Re ME Property Development Pty Ltd (in liq)

[2023] VSC 520

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL COURT

CORPORATIONS LIST

S ECI 2023 03757

In the matter of ME Property Development Pty Ltd (In liquidation) (ACN 140 874 737)

CRAIG IVOR BOLWELL in his capacity as Liquidator of ME Property Development Pty Ltd (In Liquidation) (ACN 140 874 737) Plaintiff

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JUDGE:	Lyons J
WHERE HELD:	Melbourne
DATE OF HEARING:	On the papers
DATE OF JUDGMENT:	1 September 2023
CASE MAY BE CITED AS:	Re ME Property Development Pty Ltd (in liq)
MEDIUM NEUTRAL CITATION:	[2023] VSC 520

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CORPORATIONS – Application by liquidator for directions under s 90-15 of the Insolvency Practice Schedule, Schedule 2 to the Corporations Act 2001 (Cth) – Whether liquidator justified in defending proceedings brought against the company – Application allowed.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Benjamin Fry	Mills Oakley

HIS HONOUR:

1. By originating process filed 21 August 2023, the plaintiff (Liquidator) seeks directions pursuant to s 90-15 of sch 2 to the Corporations Act 2001 (Cth) (Insolvency Practice Schedule and Corporations Act) to the effect that he would be justified in causing ME Property Development Pty Ltd (in liq) (Company), to defend a proceeding commenced against it, namely County Court of Victoria proceeding CI-22-02628 (County Court proceeding). 

1. There is a degree of urgency given that the trial of that proceeding is listed to commence on 4 September 2023.  As a result, after considering the material provided by the Liquidator, on 29 August 2023, my chambers informed the plaintiff that, in substance, I intended to make the orders sought.  These are my reasons for doing so.

Background

1. The Company was established for the purpose of a student accommodation development, which it completed in 2014.  The Company remains the registered proprietor of 81 apartments (apartments).

1. The County Court proceeding was commenced against the Company and one of its former directors, Jinhua Wang, on 8 July 2022 by Yongzhong Australia Pty Ltd and Shibiao Gu (County Court plaintiffs). The County Court plaintiffs allege that they advanced a loan of $2.5 million to the Company which was secured against the assets of the Company and guaranteed by a former director of the Company.  The claim is based on several agreements – an ‘investment agreement’, a ‘supplementary investment agreement’ and a ‘share sale and purchase agreement’.

1. Relevantly, the plaintiffs seek repayment of the loan plus interest and a declaration that they hold proprietary interests in the Company’s assets.  In summary, the Liquidator intends to defend the claim on the basis of the defence filed by the Company in the County Court proceeding but does not wish to pursue the allegation that the County Court plaintiffs are estopped from claiming that the Company is liable to repay the $2.5 million loan (estoppel defence).

1. The County Court proceeding was set down for trial commencing 11 July 2023. On 7 July 2023, the plaintiff was appointed administrator of the Company. On 10 July 2023, the County Court plaintiffs obtained leave pursuant to s 440D(1) of the Corporations Act to proceed against the Company. The plaintiff, as administrator, decided not to take part in the County Court proceeding at that time. On 12 July 2023, the trial of the County Court proceeding was vacated for unrelated reasons and re-fixed for hearing on 4 September 2023.

1. On 10 August 2023, the plaintiff was appointed liquidator of the Company at the second meeting of creditors. This caused the County Court plaintiffs to again seek leave to proceed against the Company, this time pursuant to s 500(2) of the Corporations Act, which the Liquidator did not oppose. Leave was granted on 24 August 2023.

Evidence

1. The application is supported by two affidavits of the Liquidator, Mr Craig Bolwell, sworn 22 and 25 August 2023 and an affidavit of the Liquidator’s solicitor, Mr Alex Myers affirmed 21 August 2023.  The Liquidator deposed to the financial situation of the Company as follows:

(a)        the Company’s principal asset is the apartments, which have an estimated value of $12 million. The Company currently receives rental income of approximately $92,000 per month from tenants in the apartments;

(b)       Judo Bank Pty Ltd holds registered mortgages over the titles of each of the apartments which secure the amount of $6 million;

(c)        there are three parties (other than the County Court plaintiffs) which claim to be secured creditors. These are:

(i)         Yingteng (Shanghai) Education Technology Co, which claims a debt of $32,801,545;

(ii)       Golden Harvest Australia Investment Pty Ltd, which claims a debt of $9,898,052;

(iii)      Jianfei Lu, director of the Company, who claims a debt of $853,860; and

(d)       presently there are unsecured creditors’ claims of between $45,870,757 and $51,570,757.

1. As to paragraph 8(c) above, the Liquidator deposes that the documents provided in support of these claims appear ambiguous and that none of these debts are registered or noted on the titles of the apartments or elsewhere.  As such, the Liquidator has not yet been able to determine whether these claims against the Company are valid and, if so, whether they are secured. 

1. On this basis, the Liquidator estimates that, if successful in the County Court proceeding, the County Court plaintiffs will absorb between 50% and 65% of the funds available to the Company’s unsecured creditors.  I note that the Liquidator has obtained advice from counsel regarding the defence filed by the Company in the County Court proceeding and whether the Liquidator ought to take an active role in the proceeding.  I will address this further below.  However, as a result of that advice, the Liquidator does not seek an order that it is justified in defending the County Court proceeding on the basis of the estoppel defence.

1. The Liquidator also deposes that the Company’s rental income is sufficient to cover its anticipated expenses in the County Court proceeding and that Judo Bank Pty Ltd, which has a registered security interest over all the Company’s present and after-acquired property, has consented to the Liquidator’s costs being met from the rental income.

Legal principles

1. A liquidator may apply to the court for directions under s 90-20 of the Insolvency Practice Schedule. Pursuant to s 90-15(1), upon an application the court may make ‘such orders as it thinks fit in relation to the external administration of a company’, including ‘an order determining any question arising in the external administration of the company.’ Liquidators may obtain orders pursuant to s 90-15 in respect of whether they would be justified in causing the company to institute or defend legal proceedings.[1]

   [1]Re Kelly [2018] FCA 780 (Gleeson J); Re Mudgee Dolomite & Lime Pty Ltd (in liq) (No 4) [2021] NSWSC 393 (Williams J); Re Accord Pacific Land Pty Ltd [2012] NSWSC 1283 (‘Re Accord’) (Brereton J).

1. The court’s power to give a direction under s 90-15 is intended to facilitate the performance of a liquidator’s functions and has accordingly been given a wide interpretation. [2]  However, the court will not give a direction that relates to the making or implementation of a business or commercial decision where there is no actual or potential attack on the propriety or reasonableness of the decision.[3]  I note also that protecting the interests of creditors is an important purpose of a liquidator seeking advice.[4]

   [2]El-Saafin v Franek (No 2) [2018] VSC 683, [101]-[111] (Lyons J).

   [3]Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409; Re Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556 [7], cited in Re Mudgee Dolomite & Lime Pty Ltd (in liq) (No 4) [2021] NSWSC 393, [21].

   [4]Re S&D International Pty Ltd (2012) 92 ACSR 38, [91] (Robson J).

Consideration

1. I have formed the view that the Liquidator is justified in seeking a direction under s 90-15 of the Insolvency Practice Schedule on whether he should cause the Company to defend the County Court proceeding. I also consider that the Liquidator would be justified and acting reasonably in causing the Company to defend the County Court proceeding other than in respect of the estoppel defence. I reached these two conclusions for substantially the same reasons.

1. The first and principal reason is because it is appropriate that the claims as to whether any debt owed to the County Court plaintiffs is secured be determined by a court, not by a liquidator.  Those claims require the determination of proprietary interests in the Company’s assets and involve complex legal issues which will be more appropriately dealt with by a court rather than through a proof of debt.  This is in circumstances where the County Court plaintiffs have obtained leave to proceed with those claims against the Liquidator.  As a result, it is appropriate that the claims in the County Court proceeding have a contradictor and can be fully ventilated and determined by the court.  The suitable contradictor in the circumstances is the Liquidator.

1. The second and related reason is that, in my view, there is at least a reasonably arguable basis upon which the Company may defend the claims in the County Court Proceeding regarding the alleged security interest.  I have read the advice of counsel obtained by the Liquidator, the pleadings in the County Court proceeding and key documents relied upon by the County Court plaintiffs.  In my view, the key documents are far from clear or certain as to the nature and extent of any security interest created.  This is evident from the fact that in the alternative the County Court plaintiffs seek rectification of the relevant agreement or agreements.

1. The third reason is that, if the Company successfully resists the claim for security sought by the County Court plaintiffs, there may be additional funds available to the general body of unsecured creditors in the amount of around $3 million, which would be a substantial benefit to those unsecured creditors.  By contrast, if the Company does not participate in the County Court proceeding, there will be no contradictor to the claims for security over the Company’s assets.  That would not be in the best interests of the Company in circumstances where it has funds sufficient to finance its defence in the County Court proceeding. 

1. I am conscious that, if the claims of the other allegedly secured creditors referred to at [8(c)] above are upheld, then the defence of the County Court proceeding stands only to benefit those other secured creditors and not the general body of unsecured creditors.  However, I accept that there is some doubt as to whether they are in fact secured creditors and that there is insufficient time before the trial of the County Court proceeding for the Liquidator to properly assess those claims. 

1. I am also conscious that early in the administration the plaintiff (as administrator) decided not to take part in the County Court proceeding.  However, the plaintiff as liquidator has now been able to consider the issues raised in the County Court proceeding in more detail with the assistance of counsel and in the context of the affairs of the Company as a whole.  In my view, this is a factor which favours the provision of a direction to the Liquidator to avoid any appearance, or subsequent allegation, of inconsistency in the position of the plaintiff as administrator and later as liquidator.[5]  However, this change of position is not determinative of what direction should be made;  that must be ascertained on the basis of the evidence before me.

   [5]Re Accord (n 1) [7].

1. Finally, I note that there are other defences in the defence of the Company in the County Court proceeding including a denial of the rectification claim and other technical defences which go to the issue of liability more generally.  I consider that it would be appropriate for the Liquidator to have these issues determined in the County Court proceeding.  This will ensure all issues relating to liability and any security interest will be heard and determined once and for all.

1. In all these circumstances, I consider that the Liquidator would be justified in causing the Company to defend the County Court proceeding other than in respect of the estoppel defence.  Further, as a consequence, I consider that in the first instance and subject to any further order, the Liquidator would be justified in paying the costs of defending the County Court proceeding from the funds of the Company.  I also consider that the costs of this application should be costs in the winding up of the Company and be paid out of the assets of the Company.

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