartabil affirmed 24 July 2019, [4]–[7] (emphasis in original) (CB 1530–1531).
I sought clarification from the solicitors acting for the Director as to whether any of the properties listed above are currently on the market. The solicitors responded in the following terms:
We adopt the terms as defined in the affidavit of Hisham Khartabil sworn 24 July 2019 and inform the Court that we are instructed as follows:
1. In relation to the Capital K Properties:
(a)[15] Tempany Street, North Fitzroy (Volume 11469 Folio 934) – This property is not presently on the market;
(b)17 Tempany Street, North Fitzroy (Volume 11469 Folio 933) – This property is on the market;
(c) & (d)Buckley Street, Essendon (Volume 09732 Folio 401 and Volume 08406 Folio 397) – These properties together comprise of 7 town houses and have all been sold. These townhouses are awaiting Council compliance for sub–division in order for settlement to occur; and
(e)102 Douglas Parade, Williamstown (Volume 08516 Folio 364) – This property is on the market.
2. In relation to the H&M Properties:
(a)60 Ferguson Street, Williamstown (Volume 05137 Folio 320) – This property is on the market; and
(b)3 Coxs Garden, Williamstown (Volume 09875 Folio 729) – This property is on the market.[21]
[21]Email from Anne Maree Flanagan of Nerlich Lawyers Pt Ltd to Chambers of the Honourable Justice McDonald, 24 July 2019 (emphasis in original) (CB 1594).
The Director’s affidavit affirmed 24 July 2019 did not disclose the fact that:
(a) all of the properties owned by H&M Custodians Pty Ltd (‘H&M’) were on the market; and
(b) all of the properties owned by Capital K Property Group Pty Ltd (‘Capital K’), save for one, had either already been sold or were on the market.
One of the benefits of the DOCA identified by the Administrators in the further report was that the Director’s contribution ‘is to be supported by real property security’.[22] Further, the Director’s solicitors sent a letter to the Administrators dated 24 June 2019 which was read out at the meeting of 26 June 2019.[23] That letter contained the statement that:
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]
[22]Exhibit APS-5 to the affidavit of Andrew Schwarz sworn 8 August 2019, 148 (CB 1028).
[23]Affidavit of John Goulding sworn 23 July 2019, [144] (CB 199).
[24]Exhibit JG–21 to the affidavit of John Goulding sworn 23 July 2019 (CB 658).
In the Court’s interlocutory ruling delivered on 24 July 2019, I concluded as follows:
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.[25]
[25]MCCA Asset Management Limited v Kamata Homes Pty Ltd (admins apptd) [2019] VSC 512, [25]–[28].
The Court made orders on 25 July 2019 which restrained the Administrators from giving effect to the DOCA, save for certain specific actions, until MCCA’s claims were heard and determined by the Court.[26] The trial was listed to commence on 19 August 2019 on an estimate of three hearing days.[27] On the first morning of the trial, I raised with the parties whether the Administrators should be directed to convene a further meeting, at which creditors could be provided with information regarding the marketing and sale of the properties owned by Capital K and H&M.[28] If, notwithstanding the provision of such information, creditors continued to support the DOCA, this would be relevant to whether the Court should terminate the DOCA, even if satisfied that one or more of the grounds prescribed by s 445D of the Act had been made out.
[26]Order of McDonald J in MCCA Asset Management Limited v Kamata Homes Pty Ltd (Supreme Court of Victoria, S ECI 2019 03305, 25 July 2019) [3] (CB 148).
[27]Ibid [9].
[28]Transcript of proceeding (19 August 2019) 22.16–22.19 and 25.21–26.13 (CB 1885).
None of the parties opposed the convening of a further meeting. The proposed course of action was consistent with the approach adopted by Hansen J in Greek Orthodox Community of Oakleigh and District Inc v Pizzey Noble Pty Ltd (admin apptd) (‘Greek Orthodox Community’).[29] In Greek Orthodox Community, Hansen J considered that the failure of administrators to disclose the existence of professional indemnity insurance was a material omission. The benefit of the insurance might have flowed to creditors upon the company’s liquidation, which was a relevant and material circumstance.[30] Hansen J provided the parties with the opportunity to place evidence before the Court of the views of the creditors in light of the existence of the professional indemnity insurance. The proceeding was adjourned to allow the administrators the opportunity to send a circular to each creditor informing them of all relevant facts and matters concerning the insurance policy. The administrator filed an affidavit evidencing that no creditor would have voted differently in light of knowledge of the existence of the insurance policy.[31]
[29](1997) 23 ACSR 274.
[30]Ibid 286.
[31]Ibid 288–289.
On 19 August 2019, I adjourned the trial to allow the Administrators an opportunity to provide information to creditors regarding the marketing and sale of properties owned by Capital K and H&M. Prior to the hearing on 19 August 2019, no evidence had been filed which would have permitted a finding that any of the creditors who had voted in favour of the DOCA on 26 June 2019 would have voted against the DOCA if provided with information regarding the marketing and sale of the properties owned by Capital K and H&M. Further, prior to the hearing on 19 August 2019, the Administrators filed evidence that since the meeting on 26 June 2019 their ongoing investigations had identified additional potential unfair preference and insolvent trading claims against the Director.[32] I considered it appropriate that creditors also be provided with this information.
[32]See affidavit of Andrew Schwarz sworn 8 August 2019, [247]–[259] (CB 866–869).
The contents of a Court-approved circular to be distributed to creditors was the subject of considerable debate on 19 and 21 August 2019. Further, the parties exchanged correspondence subsequent to 21 August 2019 before the final version of the circular was approved by the Court.[33] The events following the Court-approved circular are accurately summarised by the second defendant as follows:
[33]Order of McDonald J in MCCA Asset Management Limited v Kamata Homes Pty Ltd (Supreme Court of Victoria, S ECI 2019 03305, 27 August 2019) Annexure A (CB 2053–2068).
The additional information to be presented to creditors was limited to three facts:
(a) that the properties the subject of the security granted to secure the directors’ contribution were ‘on the market’ at the time of the Second Meeting (which the Court referred to as the ‘primary issue’);
(b) the terms of clause 4 of the GSAs; and
(c) the further potential voidable transaction claims identified by the Administrators following the Second Meeting.
The Court was evidently concerned about ‘avoiding any disputation regarding the way in which information is being presented’ to the creditors. His Honour stated that:
I will not be assisted … if in due course this proposal just simply translates into further sort of satellite litigation involving disputation about what’s been said and what hasn’t been said at the further meeting.
The Court went on to state that:
The way of avoiding that is to have – to do this by way of a poll with a circular where the contents of the circular are known and not – and there’s no room for debate about what information people have been given.
It was on that basis that the Court reviewed and – following lengthy submissions by all parties, and in particular the plaintiffs – settled and approved the further circular.
The very purpose of that exercise was to ‘minimise any disputation about the accuracy’ of the information being provided to creditors. The Court went so far as to state to the plaintiffs’ counsel that it was not the Court’s intention that the plaintiffs would provide a competing circular to creditors, the evident purpose being to minimise any such dispute. Instead, the Court made clear that the plaintiffs (as creditors) could attend the Further Meeting and ask questions and raise relevant issues.
The Administrators adhered to the Court’s directions. The further circular was issued in precisely the same form as approved by the Court and the Administrators took no other steps to provide any further or different information to any creditor prior to the Further Meeting (or at all).
The plaintiffs, on the other hand, deliberately ignored the Court’s directions about the information to be provided to creditors. In particular, they:
(a) prepared and distributed the Competing Circular and a pro forma proxy which appointed their representatives as proxies and directed a vote against the DoCA; and
(b) established a ‘call centre’ to contact creditors in relation to the meeting.
The evidence also demonstrates that the plaintiffs’ efforts had a very substantial impact on the results of the Further Meeting. In particular, the evidence shows that the prefilled proxy forms attached to the plaintiffs’ circular were used by:
(a) 40 of the 44 creditors (91%) who voted against the resolution;
(b) 30 of the 31 creditors (97%) who participated in the vote for the first time at the Further Meeting and voted against the resolution; and
(c) all 5 of the creditors who changed their votes between the two meetings.
None of those creditors attended the meeting in person, and only one of them provided a proxy directly to the Administrators (the remainder delivered proxies to the plaintiffs).
Given that the pre-filled proxy forms were attached to the creditors’ circular, the clear inference is that all 40 of the creditors who used those proxies received and read that circular, and may also have been contacted by the plaintiffs’ call centre. In fact, the evidence demonstrates that at least in some cases those creditors did not read the Administrators’ circular and voted solely on the basis of the plaintiffs’ information.
For the following reasons, the consequences of the plaintiffs’ conduct are twofold. First, it is at least likely that the majority of creditors who voted against the DoCA at the further meeting did so in reliance on misleading information contained in the plaintiffs’ circular and conveyed by the plaintiffs’ call centre. Secondly, some of those creditors acted on inducements or hollow promises made on behalf of the plaintiffs by their call centre.
In addition to going beyond the bounds of the issues identified by the Court, the plaintiffs’ circular was misleading in the following respects:
(a) it understated the estimated return under the DoCA (stating that it was 3 cents in the dollar when the estimated return was between 3 and 4.3 cents in the dollar);
(b) it overstated the extent of potential voidable transaction recoveries, by referring to the gross value of potentially challengeable transactions ($2 million) rather than the net value of those transactions (a ‘high side’ estimate of $422,200) …[34]
[34]Second defendant, ‘Further submissions’, 4 October 2019, [27]–[38] (emphasis in original) (citations omitted).
In addition to the matters set out above, there is evidence that call centre staff engaged by MCCA made the following false statements to creditors:
(a) Clint Simonson of Portable Office Solutions was told that the Director ‘has many non-disclosed assets, was getting away scot free and would be keeping a couple of houses’;[35]
[35]Exhibit RAC-1 to the affidavit of Robert Cleary affirmed 20 September 2019, 11 (CB 2343).
(b) Rhet Lock, a bricklayer, was told that ‘he would be paid up to 70-80 per cent of his debts’ in a liquidation;[36]
[36]Ibid 14 (CB 2346).
(c) Shaun Andueza of Superior Brickwork was told that ‘he would be paid up to 70% of his debt’ in a liquidation;[37]
[37]Ibid 16 (CB 2348).
(d) Mustafa Barakat of All Around Painting Services was guaranteed full payment within twelve months in the event of a liquidation;[38]
(e) Maureen Vaughan was told that it was likely she would receive 60 to 70 per cent of her debt in a liquidation;[39]
(f) Metin Dalgali and Michel Rasel were told they would be paid in full if they voted in favour of a liquidation.[40]
[38]Affidavit of Mustafa Barakat affirmed 16 September 2019, [3] (CB 2298).
[39]Affidavit of Maureen Vaughan sworn 16 September 2019, [3] (CB 2322).
[40]Affidavit of Metin Dalgali affirmed 16 September 2019, [3] (CB 2307); Affidavit of Michel Rasel affirmed 13 September 2019, [3] (CB 2320).
Mr John Goulding, a consultant engaged by MCCA, gave evidence that MCCA had not authorised call centre staff to make any inaccurate statements, such as those set out above. He could provide no explanation as to how it had come to pass that such statements were made. Irrespective of whether the false statements were authorised by MCCA, it must accept responsibility for the misleading nature of the statements which were made. MCCA engaged the call centre for the express purpose of getting creditors to vote in favour of a liquidation. MCCA was responsible for ensuring that information provided to creditors was accurate. It failed to do so.
MCCA’s conduct in:
(a) Forwarding a circular to all creditors containing inaccurate information;
(b) Engaging a call centre to canvas creditors; and
(c) Failing to ensure that call centre staff provided accurate information to creditors;
undermined the primary objective of the course which was agreed to by the parties on 19 August 2019. That objective was to gauge whether creditors’ attitude to the DOCA would have been different on 26 June 2019 if they had been provided with the information contained in the Court-approved circular.[41]
[41]Transcript of proceeding (21 August 2019) 109.11–109.20 (CB 1970).
Mr Maiden QC, on behalf of the Administrators, submitted that in light of MCCA’s conduct prior to the further meeting of creditors on 11 September 2019 (‘further meeting’), the Court cannot safely rely on the 40 proxy votes of creditors who did not vote at the meeting on 26 June 2019 and subsequently provided MCCA with proxies voting against the DOCA at the further meeting. Mr Maiden advanced the same submission in respect of five creditors who voted in favour of the DOCA at the original meeting on 26 June 2019, but changed their vote at the further meeting. I accept this submission.
MCCA’s conduct has significantly undermined the weight which can be given to the votes cast at the further meeting. To say that the conduct was regrettable is an understatement. The conduct was ill-conceived and opportunistic. I would not have adjourned the trial and made orders for the further meeting to be convened if I had any inkling that MCCA intended to act as it did post 19 August 2019.
A question arises as to the legal consequences of MCCA’s conduct vis-à-vis the application for termination of the DOCA. The primary issues for determination in this proceeding are twofold:
(a) Whether one or more of the grounds in s 445D of the Act have been made out; and
(b) If so, whether or not discretionary considerations support the termination of the DOCA.[42]
[42]See Britax Childcare Pty Ltd v Infa Products Pty Ltd (admin apptd) (2016) 115 ACSR 322, 342 [90] (Burley J) (‘Britax’); In the matter ofRecycling Holdings Pty Ltd (2015) 107 ACSR 406, 419 [29] (Brereton J) (‘Re Recycling’).
Prima facie, the votes of the 40 creditors who voted against the DOCA for the first time at the further meeting are relevant to the Court’s assessment of whether the termination of the DOCA is in the interests of the creditors. However, for the reasons set out above, the weight which can be attributed to these votes must be treated with significant caution. There is a significant risk that the 40 creditors who voted for the first time against the DOCA were influenced by misleading information contained in MCCA’s circular and/or which was provided to them by call centre staff. MCCA’s conduct prior to the meeting on 11 September 2019 is relevant insofar as it diminishes the weight which can be accorded to the votes of creditors who voted against the DOCA at that meeting. However, I do not consider MCCA’s conduct to be otherwise relevant to the determination of the primary issues in the proceeding. The conduct may, however, be of considerable relevance in respect of the costs of the proceeding, particularly the costs incurred in relation to the hearing on 19 and 21 August 2019.
Section 445D(1)(c)
I am satisfied that the failure of the report and further report to inform creditors of the marketing and sale of properties owned by Capital K and H&M was a material omission. The test of materiality if whether the omission could ‘potentially rationally influence the decision of a hypothetical reasonable creditor’.[43]
[43]Re Recycling (2015) 107 ACSR 406, 420 [31] (Brereton J); Britax (2016) 115 ACSR 322, 352 [158] (Burley J).
The notion of a material omission ‘depends on the objective quality and potential of the information, and not whether anyone was in fact misled’.[44] The subjective impact of an omission may be relevant where a court undertakes the second, discretionary stage of the enquiry under s 445D.[45]
[44]Re Recycling (2015) 107 ACSR 406, 420 [31] (Brereton J).
[45]Ibid. See also Mondello Farms Pty Ltd v Annatom Pty Ltd (2007) 64 ACSR 91, 106 [99] (Layton J).
The Director’s contribution of $1 million was a key feature of the DOCA. The security to be provided in respect of that contribution would rationally influence a reasonable creditor’s decision to vote for or against the DOCA. Insofar as the security was comprised, in part, of real property assets of Capital K and H&M, whether such assets were being sold would potentially influence how a creditor voted. The fact that nearly all of the properties were being sold raised questions as to what was occurring with the proceeds of the sale, including whether there would be any net proceeds available after secured creditors had been paid. I am satisfied that the omission from the report and further report, which were provided to creditors prior to the meeting on 26 June 2019, of any reference to the sale and marketing of the relevant properties was a material omission. I am therefore satisfied that the ground prescribed by s 445D(1)(c) has been established.
Section 445D(1)(g): Termination of DOCA for some other reason
Termination of a DOCA pursuant to s 445D(1)(g) may be justifiable in the public interest, even where it is established that termination would not necessarily be in the interest of creditors.[46] It is well established that:
where there has been ostensible misconduct in the affairs of a company requiring investigation by a liquidator, it would be detrimental to commercial morality to prevent such an investigation through the operation of a DOCA propounded by entities and individuals who ought to be the subject of an investigation and the target of such proceedings.[47]
[46]ASIC v Midland Highway Pty Ltd (admin apptd) (2015) 110 ACSR 203, 223 [73] (Beach J); Eco Heat (Vic) Pty Ltd v Syndicate Forty Four Pty Ltd (subject to deed of company arrangement) [2018] VSC 156, [37] (Sifris J) (‘Eco Heat’).
[47]Eco Heat [2018] VSC 156, [38]; See also TiVo, Inc v Vivo International Corporation Pty Ltd (subject to deed of company arrangement) [2014] FCA 789, [58] (Gordon J) (‘Tivo’); Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510, 566 [290] (‘Campbell J’) (‘Bidald Consulting’).
In Bidald Consulting, Campbell J set aside a DOCA on grounds including public interest grounds under s 445D(1)(g). As to the weight to be given to the fact that the affairs of a company will not be investigated, his Honour stated:
How much weight is given to the fact that the affairs of the company will not be investigated depends on whether there are circumstances which suggest that investigation is called for. Sometimes, the fact that only a small dividend will be paid to creditors is itself such a circumstance … Sometimes, the fact that it appears that there may be prospects of preference or uncommercial transaction or insolvent trading recoveries can be such a circumstance. In the present case, it is clear that only a small dividend will be paid to creditors, if any dividend at all. There is some basis for believing that insolvent trading recoveries might be possible, but the evidence concerning that topic is fairly slight, and any actual recoveries would depend on a liquidator obtaining the funding to sue.[48]
[48]Bidald Consulting (2005) 226 ALR 510, 566 [291] (citations omitted).
The considerations referred to by Campbell J are relevant in the present proceeding. First, under the DOCA, only a small dividend will be paid to creditors. Second, there is a real prospect of uncommercial transactions or insolvent trading recoveries.
An investigation into the affairs of the Company by a liquidator is warranted
The Director is the registered proprietor of a property situated at 2 Dunbar Court, Greenvale (‘the Greenvale property’). The property is mortgaged to the National Australia Bank as security for a loan of $1,590,000.[49] That loan is currently in arrears in a sum of approximately $120,000.[50] The Greenvale property is the Director’s family home. The Director was cross-examined at length regarding the financing arrangements governing the purchase of the Greenvale property. He stated that the land was purchased with a $700,000 loan taken out by Capital K, which has not been paid off.[51] He then took out a loan in his own name for $1,590,000 to fund the construction of the home.[52] The home was built by the Company, utilising subcontractors which it engaged.[53] The Director paid the $1,590,000 to the Company to meet the cost of construction. However, the actual cost of construction which was incurred by the Company was ‘around $2.5 million, maybe.’[54] Notwithstanding the fact that the company incurred costs of approximately $900,000 building a home for the Director’s personal use, he denied that he was indebted to the Company in the sum of $900,000.[55] There is no record in the Company’s accounts for the Director being indebted to the Company for the cost which it incurred for the construction of the Director’s home.[56] The Director stated that he has no intention of paying the difference between the $1,590,000 he advanced to the Company and the cost which the Company actually incurred in the construction of the home.[57]
[49]Transcript of proceeding (14 October 2019) 384.31–385.03.
[50]Ibid 385.06–385.08.
[51]Ibid 381.11–381.27.
[52]Ibid 375.30–376.13.
[53]Ibid 392.04–392.10.
[54]Ibid 393.26–393.27.
[55]Ibid 395.10–395.11.
[56]Ibid 395.31–396.02.
[57]Ibid 399.01–399.02.
The Director’s home was completed ‘in a practical sense’ in about July/August 2017,[58] even though no certificate of occupancy was provided until 2019.[59] The Company paid the subcontractors working on the home out of ‘cash flow’,[60] and ‘[t]here might have been some cash injection from Capital K.’[61]
[58]Ibid 404.25–404.28.
[59]Ibid 404.15–404.19.
[60]Ibid 406.03–406.04.
[61]Ibid 406.05–406.06.
The Director’s conduct in using the Company’s resources to build a home for his personal use weighs heavily in favour of the termination of the DOCA. There is a strong case for further investigation to be undertaken by a liquidator. On the evidence currently before the Court there is a prima facie case that the Director is personally liable to reimburse the Company for the difference between the $1,590,000 which the Director advanced to the company, and the actual cost which was incurred by the Company in construction of the home. Based on the evidence of the Director, there is a prima facie case that he is indebted to the Company in the sum of $900,000. However, a detailed investigation of the Company’s accounts may establish that the level of the Director’s indebtedness to the Company exceeds $900,000.
Of itself, the magnitude of the Director’s potential indebtedness to the Company warrants further investigation by a liquidator. However, there are additional considerations which reinforce this conclusion. In July 2017, the Company incurred a loss of $1,193,671.[62] For the period of 1 July to 30 November 2017 the Company incurred losses totalling $4,588,453.[63] There is therefore a temporal proximity between the period the Company was involved in the construction of the Director’s home, and the time when the Company’s financial position significantly deteriorated. A question arises as to whether there is a nexus between the costs incurred by the Company in the construction of the Director’s home and the financial deterioration of the Company leading to its insolvency. It is significant that the potential claims identified by the Administrators do not include any amount referable to the cost incurred by the Company on the Director’s behalf in building his home.
[62]Exhibit APS-5 to the affidavit of Andrew Schwarz sworn 8 August 2019, 409 (CB 1289), 433–434 (CB 1313–1314).
[63]Ibid 409 (CB 1289) and 428–434 (CB 1308–1314).
Further, since the meeting on 26 June 2019, at which point the Administrators had identified an insolvent trading claim with a potential value of up to approximately $800,000,[64] and unfair preference claims with a potential value of up to approximately $87,000,[65] the Administrators have identified additional potential unfair preference claims. As at 8 August 2019, the gross sum of additional potential unfair preference claims identified by the Administrators is $1,995,312.[66] After taking account of costs and litigation contingencies, the Administrators estimate a potential net return of up to approximately $422,000.[67]
[64]Exhibit APS-5 to the affidavit of Andrew Schwarz sworn 8 August 2019, 99 (CB 979) and 103 (CB 983).
[65]Ibid 100 (CB 980) and 103 (CB 983).
[66]Affidavit of Andrew Schwarz sworn 8 August 2019, [252]–[259] (CB 867–868).
[67]Ibid [255]–[259] (CB 868).
The Director’s evidence regarding the expenditure of Company funds on the construction of his home raises a question, warranting further investigation, as to whether he breached duties imposed upon him by ss 180, 181, 182, 286 and 588G of the Act.[68]
[68]See Kenna & Brown Pty Ltd v Kenna (1999) 32 ACSR 430, 440 [59], 446–449 [104]–[115] and 446 [227] (Bergin J).
It would be offensive to commercial morality and public policy if, by reason of the DOCA, further investigation into the circumstances contributing to the Company’s insolvency was frustrated.[69] The plaintiffs have offered to fund investigations and the preparation of a report by a liquidator, in the sum of $100,000.[70]
[69]Emanuele v Australian Securities Commission (1995) 141 ALR 506, 520 (Spender, von Doussa and Hill JJ); Public Trustee (Qld) v Octaviar Ltd(subject to deed of company arrangement) (recs and mgrs apptd) (2009) 73 ACSR 139, 192–193 [179] and 194 [182] (McMurdo J); Bibald Consulting (2005) 226 ALR 510, 566 [290] (Campbell J); TiVo [2014] FCA 789, [60] (Gordon J); Eco Heat [2018] VSC 156, [38] (Sifris J).
[70]Exhibit P9, Letter of offer from the plaintiffs to the second defendant dated 15 October 2019.
In considering whether public interest grounds warrant the termination of the DOCA, I have had regard to the evidence of the Administrators that they consider a better financial return to creditors will be achieved under a DOCA compared to a winding up. At the further meeting on 11 September 2019, creditors were advised that the Administrators estimated that the likely return in a liquidation ranged from zero to 2.9 cents in the dollar, compared to 3 cents to 4.3 cents in the dollar under the DOCA. The potential returns to creditors are miniscule, irrespective of whether such returns flow as a consequence of the Company’s liquidation or, alternatively, pursuant to the DOCA. The difference between the return under the DOCA compared to a liquidation is insignificant. Further, the estimated return under a winding up does not take account of the potential to recover from the Director the money spent by the Company on the construction of his home.
The fact that a DOCA is expected to provide a better return to creditors does not mandate an outcome whereby the DOCA will be allowed to stand.[71]
[71]Bibald Consulting (2005) 226 ALR 510, 565 [286] (Campbell J); Eco Heat [2018] VSC 156, [37], [67] and [70] (Sifris J).
I am satisfied that the plaintiffs have established the grounds for terminating the DOCA prescribed by both ss 445D(1)(c) and (g). In light of this finding it is unnecessary to make a finding as to whether any of the other grounds of termination prescribed by s 445D and/or ss 75-42 and 90-15 of the Insolvency Practice Schedule, have been made out. Nevertheless, for the sake of completeness, it should be recorded that nothing in this judgment should be taken to be a criticism of the conduct of the Administrators. To the contrary, the evidence before the Court supports a finding that at all material times the Administrators have acted appropriately and in the best interests of creditors.
I turn now to consider the residual question of whether discretionary considerations favour the termination of the DOCA. The matters which support termination of the DOCA on public interest grounds under s 445D(1)(g) are relevant to the exercise of the Court’s discretion. Each of the considerations which underpin the Court’s conclusion that the termination of the DOCA is in the public interest, also favour the discretion under s 445D being exercised to terminate the DOCA.
Conclusion
The Court shall order that the DOCA be terminated. I shall provide the parties with an opportunity to make submissions on costs.
SCHEDULE OF PARTIES
S ECI 2019 03305
BETWEEN:
| MCCA ASSET MANAGEMENT LIMITED (ACN 113 728 706) TRADING AS THE MCCA PROPERTY LIST | Plaintiff |
| SANDHURST TRUSTEES LIMITED (ACN 004 030 737) AS CUSTODIAN FOR THE MCCA PROPERTY FUND | Second Plaintiff |
| SANDHURST NOMINEES (VICTORIA) LTD (ACN 004 030 737) AS CUSTODIAN FOR THE MCCA PROPERTY FUND | Third Plaintiff |
- and -
| KAMATA HOMES PTY LTD (ACN 130 155 305) (ADMINISTRATORS APPOINTED) | 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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