Re Hayes Steel Framing Systems Pty Ltd (admins apptd)

[2017] NSWSC 385

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Hayes Steel Framing Systems Pty Ltd (Administrators Appointed) [2017] NSWSC 385
Hearing dates:	24 March 2017
Decision date:	11 April 2017
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	The Court orders that the First, Second and Third Defendants be wound up in insolvency; Mr Bradley Tonks be appointed to act as liquidator of the each of the companies; and the Plaintiffs’ costs be costs in the winding up.
Catchwords:	CORPORATIONS – Winding up – Applications for winding up by court – where companies insolvent and in external administration – where creditors related to the companies and their director oppose applications with a view to executing deeds of company arrangement – whether liquidations likely to provide a better return to creditors than deeds of company arrangement – whether liquidations are in the public interest.   CORPORATIONS – Winding up – Liquidators – where order made that companies be wound up – whether Plaintiffs’ nominee, rather than incumbent administrators, should be appointed as liquidator.
Legislation Cited:	- Copyright Act 1968 (Cth) - Corporations Act 2001 (Cth), Pt 5.3A, ss 9, 286, 439A, 440A, 445D, 447A, 459P, 461, 588FDA, 600A - Corporations and Other Legislation Amendment (Insolvency Law Reform) Regulation 2016 (Cth), Sch 2 - Corporations Regulations 2001 (Cth), reg 10.25.02(3)(i) - Insolvency Law Reform Act 2016 (Cth) - Supreme Court (Corporations) Rules (NSW), r 2.13
Cases Cited:	- Australian Securities and Investments Commission v Midland Hwy Pty Ltd (admin apptd) [2015] FCA 1360; (2015) 110 ACSR 203 - Australian Securities and Investments Commission v Storm Financial Ltd (recs and mgrs apptd) (admin apptd) [2009] FCA 269; (2009) 71 ACSR 81 - Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235; (2005) 226 ALR 510 - Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883; (2003) 47 ACSR 391 - Deputy Commissioner of Taxation v Woodings (1995) 13 WAR 189; 16 ACSR 266 - Fortress Credit Corporation (Australia) II Pty Ltd v Octaviar Ltd (recs and mgrs. apptd) (in liquidation) [2010] QCA 45; (2010) 77 ACSR 339 - Grocon Constructors Pty Ltd v Kimberley Securities Ltd (admins apptd) [2009] NSWSC 541; (2009) 72 ACSR 305 - Joseph Khoury & Sons v Zambena Pty Ltd [1999] NSWCA 402; (1999) 217 ALR 527 - Public Trustee (Qld) v Octaviar Ltd (subject to a deed of company arrangement) (recs and mgrs. apptd) [2009] QSC 202; (2009) 73 ACSR 139 - Re El Zorro Transport Pty Ltd [2013] NSWSC 1082 Re Streetscape Projects (Australia) Pty Ltd (subject to a deed of company arrangement) [2013] NSWSC 1289 - Workers Compensation Nominal Insurer v Perfume Empire Pty Ltd [2011] NSWSC 379 - Ziziphus Pty Ltd v Pluton Resources Ltd (recs and mgrs apptd) [2016] WASC 276
Category:	Principal judgment
Parties:	Framecad IP Limited (First Plaintiff) Tanmari Pty Ltd (Second Plaintiff) Robert Cummings (Third Plaintiff) Hayes Steel Framing Systems Pty Ltd (admin apptd) (First Defendant) Steel Framing Systems International Pty Ltd (admin apptd) (Second Defendant) JR Consulting & Drafting Pty Ltd (admin apptd) (Third Defendant) Sean Wengel (Fourth Defendant) Robert Whitton (Fifth Defendant)
Representation:	Counsel: F Assaf/S L Ross (Plaintiffs) J Scarcella (Solicitor – Creditors)   Solicitors: Sparke Helmore Lawyers (Plaintiffs) Johnson Winter & Slattery (Creditors)
File Number(s):	2016/376879

Judgment

1. By Amended Originating Process filed on 10 February 2017, the Plaintiffs, Framecad IP Limited, Tanmari Pty Limited (“Tanmari”) and Mr Robert Cummings seek orders, inter alia, that Hayes Steel Framing Systems Pty Limited (admin apptd) (“HSFS”), Steel Framing Systems International Pty Limited (admin apptd) (“SFSI”) and JR Consulting & Drafting Pty Limited (admin apptd) (“JRC”) be wound up.

2. The Plaintiffs initially put the winding up applications on four alternative bases, under s 600A of the Corporations Act 2001 (Cth), s 447A of the Corporations Act, s 459P of the Corporations Act and s 461 of the Corporations Act. The Plaintiffs ultimately put primary reliance on their application under s 447A of the Corporations Act and secondary weight on their applications under ss 459P and 461 of the Corporations Act. The Plaintiffs’ application under s 600A of the Corporations Act was ultimately put on a narrower basis to which I will refer below, although I do not find it necessary to determine it for the reasons noted below.

3. Several creditors of HSFS, SFSI and JRC who were (with one possible exception) related to the companies and their director, Mr John Pacione (“interested creditors”) were heard under r 2.13 of the Supreme Court (Corporations) Rules (NSW) but did not seek to lead evidence in the application. Their solicitor, Mr Scarcella, relied on written submissions to which I will refer below, which were handed up at the commencement of the hearing, and then sought and was granted leave to withdraw from the hearing. Mr Pacione was served with relevant documents and had indicated his opposition to the application in correspondence but did not lead evidence or appear on the application. I was informed that the Australian Taxation Office, which is a substantial creditor of HSFS, SFSI and JRC, had informed the Plaintiffs’ solicitors that it did not wish to be heard in the proceedings and it did not appear in them. The administrators of HSFS, SFSI and JRC were excused from appearing in the proceedings at their request.

Background and affidavit evidence

4. The Plaintiffs rely on affidavits of their solicitor, Mr Daniel Forster affirmed 15 December 2016 and 27 February 2017; an affidavit of the liquidator whom they have nominated for appointment, Mr Bradley Tonks, sworn 27 February 2017; and a further affidavit of Mr Forster affirmed 10 March 2017. The Plaintiffs also tendered several folders of documents in support of the application. Several parties which had produced documents under compulsory process had claimed confidentiality in respect of a significant number of those documents but did not seek to be heard as to those claims or lead evidence to support them at the hearing. I was not satisfied that a basis for non-publication orders was established in respect of those documents, although I did not vary orders previously made by a Registrar that prevented the Plaintiffs’ legal representatives communicating the content of those documents to the Plaintiffs. I will refer to those documents, although generally not their detail, where relevant in this judgment. The Plaintiffs also filed several affidavits proving service of the proceedings on interested creditors, but did not need to read those affidavits where those creditors (other than the Australian Taxation Office) had been heard in the application as I noted above.

5. The background to these applications involve complex proceedings in this Court and, on appeal, in the Full Court of the Federal Court of Australia, which had jurisdiction to hear that appeal since it included issues arising under the Copyright Act 1968 (Cth). HSFS, SFSI and JRC were the Plaintiffs and Cross-Defendants in those proceedings, in which they brought claims under licensing agreements, and the Plaintiffs in this application were the Defendants and some of them were Cross-Claimants in those proceedings, in which they brought claims for copyright infringement of a computer program known as Quik Series Software. I delivered judgment as to the liability aspects of those proceedings on 12 September 2014 and made orders arising from that judgment on 19 December 2014. No party suggested that my involvement in determining the earlier proceedings at first instance gave rise to any reason that I should not also hear this application, where no question of the credit of witnesses arises in this application.

6. HSFS, SFSI and JRC then brought an unsuccessful appeal to the Full Court of the Federal Court of Australia from my judgment and, it appears, were also unsuccessful in obtaining special leave to appeal from the judgment of the Full Court of the Federal Court to the High Court of Australia. The quantum stage of the proceedings, which was to be determined separately and after the liability stage, has been stayed as a result of the subsequent appointment of administrators to HSFS, SFSI and JRC.

7. It appears that one of the administrators, Mr Wengel, was contacted by the external accountant for HSFS, SFSI and JRC in October 2014, shortly after my liability judgment was delivered, again in mid-2015 and again in March 2016 in respect of the possibility of placing the companies in external administration, in the context of the proceedings and costs orders made in them, and Mr Pacione, the sole director HSFS, SFSI and JRC, then met with Mr Wengel on 13 September 2016 to discuss that possibility. HSFS, SFSI and JRC were placed in voluntary administration on 31 October 2016. The Plaintiffs placed some emphasis on the fact that Mr Pacione also appointed a controlling trustee on 25 November 2016 and subsequently entered into a Personal Insolvency Agreement dated 4 January 2017 which was later terminated. I have not found it necessary to address Mr Pacione’s personal financial position in order to determine this application.

8. The administrators appointed to HSFS, SFSI and JRC provided a report to creditors under s 439A of the Corporations Act on or about 24 November 2016 (Ex A1, tab 5) and recommended that the companies enter into deeds of company arrangement. The draft deeds of company arrangement, if they exist, are not in evidence. Their terms are outlined in the administrators’ s 439A report and are to substantially the same effect for each of the companies, although the amount that the deed proponent, Mrs Pacione, would contribute to a deed fund differed in respect of the three companies. The proposed terms provide for Mrs Pacione to make a contribution of $22,000 to a deed fund for HSFS, $32,000 to a deed fund for SFSI and $21,000 to a deed fund for JRC and would preserve the claims of specified creditors, namely Simone Legal, Mrs Pacione and Machinetek Pty Ltd (“Machinetek”) and extinguish the claims of all other creditors, primarily the claims of the Plaintiffs and the Australian Taxation Office. Simone Legal is the law firm that acted for the companies in the earlier proceedings and the administrators’ s 439A report records that Mr Simone is Mr Pacione’s brother-in-law, although I will return to that matter below. It appears that Machinetek also has a connection with Mr Pacione since its sole director is his son. The proposed terms of the deeds of company arrangement would provide for control of HSFS, SFSI and JRC to be returned to Mr Pacione as the companies’ sole director after they took effect.

9. The administrators’ s 439A report estimates that creditors of HSFS, SFSI and JRC would receive about 1 cent in the dollar under the terms of the proposed deeds of company arrangement and that there would be no return in a liquidation and, on that basis, the administrators recommended that creditors approve the respective deeds of company arrangement. The administrators also expressed the view in that report that:

“The proposal for a DOCA offers the best return to creditors. We recommend creditors accept the proposal the company execute a DOCA. In a liquidation, unsecured creditors are unlikely to receive a return.”

It emerged in the course of this hearing that the administrators’ estimate of the return to creditors under the proposed deeds of company administration does not take account of either known unpaid tax owed by the companies to the Australian Taxation Office or the fact that further tax liabilities may arise if the companies lodged several years of outstanding tax returns, which would potentially be additional claims upon the deed fund. It seems to me that little weight can be given to that estimate.

10. The Plaintiffs also contest the administrators’ assessment that the proposed deeds of company arrangement offer the best return to creditors on the basis that that assessment was based upon financial records of HSFS, SFSI and JRC which the administrators had recognised were inadequate and that possible voidable transaction claims had not been adequately investigated and, as the administrators recognised, could be investigated in a winding up. I will address those matters below.

11. Second meetings of creditors for each of HSFS, SFSI and JRC were held concurrently on 2 December 2016 and creditors resolved to execute the proposed deeds of company arrangement by majority, including the interested creditors for whom Mr Scarcella appears. The Plaintiffs then brought an interlocutory application in late December 2016 seeking orders restraining the execution of the proposed deeds of company arrangement and the administrators’ solicitors then undertook that the deeds of company arrangement would not be executed before 20 December 2016. The administrators subsequently extended that undertaking so as not to execute the deeds of company arrangement prior to this hearing.

12. The director of HSFS, SFSI and JRC is on notice of this application and has corresponded with the Plaintiffs’ solicitors concerning the application. By letter dated 31 January 2017 from Mr Pacione to the Plaintiffs’ solicitors, in respect of a dispute as to subpoenas issued to him, Mr Pacione observed that:

“While the Court retains a discretion as to whether or not to wind up the [companies], in circumstances where they are all insolvent and known to be insolvent, and the application seeks winding up under s 459P (insolvency), then I assume, they will be wound up.”

The position taken by Mr Pacione at that point is inconsistent with that taken by the interested creditors and later taken by him in correspondence. By a further letter dated 23 February 2017 (Ex A5, tab 22), Mr Pacione advised the plaintiffs’ solicitors of his view that:

“The relief sought (placing the companies into liquidation) is not in the interests of Creditors, particularly as some Creditors have indicated they would continue to support the companies in the future.”

13. By letter dated 24 February 2017, Simone Legal advised the Plaintiffs’ solicitors that the relief sought in the Amended Originating Process was opposed, and expressed the view that it would prejudice the position of the relevant creditors, and that those creditors supported the appointment of the existing administrators as liquidators to each of the companies, rather than the liquidator proposed by the Plaintiffs, Mr Tonks, if a liquidator was to be appointed.

The solvency of HSFS, SFSI and JRC after the deeds of company arrangement are effectuated

14. The Plaintiffs rely, in support of their application under s 447A of the Corporations Act and for a winding up order, on a submission that each of HSFS, SFSI and JRC is presently insolvent, including by reason of costs orders assessed as at least $905,327.76 made in favour of the Plaintiffs in the earlier proceedings, and an amount owed by the companies to Simone Legal in excess of $1,435,900 in respect of the proceedings. Although the present insolvency of the companies is clear on the evidence, little turns upon it, because the voluntary administration regime is available for and intended for use by presently insolvent companies.

15. The more significant issue in this case is not that HSFS, SFSI and JRC were or are now insolvent, but that the evidence establishes that the deeds of company arrangement will not, when effectuated, return them to solvency. The Plaintiffs point out that Simone Legal has lodged a proof of debt against each of HSFS, SFSI and JRC for legal costs, as I noted above, in excess of $1,435,900 and that amount is presently due and payable, and that proposed terms of the deeds of company arrangement expressly preserve that debt. No evidence has been led by HSFS, SFSI and JRC, or by Simone Legal (which was heard in the proceedings but did not seek to be joined or to lead evidence in them) of any forgiveness, moratorium, standstill or capitalisation of that debt. HSFS, SFSI and JRC would not be able to pay that debt or other debts due to Mrs Pacione and Machinetek after the deeds of company arrangement are effectuated.

Non-compliance with tax and financial reporting obligations

16. The Plaintiffs also point out that the administrators’ s 439A report identifies several deficiencies in the tax affairs and financial records of HSFS, SFSI and JRC. The administrators express the view in that report that those companies’ financial records do not correctly record and explain their transactions, financial position and performance to enable a true and fair financial statement to be prepared and audited in accordance with s 286 of the Corporations Act (Ex A1, tab 5, p 68). For example, the administrators note that HSFS’s income tax returns for the years ended 30 June 2013, 2014, 2015 and 2016 and business activity statements since 1 July 2014 have not been lodged (Ex A1, tab 5, p 68). They observe that HSFS and SFSI maintained internal accounting software that “combine[d] the transactions of both entities and therefore require deconsolidation to be conducted by the Companies’ accountant” (Ex A1, tab 5, p 70). It is not clear whether such deconsolidation has occurred or on what basis. The administrators also point out that the work in progress figures in HSFS’s accounts have remained unchanged at each balance date of the last four financial years (Ex A1, tab 5, p 72), suggesting that those figures are not accurate. They also express doubt as to the reliability of HSFS’s balance sheet and profit and loss statement (Ex A1, tab 5, p 70); note that HSFS’s profit and loss statement does not specify the contents of its plant and equipment assets and that its plant and equipment assets as at each balance date over the past four financial years have also remained unchanged although Mr Pacione had acknowledged that an asset was sold to Mrs Pacione on 1 October 2014 (Ex A1, tab 5, p 72). The administrators also observe that the inclusion of the “Base system” in HSFS’s balance sheet “misrepresents” its financial position (Ex A1, tab 5, p 72) and that, although HSFS’s balance sheet records a deferred tax asset and tax clearing account balance totalling $142,816, the true position is unknown since a number of business activity statements have not been lodged by HSFS (Ex A1, tab 5, p 72). The administrators note that unsecured creditor claims of $2,577,700 are not recorded in HSFS’s balance sheet as at 30 June 2016 (Ex A1, tab 5, p 72). Unsurprisingly, given these matters, the administrators conclude that the balance sheet of HSFS “does not accurately reflect its financial position” (Ex A1, tab 5, p 73).

17. The administrators also note, in respect of SFSI, the same issue that transactions recorded in internal accounting software are not allocated to SFSI as distinct from HSFS (Ex A1, tab 5, p 70); that SFSI was not entitled to offer relevant licences to customers, following an undertaking given by it to the Court effective from 15 October 2014; that all new trading by SFSI had ceased and that income reported during the 2016 financial year was incorrectly recorded against SFSI instead of HSFS (Ex A1, tab 5, p 73); and that the balance of work in progress accounts for SFSI has also remained unchanged over the last four financial years, again suggesting it is inaccurate. They observe that they doubt the reliability of SFSI’s profit and loss statement (Ex A1, tab 5, p 73); that plant and equipment has also remained unchanged at each balance date over the past four financial years despite accumulated depreciation (Ex A1, tab 5, p 73); that SFSI’s balance sheet also does not specify the contents of its plant and equipment, which has also remained unchanged over the past four financial years, although an asset was divested on 4 July 2016 (Ex A1, tab 5, p 74); and that unsecured trade creditors of $2,515,319 are not captured in SFSI’s balance sheet as at 30 June 2016 (Ex A1, tab 5, p 75). The administrators also identify other deficiencies in SFSI’s accounts which it does not seem to me to be necessary to add to this already long list of material deficiencies. Again, SFSI’s income tax returns for the years ended 30 June 2013, 2014, 2015 and 2016 and business activity statements since 1 July 2014 have not been lodged (Ex A1, tab 5, p 68).

16. The administrators also note that they understand that JRC ceased trading in 2003 and that they have not received any financial reports of JRC for the last four years (Ex A1, tab 5, p 70).

17. The Plaintiffs point out that there is no indication whether, if the proposed deeds of company arrangement are executed and effectuated, any steps will be taken by HSFS, SFSI, JRC or Mr Pacione to ensure that all outstanding tax returns of HSFS, SFSI and JRC are lodged and any outstanding taxes paid or to bring the companies’ financial records into compliance with s 286 of the Corporations Act. The Plaintiffs submit that this indicates that the Court should not permit the companies to execute the deeds of company arrangement and allow them to be returned to Mr Pacione’s control without any commitment to address those issues. These matters seem to me to be significant, and their significance is increased, in my view, where none of HSFS, SFSI, JRC, Mr Pacione, the proponents of the deeds of company arrangement or the interested creditors have led any evidence or offer any undertaking that these deficiencies will be rectified promptly, or at all, after the companies are returned to Mr Pacione’s control under the proposed deeds of company arrangement.

18. The Plaintiffs also submit, and I accept, that the deficiencies in the companies’ financial records are likely to have contributed to inadequacies in the administrators’ identification of potentially voidable transaction claims which undermine the view expressed in their s 439A report that the proposed deeds of company arrangement are likely to provide a better return to creditors than a liquidation, and also compromise the adequacy of the information provided to creditors to allow them to make an informed decision as to whether to execute the proposed deeds of company arrangement or put the companies into liquidation.

Whether the deeds of company arrangement will provide a better return to creditors than a liquidation

21. The administrators express the view in the s 439A report (Ex A1, tab 5, p 76) that any amount potentially recoverable under voidable transaction claims is nil. The Plaintiffs submit, and I accept, that there are several matters that at least raise substantial doubts as to the correctness of that view. The administrators’ time sheets (Ex A1, Tab 5, pp 116, 128, 141) indicate that the administrators spent 6.6 hours in respect of investigations in respect of HSFS, 3.1 hours of investigations in respect of SFSI and 2.9 hours of investigations in respect of JRC. That seems to me a limited amount of time to investigate relatively complex matters, even having regard to the time constraint in which an administrators’ report must be prepared. Although the administrators indicate they have had regard to, inter alia, discussions with the director and his advisors, the director’s report as to affairs and questionnaire, management accounts, books and records and financial statements, there are obvious difficulties with reliance on information provided by an interested director and financial records that have the material deficiencies that the administrators themselves identified, to which I referred above.

22. The administrators’ view that any amount potentially recoverable under voidable transaction claims is nil is difficult to reconcile with their identification of transactions that, on their face, would warrant further inquiry. The s 439A report (Ex A1, tab 5, p 77) refers, for example, to a Deed of Assignment dated 25 April 2013 between HSFS, Mr Pacione and SFS International Hafif Celik Konstruksiyon Ve Prefabrik Yapi Uretim Teknolojileri Dis Ticaret Limited Sirketi (“SFS Turkey”) and a further Sale Agreement dated 1 October 2016 between JRC and SFS Turkey (Ex A4, tab 5, p 66). These transactions appear to deal with the licence agreement dated 11 August 2004 between Tanmari Pty Limited and HSFS that was in issue in the earlier proceedings in this Court and the appeal in the Full Court of the Federal Court. The administrators recognise that the sale of intellectual property by JRC to SFS Turkey under the Sale Agreement is within a two-year period before the relation back day, although they also suggest that, because of the quantum of the transaction, the apparent lack of public market for such an asset and apparent minimal impact on the companies, the transaction may not be commercial to pursue (Ex A1,tab 5, p 77). While that may be correct, the administrators appointed have only made somewhat limited inquiries in order to found a conclusion of that significance. The Plaintiffs also advance other criticisms of the adequacy of the description of this transaction in the s 439A report that it is not necessary to address to determine these proceedings. The administrators also identify a possible unreasonable director-related transaction within the meaning of s 588FDA of the Corporations Act (Ex A1, tab 5, p 77) relating to the Deed of Assignment and Technology Licence Agreement executed between HSFS and SFS Turkey, and they do not identify whether or why they consider a recovery could be made in respect of that transaction.

23. The Plaintiffs also point to several other transactions which, they submit and I accept, would warrant further investigation by a liquidator appointed to the companies. They point to a significant reduction in the balance of the bank accounts of HSFS and SFSI in late 2014 and early 2015, after orders adverse to the companies were made in the earlier proceedings, and to withdrawals from company bank accounts and expenditures which, absent further explanation, may seem to have a personal character (Ex A4, tab 52, pp 269, 272, 274, 279, 291–292 , 295–296; tab 57, pp 378, 380; tab 58, pp 406, 410.) Those withdrawals (collated in MFI 4) disclose expenditures from HSFS in the period 2014–2016 which, on their face, appear to be in the nature of personal expenditures in the amount of $5,458.21; significant withdrawals from the account of HSFS, apparently partly from automatic teller machines, totalling $73,561.69; payments to a Visa card totalling $114,217.52; several transactions which may warrant inquiry, including by reason of size, in the amount of $90,459.08, and significant payments by SFSI and HSFS to bank accounts in Turkey totalling $119,563.36, which may be associated with SFS Turkey but which also appear to warrant further inquiry. These transactions are not addressed in the administrators’ s 439A report. It is also difficult to see how the administrators could conclude that there would be no recoveries from insolvent transactions without more detailed inquiry as to these matters.

24. The Plaintiffs also submit that, even if the proposed deeds of company arrangement offered a better return to creditors than a winding up, a winding up would be preferable on the basis that the estimated return to creditors of 1 cent in the dollar is insignificant and does not have regard to the Australian Taxation Office’s claims. There is force in that submission, given the matters to which I have referred in paragraph 9 above.

25. I should note, for completeness, that the Plaintiffs also criticise the terms of a Business Licence Deed (Ex A4, tab 26) by which the administrators permitted Mr Pacione to trade HSFS’s business. The administrators explain the entry into that arrangement in the s 439A report as being directed to “maintaining the status quo of HSFS” and indicate that, under the terms of the arrangement, “the director agreed to remit all income generated by the business to HSFS less any valid business expenses” and that revenue expected to be received during the administration will be applied, inter alia, to expenses of the voluntary administrators. That Business Licence Deed has some difficulties, including a significant internal inconsistency as to the extent of revenue that Mr Pacione was entitled to retain from HSFS’s business. However, I do not consider it necessary to address the Plaintiffs’ criticism of that arrangement further in order to determine this application. The Plaintiffs also submit that the administrators have permitted HSFS to trade while insolvent and also allowed Mr Pacione personally to have the benefit of HSFS’s profit and takings in breach of his statutory and fiduciary duties. I have also not found it necessary to determine that matter in order to determine this application.

The interested creditors’ position as to the benefits of the deeds of company arrangement

26. As I noted above, Mr Scarcella appeared for the interested creditors, namely Mr Michael Simone trading as Simone Legal, who is the solicitor who acted for HSFS, SFSI and JRC in the earlier proceedings and is the brother-in-law of the sole director of the companies, Mr Pacione; Financial Dynamics Group Pty Ltd, which is the companies’ accountant and advised in respect of the appointment of administrators; Machinetek, the director of which is Mr Pacione’s son; Mrs Renate Pacione, who is Mr Pacione’s wife; Zimm Pty Ltd; Western Services Group Pty Ltd; Andrew Milne trading as Dremil; Andmac Systems Ltd NZ; and GDC Tax Pty Ltd. Mr Scarcella indicated that those creditors reaffirmed their support for the various deeds of company arrangement, having voted in favour of those deeds, and considered that an order that would prevent those deeds being executed and effectuated was not in their interests.

27. The interested creditors identified the first reason for that view as that the proposed deeds of company arrangement would provide a better return than a liquidation of the companies. The interested creditors also submit that there is no evidence that there would be valuable recoveries in a liquidation that render a higher return. As I have noted above, there is evidence of a number of transactions that appear to warrant further inquiry by a liquidator and that, if pursued, may lead to a recovery. It seems to me that, for the reasons noted above, there is a real prospect that any recovery in a liquidation will be more favourable than the minimal return, calculated on a fragile basis, under the deeds of company arrangement. The Plaintiffs, by their Counsel, have undertaken to the Court that they will pay an amount up to $40,000 to a liquidator of HSFS, SFSI and JRC for the purpose of its conducting examinations and investigations and confirmed the availability of funds for that purpose.

28. The interested creditors also submit that there is another advantage to creditors other than those related to Mr Pacione, namely their ability to conduct business with the companies after the various deeds of company arrangements are effected. I have had regard to that matter. Even if there would be an advantage to individual creditors in conducting business with companies that I have concluded above will be insolvent, even after the deeds of company arrangement are effectuated, and are neither complying with their tax obligations nor their obligation to maintain proper accounting financial records under s 286 of the Corporations Act, it does not seem to me that that is sufficient to outweigh the public interest in a winding up in those circumstances.

Application under s 447A of the Corporations Act

29. The Plaintiffs submit that the administrations of each of the corporate Defendants should be terminated under s 447A of the Corporations Act on the basis of, inter alia, an abuse of Part 5.3A of the Corporations Act. The Plaintiffs point out that that section authorises the Court to make such order as it thinks appropriate about how Part 5.3A of the Corporations Act is to operate in relation to a particular company, inter alia, if the Court is satisfied that the administration of a company should end because provisions of Part 5.3A of the Act are being abused. The Plaintiffs submit that the Court’s power under that section is to be exercised having regard to the interests of the creditors as a whole and the public interest: Australian Securities and Investments Commission v Midland Hwy Pty Ltd (admin apptd) [2015] FCA 1360; (2015) 110 ACSR 203; Ziziphus Pty Ltd v Pluton Resources Ltd (recs and mgrs apptd) [2016] WASC 276 at [34]. The Plaintiffs also submit that public interest includes considerations of commercial morality and the interests of the public at large: Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235; (2005) 226 ALR 510 at [287] per Campbell J; Australian Securities and Investments Commission v Midland Hwy Pty Ltd above.

30. The fact that the Court has power to terminate an administration and order a winding up in the public interest has been recognised at least since the observations of Wallwork J to that effect in Deputy Commissioner of Taxation v Woodings (1995) 13 WAR 189; 16 ACSR 266 at 279. In Joseph Khoury & Sons v Zambena Pty Ltd [1999] NSWCA 402; (1999) 217 ALR 527 at [80], in a passage quoted with approval by Campbell J in Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd above, Fitzgerald JA (with whom Beazley JA and Davies AJA agreed) observed that:

“… The Court should not encourage the notion that ‘anything goes’ provided only that a deed of company arrangement provides some benefit for dis-satisfied creditors. Commonly, companies proposing deeds of company arrangement are insolvent and what is proposed involves some benefit for unsecured creditors. That cannot be permitted to be used by those who promote such proposals as a critical factor which warrants the Court’s refusal to terminate or declare void such deeds, especially when different groups of unsecured creditors are treated differently.”

31. In Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883; (2003) 47 ACSR 391, the Court terminated a voluntary administration where a company’s sole director placed the company in voluntary administration with a view to adopting a deed of company arrangement by a decision of creditors (being himself and two persons allied with him) of doubtful value which would bar particular claims already being litigated against the company. That case has much in common with the present case. In Grocon Constructors Pty Ltd v Kimberley Securities Ltd (admins apptd) [2009] NSWSC 541; (2009) 72 ACSR 305, Barrett J made an order setting aside a resolution approving a deed of company arrangement under, inter alia, s 445D of the Corporations Act, where that deed of company arrangement was passed by reason of the votes of related creditors, and would have avoided the examination of the potential liability of third parties to the company in the way in which a liquidator would examine it, and would give rise to prejudice to creditors who voted against the resolution adopting the deed of company arrangement in that a potential source of recovery for the benefit of creditors would not be addressed, and where creditors would be deprived of the fuller examination which a liquidator would undertake.

32. In Public Trustee (Qld) v Octaviar Ltd (subject to a deed of company arrangement) (recs and mgrs apptd) [2009] QSC 202; (2009) 73 ACSR 139 at [182], McMurdo J also noted that a winding up may serve the public interest where investigations and recovery proceedings are likely to be funded and could realistically lead to persons who engaged in suspect transactions being brought to account. In Fortress Credit Corporation (Australia) II Pty Ltd v Octaviar Ltd (recs and mgrs apptd) (in liq) [2010] QCA 45; (2010) 77 ACSR 339, the Court of Appeal of the Supreme Court of Queensland upheld an order setting aside a deed of company arrangement and ordering a winding up under s 447A of the Corporations Act in circumstances that that order would secure a winding up related back to an earlier date.

33. The Plaintiffs also refer to the observations of Barrett J in Workers Compensation Nominal Insurer v Perfume Empire Pty Ltd [2011] NSWSC 379 at [22] that the cases in which the court has intervened to terminate a voluntary administration are all cases in which there has existed what might be termed some “ulterior element” and to the cases where such an order had been made to which his Honour there referred. The Plaintiffs also refer to my decision in Re Streetscape Projects (Australia) Pty Ltd (subject to a deed of company arrangement) [2013] NSWSC 1289 at [11] as authority that s 447A of the Corporations Act is sufficiently broad to support an application for a winding up order in respect of a company in administration.

34. In Australian Securities and Investments Commission v Midland Hwy Pty Ltd (admin apptd) above, Beach J considered the circumstances in which an order could be made under s 447A of the Corporations Act to set aside a resolution of creditors before a deed of company arrangement was executed, and noted the relevance of the factors under s 445D of the Corporations Act in those circumstances. His Honour held that such an order could be made where it was in the public interest that the company’s administration come to an end and that it be wound up. His Honour observed (at [67]–[68]) that the Court’s power under that section is to be exercised having regard to, inter alia, the interests of creditors as a whole and the public interest, but the public interest may override the creditors’ interests and favour liquidation, and that the public interest included considerations of commercial morality and the interests of the public at large. His Honour also observed (at [69]) that the Court could apply by analogy the principles applicable under s 445D in exercising a power under s 447A to set aside a resolution to enter into a deed of company arrangement and order a winding up. His Honour noted that that power extended to the situation where creditors may be better off under the deed of company arrangement than a liquidation, although the Court would no doubt have regard to that matter as tending against such an order. His Honour also noted (at [74]) that the fact that the entry into a deed of company arrangement may prevent an effective investigation by a liquidator into relevant transactions and the opportunity for greater returns may render it contrary to creditors’ interests.

35. The Plaintiffs here submit that Part 5.3A of the Corporations Act is being abused because HSFS, SFSI and JRC have been placed into voluntary administration not for a purpose envisaged by that Part but rather with a view to preventing or hindering the proper scrutiny of the companies’ affairs; voluntary administration has been “imposed” (in the Plaintiffs’ term) by the sole director, Mr Pacione, in the face of an extant claim for pecuniary relief and in order to defeat that claim, while preserving claims of Mr Pacione’s close relatives; that the use of Part 5.3A and the proposed deeds of company arrangement are not a genuine attempt at restructuring the companies; and the return to unrelated creditors under the deeds of company arrangement is de minimus and can be ignored for the purposes of determining whether or not there is an abuse of Part 5.3A of the Corporations Act. It is not necessary to find that Mr Pacione, or persons associated with him, had such a purpose, as a subjective matter, to conclude that the nominal return to creditors and the preservation of substantial debts that the companies could not pay, after the deeds of company arrangement were implemented, cast real doubt on whether any reconstruction of the companies is genuine.

36. The Plaintiffs also submit that there is no explanation as to how (or, I interpolate, whether) the deficiencies in the financial records for each of the companies will be rectified, or how (or, I interpolate, whether) outstanding tax returns will be rectified and the likely outcome of the lodgement of those returns. The Plaintiffs submit that, even if the Court were to find that Part 5.3A was not being abused, the companies should be wound up having regard to these factors. The Plaintiffs also submit that the public interest requires the administrations end and the companies be wound up where there are possible voidable transaction and directors’ duties claims which should be investigated and there has been a failure to comply with s 286 of the Corporations Act; and a winding up will be beneficial from a public interest perspective where investigations and recovery proceedings will, at least initially, be funded by the Plaintiffs.

31. There is authority that the public interest in placing a company in the hands of a liquidator may prevail over the interests of creditors, at least if a company is not trading and there is no likelihood of its resuming its former business: Australian Securities and Investments Commission v Storm Financial Ltd (recs and mgrs apptd) (admin apptd) [2009] FCA 269; (2009) 71 ACSR 81 at [69]–[71]; Australian Securities and Investments Commission v Midland Hwy Pty Ltd (admin apptd) above at [71]. I can see no less a reason to apply that principle where HSFS, SFSI and JRC, or some of them, maintain a continued intent to trade, but their doing so would amount to insolvent trading for the reasons that I have noted above. In this case, as in Australian and Securities and Investments Commission v Midland Hwy Pty Ltd (admin apptd) above, it seems to me that the deeds of company arrangement would have been liable to have been set aside under s 445D(1) of the Corporations Act had they been entered into in conformity with the resolutions passed by creditors and, in those circumstances, the orders sought by the Plaintiffs should be made. In particular, as I have noted above, the companies are insolvent and will remain insolvent after implementation of the deeds of company arrangement, which will not restore them to a position where they will be able to trade. I have referred above to the fact that the companies are not in compliance with either their accounting or tax obligations and no evidence has been led of any steps to be taken to correct that position. I have also referred above to several transactions which seem to me to warrant investigation, and the Plaintiffs have undertaken to fund that investigation, and it seems to me to be in the public interest that that investigation take place.

32. I am comfortably satisfied that the Court should exercise its powers under s 447A of the Corporations Act to avoid the result that apparently insolvent companies, with inadequate accounting records and tax returns not lodged for an extended period, and with no commitment offered to address the failures in meeting their accounting and tax obligations, would be returned to the management of their director and permitted to continue to trade in a manner that exposes their future creditors to material risk.

Winding up under ss 459P and 461(1)(k) of the Corporations Act

39. Further or alternatively, the Plaintiffs submit that each of HSFS, SFSI and JRC should be wound up under s 459P of the Corporations Act on the basis that they are insolvent. They also submit that the Court’s discretion should be exercised to wind up the companies immediately with no adjournment of the winding up application, having regard to s 440A of the Corporations Act. I am satisfied that, so far as s 440A of the Corporations Act is relevant, it is not in the creditor’s interest to continue the administration, where the deeds of company arrangement would not restore the companies to solvency or address the issues as to the companies’ tax obligations or financial records to which I have referred above. I am satisfied that the matters to which I have referred above in respect of the companies’ insolvency, after the deeds of company arrangement are implemented, justify winding up orders on that basis.

40. Further or alternatively, the Plaintiffs submit that each of HSFS, SFSI and JRC should be wound up under s 461(1)(k) of the Corporations Act on the basis that it is just and equitable to do so, and refer to Australian Securities and Investments Commission v Storm Financial Ltd (recs and mgrs apptd) (admin apptd) above at [65]ff as authority for that course. I am satisfied that the matters to which I have referred above, in respect of the companies’ solvency, financial records and tax returns, also warrant winding up orders on that basis.

Section 600A

41. As I noted above, the Plaintiffs initially also brought an application under s 600A of the Corporations Act. That section was repealed by the Insolvency Law Reform Act 2016 (Cth), with effect from 1 March 2017, but reg 10.25.02(3)(i) of the Corporations Regulations 2001 (Cth), inserted by Schedule 2 of the Corporations and Other Legislation Amendment (Insolvency Law Reform) Regulation 2016 (Cth) preserves the application of that section in relation to external administrations until 1 September 2017.

42. An issue arose in the course of the hearing as to whether s 600A of the Corporations Act is applicable in the present case. The Plaintiffs, the administrators of the companies and the solicitor who appeared for the interested creditors including Mr Simone had proceeded on the basis that Mr Simone, trading as Simone Legal, was a related creditor of the companies for the purposes of that section. In the course of the hearing and in supplementary submissions, Mr Assaf and Ms Ross, who appeared for the Plaintiffs, fairly recognised that that was not correct. Mr Assaf and Ms Ross accept that Mr Simone does not fall within subparagraph (f) of the definition of “related entity” in s 9 of the Corporations Act, at least in respect of HSFS and SFSI, since it has emerged that Mr Simone is not Mr Pacione’s brother-in-law by reason of being the brother of Mr Pacione’s wife, but instead by reason that Mr Simone’s wife is Mrs Pacione’s sister.

43. The Plaintiffs nonetheless press the application under s 600A of the Corporations Act in respect of one of the companies, JRC. They submit that Simone Legal is a related creditor of JRC because it is a related entity in relation to JRC, Mr Simone being a beneficiary under a trust of which JRC is or has been a trustee, namely the Pacione Trust. That submission is made in reliance on the Pacione trust deed of settlement dated 9 February 1998, and leave to reopen is sought for the purpose of tendering that trust deed. I recognise that it appears that the Plaintiffs’ supplementary outline of submissions concerning these matters was sent to Mr Scarcella, who acts for the interested creditors, and by post to Mr Pacione. However, I am doubtful that I should determine an application to reopen to tender that trust deed without relisting the matter to allow those parties an opportunity to be heard. I also have reservations as to whether I could draw the inferences which the Plaintiffs seek to have me draw from various documents as to whether that trust continues in existence.

44. In any event, it is not necessary to determine this application, since it is not necessary to determine the claim for an order under s 600A of the Corporations Act where I have held that orders winding up HSFS, SFSI and JRC should be made under s 447A or alternatively ss 459A and 461(1)(k) of the Corporations Act.

Identity of liquidator

45. The Plaintiffs submit that their nominee, Mr Brad Tonks, should be appointed as liquidator. They point out that Mr Tonks has agreed not to charge for any of the “Initial Work” as defined (Tonks [4]) and that his charge out rates are comparable with (and marginally lower than) the administrators’ charge out rates (Tonks [3]). They submit that there is no prejudice to HSFS, SFSI and JRC or other creditors arising out of the appointment of their nominee as creditor.

46. A creditor will ordinarily be allowed to nominate the liquidator in a winding up. In Re El Zorro Transport Pty Ltd [2013] NSWSC 1082, where a company was wound up although an administrator was already appointed, Brereton J appointed the plaintiff’s nominee as liquidator. His Honour observed (at [5]) that:

“It is the practice of the Court that, all things being equal, it will appoint the plaintiff’s nominee as liquidator where there is a contest to the appropriate identity of the appropriate appointee, and there is nothing to be said between the competing nominees as to their respective fitness, qualifications or cost.”

His Honour gave effect to that principle notwithstanding the administrator’s claim, in that case, that they had already undertaken work and their appointment would avoid duplication and save costs for the company and its creditors. That practice is well established and I consider that I should give effect to it, subject to the matters raised by the interested creditors to which I refer below. It also seems to me that this case is also one in which the Court would likely appoint a special purpose liquidator to conduct investigations, funded by the Plaintiffs, if the Plaintiffs sought such an appointment. It is preferable to avoid the duplication in that course if it is possible to do so.

47. The interested creditors, represented by Mr Scarcella, submit that the existing administrators rather than Mr Tonks should be appointed as liquidators if the companies are placed in liquidation. By letter dated 23 March 2017 to the interested creditors’ solicitors, the existing administrators confirmed that they were prepared to act as joint and several liquidators of HSFS, SFSI and JRC if the companies were wound up in the proceedings. The interested creditors submit that the existing administrators have familiarity with the affairs of the companies, such that there would be a natural costs saving if they were to conduct the liquidation. I give some weight to that matter, although it seems to me that much that would be known to the existing administrators will be apparent from their s 439A report. Mr Scarcella also submits, and I accept, that no case has been made, or been sought to be made, that the administrators are not fit or proper persons to conduct the liquidation. Mr Scarcella also drew attention to a report dated 25 January 2017 (Ex A2, tab 1) from the existing administrators to creditors, which indicated that they may seek approval of remuneration from the Court. That course is open to them, and such an application can be addressed on its merits. The issue as to remuneration may be in somewhat narrow scope, since the amount of additional remuneration claimed in the administrator’s report dated 25 January was in the order of $8,674, and it seems to me that it provides little reason for preferring the existing administrators to the Plaintiffs’ choice of liquidator. The interested creditors also submit they do not understand there to be reason to suggest that the funding offered to Mr Tonks would not be available to the administrators to conduct any investigation as liquidator and I proceed on that basis. This matter is neutral so far as the choice of liquidator is concerned.

48. On balance, it seems to me that the general practice as to accepting the Plaintiffs’ choice of a qualified liquidator is properly adopted in this case, where the other matters to which I have referred provide little reason not to take that course.

Orders and costs

49. Accordingly, I make the following orders:

1.   Order that the First, Second and Third Defendants be wound up and Mr Bradley Tonks of PKF Australia be appointed liquidator to each of the First, Second and Third Defendants.

2.   The Plaintiffs’ costs of the application be costs in the winding up.

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Decision last updated: 18 April 2017