Re Legend International Holdings Inc (in liq)

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL COURT

CORPORATIONS LIST

S CI 2016 04516
S CI 2017 05129

IN THE MATTER of Legend International Holdings Inc (In Liq)

MARK ANTHONY KORDA AND CRAIG PETER SHEPARD AS JOINT AND SEVERAL LIQUIDATORS OF LEGEND INTERNATIONAL HOLDINGS INC (IN LIQUIDATION) (ARBN 120 855 352)	First Plaintiff
LEGEND INTERNATIONAL HOLDINGS INC (IN LIQUIDATION) (ARBN 120 855 352)	Second Plaintiff
v
QUEENSLAND PHOSPHATE PTY LTD (ACN 609 384 894)	First Defendant
PARADISE PHOSPHATE LIMITED (ACN 154 180 882)	Second Defendant

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JUDGE:	Randall AsJ
WHERE HELD:	Melbourne
DATE OF HEARING:	5 March 2018, 6 March 2018, 7 March 2018 and 9 March 2018
DATE OF JUDGMENT:	14 December 2018
CASE MAY BE CITED AS:	Re Legend International Holdings Inc (in liq)
MEDIUM NEUTRAL CITATION:	[2018] VSC 789

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CORPORATIONS – Corporations Act (Cth) 2001 – Second plaintiff’s (Legend) entry into a Bond Deed and General Security Deed after the commencement by substantial creditors of a proceeding in the Supreme Court of Victoria for orders to enforce a Singapore arbitral award which the High Court of Singapore granted leave to enforce in the same manner as the judgment of that Court – Whether an uncommercial transaction – Section 588FB – Whether an insolvent transaction – Section 588FC – Whether a voidable transaction – Section 588FE(2)&(3) – Whether void as at the time when the Bond Deed and General Security Deed were made – Section 588FF(1)(h).

CORPORATIONS – Whether the appointment of receiver of Legend’s shareholding is valid – Whether the appointment of a receiver or manager of Legend’s subsidiary is valid.

CORPORATIONS – Whether Share Sale Agreement entered into by receiver consequent upon default under the Bond Deed and General Security Deed was an ‘act done for the purposes of giving effect to the transaction’? – Alternatively whether the Share Sale Agreement is void or unenforceable in any event.

CORPORATIONS – Was the good faith defence available? – Section 588FG(2).

INSOLVENCY – Was Legend insolvent at the time of entry into the Bond Deed and the General Security Deed or did it become insolvent by reason of such entry? – Section 95A – Section 585 with respect to a Part 5.7 body.

CORPORATIONS – Should a foreign debt be considered a ‘debt’ for the purposes of assessing insolvency prior to an order being made under s 8(2) of the International Arbitration Act 1974 (Cth) enforcing the Singaporean arbitral award in Australia.

CORPORATIONS – Corporations Act (Cth) 2001 – Winding up in insolvency or on just and equitable grounds – Section 459A – s 461(k).

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Dr C G Button with Ms R T Zambelli	Arnold Bloch Leibler
For the Defendants	Mr L Glick QC with Mr D K Ratnam	Harwood Andrews, Sladen Legal and Adley Burstyner

TABLE OF CONTENTS

Determination..................................................................................................................................... 2

Parties................................................................................................................................................... 2

Legend............................................................................................................................................ 2
Paradise.......................................................................................................................................... 3
QPPL............................................................................................................................................... 3

Background......................................................................................................................................... 3

Issues for determination................................................................................................................. 14

I.... Was Legend insolvent?............................................................................................................. 15

Plaintiff’s Submissions............................................................................................................... 16
Defendants’ Submissions........................................................................................................... 19
Applicable law............................................................................................................................. 22
(a).... Was Legend able to pay its debts as when they were due?........................................ 23
Evidence of Legend’s financial state in November 2015............................................. 23
Cash flow............................................................................................................... 23
Liabilities............................................................................................................... 24
Assets..................................................................................................................... 26

Consideration..................................................................................................................... 27

(b).... Should the Balance Sheet be accepted as evidence of Legend’s financial position? 30
Applicable law................................................................................................................... 31
Consideration..................................................................................................................... 33

(c).... Did Legend have a realisable asset?............................................................................... 36
How could Legend realise the value of the tenements?.............................................. 36
Submissions........................................................................................................................ 36
Applicable Law.................................................................................................................. 37
Consideration..................................................................................................................... 49
The business and circumstances of Legend..................................................... 49
The nature and the size of the debts.................................................................. 52
The nature of the asset......................................................................................... 52
Whether the asset was in a realisable form...................................................... 55
The timeframe to realise the asset...................................................................... 56
Whether realisation of the asset was contemplated/open in the commercial context................................................................................................................ 56
History of potential sale of the asset or possible purchasers......................... 58
What actually happened to the asset perhaps can reaffirm other factors.... 58
Were the assets readily realisable after entering into the Bond Deed?........ 60

(d).... Can the IFFCO debt be considered prior to its Australian registration?................... 63
Applicable Law.................................................................................................................. 66
Consideration..................................................................................................................... 68

(e).... Should a Jones v Dunkel inference be drawn regarding Mr Lee’s failure to give evidence?.............................................................................................................................................. 72
Applicable Law.................................................................................................................. 72
Consideration..................................................................................................................... 76

Conclusion.................................................................................................................................... 77

II.. Ought the Bond Deed and General Security Deed be declared void as voidable and insolvent transactions?................................................................................................................................ 78

III. In making the above determination, is the ‘good faith’ defence available?.................. 78

Plaintiff’s submissions................................................................................................................ 81
Benefit to Legend............................................................................................................... 82
Detriment to Legend......................................................................................................... 82
Benefits to other parties.................................................................................................... 83

Other Relevant Matters.............................................................................................................. 85
The defendants submissions............................................................................................ 85

Good faith..................................................................................................................................... 87
Defendants submissions................................................................................................... 87
The plaintiffs response to the Good faith defence........................................................ 88

Suspicion of insolvency.............................................................................................................. 89
Applicable Law............................................................................................................................ 90
Consideration.............................................................................................................................. 97
The s 588FB(1) factors............................................................................................................... 110
Benefit to Legend............................................................................................................. 110
Detriment to Legend....................................................................................................... 111
Benefits to other parties.................................................................................................. 113
Other relevant matters.................................................................................................... 114

Conclusion.................................................................................................................................. 115
The good faith defence............................................................................................................. 116

IV. Was the Share Sale Agreement void or unenforceable? Was Mr Palmer’s appointment invalid?...................................................................................................................................................... 120

Was entering into the Share Sale Agreement an ‘act done for the purposes of giving effect to the transaction’?...................................................................................................................... 128
Consideration............................................................................................................................ 130

V.. Is Paradise insolvent or should the company be wound up on just and equitable grounds?...................................................................................................................................................... 132

Winding up in insolvency........................................................................................................ 132
Winding up on the just and equitable ground..................................................................... 137

HIS HONOUR:

By originating process filed on 7 November 2016 (amended on 20 November 2017) and 15 December 2017, the first plaintiffs (‘the Liquidators’) and the second plaintiff (‘Legend’) seek orders that:

(a) the second defendant (‘Paradise’) be wound up in insolvency pursuant to s 459A of the Corporations Act 2001 (Cth) (‘the Act’) or, alternatively, that Paradise be wound up on the just and equitable ground pursuant to s 461(1)(k) of the Act;

(b) pursuant to s 472(2) of the Act that the Liquidators be appointed as provisional liquidators of Paradise pending the outcome of the application for relief sought in paras 1 or 2 of the 20 November 2017 amended originating process. The plaintiffs did not prosecute this relief.

(c) the Convertible Bond and Share Subscription Agreement (‘Bond Deed’) and the General Security Deed (‘General Security Deed’) entered into by Legend, the first defendant (‘QPPL’) and Paradise on 25 November 2015 are:

(i) uncommercial transactions within the meaning of s 588FB of the Act;

(ii) insolvent transactions within the meaning of s 588FC of the Act;

(iii) voidable transactions within the meaning of ss 588FE(2) and 588FE(3) of the Act; and

(iv) void as at the time when the Bond Deed and General Security Deed were made pursuant to s 588FF(1)(h) of the Act.

(d) alternatively, pursuant to s 588FF(1)(e) of the Act that any security interest given by Legend under or in connection with the General Security Deed is wholly discharged. The plaintiffs did not prosecute this relief.

(e) QPPL is entitled to prove in the winding up of Legend as an ordinary unsecured creditor for an amount equal to monies paid to Legend under or in connection with the terms of the Bond Deed, and for monies expended during the appointment of Mr Christopher Palmer as the receiver and manager of Paradise in preservation of the assets of Paradise plus interest;

(f) the Share Sale Agreement dated 22April 2016 (‘Share Sale Agreement’) between Legend, QPPL and Paradise is void or unenforceable; and

(g) the appointment of Mr Palmer as the receiver of Legend’s shares in Paradise and the receiver and manager of Paradise is invalid.

Determination

For the reasons set out herein I determine that the following relief ought to be granted to the plaintiffs in the following terms:

(a) Each of the Bond Deed and the General Security Deed are:

(v) uncommercial transactions;

(vi) insolvent transactions; and

(vii) void from the date of entry into the same, being 25 November 2015.

(b) The appointment of Mr Palmer as the receiver of Legend’s shares in Paradise and as receiver and manager of Paradise is invalid.

(c) The Share Sale Agreement is void and unenforceable.

(d) That Paradise ought to be wound up in insolvency.

Parties
Legend

Legend was incorporated in the State of Delaware, United States of America (‘US’). Legend was also registered with the Australian Securities and Investments Commission (‘ASIC’) as a pt 5.7 body. On 2 June 2016, I ordered that Legend be wound up in insolvency and appointed the Liquidators as liquidators of Legend.

The directors from about August 2008 to 25 November 2015 were, in addition to others, Joseph Gutnick (‘Mr Gutnick’), David Tyrwhitt (‘Mr Tyrwhitt’), Allan Trench (‘Mr Trench’) and Henry Herzog (‘Mr Herzog’). The latter three directors were non-executive directors. Mr Gutnick ceased his directorship on 8 July 2016. During this time Legend’s company secretary and chief financial officer was Peter Lee (‘Mr Lee’).

Paradise

Paradise is an unlisted public company incorporated in Australia. From at least January 2014 to 25 November 2015, Paradise’s directors were Mr Gutnick, Mr Lee and Mr Tyrwhitt. From 25 November 2015, Paradise’s directors were Mr Gutnick, Mordechai Gutnick, Sholom Feldman (‘Mr Feldman’) and Pnina Feldman (‘Ms Feldman’). Mr Gutnick ceased his directorship on 8 July 2016. Mordechai Gutnick, Mr Gutnick’s son, ceased his directorship on 23 March 2016. Mr Feldman and Ms Feldman replaced Mr Lee and Mr Tyrwhitt. Ms Feldman is Mr Gutnick’s sister, Mr Feldman is Ms Feldman’s son and Mr Gutnick’s nephew.

QPPL

QPPL was incorporated on 19 November 2015. QPPL’s directors are Mr Feldman and Ms Feldman. QPPL has 10,825 ordinary shares on issue and paid up capital of $796,499.99. 10,000 of those ordinary shares are owned by Menachem Mendel Pty Ltd as trustee for the Mendel Trust, whose beneficiaries include Rabbi Pinchus Feldman, Ms Feldman and any of their issue.

In making a pitch to the Minerals and Metals Group (‘MMG’) in relation to its Century Mine (which was part of the ‘Karumba’ option), Mr Feldman confirmed that QPPL was held by a trustee company for the Feldman family and associated charities.

Background

On 14 July 2008:

(a) Indian Farmers Fertiliser Cooperative Ltd (‘IFFCO’) entered into a Share Options Agreement with Legend whereby IFFCO acquired the option to purchase shares in Legend;

(b) IFFCO and Mr Gutnick entered into a Shareholders Agreement in order to regulate their relationship as shareholders in Legend; and

(c) by an Affiliate Deed of Adherence, Kisan International Trading FZE (‘Kisan’), a subsidiary of IFFCO, agreed to be bound by the terms of the Shareholders Agreement.

Pursuant to the terms of those agreements, IFFCO and Kisan purchased 20 million shares in Legend for a total of US$40.4 million. IFFCO later purchased a further 14,364 million shares in Legend in an open market transaction.

Those parties later fell into dispute and on 18 January, and 25 March 2013, the dispute was arbitrated in Singapore.

On 7 May 2015, the arbitral tribunal delivered its award in Singapore, finding against Legend and Mr Gutnick. Legend was ordered to pay US$12.35 million (plus costs and interests of 5.33 per cent per annum from 7 August 2008 until the date of the award) to IFFCO and Kisan. The interest accrued to 7 May 2015 amounted to US$5,391,693.00. As at 7 May 2015, the total debt owed by Legend was US$17,741,693.00 (A$22,435,612.72) together with legal costs. The arbitral award also required Mr Gutnick to separately pay US$28.05 million plus interest and legal costs.

On 22 June 2015, the High Court of Singapore granted IFFCO and Kisan leave to enforce the award in the same manner as a judgment of that Court. Judgment was entered and the award was enforced in Singapore as against Mr Gutnick on 9 July 2015 and as against Legend, on 2 September 2015.

On 8 October 2015, IFFCO and Kisan applied to this Court for orders to enforce the Singapore award. The application was heard on 19 November 2015. On the same day, QPPL was incorporated in Australia.

Until 2012, Legend’s main business was the development of mining, beneficiation and processing of phosphate assets near Mt Isa in Northwest Queensland. Those phosphate assets comprised of mining tenements. In February 2012, those phosphate assets were transferred to Paradise, Legend’s wholly owned subsidiary at the time, in return for Paradise issuing 100 million of its shares to Legend. The transfer formed part of a restructure of Legend’s assets for the purpose of conducting an Initial Public Offering (‘IPO’) of Paradise on the Australian Stock Exchange (which subsequently failed).

On 25 November 2015, Legend and Paradise entered into the Bond Deed and the General Security Deed with QPPL.

The Bond Deed provided for QPPL to subscribe for up to 2,500 convertible bonds with a face value of $1,000 dollars immediately or over time.

On 26 November 2015, Legend filed forms with the US Securities and Exchange Commission (‘SEC’), notifying the entering into of the transactions with QPPL.

On 21 December 2015, Croft J delivered judgment enforcing the arbitral award against Legend. On 22 December 2015, Croft J granted an interim stay of execution until 5 February 2016.

On 5 February 2016, there was a hearing before the Court of Appeal with respect to Croft J’s decision. On 9 February 2016, the Court of Appeal delivered judgment dismissing the appeal and granted an interim stay of execution until 12 February 2016.

On 18 February 2016, after the expiration of the stay, IFFCO and Kisan served a statutory demand on Legend.

On 8 March 2016, Legend applied to the High Court of Australia for special leave to appeal, which was subsequently withdrawn.

On 10 March 2016, the time for compliance with the statutory demand expired.

On 11 March 2016, QPPL appointed a receiver of Legend’s shares in Paradise and receiver and manager of Paradise.

On 11 April 2016, IFFCO and Kisan filed the winding up application of Legend. The first return date was listed for 11 May 2016.

On 22 April 2016, the receiver to Legend and Paradise, transferred the Paradise shares to QPPL. By that date, $400,000 may have been advanced to Legend/Paradise on behalf of QPPL.

On 8 May 2016, Legend filed US Bankruptcy Code ch 11 proceedings.

On 10 May 2016, being the date before the return date of the wind up application, Mr Lee, as authorised representative of Legend, filed an originating process seeking recognition of the US proceeding. That originating process was subsequently amended to insert Legend as the applicant as it was still in possession of the Legend assets pursuant to the provisions of ch 11.

On 17 May 2016, there was a status conference before the Honourable Brandan L Shannon, US Bankruptcy Judge. That conference was adjourned to ascertain the outcome of the winding up application.

The application to wind up Legend was heard on 27 and 30 May 2016. On 2 June 2016, Legend was wound up in insolvency.

The plaintiffs’ opening submissions conveniently sets out the background leading up to the implementation of the Bond Deed and General Security Deed. The general substance of the chronology was not in dispute. Accordingly, I will adopt the same:

15.On 26 October 2015, Legend, through Mr Lee, obtained legal advice in relation to a proposed convertible note issue under which Legend would grant security over its shareholding in Paradise to a convertible note holder. The advice noted, among other things:
To the extent that Australian law may intersect, the granting of the security could be subject to challenge if Legend or Paradise is insolvent, or could become insolvent in the next 6 months – in which case the granting of the security may be challenged and undone as an uncommercial transaction.
16.Between 30 October 2015 and 24 November 2015, Mr Gutnick and Mr Feldman exchanged a number of emails, most of which attached versions of draft agreements and term sheets that related to the proposed convertible note issue.
17.On 30 October 2015, Mr Gutnick circulated a draft agreement entitled ‘Convertible Note Agreement’ to Mr Feldman. This draft agreement provided for an unspecified noteholder’s subscription of 1 million notes in Legend at $1 per note. The proposed security under that agreement was a staged provision of security over Legend’s shares in Paradise, namely:
(a)security over 25% of the shares on payment of $250,000 on 2 November 2015;
(b)security over 35% of the shares on payment of $350,000 on 2 December 2015; and
(c)security over 40% of the shares on payment of $400,000 on 31 December 2015.

18.On 4 November 2015, Mr Feldman emailed a draft term sheet to Mr Gutnick. The draft term sheet provided for a subscription of an unspecified number of convertible bonds for an amount of $2.5 million secured by first ranking security over Legend. It was initially contemplated that the transaction with Legend and Paradise would be entered into by Queensland Bauxite Limited, a public company of which Mr Feldman and Ms Feldman are directors. The draft terms sheet provided that the purpose of the funding was for Legend to defend the ‘current court action’ (ie IFFCO and Kisan’s enforcement action).
19.The draft term sheet also provided for the following event to constitute an event of default:
(1)Any finding by a court of law against the Company that causes a judgment of more than $1M to be entered against the company.[1]
[1]Email from Sholom Feldman to Joseph Gutnick, Court Book 2, 0650.

20. On 6 November 2015, Mr Gutnick emailed Mr Feldman stating:
We need to move on Legend ASAP because we need the funds and don’t want to go elsewhere. Try your best.[2]
[2]Email from Joseph Gutnick to Sholom Feldman, Court Book 2, 0669.

21.In the period 4 November 2015 to 20 November 2015, several versions of the draft term sheet were exchanged in emails between Mr Feldman and Mr Gutnick.
22.On 5 November 2015, Mr Gutnick provided Mr Feldman’s version of the terms sheet to Mr Lee. Mr Lee marked it up. Mr Lee’s amendments included the insertion of a carve out from the event of default by including the words ’other than any actions by IFFCO and/or Kisan’ in brackets after the first event of default set out in paragraph 0 above.[3] Clearly, Mr Lee’s amendment was designed to exclude the anticipated enforcement of the Singaporean arbitral award from triggering an event of default, as it was well known to all concerned that:
[3]Email from Sholom Feldman to Joseph Gutnick, Court Book 2, 0665.
(a)judgment had in fact already been entered against Legend in the Singaporean High Court; and
(b)IFFCO and Kisan had already commenced their action in the Supreme Court of Victoria.

23.On 5 November 2016, Mr Gutnick forwarded Mr Lee’s markup of the term sheet to Mr Feldman.
24.The following day, on 6 November 2016 at 4:54 pm, Mr Feldman emailed Mr Gutnick attaching a further revised term sheet. In this version, Mr Feldman rejected the change (made by Mr Lee and forwarded by Mr Gutnick) carving out the IFFCO/Kisan action (which was then on foot) from the event of default. The effect of Mr Feldman’s amendment was to ensure that there would be an event of default if IFFCO and Kisan were successful in their application to register the arbitral award in Australia. This amendment remained in the binding term sheet, which was eventually executed on or about 19 November 2015.
25.… on 10 November 2015, an initial tranche of $100,000 was provided by Mr Feldman (from Queensland Bauxite Ltd) to Legend, despite the fact that the term sheet had not yet been executed.
26.On 12 November 2015, Craig Michael (‘Mr Michael’) (Legend’s Executive General Manager) sent Mr Feldman two financial models for Paradise’s phosphate assets. The first model was expressed to be ’a simplistic financial model (no inflation, based on current rock price and forex with no forecast assumptions) for the MMG option of shipping rock through their infrastructure to the Port of Karumba’.[4] This model produced a pre-tax net present value (‘NPV’) of Paradise’s phosphate assets of $566 million. The second model was expressed by [Mr] Michael to be a ’much more complex and detailed financial model for the Townsville option. This model was built by KPMG and I have updated it to reflect current prices and forex rates’.[5] This model produced a post-tax net present value of Paradise’s phosphate assets of $174.3 million.
[4]Email from Craig Michael to Sholom Feldman, Court Book 3, 0787.
[5]Ibid.
27.The two options referred to, ‘Karumba’ and ’Townsville’ were transport options then under consideration, the details of which are set out in a presentation which Mr Gutnick provided to Mr Feldman on 2 November 2015.
28.On 16 November 2016, Mr Feldman emailed a draft security deed to Mr Gutnick under the cover of an email which relevantly stated:
I need to check on how we secure a US company, so I included Paradise in the deed. Paradise is probably the most important one to protect in this transaction to ensure no one can get first preference so we can protect the asset.[6]
[6]Email from Sholom Feldman to Joseph Gutnick, Court Book 3, 0892.

29.On 19 November 2015, IFFCO and Kisan’s application to enforce the arbitral award against Legend in Australia was heard by the Honourable Justice Croft in the Supreme Court of Victoria. Justice Croft reserved his decision.

…
31.On 19 November 2015, Mr Gutnick emailed Mr Feldman a copy of Legend’s and Paradise’s balance sheets as at 30 September 2015. Both balance sheets strongly suggested that both companies were insolvent at the time. In particular:
(a)Legend’s balance sheet indicated that it had current liabilities of AUD$27,161,061.00 and current assets of AUD$663,028.00 as at 30 September 2015; and
(b)Paradise’s balance sheet indicated that it had current liabilities of AUD$2,458,358.00 and current assets of AUD$2,537.00 as at 30 September 2015.

32.As at November 2015, the phosphate tenements were not in, and were not close to being in, production.
33.On the same day (19 November 2015), the binding term sheet was executed by Mr Feldman and Ms Feldman on behalf of QPPL and Mr Gutnick and Mr Lee on behalf of Legend.
34.On 19 November 2015, Legend also received legal advice from US lawyers by email, which relevantly stated (emphasis added):
At a conversion rate of A$0.005, it appears that the Bonds are convertible into 500,000,000 shares (excluding shares issuable upon conversion of interest payments). This would represent more than 53% of the issued and outstanding shares of Legend following conversion, which would substantially dilute existing stockholders. With this level of dilution (and considering the 50% penalty interest rate), the Board needs to be satisfied, after making a reasonable inquiry, that there isn’t an alternative source of financing that would be available to the Company on more favourable terms. Also, I understand that Pnina Feldman is Joseph’s sister so the existence of this family relationship will impose a heightened level of scrutiny on the reasonableness of the Board’s actions.
35.On 20 November 2015, Mr Feldman received an email from David Sipina of Courtenay House Capital Trading Group, enquiring about the impact of IFFCO and Kisan’s application to enforce the arbitral award against Legend and Mr Gutnick. Mr Feldman replied:
This is his [Mr Gutnick’s] main fight he is fighting at the moment. He is confident he will win it, but if he doesn’t then we are doing what we can through this structure to protect the asset and its value. This is precisely the point of his doing this deal, to ensure that all value is not lost to the company if he loses the battle … We as third parties will develop and control the asset for the foreseeable future, ensuring maximum value possible will be retained by the company if they lose this case …

36.On or about 20 November 2015, Mr Gutnick and his son, Mordechai Gutnick, Zalg Exploration Pty Ltd as trustee for the Zalg Exploration Trust (‘Zalg’), QPPL, Mr Feldman and Ms Feldman entered into a Shareholders Deed under which the parties agreed that:
The Feldmans and QPPL give Zalg or its nominee, as facilitator of the Convertible Bond Deed, the option to buy up to half of the Convertible Notes (or Shares if the Convertible Note has been converted into Shares) held by QPPL under the Convertible Bond Deed from QPPL anytime in the period of 18 months from the date of this Deed, at a price of $1000 per Convertible Note (or the equivalent of $0.005 per Share if the Convertible Note has been converted into Shares).
37.The effect of this option was to give Zalg or its nominee… a right to purchase up to approximately 26 per cent of Legend’s shares for $1.25 million in circumstances where Mr Gutnick and his son, Mordechai Gutnick, were directors of Zalg and the shares in Zalg are beneficially owned as to one third each by Mr Gutnick, his wife, Stera Gutnick and their son Modechai Gutnick. Legend did not disclose the existence of this agreement to the US market in its Current Report Form 8-K lodged with the SEC on 26 November 2016.
38.On 22 November 2015, Mr Feldman emailed Mr Gutnick stating :
I made quite a number of additions to the documents, particularly surrounding Paradise as the guarantor to the deal, in case anything happens to Legend, we want to make sure that Paradise is secure and we will have the right to step in and protect the assets from any other creditor or receiver, so I put in quite a bit of wording that I feel would be necessary in such a scenario. Let’s all hope that scenario does not happen, but these documents should at least protect us as much as possible from that scenario.

39.The next day, on 23 November 2015… [an] email exchange ensued between Mr Feldman and Mr Gutnick:
(a) at 3:14 pm, Mr Feldman stated :
The main issue is obviously on the warranty of solvency. If the company cannot say that it is solvent then how is it able to legally do this deal. The whole basis of doing any business is that the Company thinks that it’s [sic] asset is worth more than its liabilities, and has the current support of its creditors to wait until the company has funds to be paid, or else the company is not legally able to trade. We then can’t take security over the asset if there is a reasonable suspicion that the company is insolvent. It is my view that the assets are worth more than the liabilities, and worth more than the funds being advanced as well, which is why we are looking to save the asset, but my understanding is that we need the directors to be able to say that is the case in their view in order to be able to legally take security.

(b)at 3:20 pm, Mr Gutnick replied: “The problem is only the IFFCO debt”;
(c)at 3:24 pm, Mr Gutnick followed up his previous email: “We can do it if you insist” [ie give the warranty as to solvency];
(d)at 3:28 pm, Mr Feldman responded to Mr Gutnick’s email of 3:20 pm stating:
a) you are still arguing that it [the IFFCO/Kisan debt] is not payable
b) even if it gets enforced as payable, you still have reasonable grounds to believe that the asset is worth more than the $12M and can at that point be put up to tender to pay the debt. Until that is publicly tested, it is only a matter of reasonable belief.
c) You clearly are not of the belief that the company is currently insolvent, or else you wouldn’t be able to do this transaction. In order for the security to be valid, the company needs to say that to be the case. If that warranty is deleted from the deed, it effectively invalidates the deed in my understanding?

(e)at 3.37 pm, Mr Feldman responded to Mr Gutnick’s email of 3:24 pm about the warranty as to solvency stating :
ok. I think it is important to ensure the validity of the security as much as possible.

40.That email was triggered by Mr Lee having deleted the warranty of solvency in a draft of the Bond Deed, sent to Mr Feldman, and copied to Mr Gutnick.
41.On 24 November 2015, Mr Feldman emailed Mr Sipina attaching a presentation. The first page of the presentation stated, among other things (emphasis added):
Legend is currently under serious litigation by IFFCO
Legend has a world class phosphate project 100% owned and unencumbered
…
Queensland Phosphate to lend $2.5M to Legend and will take first ranking security on the asset …
With valuations of between approximately $200M and $4Bn on the project, depending on the options and level of development or a combination of them, Queensland Phosphate current value would be $50M-$1Bn …

42.QPPL was newly incorporated and there is no suggestion it held or was intended to hold any asset other than its interest in Paradise. It appears that Mr Feldman considered that the Paradise phosphate project was worth somewhere between $200 million–$4 billion, making the acquisition of such a substantial part of Legend for a maximum of advance of $2.5 million of great benefit to QPPL.
43.On 25 November 2015, as envisaged by the binding term sheet executed on 19 November 2015, Legend entered into the Bond Deed and the General Security Deed with QPPL and Paradise. Under the Bond Deed:
(a)Legend was to issue to QPPL up to 2,500 convertible bonds with a face value of $1,000;
(b)there was a timetable for the issue of Bonds to QPPL ($200,000 for 200 Bonds on Completion, $200,000 for 200 Bonds on 15 December 2015, $100,000 for 100 Bonds on 28 February 2016 with further obligations to take Bonds up to a total of $1 million, following which it was optional for QPPL to take any further Bonds);[7]
[7]Convertible Bond and Subscription Deed and General Security Deed between QPPL, Legend and Paradise, 25 November 2015, cl 3.3, Court Book 3, 1194-5.
(c)QPPL was not required to take any tranche of the $1 million worth of Bonds if there was an Event of Default;[8]
[8]Ibid cl 3.3(b).
(d)Legend was entitled to use the proceeds of the bond issue for its ’general working capital purposes’;[9]
[9]Ibid cl.
(e)Legend gave the warranties set out in part 1 of schedule 1, which included a warranty that Legend was solvent and would not become insolvent by entering into and performing its obligations under the Bond Deed and the General Security Deed;[10]
[10]Ibid cl 7.1(a); 2(a) in pt 1 of sch 1, Court Book 3, 1225.
(f)the Bonds were transferable without Legend’s consent being required;[11]
[11]Ibid cl 8.2, Court Book 3, 1197.
(g)interest was to be paid on the Bonds at 10 per cent or a default rate of 50 per cent per annum;[12]
[12]Ibid cl 9.2.
(h)the Bonds were convertible at the option of the Bondholder at any time;[13]
[13]Ibid cl 10.1.
(i)there was an immediate redemption obligation on default (at the election of the Bondholder);[14]
[14]Ibid cl 12.2.
(j)an ‘Event of Default Fee’[15] … comprising a 50 per cent penalty on any amounts advanced was payable if an event of default occurred;[16]
[15]Ibid cl 1.1.
[16]Ibid cls 12.2(d), 15.
(k)the specified Events of Default … included:[17]
[17]Ibid cl 15.1.
(i)any change to the composition of the board of Legend or Paradise without the consent of the Bondholder (at sub-cl (k)); and
(ii)‘a final judgment or judgments of an Australian or USA court or courts of competent jurisdiction for the payment of money aggregating in excess of $1,000,000 … are rendered against the Corporation or any Subsidiary and not stayed pending appeal within 21 days after entry thereof’ (at subclause(d)).

(l)the guarantor (Paradise) was additionally to pay interest at the Default Rate (50 per cent) on amounts due and payable under the Bond Deed, which interest accrued daily and was capitalised monthly;[18]
[18]Ibid cl 28.1.
(m)Legend gave various negative covenants, including that it would not (and would not permit its subsidiaries to) further encumber their Material Assets without the consent of the ‘Consenting Party’ (effectively QPPL);[19] and
[19]Ibid cl 16.2.
(n)Legend also undertook not to procure any other financing without the consent of the ’Consenting Party’ (effectively QPPL).[20]
[20]Ibid cl 16.3(g).

44.By clause 2.1… of the General Security Deed, Legend and Paradise granted security over all of their assets to secure their obligations under the Bond Deed, including the payment obligations on an event of default.
45.Prior to execution, Mr Lee emailed ‘a resolution in writing for signature’ to Legend’s non-executive directors, Mr Tyrwhitt, Mr Trench and Mr Herzog. The resolution authorised Legend to:
Enter into the transaction as described in this resolution in Writing and authorize Joseph Gutnick and Peter Lee to sign the Bond Deed and Security Deed on behalf of [Legend] and [Paradise].

46.However, the summary of the Bond Deed provided in the Resolution failed to identify a number of critical provisions in the Bond Deed, including:
(a)the event of default in clause 15.1…,[21] which was effective on a final judgment for the payment of an amount over AUD$1 million being entered in a court of Australia or the US;
(b)the warranty as to solvency in clause 2(a) in part 1 of schedule 1;[22]
(c)the undertakings in clause 16.3…,[23] including the undertaking not to procure any other financing whilst a bond remains outstanding without QPPL’s written consent;
(d)QPPL bondholders’ right of redemption on an event of default under cl 12.2(a);[24] and
(e)the Event of Default Fee, comprising 50 per cent of any amounts advanced under the Bond Deed, immediately payable to the Bondholder where it exercises a redemption right under clause 12.1(a)…[25]

47.There is no evidence that the approval of Legend’s other directors was sought before Mr Gutnick committed Legend to the binding terms sheet on 19 November 2015.
[21]Ibid Court Book 3, 1206.
[22]Ibid 1225.
[23]Ibid 1207.
[24]Ibid 1203.
[25]Ibid cls 12.2(d), 1.1.

Issues for determination

The issues for determination are as follows:

(viii) Was Legend insolvent as at 25 November 2015?

(ix) Ought the Bond Deed and the General Security Deed be declared void as voidable and insolvent transactions?

(x) In making the determination referred to in sub-para ii, is the ‘good faith’ defence available?

(xi) Was the Share Sale Agreement void or unenforceable? Was Mr Palmer’s appointment invalid?

(xii) Ought Paradise be wound up?

The defendants strenuously argued that Legend was not insolvent. Accordingly, it is appropriate to deal with that issue first and in isolation.

I. Was Legend insolvent?

In determining this issue five questions are germane:

(a) Was Legend able to pay its debts as and when they were due?

(b) Should I accept the Balance Sheet as evidence of Legend’s financial position?

(c) Did Legend have a realisable asset?

(d) Can the IFFCO debt be considered prior to its Australian registration?

(e) Should a Jones v Dunkel inference be drawn regarding the defendants failure to call Mr Lee?

Section 95A of the Act provides as follows:

95A Solvency and insolvency
(1)A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.

(2) A person who is not solvent is insolvent.
…

Section 585 of the Act contains additional insolvency deeming provisions applicable to pt 5.7 bodies. Section 585 relevantly provides:

585 Insolvency of Part 5.7 body
For the purposes of this Part, a Part 5.7 body is taken to be unable to pay its debts if:
(a)a creditor, by assignment or otherwise, to whom the Part 5.7 body is indebted in a sum exceeding the statutory minimum then due has served on the Part 5.7 body, by leaving at its principal place of business in this jurisdiction or by delivering to the secretary or a director or senior manager of the Part 5.7 body or by otherwise serving in such manner as the Court approves or directs, a demand, signed by or on behalf of the creditor, requiring the body to pay the sum so due and the body has, for 3 weeks after the service of the demand, failed to pay the sum or to secure or compound for it to the satisfaction of the creditor; or
(b)an action or other proceeding has been instituted against any member for any debt or demand due or claimed to be due from the Part 5.7 body or from the member as such and, notice in writing of the institution of the action or proceeding having been served on the body by leaving it at its principal place of business in this jurisdiction or by delivering it to the secretary or a director or senior manager of the Part 5.7 body or by otherwise serving it in such manner as the Court approves or directs, the Part 5.7 body has not, within 10 days after service of the notice, paid, secured or compounded for the debt or demand or procured the action or proceeding to be stayed or indemnified the defendant to his, her or its reasonable satisfaction against the action or proceeding and against all costs, damages and expenses to be incurred by him, her or it by reason of the action or proceeding; or
(c)execution or other process issued on a judgment, decree or order obtained in a court (whether an Australian court or not) in favour of a creditor against the Part 5.7 body or a member of the Part 5.7 body as such, or a person authorised to be sued as nominal defendant on behalf of the Part 5.7 body, is returned unsatisfied; or
(d)it is otherwise proved to the satisfaction of the Court that the Part 5.7 body is unable to pay its debts

…

Clearly, s 585(a) and (c) are not applicable. I doubt that the enforcement proceeding in the Singapore High Court is the type of proceeding contemplated by s 585(b). Accordingly, I utilise s 588(d) for the purposes of considering if Legend as a pt 5.7 body, insolvent.

Plaintiff’s Submissions

The plaintiffs asserted that as identified in Brooks v Heritage Hotel Adelaide Pty Ltd[26] and Crema (Vic) Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd,[27] s 95A adopts a cash flow approach. In the latter case, for example, which was an appeal from a decision of an Associate Justice to wind up the appellant upon a s 459P application, Dodds-Streeton J (as her Honour was then) determined:

Section 95A of the Act enshrines the cash flow test of insolvency which, in contrast to a balance sheet test, focuses on liquidity and the viability of the business. While an excess of assets over liabilities will satisfy a balance sheet test, if the assets are not readily realisable so as to permit the payment of all debts as they fall due, the company will not be solvent. Conversely, it may be able to pay its debts as they fall due, despite a deficiency of assets.
Section 95A evolved from the test of insolvency classically enunciated by Barwick CJ in Sandell v Porter, where his Honour stated:
Insolvency is expressed in s 95 as an inability to pay debts as they fall due out of the debtor’s own money. But the debtor’s own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time — relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirely and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.[28]

[26](1996) 20 ACSR 61, 64 (‘Brooks v Heritage’).

[27](2006) 58 ACSR 631, 652 (‘Crema’).

[28]Ibid (citations omitted).

In Brooks v Heritage, after stating that the definition of insolvency adopts a ‘cash flow test’, Olsson J reasoned:

In reviewing the evidentiary material it is important to keep in mind what was said by McGarvie J in Taylor v Australian and New Zealand Banking Group Ltd … The issue of insolvency is a question of fact, which falls to be decided as a matter of commercial reality in the light of all the circumstances or, as Gummow J expressed it in New World, a situation must be viewed as it would be by someone operating in a practical business environment. Moreover, it is not to be forgotten that the statutory focus is on solvency and not liquidity ... So it is that it is appropriate to consider the terms of credit or financial support available to the respondent with which to defray debts owed to creditors ... The question is not to be answered merely by looking at the financial statements, although these are, of course, not irrelevant.[29]

[29]Brooks v Heritage (1996) 20 ACSR 61, 64 (citations omitted).

In applying s 95A, regard is to be had to the commercial realities and the ability of the company to meet its liabilities:

[I]nsolvency is a question of fact
to be ascertained from a consideration of the company’s financial position taken as a whole. In considering the company’s financial position as a whole, the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable.[30]

[30]Lewis (as liquidator of Doran Constructions Pty Ltd) v Doran (2005) 219 ALR 555, 576 (‘Lewis v Doran’), quoting Southern Cross Interiors Pty Ltd (in liq)v Deputy Commissioner of Taxation (2001) 53 NSWLR 213, 224 (‘Southern Cross’); see also Wimpole Properties Pty Ltd v Beloti Pty Ltd(No 3) [2012] VSC 219, [40].

A distinction was said to be drawn between circumstances involving a ‘temporary lack of liquidity’[31] and those involving an ‘endemic shortage of working capital’,[32] the latter in which insolvency is found. In Hall v Poolman, Palmer J said:

The law recognises that there is sometimes no clear dividing line between solvency and insolvency from the perspective of the directors of a trading company which is in difficulties. There is a difference between temporary illiquidity and ‘an endemic shortage of working capital whereby liquidity can only restored [sic] by a successful outcome of business ventures in which the existing working capital has been deployed’: Hymix Concrete Pty Ltd v Garritty ... The first is an embarrassment, the second is a disaster. It is easy enough to tell the difference in hindsight, when the company has either weathered the storm or foundered with all hands; sometimes it is not so easy when the company is still contending with the waves. Lack of liquidity is not conclusive of insolvency, neither is availability of assets conclusive of solvency: Expo International Pty Ltd (in liq) v Chant ...
Where a company has assets which, if realised, will pay outstanding debts and will enable debts incurred during the period of realisation to be paid as they fall due, the critical question for solvency is: how soon will the proceeds of realisation be available … Bearing in mind the commercial reality that creditors will usually prefer to wait a reasonable time to have their debts paid in full rather than insist on putting the company into insolvency if it fails to pay strictly on time, I think it can be said, as a very broad general rule, that a director would be justified in ‘expecting solvency’ if an asset could be realised to pay accrued and future creditors in full within about 90 days.[33]

[31]Sandell v Porter (1966) 115 CLR 666, 670.

[32]Hall v Poolman (2007) 215 FLR 243, 305, quoting Hymix Concrete Pty Ltd v Garritty (1977) 2 ACLR 559, 566. An appeal was upheld on a separate issue in Hall v Poolman (2009) 75 NSWLR 99; see also McLellan v Carroll (2009) 76 ACSR 67.

[33]Hall v Poolman (2007) 215 FLR 243, 305 (citations omitted).

In Hall v Poolman, while certain property and stock could potentially have been sold to assist cash flow, ‘realisations from those sources would not be sufficient to enable Wines and Vineyards to pay all existing creditors and to pay future trading debts as and when they fell due for payment’.[34]
[34]Ibid 313.

The plaintiffs acknowledged that the nature of a company’s assets and its ability to convert those assets into cash in a relatively short time, is a relevant consideration in determining whether the company can meet its debts when they fall due.[35] On this point reliance was placed upon Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd,[36] an application brought under s 459P. There, Weinberg J (as his Honour was then) stated as a relevant principle:

There is a distinction between solvency and a surplus of assets. A company may be at the same time insolvent and wealthy. The nature of a company's assets, and its ability to convert those assets into cash within a relatively short time, at least to the extent of meeting all its debts as and when they fall due, must be considered in determining solvency ... [37]
[35]Mark Anthony Korda, Craig Peter Shepard and Legend International Holdings Inc, ‘Plaintiffs’ Closing Submissions’, Submission in Re Legend International Holdings Inc (in liq), S CI 2016 04516, S CI 2017 05129, 8 March 2018, [39] (‘Plaintiffs’ Closing Submissions’).
[36][1999] FCA 728 (‘Ace Contractors’).
[37]Ibid [44] (citations omitted).

Defendants’ Submissions

The defendants emphasise that the issue of solvency is not solely determined by the cash flow test. Rather, all of the circumstances need to be considered, including the ability of the debtor to realise funds from its balance sheet assets, how long it would take to realise such funds and on what terms. Here, reliance is placed upon International Cat Manufacturing Pty Ltd (in liq) v Rodrick,[38] Re Swan Services Pty Ltd (in liq),[39] Re Ashington Bayswater Pty Ltd (in liq)[40] and The Bell Group Ltd (in liq) v Westpac Banking Corp (No 9).[41]
[38][2013] QSC 91 (‘International Cat’); affirmed on appeal International Cat Manufacturing (in liq) v Rodrick (2013) 97 ACSR 200 (‘International Cat Appeal’).
[39][2016] NSWSC 1724, [138] (‘Swan Services’).
[40][2013] NSWSC 1008, [3]–[4] (‘Re Ashington’).
[41](2008) 39 WAR 1, 142.

In Swan Services, in the context of an insolvent trading claim, Black J repeated the summary of the principles of insolvency that his Honour had stated in Re Ashington:

[Section 95A] adopts a ‘cashflow test’ of insolvency which turns upon the income sources available to the Company and the expenditure obligations that it has to meet, rather than a balance sheet test which focuses on the value of the Company's assets and liabilities reflected in its books, although a balance sheet test can provide context for the application of the cashflow test ...
Whether the Company was able to pay its debts as and when they fall due and payable is a question of fact to be determined objectively and without hindsight in all the circumstances, including the nature of its assets and business, and the court will have regard to commercial realities in that regard ... In Playspace Playground Pty Ltd v Osborn [2009] FCA 1486 at [40], [43]; Reeves J observed that a determination of solvency is not based on a simple analysis of a company’s current assets and liabilities or liquidity at a particular point in time and must involve a consideration of its financial position in its entirety, including matters such as expected profits and other sources of income and funding. ….[42]

[42]Swan Services [2016] NSWSC 1724, [138], quoting Re Ashington [2013] NSWSC 1008, [3]–[4] (citations omitted).

In the circumstances of Swan Services, while reference was generally made to the realisable value of immediately available assets,[43] such assets were not considered in detail. Re Ashington involved claims of unfair preferences and uncommercial transactions by a company that operated as a commercial property developer. Evidence was accepted that the only way the company could meet its liabilities, where rental income was insufficient and other funds could not be sourced, was through the sale of properties, which the creditors would have to wait for. Additionally, the company had encountered difficulties in selling properties to members of the public previously. In the circumstances, generating revenue from selling properties was not considered sufficient for the company to meet its debts as and when they fell due.[44]
[43]Swan Services [2016] NSWSC 1724, [142].
[44]Re Ashington [2013] NSWSC 1008, [39].

International Cat involved a company that ran a boat construction business. The company’s liquidator brought a claim asserting that a charge made in favour of another company, Nu-Log, was a voidable transaction. During periods of boat construction the company was short of working capital, and both Nu-log and Nu-log’s director provided finance. This included the director of Nu-log allowing the company to use his credit cards.

Nu-log also contracted to buy a boat from the company, although on two occasions, by agreement the boat was sold to another party. The director of Nu-log spent much time at the company’s factory and took an interest in the conduct of the company’s business. At a time when Nu-log was the company’s only customer, and the company had also begun construction on a fourth boat, funds were needed to maintain day to day operations. Nu-log agreed to provide further finance, but only on the condition that Nu-log be granted a charge to secure present and future debts. There was evidence that at that time the company was balance sheet ‘insolvent’, it had debts to Nu-Log and Nu-log’s director, debts to the Australian Taxation Office (‘ATO’) and for superannuation. Of the liabilities, however, only the tax and superannuation debts as well as trade creditors of about $6,000 were due.

At first instance, McMurdo J determined that the company was solvent at the relevant time. In summarising the law his Honour stated:

A company’s ability to pay its debts is not assessed by reference only to its cash or current assets at the relevant date. In Bell Group Ltd (in liq) v Westpac Banking Corporation, Owen J said that in this context:
It is legitimate to take into account funds the company can, on a real and reasoned view, realise by the sale of assets, borrowing against the security of its assets, or by other reasonable means.

Therefore the Court must have regard to ‘commercial realities’, particularly when considering ‘what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable’.[45]

[45]International Cat [2013] QSC 91, [106], quoting Bell Group Ltd (in liq) v Westpac Banking Corp (No 9) (2008) 39 WAR 1, 145; Southern Cross (2001) 53 NSWLR 213, 224.

Given that Nu-log was the company’s biggest creditor, the key issues were the relationship between Nu-log and the company, the company’s trading prospects, and whether the director’s interests ‘were likely to continue to provide whatever finance was required to meet the company’s lack of liquidity’.[46] In his Honour’s view, the solvency of the company was to be determined by the ability of the company to pay its debts as and when they fell due ahead of the completion of the boats.[47] In the circumstances, the granting of the charge allowed the company to secure whatever funds that it needed and it had an almost certain buyer for the third boat (Nu-log). The evidence also supported the conclusion that although Nu-log purchased the third boat, Nu-log’s director was willing to have the boat used as a demonstration model.
[46]International Cat [2013] QSC 91, [39].
[47]Ibid [109].

The decision was upheld upon appeal.[48] The Court of Appeal specifically noted that the financing provided by Nu-log was to last at least until the fourth boat was sold.[49] Repayment of the debt to Nu-log was not likely to be demanded ahead of such sale.[50] Further, although the ATO and superannuation debts were due and payable, the company had the capacity to pay these, even if it opted not to.[51]
[48]International Cat Appeal (2013) 97 ACSR 200.
[49]Ibid 220.
[50]Ibid 221.
[51]Ibid 219.

Applicable law

The applicable test as to insolvency under s 95A is that propounded in Sandell v Porter.[52] The approach was summarised by the Court of Appeal in Jetaway Logistics Pty Ltd v Deputy Commissioner of Taxation[53] as follows:
[52](1966) 115 CLR 666.
[53](2009) 76 ACSR 404 (‘Jetaway Logistics’).

Ordinarily the mere inability to pay a particular debt when it falls due does not demonstrate insolvency. It may simply reveal a temporary lack of liquidity. The classic statement is that of Barwick CJ in Sandell v Porter:
Insolvency is expressed in s 95 as an inability to pay debts as they fall due out of the debtor’s own money. But the debtor’s own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time – relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.

This statement has been accepted as applicable in the current statutory environment. In Evans & Tate Premium Wines Pty Ltd v Australian Beverage Distributors Pty Ltd, Palmer J emphasised the importance of considering ‘commercial realities’, as follows:
The law is clear that solvency is, first and last, a question of fact to be ascertained from a consideration of the company’s financial position taken as a whole. In considering the company’s position, the Court must have regard to commercial realities. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are available by sale or borrowing upon security, and when such realisations are achievable.

The statement that a company is insolvent is usually conclusionary in nature. Unlike, for example, the fact of incorporation, solvency or insolvency is rarely a matter of straightforward proof. Rather, there must be an examination of the financial condition of the company, typically by reviewing its dealings over a period of time; the identification of the symptoms (if any) of insolvency; and the making of a ‘diagnosis’ as to the ability of the company to pay its debts as they fall due.
The conclusion is one to be drawn in all of the circumstances present at the time, as known to the creditor. This might include the nature of the debtor’s business and, perhaps, its cyclical nature. It might also include the character of the debt.[54]
[54]Ibid 406–7 [12]–[15], quoting Sandell v Porter (1966) 115 CLR 666, 670; Evans & Tate Premium Wines Pty Ltd v Australian Beverage Distributors Pty Ltd [2005] NSWSC 186, [11]. See also Rexel Electrical Supplies Pty Ltd v Morton (as liquidator of South East Queensland Machinery Manufacturing and Distribution (Mining No 1) (in liq)) (2015) 110 ACSR 341.

(a) Was Legend able to pay its debts as when they were due?
Evidence of Legend’s financial state in November 2015
Cash flow

In the Annual Report of 2013, Legend stated:

As an exploration stage company until February 2011 and a development stage company since then, we have not had an ongoing source of revenue. Our revenue stream is normally from ad-hoc tenement disposals, interest received on cash in bank and applicable receivables.[55]

[55]Extract from Annual Report of Legend filed with SEC, Court Book 2, 0405.

It further stated:

We have historically funded our operations through fund raisings noted below.
As of December 31, 2013, the Company has A$2,000 (US$2,000).[56]
…
The report of our independent registered public accounting firm on our consolidated financial statements … for the years ended December 31, 2013 and 2012, includes a paragraph questioning our ability to continue as a going concern. This paragraph indicates that we have not yet commenced revenue producing operations, have incurred net losses from inception, and have an accumulated (deficit) of A$171,921,000 which conditions raise substantial doubt about our ability to continue as a going concern.
As future exploration and development activities will require additional financing, the Company is pursuing various strategies to accomplish this including obtaining third parties to take an ownership interest in or to provide financing for the anticipated development activities related to the phosphate project, as well as capital raising through share issuances and sale of assets.[57]

[56]Ibid 0408.

[57]Ibid 0409-0410.

The consolidated cash flow in the 2013 Annual Report demonstrated a net decrease in cash of $1.06 million, such that Legend had $2,000 cash remaining. By 2015 Legend was not trading.

On 5 August 2015 an email was sent from a debt recovery agency to Legend on behalf of a body corporate attaching a statement of claim for $3,163. The sum appears to be associated with levies accumulating from November 2014. The correspondence suggests that Legend offered part payment on the same day.

In October 2015 David Tyrwhitt also emailed invoicing his director’s fees for the previous quarter.

The Balance Sheet of 30 September 2015 (‘the Balance Sheet’) showed cash of $1,028.

In an email to Gutnick on 7 October 2015 Craig Michael stated:

This is the second letter regarding rents for all of the Kind Eagle phosphate tenements … They have given us until 1 November to pay. I am not sure what action they will take after this as we haven’t been in this position yet with Queensland tenements. This letter does say ‘to avoid the possibility of the tenure or authority being cancelled, we ask you to please give this matter your immediate attention…:. We may be lucky and get one more letter after this one stating that cancellation will take place unless payment is made by a certain date however they may just proceed to cancellation after 1 Nov given that this is their second letter.[58]

[58]Bundle of creditor correspondence from KPR, Craig Michael and David Tyrwhitt, Court Book 6, 2327.

The funds provided under the binding terms sheet, Bond Deed and General Security Deed appear to have been paid in three transactions — $100,000 from Queensland Bauxite Limited (‘QBL’) on 10 November 2015, $100,000 from QPPL on 25 November 2015 and a further $200,000 from QPPL on 26 November 2015. The draft of the binding terms sheet suggests that the funds were primarily intended to be used to continue to challenge the IFFCO debt, albeit this was later amended to be used for ‘general working capital purposes’. There is also, however, the email of Mr Lee dated 16 December 2015 which listed how the $200,000 would be used for a number of payments, including rent, tenements, legal and audit fees.

Liabilities

The IFFCO debt is identified in the Balance Sheet as $25,203,309. ‘Accounts payable’ identifies a sum of $1,916,320. While according to an email of Mr Lee it appears that this sum includes $700,000 of costs that had been incurred but not invoiced, it may be that the sum would still be considered a debt or perhaps a contingent debt for the purposes of s 95A.

The list of aged creditors dated 16 December 2015 identifies a total of $868,504 owing for over 120 days, $14,363 over 90 days and $10,109 over 30 days. Of the liabilities owing for over 120 days, the creditors include the following:

·Judicial Holdings Pty Ltd ($161,700)
·Northern Land Council ($87.161.94)
·Richards Layton & Finger ($62,247)
·David S Tyrwhitt ($122,100)
·Body Corporate Services, Enterprise Park Mt Isa ($593.20)[59]

[59]Email from Joseph Gutnick to Sholom, Court Book 4, 1291.

The Report as to Affairs (‘RATA’) signed by Mr Gutnick date 2 June 2016 identified a liability to IFFCO of $25,027.207 and a further $1,271,813 owing to creditors (albeit approximately $255,637 of that sum is said not to be owing). Listed among the creditors owed are:

·Judicial Holdings Pty Ltd ($161,700)
·Northern Land Council ($87.161.94)
·Richards Layton & Finger ($62,247.73)
·David S Tyrwhitt ($135,372)
·Body Corporate Services, Enterprise Park Mt Isa ($2037.05)

The balance listed against a further three creditors remained the same between the Balance Sheet and RATA, however the liability was disputed in the RATA.

The funds owing to some creditors reduced between the Balance Sheet and the RATA in July 2016, including to Mt Isa City Council and the Queensland Government.

Broadly, the documents filed by Mr Gutnick in the ch 11 proceedings appear to list the same creditors.

Assets

The Balance Sheet of Legend does not set out the shareholding in Paradise as a non-current asset. Nor does it identify as asset loans to Paradise, which are listed in Paradise’s Balance sheet of 30 September 2015 as $15,910,000 and $2,143,443 (current liability), the RATA of Legend in June 2016 as $18,219,519, the ch 11 documents as US$18,109,803. When the figure from the Paradise Balance Sheet was raised during the hearing, the following exchange took place:

DR BUTTON: I've clarified with my friend that he said to Your Honour that his instructions did not permit him to say the intercompany balance was wrong, so on the basis of that concession I will not press the question.
HIS HONOUR: Yes. I've taken the record of the intercompany balances until somebody points out differently that it stands.[60]

[60]Transcript, 242.

As such, the concession appears to be that the intercompany loan was approximately $18,053,443.

Further, as already noted, the value of the tenements is somewhat uncertain, also leading to uncertainty surrounding the value of the shares:

·according to Mr Feldman, the ‘book entry’ when they were transferred to Paradise in 2012 was $2.7 million;[61]
·the Balance Sheet of Paradise dated 30 September 2015 listed total assets of $3,068,733, primarily comprised of ‘capitalised development expenditure’;
·Mr Feldman gave evidence that he thought the value of the tenements was $10–20 million leading up to the Share Sale Agreement;
·the Dunlop valuation was $3.2 million;
·the Snowden valuation was $17–25 million;
·Mr Gutnick signed off on a realisable value of $10 million on the shares in Paradise in the June 2016 RATA, however this may indicate a tenement value of approximately $28 million;
·the defendants accepted as applicable the upper figure of the technical range of the Snowden valuation ($29 million).[62] Given its technical nature, however, this does not appear appropriate.

[61]Email from John Dunlop to Sholom Feldman, Court Book 4, 1638.

[62]Transcript, 401.

It may not be possible to determine, on balance, what the likely value of the tenements was. The most reliable figure appears to be that of Snowden, however the date of the valuation appears to be twelve months after November 2015. The tenement value would also be subject to the other trade creditors of Paradise ($314,915 according to the Balance Sheet of 30 September 2015, $329,513 according to the Receiver’s RATA of Paradise).

Looking beyond the shares or underlying value of the tenements, the Balance Sheet lists assets of $4,457,960, $3,027,741 of which is a non-current asset ‘development expenditure’. It is unclear if this would be considered a realisable asset, and as discussed earlier, this aspect of the Balance Sheet (ie the assets), should perhaps be given little weight. The RATA and ch 11 material identifies certain loans (in addition to those to Paradise) as assets — Merlin Diamonds Ltd (‘MED’) ($436,644) and AXIS Consultants Pty Ltd (‘AXIS Consultants’) ($3,527,086). It is unclear if these could have been called upon, however, the fact that Mr Gutnick did not realise in the context of the aged creditors list and need for funds to defend the IFFCO debt, suggests that they could not do so.

Consideration

The commercial realities were:

·Legend was in difficult financial circumstances prior to the IFFCO debt. The independent accounting reviews attached to its annual reports questioned its ability to continue as a going concern. Significant funds had been invested without the project progressing to the production stage.
·The strategy of incorporating an Australian company and publicly listing had not progressed the project. Paradise was then consuming significant funds, and required further substantial investment to reach production.
·Both Paradise and Legend had little cash.
·While it would perhaps not be uncommon for a mining development company to go through periods of limited cash flow, Legend appears to have had difficulties since at least 2012. Further, simply maintaining the tenements costs money.
·As Mr Feldman put it, in the industry:
... the mining business is a very high risk, high reward business. So, you enter into - that's why companies are created and people invest in specific companies. If it works, you progress it. If it doesn't work, you close it down.[63]
[63]Transcript, 343.
·Legend had already sold a significant asset (interest in MED) to repay Acorn Capital (‘Acorn’) after the IPO did not progress.
·In addition to having difficulties with cash flow on account of lack of investment, the IFFCO arbitral decision was then determined against Legend. The sum attributed to the debt in September 2015 by Legend was $25,203,309. This is broadly consistent with the $22,435,612 plus costs awarded plus interest, and the figures in the RATA.
·Legend and Paradise were not voluntarily wound up, even after the IFFCO debt became payable.
·Once the debt was announced to the market, securing financing or ongoing funding would have become difficult.
·The aged creditors list suggests that perhaps as early as August, Legend had particular difficulty paying its smaller debts as they fell due.
·Legend then sought to raise funds to defend the IFFCO enforcement.
·The underlying value of the tenements was not a ‘realisable asset’:
oThe period identified, three to six months, is not ‘relatively short’ or reasonable.
oThe asset was the chief asset of the business, necessary for its ongoing survival.
oThere was no evidence of potential buyers and/or the phosphate project was far from completion, such that realisation of the chief asset was not justified in the circumstances if the business was to continue/succeed.
oUpon entry into the General Security Deed, Legend and Paradise were both limited in their ability to raise finance based upon the tenements or realise the value of the tenements.

·Without realisation of the tenements, the IFFCO debt could not be paid at the time the Bond Deed and General Security Deed were entered into.

The circumstances are distinct from International Cat. There, although in the context of the business periods of limited cash flow and high costs were to be expected (between boat sales), financial support was being provided by a director (de facto) and his company, that was able to cover the trade creditors until the next boat was sold, which was likely to occur. Similarly, in Sandell v Porter, a building partnership that had difficulties paying sub-contractors until payments for the built properties were received, the company received funding to provide support in the interim between paying the sub-contractors and being paid for the built property. Here, there was no external support to cover the IFFCO debt and the aged trade creditors, and there was not a point in the near future in which Legend would be likely to produce income or secure ongoing substantial investment until it did. The funds from QBL and QPPL appeared aimed, at least in part, to defend the enforcement of the IFFCO debt. The provision of financial support while a company attempts to eliminate enforcement of a debt is distinct from support covering trade creditors until income is produced or an asset is realised.

Legend had an ‘endemic shortage of working capital’, compounded by a significant debt. When the Bond Deed and General Security Deed were entered into, Legend was not suffering from a ‘temporary lack of liquidity’. That is, realisation of the tenements would not have allowed Legend to weather a temporary period of illiquidity prior to becoming income-producing or establishing substantial ongoing financial support, it would have led to the cessation of Legend’s primary business purpose. Even if, prior to entry into the Bond Deed and the General Security Deed the tenements were realisable, upon entry into those documents it was not commercially realistic to suggest that Mr Feldman would have consented to sale of the tenements to repay the IFFCO debt.

(b) Should the Balance Sheet be accepted as evidence of Legend’s financial position?

The plaintiffs submit that Legend’s books and records are prima facie evidence of Legend’s insolvency, pursuant to s 1305 of the Act.[64] It is contended that, there is no evidence that would displace that standing, and Legend’s liabilities are established by the Balance Sheet.[65] On the issue regarding the accuracy of the Balance Sheet, the plaintiffs submit that although the shares in Paradise are absent as an asset, the accuracy of the liabilities should not be doubted.[66]
[64]Plaintiffs’ Closing Submissions [45].
[65]Legend’s Balance Sheet, Court Book 3, 0989.
[66]Plaintiffs’ Closing Submissions [47].

The plaintiffs also rely upon Switz Pty Ltd v Glowbind Pty Ltd[67] in support of the proposition that ‘the primary source of the information on the solvency of the company must be the company itself’.[68] There, in the context of s 459S(2) Spigelman CJ stated:

The process of proving solvency is not some kind of forensic game. Solvency is a matter peculiarly within the knowledge of the company. The primary source of information on the solvency of the company must be the company itself.[69]

[67](2000) 48 NSWLR 661.

[68]Plaintiffs’ Closing Submissions [40].

[69]Switz Pty Ltd v Glowbind Pty Ltd (2000) 48 NSWLR 661, 674.

Additionally, as the Balance Sheet was also put in evidence by the defendants through affidavits of Mr Feldman, the plaintiffs suggested that it was ‘somewhat rich’ for the defendants to be ‘resiling from them now’.[70]
[70]Transcript of Proceedings, Re Legend International Holdings Inc (in liq) (Supreme Court of Victoria, S CI 2016 04516, S CI 2017 05129, Associate Justice Randall, 9 March 2018) 454 (‘Transcript’).

The defendants contend that the Balance Sheet should be given no weight as its author is unknown,[71] there is no reference to Legend’s main asset,[72] and it refers to a $25 million IFFCO liability without explanation.[73] Further, Mr Shepard agreed that on its face, the Balance Sheet was not drafted in accordance with generally accepted accounting principles,[74] and that I should not give weight to them ‘as a balance sheet prepared in accordance with accepted accounting principles’.[75] The loan that is reflected in the Balance Sheet of Paradise is also not documented as a non-current asset.[76]
[71]Ibid 176.
[72]Ibid.
[73]Ibid 176–7.
[74]Ibid 181.
[75]Ibid 183.
[76]Ibid.

It is asserted that the plaintiffs’ submissions regarding s 1305 of the Act ‘camouflages the issue and the difficulty’ with that section.[77] As stated in Whitton v Regis Towers Real Estate Pty Ltd (in administration) and quoted by Sloss J in Shot One Pty Ltd (in liq) v Day:

Section 1305 of the Corporations Act does not elevate the entry to prima facie evidence that any such transaction (or series of transactions) exists. It can be no more than prima facie evidence that an unknown person formed an opinion on an undisclosed basis that, in the absence of any directly recordable transaction nevertheless, as a balancing entry, such a figure should appear in the accounts. Mr Harris took the matter no further and, indeed, eroded any weight the entry may have had.[78]

Therefore the payment must have had a purpose of giving effect to the creation of the charge. None of these payments was made in order that the creation of the charge would have its legal effect. Rather each payment was made simply for the purpose of reducing the debt to Nu-Log. By contrast, the registration of a charge could be considered an act done for the purpose of making effective the creation of the charge.[369]

[368]See International Cat [2013] QSC 91, [115].

[369]Ibid [118] (emphasis in original).

In Cashflow Finance Pty Ltd (in liq) v Westpac Banking Corp,[370] certain payments were held to ‘give effect’ to unfair preference transactions.[371]
[370][1999] NSWSC 671.
[371]Ibid [562], [563]; see also Neman v Coropean Pty Ltd [2002] WASC 79.

Ford’s Principles of Corporations law provides the following example of when the subsection may apply:

·When the company is solvent a circulating security interest was given, the company becomes insolvent when the secured party causes the security interest to crystallise.[372]
[372]Ford, Austin and Ramsay [27.340.18].

Consideration

In the current circumstances, upon initial consideration the entry into the Share Sale Agreement perhaps would not be regarded as an act to ‘give effect’ to the Bond Deed and General Security Deed. The phrase is ‘for the purpose of giving effect to the transaction’. In Demodrille, this was interpreted to mean ‘for the purpose of giving effect to the uncommercial transaction’, where the first transaction gave a right to the defendant that the second transaction gave effect to.

It may be that in the current circumstances, the broad approach adopted in Demondrille could be followed:

·The Bond Deed and General Security Deed created a right in QPPL to security, in circumstances where an event of default may have occurred in the near future.
·The right created in the General Security Deed was the most commercially significant part of the transaction, and was not of value without further steps.
·The Share Sale Agreement ‘gave effect’ to the General Security Deed, including the ‘uncommercial part’ of the General Security Deed, in the sense that Feldman at least was seeking to take the assets out of the reach of IFFCO/Kissan.
·The Share Sale Agreement only made commercial sense insofar as it ‘gave effect’ to the General Security Deed.

Further, in Lewis v Doran reference was to acts when the uncommercial agreement was performed. On a broad approach it may be that the Share Sale Agreement was an act of controlling an asset of Paradise, which could be considered performance of the rights under the General Security Deed.

In any event, the Share Sale Agreement is void and unenforceable by reason of its substratum falling away. The Bond Deed and General Security Deed which authorised the sale of the shares are void. The power to sell no longer exists. Further, Mr Palmer’s appointment must also be considered invalid. In Jenner v Selmoore Pty Ltd[373] Ryan J considered the validity of the appointment of a receiver under a debenture mortgage. Ryan J had held that the insufficient time had been afforded to meet a demand and thus the right to appoint had not crystallised. Ryan J said:

Mr Jenner was appointment under the debenture mortagage. The fact that the appointment was liable to, and was actually, set aside does not mean that he was to be equated with a person who continued to act as a receiver after the invalidity of his appointment had been established, or otherwise, in a way which made him analogous to an executor in de son tort.[374]

[373](1997) 23 ACSR 552.

[374]Ibid 561.

Ryan J cited Velcrete Pty Ltd v Melsom[375] that:

An invalidly appointed receiver, in so far as he has possession, is not entitled to such possession and is in law a trespasser. That being so, the invalidly appointed receiver cannot take advantage of his unlawful possession by retaining assets pending a valid appointment.

[375](1995) 13 ACLC 799.

It follows that as Mr Palmer was not validly appointed, given that I have found that the Bond Deed and General Security Deed are void, his imprimatur to deal with the shares no longer existed.

V. Is Paradise insolvent or should the company be wound up on just and equitable grounds?

The plaintiffs contend that Paradise is insolvent pursuant to s 95A of the Act as it was unable to pay its debts as and when they fell due and payable.[376] The plaintiffs further argue that s 95A mandates a cash flow approach to determining solvency.[377] As a result, they seek orders that Paradise be wound up in insolvency pursuant to s 459A of the Act or, alternatively, on the just and equitable ground pursuant to s 461(1)(k).[378]
[376]Plaintiffs’ Closing Submissions [71].
[377]Plaintiffs’ Submissions of 26 February 2018 [158].
[378]Ibid [1(b)].

In opposition to that, the defendants argue that Paradise is not insolvent on a cash flow test.[379] The defendants rely on evidence that funds were available to expend by or sourced from QBL. Moreover, they contend that if the underlying value of the phosphate tenement is taken into account, the debt of Paradise to Legend could be satisfied.[380]
[379]Defendants’ Closing Submissions 2.
[380]Ibid.

I determine that Paradise is an insolvent company pursuant to s 95A of the Act. Furthermore, the conduct and conflict of interest of Mr Gutnick and Mr Feldman is such that it satisfies an application to wind up Paradise on the just and equitable ground.

Winding up in insolvency

Section 459A of the Act provides as follows:

459A Order that insolvent company be wound up in insolvency
On an application under section 459P, the Court may order that an insolvent company be wound up in insolvency.
…

Legend has standing to apply pursuant to s 459P(1)(b), which allows a creditor to apply to the Court for a company to be wound up in insolvency. According to Paradise’s RATA prepared by Mr Palmer, Legend is an unsecured creditor of Paradise.

The approach for determining the solvency of a company is relatively settled, although ‘a balance sheet test can provide context for the application of the cash flow test.’[381]
[381]Re Ashington [2013] NSWSC 1008, [3] (citations omitted).

The Balance Sheet of Paradise dated 30 September 2015 shows net liabilities in the sum of $15,342,915.00. This includes a current liability to Legend for an amount of $2,143,443.00 and a non-current liability to Legend for an amount of $15,910,000.00. The Balance Sheet of Paradise dated 31 December 2015 shows net liabilities in the sum of $15,399,530.40, which includes two current liabilities to Legend for an amount of $781,986.92 (account number 65301.290.000) and $1,407,996.77 (account number 70201.209.000) and a non-current liability for an amount of $15,910,000.00 (account number 70200.290.000).

In an email to Ms Chin on 10 November 2016, Mr Lee provided an explanation of the abovementioned liabilities. The current liability of $781,986.92 (account number 65301.290.000) is a running account for funding or other costs incurred by Legend on behalf of Paradise.[382] The current liability of $1,407,996.77 (account number 70201.209.000) is the billing from AXIS Consultants to Legend with respect to Paradise, which Legend then on-charged to Paradise.[383] Furthermore, the non-current liability to Legend for an amount of $15,910,000.00 (account number 70200.290.000) relates to loans from Legend for payments to Acorn.[384]
[382]Email from Peter Lee to Natalie Chin, Court Book 5.
[383]Ibid.
[384]Email from Peter Lee to Natalie Chin, Court Book 5, 2191.

Significantly, the moneys owed to Legend by Paradise is evident in the RATA up to 10 May 2016 prepared by Mr Palmer.[385] The RATA shows that the total moneys owed by Paradise to Legend up until this date amounted to $18,109,803.78. The RATA reveals that Paradise owed money to other creditors, although Legend's percentage of the total debt owed by Paradise to its creditors was approximately 98.2%.
[385]Report as to affairs of Paradise, Court Book 4. .

On 22 June 2016, the Liquidators sent an email to Paradise requesting payment of the debt for the amount of $18,109,803.78.[386] However, Paradise did not respond to this email nor has Paradise repaid the debt owed by it to Legend.
[386]Affidavit of Craig Peter Shepard in Support of Application for Winding Up in Insolvency, affirmed 4 Novmber 2016, [7(b)], [10] (‘First Shepard affidavit’); Letter from KordaMentha to Paradise, Court Book 5 , 1994

A clear distinction needs to be drawn between 'temporary illiquidity’ and ‘an endemic shortage of working capital whereby liquidity can only restored by [sic] a successful outcome of business ventures in which the existing working capital has been deployed’.[387] Whereas the former is an 'embarrassment', the latter is a 'disaster'.[388] The evidence presented does not demonstrate that Paradise's financial position is merely one of 'temporary illiquidity'; rather, the balance sheet and the RATA indicate that Paradise has accrued significant debt and has been unable to discharge this debt.
[387]Hall v Poolman (2007) 215 FLR 243, [266], quoting Hymix Concrete Pty Ltd v Garritty (1977) 138 CLR 647.
[388]Hall v Poolman (2007) 215 FLR 243, [266].

I further note that Paradise's debt is not exclusively owed to Legend. Exhibits B and C to Mr Roberts' affidavit, which appears to be the most recent known statement of Paradise's financial position, show respectively that Paradise owes $403,165.50 to 'non-receivership creditors' and $241,890 to Judd Commercial Lawyers ('JCL') for legal fees.[389] The list of 'non-receivership creditors' in Mr Roberts' affidavit includes, among others, various Queensland Government departments and Mt Isa City Council. Similarly, the list of unsecured creditors in Paradise's RATA includes, among others, Legend, Mt Isa City Council, the ATO, ASIC and various Queensland Government departments. Notwithstanding, the debt owed by Paradise to Legend represents approximately 98.2% of its overall debt.
[389]Roberts’ Affidavit [10], Exhibits B and C.

Within the Balance Sheet of Legend, the defendants did not contest the efficacy of Paradise’s financial document.

During cross examination, Mr Feldman stated that if not for the undertakings given by Paradise to the Court, the company could have immediately borrowed moneys to discharge its debts other than those owed to Legend.[390] Moreover, Mr Feldman also stated that if Paradise was unable to borrow those moneys, it would be unable to meet its immediate liabilities.[391] Mr Feldman was referring to the application by the defendants to release himself and Ms Feldman from the undertakings given to the Court so as to allow Paradise to borrow a secured loan of $1 million from QBL for the purposes of discharging its debt of $403,165.50 to 'non-receivership creditors', $241,890 to JCL for legal fees and for payment of Paradise's ongoing expenses as and when they arise. [392]
[390]Transcript, 366–7.
[391]Ibid 367.
[392]Affidavit of Christiaan Roberts in support of application for variation of undertakings, Court Book 5, 2312.42 [10]; Email exchange between Arnold Bloch Leibler and Judd Commercial Lawyers, Court Book 5, 2312.41.

There is no indication that the $1 million loan to Paradise by QBL would have been directed toward repaying Paradise’s debt to Legend. Even if this was the case, a sum of $1 million is merely the tip of the iceberg when one considers the full debt of $18,109,803.78 that Paradise owes to Legend. In any event, a detailed consideration of whether QBL’s loan to Paradise would have been sufficient for Paradise to discharge its debt to Legend is purely hypothetical and not necessary as the defendants’ application to vary the undertakings was dismissed on 24 April 2017.[393]
[393]Order of the Honourable Associate Justice Randall, Court Book 5.

The defendants contend that if the underlying value of the mining tenements is taken into account, this would result in a position where Paradise could satisfy its debt to Legend.[394] However, the underlying value of the mining tenements can only be considered pertinent to Paradise's ability to repay Legend if Paradise is able to convert those tenements into cash within a realistic timeframe. I have dealth with and determined this issue at paragraphs [40]-[42] of this judgment.
[394]Defendants’ Closing Submissions [2].

In considering the commercial reality within which Paradise operates, the evidence suggests that it may not be possible to realise Paradise's mining tenements into cash within a realistic time period. Legend's annual report of 31 December 2013 states that the Paradise North Project 'has an estimate of capital expenditure of approximately A$26.4 million',[395] while the Paradise South Project also has 'significant capital requirements'.[396] This is supported by the presentation on Legend which indicates that the Paradise North Project would take between US$23.8-64 million of capital expenditure to bring into production and the Paradise South Project would take US$204-343 million of capital expenditure to bring into production.[397]
[395]Extract from Annual Report of Legend filed with the SEC, Court Book 1, 388.
[396]Ibid 387.
[397]Email from Joseph Gutnick to Sholom Feldman, Court Book 2, 580, 599, 604.

These problems are compounded by the fact, admitted by Mr Feldman, that Paradise is a dormant entity. During cross examination, Mr Feldman stated that Paradise became dormant in the sense of not actively progressing the tenements 'years ago'.[398] Mr Shepard depose in his affidavit that Paradise is an 'illiquid, dormant entity'.[399] Furthermore, Mr Shepard depose that the mining assets 'were not yet at the stage of, or close to, production and significant additional capital expenditure was required to bring them to production'.[400] Indeed, the timeline for the Paradise North Project, as shown in the presentation, is approximately 21 months (including shipment period).[401]
[398]Transcript, 354.
[399]First Shepard affidavit, [29].
[400]Affidavit of Craig Peter Shepard, affirmed 4 November 2016, [50] (‘Supporting affidavit’).
[401]Email from Joseph Gutnick to Sholom Feldman, Court Book 2, 580, 600.

Mr Shepard also states in his affidavit that Paradise's mining tenements 'cannot be readily realised to meet its liabilities as they fall due and payable, but would require an ordered sale process which, based on my experience, I estimate would take three to six months to complete'. [402] However, even if an expeditious sale process of the mining tenements is taken into account, it is important to take into account the consequences of the delay in the production of the tenements as highlighted by Marcel Equity, the corporate advisors of QPPL, in their email to Arnold Bloch Leibler. Marcel Equity estimated a cost of $300,000 per month to 'adequately manage' the phosphate project.[403] Marcel Equity also expressed their concern that the longer the mining tenements remain undeveloped, the more the value of Paradise and the phosphate project is liable to diminish.[404]
[402]First Shepard affidavit, [29].
[403]Letter from Marcel Equity to Arnold Bloch Leibler, Court Book 5, 2026, 2031.
[404]Ibid 2032.

I determine that Paradise is insolvent for the purposes of s 95A of the Act. Paradise's financial position has moved beyond temporary illiquidity; it is now in a state where it is unable to generate enough revenue to discharge its debts as and when they fall due and payable. Accordingly, Paradise should be wound up in insolvency pursuant to s 459A of the Act.

Winding up on the just and equitable ground

In the alternative, the plaintiffs submit that Paradise should be wound up on the just and equitable ground pursuant to s 461(1)(k).. It is their contention that Mr Feldman and Ms Feldman are under a conflict of interest as they are directors of both Paradise and QPPL and have not been able to separate their roles in order to act in the best interests of each company. As a result, the plaintiffs argue that the Court can have no confidence in the management of the company and Paradise ought to be wound up pursuant to s 461(1)(k), as this would benefit all of Paradise’s unsecured creditors.[405] The defendants counter-argue that there is no basis in evidence for Paradise to be wound up on the just and equitable ground.[406]
[405]Plaintiffs’ Closing Submissions [79].
[406]Defendants’ Closing Submissions [2].

Section 461(1)(k) of the Act provides as follows:

461 General grounds on which company may be wound up by Court
(1) The Court may order the winding up of a company if:
…
(k)the Court is of opinion that it is just and equitable that the company be wound up.

…

Legend has standing to apply pursuant to s 462(2)(b) of the Act, which allows a creditor to apply to the Court for a company to be wound up on a ground provided for by s 461. According to Paradise's RATA prepared by Mr Palmer, Legend is an unsecured creditor of Paradise.

In ASIC v ActiveSuper Pty Ltd (No 2),[407] Gordon J summarised the relevant legal principles when winding up a company pursuant to s 461(1)(k) of the Act. From the outset, her Honour observed that '[t]he classes of conduct which justify the winding up of a company on the just and equitable ground are not closed, and each application will depend upon the circumstances of the particular case'.[408] Her Honour also noted that ‘[i]t has long been established that a company may be wound up where there is "a justifiable lack of confidence in the conduct and management of the company's affairs”’,[409] before reiterating the 'general fundamental principles' enunciated by Warren J (as her Honour then was) in ASIC v ABC Fund Managers.[410]
[407][2013] FCA 234.
[408]Ibid [19], citing Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, 374, 376–9; ASIC v Kingsley Brown Properties Pty Ltd [2005] VSC 506, [95]–[97]; Nilant v RL & KW Nominees Pty Ltd [2007] WASC 105, [117].
[409]Ibid [20], quoting Loch v John Blackwood Ltd [1924] AC 783, 788.
[410](2001) 39 ACSR 443.

Warren J identified three 'general fundamental principles' to be applied by courts in relation to applications for winding up a company on the just and equitable ground:

First, there needs to be a lack of confidence in the conduct and management of the affairs of the company. Second, in these types of circumstances it needs to be demonstrated that there is a risk to the public interest that warrants protection. Third, there is a reluctance on the part of the courts to wind up a solvent company.[411]

[411]Ibid [119] (citations omitted).

In relation to the first of these principles, it is 'a foundation for applications for winding up on the just and equitable ground' and '[i]t relates to the directors' conduct in regard to the company's business'.[412] Specifically:

a lack of confidence may arise where, 'after examining the entire conduct of the affairs of the company' the Court cannot have confidence in 'the propensity of the controllers to comply with obligations, including the keeping of books, records and documents, and looking after the affairs of the company'.[413]

[412]ASIC v Planet Platinum Ltd [2015] VSC 682, [18].

[413][2013] FCA 234, [21], quoting Galanopoulos v Moustafa [2010] VSC 380, [32].

In this matter, Legend entered into the Bond Deed and General Security Deed with Paradise and QPPL on 25 November 2015. As established previously, this was done in an attempt to frustrate Legend's creditors. Additionally, at the time the agreement was entered into, Mr Gutnick was a director of Legend from 17 November 2004 to 8 July 2016 and director of Paradise from 9 November 2011 to 8 July 2016, which points to a potential conflict of interest for Mr Gutnick. Similarly, Mr Feldman and Ms Feldman are the current directors of QPPL starting from 19 November 2015 and the current directors of Paradise starting from 25 November 2015. Mr Feldman was also a director of Legend from 25 November 2015 to 22 April 2016 and Ms Feldman was a director of Legend from 25 November 2015 to 20 April 2016, which again would point to a conflict of interest for the directors. There does not appear to be any indication that Mr Gutnick, Mr Feldman and Ms Feldman were able to separate their duties to each respective company and act in the best interests of each respective company. This gives rise to a distinct lack of confidence in the ability of the directors to conduct and manage the affairs of each company with clarity and honesty. It follows that the first principle is satisfied.

As to the second of these principles – a demonstrated risk to the public interest that warrants protection – this may take various forms, for example where a company has not carried on its business candidly and in a straightforward manner with the public or where it might be justified so as to prevent repeated breaches of the law.[414] As previously established, it does not appear that Mr Gutnick and Mr Feldman (as well as Ms Feldman) have been able to conduct the affairs of Legend and Paradise in a transparent and candid manner given that there is a conflict of interest for these individuals as they serve, or have served, as directors on both sides of the transaction.
[414][2013] FCA 234, [23], quoting ASIC v International Unity Insurance Pty Ltd (2004) 22 ACLC 1416, [135]–[139]; ASIC v Kingsley Brown Properties Pty Ltd [2005] VSC 506, [96].

As to the third principle, Mandie J in ASIC v Kingsley Brown Properties[415] clarified that 'a stronger case might be required where the company was prosperous, or at least solvent, and/or where there was an established business being carried on'.[416] As previously discussed, Paradise has been a dormant entity for some years and has no present source of income. Given that it has accrued substantial debt and has been unable to discharge this debt as and when they fell due and payable, Paradise is an insolvent company. As a result, there is nothing to suggest that Paradise is at this present time an active and prosperous company. It follows that the third principle is satisfied.
[415][2005] VSC 506.
[416]Ibid [96].

I have determined that Paradise be wound up in insolvency. If it had been necessary, I would have considered it appropriate to wind up Paradise on the just and equitable ground in any event.

I require the parties to provide orders which reflect these reasons. I also need assistance in identifying a consent to act as liquidators. In the absence of any debate about the form of order or if any consequential orders are required, I propose to make orders in the following terms:

(a) The Court declares that the Convertible Bond and Share Subscription Agreement and the General Security Deed each dated 25 November 2015 are:

(viii) Uncommercial transactions within the meaning of s 588FB of the Corporations Act (Cth) (2001) ('the Act');

(ix) Insolvent transactions within the meaning of s 588FC of the Act; and

(x) Voidable transactions within the meaning of s 588FE(2) and (3) of the Act.

(b) The Court orders:

(i) Pursuant to s 588FF(1)(h) of the Act, each of the Convertible Bond and Share Subscription Agreement and the General Security Deed are void as from 25 November 2015;

(ii) The Share Sale Agreement dated 22 April 2016 between the second plaintiff and the first defendant is void and unenforceable;

(iii) The appointment of Mr Palmer as receiver of the second plaintiff's shares in the second defendant is invalid;

(iv) The appointment of Mr Palmer as the receiver and manager of the second defendant is invalid;

(v) The second defendant be wound up in insolvency under the provisions of the Act;

(vi) Mark Anthony Korda and Craig Peter Shepard jointly and severally are appointed liquidators for the purposes of the winding up;

(vii) The requirement to file the requisite notices of application for winding up with ASIC are dispensed with; and

(viii) The plaintiffs costs of the application for winding up are costs in the winding up.

(ix) Otherwise, the defendants pay the plaintiffs’ costs of the proceeding, including reserved costs, on a standard basis.

[2018] VSC 789

14 December 2018