Re Pilot Advisory Pty Ltd
[2019] FCA 2171
•20 December 2019
FEDERAL COURT OF AUSTRALIA
Pilot Advisory Pty Ltd, in the matter of ACN 137 806 574 Pty Ltd (Administrators Appointed) formerly Cloud 9 Software Pty Ltd v ACN 137 806 574 Pty Ltd (Administrators Appointed) formerly Cloud 9 Software Pty Ltd [2019] FCA 2171
File number: QUD 743 of 2018 Judge: REEVES J Date of judgment: 20 December 2019 Catchwords: CORPORATIONS – application under s 445D of the Corporations Act 2001 (Cth) (the Act) to set aside a Deed of Company Arrangement (DOCA) – where the Administrators considered the DOCA to be in the interests of creditors – whether the DOCA was unfairly prejudicial to the plaintiff under s 445D(1)(f) of the Act – whether the DOCA could be set aside for some other reason pursuant to s 445D(1)(g) of the Act – application granted Legislation: Corporations Act 2001 (Cth)
Insolvency Law Reform Act 2016 (Cth)
Cases cited: Auimatagi v Australian Building and Construction Commissioner (2018) 363 ALR 246; [2018] FCAFC 191
Australian Securities and Investments Commission v Midland Hwy Pty Ltd (ACN 153 096 069) (admin apptd) (2015) 110 ACSR 203; [2015] FCA 1360
Britax Childcare Pty Ltd (ACN 006 773 600) v Infa Products Pty Ltd (ACN 092 222 994) (admins apptd) (2016) 115 ACSR 322; [2016] FCA 848
Canadian Solar v ACN 138 535 832 Pty Ltd, In the Matter of ACN 138 535 832 Pty Ltd (Subject to a Deed of Company Arrangement) [2014] FCA 783
Canadian Solar, Cresvale Far East v Cresvale Securities (2001) 37 ACSR 394; [2001] NSWSC 89
Eco Heat (Vic) Pty Ltd v Syndicate Forty Four Pty Ltd (Subject to Deed of Company Arrangement) & Ors [2018] VSC 156
Emanuele v Australian Securities Commission (1995) 63 FCR 54
Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139
Helenic Pty Ltd as trustee of the Mastrantonis Family Trust v Retail Adventures Pty Ltd (Administrators Appointed) [2013] NSWSC 1973
In the matter of Connections Total Fitness for the Family Pty Limited (administrator appointed) [2014] NSWSC 75
Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (ACN 069 549 042) (subject to deed of company arrangement) (No 2) (2011) 82 ACSR 300; [2011] FCA 178
Mentha, In the matter of Griffin Coal Mining Company Pty Ltd (administrators appointed) [2010] FCA 764
Patrick Stevedores Operations No 2 Proprietary Limited v Maritime Union of Australia (1998) 195 CLR 1; [1998] HCA 30
Richard Albarran, Brent Kijurina and Cameron Shaw as Joint and Several Administrators of Cooper & Oxley Builders Pty Ltd (Administrators Appointed) [2018] WASC 161
Shafston Avenue Construction Pty Ltd, in the matter of CRCG-Rimfire Pty Ltd (subject to deed of company arrangement) v McCann [2019] FCA 1426
Shaoyong (David) Guo & Anor v Xinwei Song & Ors; In the matter of SG Capricorn Investments Pty Ltd (subject to deed of company arrangement); Dameng Developments Pty Ltd (subject to deed of company arrangement); and New Mangrove Pty Ltd (subject to a deed of company arrangement) [2018] NSWSC 12
Sydney Land Corp Pty Ltd v Kalon Pty Ltd (1997) 26 ACSR 427
TiVo, Inc v Vivo International Corporation Pty Ltd (2014) 9 BFRA 583; [2014] FCA 789
University of Sydney v Australian Photonics Pty Ltd (subject to deed of company arrangement) (2005) 53 ACSR 579; [2005] NSWSC 412
Vero Insurance Ltd v Kassem (as joint administrators of Ungul Properties Pty Ltd) and Another (2011) 86 ACSR 607; [2011] NSWCA 381
Vouris and Tonks as Deed Administrators Of Good Impressions Offset Printers Pty Limited (ACN 002 306 587) [2012] NSWSC 603
Date of hearing: 14 June 2019 and 3 July 2019 Registry: Queensland Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 116 Counsel for the Plaintiff: Mr PA Hastie QC Solicitor for the Plaintiff: Synkronos Legal Counsel for the First Defendant: Mr D Pritchard SC Solicitor for the First Defendant: KPL Lawyers Counsel for the Second Defendant: Mr C Johnstone Solicitor for the Second Defendant: Johnson Winter & Slattery ORDERS
QUD 743 of 2018 IN THE MATTER OF ACN 137 806 574 PTY LTD (ADMINISTRATORS APPOINTED) FORMERLY CLOUD 9 SOFTWARE PTY LTD ACN 137 806 574
BETWEEN: PILOT ADVISORY PTY LTD ACN 115 403 051
Plaintiff
AND: ACN 137 806 574 PTY LTD (ADMINISTRATORS APPOINTED) FORMERLY CLOUD 9 SOFTWARE PTY LTD ACN 137 806 574
First Defendant
VINCENT JOSEPH PIRINA AND STEVEN NAIDENOV
IN THEIR CAPACITY AS ADMINISTRATORS OF ACN 137 806 574 PTY LTD (ADMINISTRATORS APPOINTED) FORMERLY CLOUD 9 SOFTWARE PTY LTD
ACN 137 806 574Second Defendant
JUDGE:
REEVES J
DATE OF ORDER:
20 DECEMBER 2019
THE COURT ORDERS THAT:
1.By the close of business on 17 January 2020, the parties are to consult, prepare and submit to my chambers a set of draft orders to reflect the contents of these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
REEVES J:
INTRODUCTION
By 1 June 2018, when it was placed in voluntary administration on the vote of its sole director, Mr Marc Goldman, ACN 137 806 574 Pty Ltd formerly known as Cloud 9 Software Pty Ltd (Cloud 9) had not traded for approximately three and a half years. During that period, it continued to operate, primarily for the purpose of distributing the proceeds of the sale of its assets to its creditors and shareholders.
On 16 May 2018, 16 days before it was placed into voluntary administration, Cloud 9 received a statutory demand under s 459E of the Corporations Act 2001 (Cth) (the Act) from its largest creditor, Pilot Advisory Pty Ltd, the plaintiff in this proceeding. That demand was for the amount of $804,133.43.
In their second report to creditors dated 2 July 2018, Mr Vincent Pirina and Mr Steven Naidenov, the joint and several administrators of Cloud 9 (the Administrators), reported that Cloud 9’s total unsecured creditors amounted to approximately $1,595,624. By the time of the adjourned second creditors’ meeting on 10 September 2018, the total value of debts admitted for voting purposes was $1,329,825.11 (see at [48] below). Pilot Advisory’s admitted debt of $1.1 million (which included costs) accounted for approximately 82.7% of this total. The only other significant creditor was the Deputy Commissioner of Taxation with a debt of $162,243.88.
At the second adjourned creditors’ meeting, seven of the eight creditors of the company voted to execute a Deed of Company Arrangement (DOCA). Pilot Advisory cast the sole vote against that resolution. When the two votes were tied (the number of creditors and the value of creditors), Mr Naidenov, the chairperson at the meeting, entered a casting vote in favour of executing the DOCA.
The central issue raised by Pilot Advisory in this proceeding is whether the DOCA should be terminated because it is unfairly prejudicial to it and/or it is not in the public interest. The Administrators and Cloud 9 itself contended that that should not happen because, so they claim, it is in the interests of the creditors as a whole to proceed with the DOCA. For the reasons that follow, I consider the DOCA should be terminated.
THE FACTUAL BACKGROUND
The parties submitted an agreed statement of facts and a court book for the trial of this proceeding. The following findings are based on those documents.
Some early history
Cloud 9 was registered on 22 June 2009. It was incorporated for the purpose of developing a cloud-based medical software package with a view to selling it to hospitals and medical practices. At the time of its incorporation, Cloud 9’s directors were Mr Goldman and Mr Abraham Bisseh. Mr Goldman is still a director of the company, but Mr Bisseh ceased to be so on 16 April 2018. Notwithstanding his retirement, henceforth in these reasons, I will, unless the context does not permit, refer to the “directors” of the company to include Mr Goldman and Mr Bisseh. Cloud 9’s shareholders are Mr Goldman and Mr Bisseh, along with Mr Farhad Abar, Mr Peter Crome and Mr Alf Tornatore.
From November 2012, Cloud 9 and Monet Technologies Pty Limited became shareholders in a company called eHealth Networks Pty Ltd (eHealth). From time to time thereafter, Messrs Goldman, Bisseh and Crome also served as directors of eHealth. eHealth was originally registered on 24 January 2005.
The sale to Telstra
On 11 November 2014, Cloud 9 and eHealth entered into an agreement for the sale of their business assets, including intellectual property and goodwill, to ACN 602 764 438 Pty Ltd, a subsidiary created by Telstra Corporation Limited. Negotiations for that sale commenced in late 2013. The original sale price was to have been approximately $40 million, but this was subsequently reduced to approximately $20 million and ultimately further reduced to $12.5 million. Under the sale agreement, an initial amount of $8,335,935 ($10,500,000 less accrued employee entitlements) was paid to Cloud 9 on 16 December 2014. The balance of the sale price was paid by instalments up to 21 September 2016.
The payments received by Cloud 9 during the abovementioned period were as follows:
(a)approximately $900,000 in or about February 2015;
(b)$557,384 on or about 20 May 2015;
(c)$1,000,000 on or about 17 July 2015; and
(d)$992,939.98 on or about 21 September 2016.
It is unclear on the evidence whether the payment of $557,384 ([10(b)] above) was connected with the sale to Telstra.
The distributions of the sale proceeds
Between the receipt of the initial payment of $8,335,935 mentioned above and 28 January 2016, Cloud 9 made a series of payments to its shareholders and other persons, including the following:
(a)on 17 December 2014, $100,000 to each of Messrs Abar, Bisseh, Crome, Goldman and Tornatore;
(b)on 18 December 2014, $258,345.88 to Mr Crome;
(c)on 19 February 2015, $200,000 to each of Messrs Abar, Bisseh, Goldman and Tornatore;
(d)on 6 March 2015, $200,000 to each of Messrs Abar, Bisseh, Goldman and Tornatore;
(e)on 16 May 2015, $33,739.96 to Mr Crome;
(f)on 28 May 2015, $100,000 to Mr Goldman;
(g)on 17 August 2015, $25,000 to Mr Goldman; and
(h)on 18 September 2015, $185,786 to Mr Bisseh and $24,048 to Mr Tornatore.
On 17 June 2015, 17 August 2015 and 28 January 2016, Cloud 9 “confirmed” as dividend payments the following, which were included in those set out above:
(a)$500,000 to Mr Bisseh, $600,000 to Mr Goldman, $500,000 to Mr Tornatore, $500,000 to Mr Abar and $100,00 to Mr Crome; an overall total of $2.2 million;
(b)the payments to Mr Bisseh of $185,786, Mr Goldman of $45,713 and Mr Tornatore of $24,048; and
(c)a payment to Mr Goldman of $20,173.
The payments in [11(b)] and [11(c)] above do not appear to have been included in these confirmations. Further, there appears to be a discrepancy between the amounts paid to Mr Goldman and those that were confirmed.
In late 2018, the Administrators performed an analysis of the “confirmed payments” set out above, from which they prepared the following table:
Meeting Date Recipient Amount ($) Imputation Credit 17/06/2015 Abraham Bisseh 500,000.00 214,286.00 17/06/2015 Marc Goldman 600,000.00 257,143.00 17/06/2015 Alf Tornatore 500,000.00 214,286.00 17/06/2015 Farhard [sic – Farhad] Abar 500,000.00 214,286.00 17/06/2015 Peter Crome 100,000.00 42,857.00 17/08/2015 Abraham Bisseh 185,786.00 79,623.00 17/08/2015 Marc Goldman 45,713.00 Unable to locate this payment 17/08/2015 Alf Tornatore 24,048.00 10,306.00 28/01/2016 Marc Goldman 20,713.00 Unable to locate this payment 2,476,260.00
In their supplementary report to creditors dated 3 September 2018, the Administrators expressed the following views about these dividend payments:
As detailed in my Second Report, dividend payments totalling $2,409,834 were identified from [Cloud 9’s] bank statements.
A review of the board minutes and bank statements confirms the following:
•A dividend of $2.2 million was declared on 17 June 2015, which was paid in advance in four instalments during the period 17 December 2014 to 28 May 2015. The dividends paid to the shareholders were in accordance with the board minutes on 17 June 2015, however, does not match the dividend proportion of the shareholding disclosed in ASIC’s records.
•An agreement was in place with shareholders that whilst, not all shareholders will participate in some returns as per their shareholding, they would receive upfront payments in the form of a salary.
•Total payments received by all shareholders via dividend and/or salary since 2011 to 2017 is as follows:
- Marc Goldman $1,254,926
- Abraham Bissseh [sic – Bisseh] $1,254,926
- Alf Tornatore $1,254,926
- Farhad Abar $1,303,935
- Peter Crome $1,278,974
It is noted imputation credits of $942,858 were paid in respect of the dividend. Although, Peter Crome received less than his shareholding entitled him to receive, we have identified two (2) additional payments of $258,345 and $33,739 on 18 December 2014 and 16 May 2015 respectively, which appear to be for wages.
Consideration should be given to whether certain dividend declarations by [Cloud 9] are valid given they were not in accordance with the shareholding of [Cloud 9] in that some shareholders appear to have received less than others and may have therefore been discriminated. However, we have been advised that there is no legal basis that would make a dividend declaration automatically void or invalid merely because it may not have been made evenly in accordance with a company’s shareholding.
Therefore, whilst the course of conduct may suggest that there has been a contravention by [Cloud 9] of Section 254T(1)(b) of the Act, this does not mean the dividend was prima facie invalid. However, a director who has authorised an improper payment of dividend could be held in contravention of Section 180 of the Act and may be personally liable to repay the amount of dividend to [Cloud 9]. It may also provide a foundation for an action by an aggrieved shareholder for oppression.
The InforMedix payment
On 23 December 2014, about a week after it received the initial payment of the sale price mentioned above, Cloud 9 paid $3,635,125.88 to a company called InforMedix FZ LLC (InforMedix – referred to by the Administrators as InfoMedix or Infomedix in various quotes below) of Dubai, in the United Arab Emirates. There is an invoice dated 23 December 2014 under InforMedix’s name describing this amount as:
First Tranche Payment: Commission for the sale of Software & asset of Idea Object related to Cloud 9 Software.
As per agreed Price Payment
Unsurprisingly, the rationale for this payment was examined by the Administrators. They questioned Mr Goldman and/or Mr Joseph Pizzolato (Cloud 9’s company accountant) and/or Mr Bisseh about it on at least three occasions. The first occasion was on 22 June 2018 when Mr Naidenov (SN) interviewed Mr Pizzolato (JP) and Mr Goldman (MG–present by telephone). The notes of the part of that interview that concerned the InforMedix payment were as follows:
SN: $3,635,125 paid on 23/12/14 with the description commission to InfoMedix. Was this part of the agreement with Telstra?
JP: No but InfoMedix was instrumental to the sale to Telstra and would not have been possible without their assistance. I have provided a copy of the invoice and TT, which was approved by the directors.
SN: was there any formal agreements with InfoMedix? What is their relation?
JP: no formal agreements. MG advised that this commission was based on the original offer of approx. $40M by Telstra. However dividend was not adjusted upon final sale price of $12.5M.
SN: Related Co or director somehow related to any of the shareholders?
MG: Wael Khalil is the owner, who is not related to Cloud 9 or any director or shareholder of Cloud 9..
(Errors in original; emphasis added)
The second interview occurred on 6 July 2018. It also involved Mr Naidenov and Mr Pizzolato. The notes of the part of that interview concerning the InforMedix payment were as follows:
SN: the $3.6m paid to Dubai.
MG: Instrumental to sale.
SN: How? I need to see specifics
MG: there was no formal agreement.
(Errors in original; emphasis added)
The third interview was conducted on 27 July 2018. Mr Naidenov, Mr Goldman and Mr Bisseh were present during that interview. It should be noted that Mr Bisseh had resigned as a director of the company by the time of this interview. The notes of the part of that interview concerning the InforMedix payment were as follows:
SN: the $3.6 million transaction is a major concern to creditors and needs to be clarified.
– Why was the sale price reduced from $45m to $12.5m.
– Why use and how did Infomedix come into the picture.
– Why was the commission not reduced in line with this reduction.
– What contractual agreement was there in place for his services..
MG: The sale to Telstra kept on reducing as we continued to negotiate and Telstra kept on finding issues with respect to various liabilities outstanding by [Cloud 9]. AB the sale had then changed from an share sale to only an asset sale.
MG in addition the sale price also incorporated an earn out at 2 different stages. As the projected revenue was not achieved no funds were applicable or received as per the sale agreement. The sale agreement consisted as follows:-
1.$10,500,000 Cash upfront
2.1st Retention of $1,000,000
3.2nd Retention of $1,000,000
4.1st Earn Out – based on certain reviews being made.
5.2nd Earn Out – based on certain reviews being made.
6.Less Employee Leave adjustments
MG stated that the overall completed sale was $12,500,000.AB stated that once again Telstra reduced the sale. The upfront payment was approx. $8.8M.
MG The sale incorporated Cloud 9, EHN and a Company called Idea Objects. (Primary Care, Platform Intergration and Hospital Business). Idea Objects was the Indian based operation. MG stated that Infomedix was instrumental to the sale. SN How.. Infomedix was introduced by the Indian branch and they were close with the people there and Infomedix persuaded them to accept the final Telstra offer.SN is Infomedix anyway related to Cloud 9, EHN and or Idea Objects and he replied no.
SN: how was this commission earnt? MG stated that commission was based on original offer of $40M. The Telstra offers kept on reducing to $30M, $12.5M and finally $10.8M. MGthe commission charged in theory should have been reduced but this amount was paid in good faith as we did not know what kind of revenues would be generated and ultimately getting more from the earn out. The payment was a mutual agreement.
Once the sale was completed and no earnouts could be earned why not request for a refund from Infomedix . MG no payment was going to be returned, but we should have pushed this harder.
SN asked as to what was the Indian side agreement that was referred in the examinations and raised by Pilot [Advisory]. MG stated that there was no side agreement as this was going to be a breach of the sale. Even though one was possibly contemplated, this was never finalised or agreed upon.
…
SN – Pilot [Advisory] partners had mentioned a company called Idea Objects and we talked about this previously. Tell me what it did.
AB – This company was based in India and also provided medical software.
SN – What is the relationship or how did you guys meet with this Indian Company..
AB – Both MG and l have come across the owners previously and the Indian Company was interested in expanding to outside of India. So we agreed that it would be worthwhile for both companies to join together and try into the Australian markets.
(Errors in original; emphasis added)
It should also be noted that Mr Goldman was cross-examined about this payment during the District Court trial connected with Pilot Advisory’s claims against Cloud 9 (see at [29] below). The relevant part of Mr Goldman’s cross-examination was recorded in the Court transcript as follows:
Can you explain to the court what was that Indian side agreement?---Originally, it was the Indian – one of the Indian shareholders wanted to be paid in Dubai, and we had agreed originally with them to do that, and we wanted a side agreement that allowed for that payment to go through. We originally contemplated it. It never happened.
And was this an agreement that was made with the intention of withholding the existence of that agreement, that is, not telling Telstra that this agreement existed?---That wasn’t the reason why we did it.
Well, I’m not asking you – is – the agreement – this Indian side agreement, was it an agreement that was made – sorry, I’ll take it back one step. Did you reveal the existence of this agreement to Telstra during the negotiations leading up to the final contract that was signed by Telstra?---We did not.
All right. And is it not the case that this – the existence of this side agreement was contrary to one of the terms of the ultimate contract you had with Telstra which effectively said that you were – pursuant to the contract with Telstra, there were no side deals in existence that you hadn’t revealed to Telstra?---I don’t remember the actual agreement with Telstra, what it said about it. We had agreed not to do any side agreements in principle. So - - -
You had agreed with Telstra not to do any side deals - - - ?---At the end.
- - - in principle?---In the end.
Yes, and this deal that you did, this side deal, was in breach of that agreement, wasn’t it?---We didn’t do it, so yes. It would have been in breach of the agreement.
And are you saying that there, in fact, was no side deal done?---We did not sign and execute on the side agreement. We realised, in the end, we didn’t want to do that.
When you say you didn’t sign, did you make an oral side agreement?---No.
(Emphasis added)
I interpose to make two observations about these interviews and Mr Goldman’s evidence. First, none of the answers given provides any rational explanation as to why the directors of Cloud 9 caused the company to pay such a significant proportion of the Telstra sale price to InforMedix. Secondly, the clear import of the statements highlighted at [16]–[19] above is that there was no agreement under which the company was obliged to make this payment.
In their second report to creditors, the Administrators expressed the following views about the uncommercial nature of this transaction:
We have identified a payment of $3,635,125 that was paid to a company named InfoMedix FZ LLC in Dubai on 23 December 2014. We have sighted a copy of the invoice and telegraphic transfer which indicates that the payment was for commission charged for the sale of the Company’s business and assets.
… As the sale only completed for an adjusted amount of $12.5 million, the commission charged (i.e. 29%) appears unreasonable and excessive.
However, as this payment was made more than two years prior to the relation-back date, it cannot be challenged as an uncommercial transaction under section 588FB of the Act.
On the information presently before us, we cannot say whether InfoMedix FZ LLC is a related entity of [Cloud 9]. If it was, the payment might be able to be challenged as a voidable transaction under section 588FE(4) of the Act, however even if this is the case the payment was made almost four years prior to the relation back day.
The costs of bringing of investigations and the prosecution of this claim (assuming it is viable) would cost in the range of $500,000 to $700,000.
We are also unable to express a view at this time as to whether the transaction might be able to be challenged as a voidable transaction under section 588FE(5) of the Act on the basis that [Cloud 9] became a party to the transaction for the purpose, or for purposes including the purpose, of defeating, delaying, or interfering with, the rights of any or all of its creditors on a winding up of the company.
However, even if the payment falls within either section 588FE(4) or 588FE(5) of the Act, there would be real practical difficulties in enforcing any judgment against a company based in the United Arab Emirates.
If a Liquidator were appointed to [Cloud 9], these payments would be further investigated and a Liquidator would consider all circumstances before initiating any recovery actions.
(Errors in original)
The Administrators returned to this issue in their supplementary report to creditors dated 3 September 2018 by which time they had obtained legal advice on the prospects of recovery action in respect of this payment. That part of their supplementary report to creditors proceeded as follows:
As detailed in our Second Report, a payment of $3,635,125 was identified, which was paid to a company named InfoMedix in Dubai on 23 December 2014. A review of [Cloud 9’s] record indicates that that the payment was for commission charged for the sale of [Cloud 9’s] business and assets which represented 43.6% of the consideration received by [Cloud 9] for the sale. I have not sighted an agreement in respect to same even though a draft agreement was circulated at the beginning of negotiations.
Given the quantum of the payment, I have obtained legal advice on the prospects of a claim against InfoMedix or its officer, Mr Wael Khalil, which noted the following:
•Given that the transaction occurred almost 4 years prior to the “relation-back day” of 1 June 2018, the time to commence any claim has lapsed.
•Even if the claim could still be made, it will still be necessary to prove that the transaction occurred at a time when [Cloud 9] was insolvent or that the Transaction itself caused [Cloud 9] to become insolvent. Given the likelihood that [Cloud 9] was solvent at the time of the transaction, the prospects of satisfying this element appear to be difficult.
•Even if it can be established that [Cloud 9] was insolvent at the time of the transaction or became insolvent by reason of the transaction, a liquidator will need to prove that a reasonable person in [Cloud 9’s] circumstances would not have entered into the transaction taking into account the benefits for and detriment to [Cloud 9], the respective benefits to the other parties to the transaction and any other relevant matters.
•The costs of bringing of investigations and the prosecution of this claim (assuming it is viable) would cost in the range of $500,000 to $700,000 in legal costs alone.
•Even if it can be shown that the Transaction was an “uncommercial transaction” within the meaning of s 588FB of the Corporations Act, a liquidator may face difficulties in seeking to enforce any judgment obtained under s 588FF, noting that the target of such an action is based in Dubai.
We have also requested our solicitors to undertake the relevant searches and investigations to confirm whether InfoMedix was a related party of [Cloud 9] or its officers. A review of the searches received indicates InfoMedix is an unrelated entity. Further, we have requested our solicitors to undertake more detailed searches on InfoMedix and Wael Khalil. However, if no other more detailed personal information be provided, it is unlikely that the additional searches will reveal anything of substance.
Notwithstanding the above, it is important to highlight the Directors may have breached statutory or fiduciary duties in approving such a payment to InfoMedix without a proper agreement in place. [Cloud 9’s] major creditor highlighted that during the proceedings, the Director acknowledged a draft agreement which was never formalised or executed, as this was going to be in breach of the sale agreement.
Further to the last paragraph above, in the first of his affidavits filed in this proceeding, Mr Naidenov expressed the following views about Cloud 9’s directors’ liabilities with respect to this InforMedix payment:
I formed the view that [Mr Goldman] and Mr Bisseh of [Cloud 9] may have breached their duties as directors in making the payment to InforMedix given its proportionate size to the sale price. However, if this is the case any recovery against [Mr Goldman] and Mr Bisseh of [Cloud 9] is limited to the assets they have to satisfy any potential judgment – this is dealt with at paragraphs 78 to 87 below.
Since the last sentence is crucial to Mr Naidenov’s views on this issue, I will return to that matter later in these reasons.
The payments to eHealth
Subsequent to 30 June 2015, Cloud 9 reduced its debt to eHealth by $882,048, that is from $2,703,553 to $1,821,505. This debt reduction was the subject of some questioning by Mr Naidenov earlier in the first interview on 22 June 2018 referred to above (see at [16]). Furthermore, Cloud 9’s relationship with eHealth was also raised during the third interview on 27 July 2018 referred to above (see at [18]). The notes of those parts of those interviews concerning that topic are as follows:
[22 June 2018 interview]
SN: another $174,554 was paid on 18/12/14 with the description super for CH9/ [eHealth], why was [Cloud 9] paying [eHealth] super.
JP: [eHealth] is a related entity. Cloud 9 which owed money to [eHealth]. Sometimes repayments were made to meet [eHealth’s] liabilities. [eHealth] was also responsible for the payroll obligations.
…
[27 July 2018 interview]
SN Lets talk about the structure and roles of related companies so we don’t have any misunderstanding.
SN – What did Cloud 9 do ?
AB – Develop medical software to doctors and speacilist…
SN – What was [eHealth] and how is this related to [Cloud 9]…
AB – [eHealth] was a subsidiary of Cloud 9, which provided support and implementation of services to its clients for the Cloud 9 software.eg training, installation ongoing queries.
(Errors in original)
On 18 May 2016, eHealth was deregistered on the application of Mr Goldman.
In their second report to creditors, the Administrators expressed the following views on the uncommercial nature of this payment:
Our preliminary review of [Cloud 9’s] accounts for the financial years ended 30 June 2015 to 30 June 2017 discloses that a loan by [Cloud 9] to eHealth was reduced by $882,048. It appears that the payments made in reduction of this loan within the two years prior to the relation back day may be uncommercial. However, there are difficulties with commencing such an action against eHealth, which are detailed below:
•eHealth was deregistered on 18 May 2016 and would need to be reinstated for [Cloud 9] to commence an action;
•A review of eHealth’s financial statements as at 30 June 2015 indicates that apart from related party loans, which have been offset, there are no visible assets; and
•Even if eHealth is reinstated, the ability of eHealth to satisfy any claim is unknown. In this regard, eHealth sold its business and assets under the business purchase agreement.
In the event of a liquidation of [Cloud 9], we will consider our options and further investigations may be warranted.
The Administrators reiterated these views in their supplementary report to creditors dated 3 September 2018.
The loan to Mr Abar
On 17 September 2015, Cloud 9 made a payment of $317,412 to Mr Abar. This payment was recorded in the company’s books as a loan. In their supplementary report to creditors, the Administrators set out the following details of their investigations concerning this payment:
As detailed in our Second Report, [Cloud 9’s] draft accounts as at 31 December 2017 recorded a loan to a shareholder in the amount of $317,412.
Given the shareholder failed to respond to our initial correspondence on 27 June 2018, I issued subsequent correspondence demanding repayment of the loan or an explanation of same. A response has not been received from the shareholder. Notwithstanding this, further investigations have revealed that Farhad Abar was the recipient of these funds and was paid the amount of $317,412 on 17 September 2015. Investigations indicate that this was an advance payment as a dividend distribution; in order for a dividend catch up to be in line with the other shareholders that received approximately $1.26 million each,
A review of [Cloud 9’s] board minutes indicates Farhad Abar was entitled to receive a dividend in the amount of $500,000. The bank statements indicate that the dividend was received in three (3) instalments on 17 December 2014, 19 February 2015 and 6 March 2015. The external accountant and Directors have advised that the loan payment was paid in advance of a dividend in addition to the three (3) instalments. In this regard, it appears that Farhad Abar has received the amount of $317,412 as he was entitle to this dividend.
(Errors in original)
In respect of this loan, the statement of agreed facts record that the Administrators concluded that:
(a)they had not been able to ascertain whether Mr Abar had the capacity to repay the loan.
(b)they lacked funds to engage lawyers in the United States of America to pursue Mr Abar for the loan.
(c)any proceedings against Mr Abar would be protracted and costly, given Mr Abar was domiciled in the United States of America, and uncommercial to pursue relative to the loan amount.
Pilot Advisory’s involvement
In December 2013, Cloud 9 appointed Pilot Advisory to assist it in the sale of its business assets. On 21 January 2015, following the sale to the Telstra subsidiary mentioned above, Pilot Advisory invoiced Cloud 9 for its services in the amount of $811,214.84. A dispute ensued, the details of which are set out below (see at [31]). By June 2015, when Pilot Advisory’s invoice remained unpaid, it filed a claim in the District Court at Brisbane seeking to recover the invoiced amount. On 18 July 2015, Cloud 9 paid Pilot Advisory $137,500 towards that amount and, in March 2017, it paid Pilot Advisory a further amount of $6,413.
On 14 May 2018, after a four day trial, Cloud 9 consented to judgment in Pilot Advisory’s favour in the amount of $804,133.43 (including interest) plus costs on an indemnity basis. As is already mentioned above, on 16 May 2018, Pilot Advisory served a statutory demand on Cloud 9 under s 459E of the Act for the amount of this judgment debt.
In their second report to creditors the Administrators reviewed the dispute that arose between Pilot Advisory and Cloud 9 and made a number of critical observations about the attitude Cloud 9’s directors adopted to it as follows:
In December 2013, Pilot [Advisory] was engaged by [Cloud 9] to assist in the sale of its business assets to the Purchaser which was to be completed by February 2014. However, [Cloud 9] failed due diligence and Purchaser did not proceed with its intended purchase of the assets at this time due to significant unpaid liabilities including PAYG, superannuation and rent.
Offers and counter-offers subsequently were exchanged until an agreement was reached in December 2014. From the time of the initial engagement of Pilot [Advisory] in December 2013 to the sale of [Cloud 9’s] business and assets a year later, Pilot [Advisory] undertook five separate engagements for work on behalf of [Cloud 9] including due diligence and taxation issues.
Pilot [Advisory] claimed fees for work completed in the period from December 2013 to December 2014 which significantly exceeded the initial quote of $125,000 which was agreed on its engagement. This initial amount was paid by [Cloud 9]. The total additional amount invoiced totalled $667,385. However, the Directors have advised me that the terms of the subsequent engagements were not agreed on.
[Cloud 9] was aware of the claim lodged by Pilot [Advisory] from at least April 2015. Several attempts to mediate and resolve the outstanding claim failed, which subsequently led to the proceedings commenced by Pilot [Advisory] against [Cloud 9] in the Queensland District Court.
On 14 May 2018, [Cloud 9] made a settlement proposal to Pilot [Advisory] of $150,000 upfront with the balance of $700,000 to be paid by 14 November 2018. This offer was rejected by Pilot [Advisory]. On the same date, [Cloud 9] consented to Pilot [Advisory] obtaining a judgement against it of $804,133.43, inclusive of $136,828.59 for interest up to judgment, plus costs on the indemnity basis.
…
As advised above, the Directors stated that [Cloud 9] was placed into Administration as a result of its dispute with Pilot [Advisory].
[Cloud 9] failed to address and update the terms of the engagement of Pilot [Advisory] in 2014 and consequently failed to deal with and settle the debt with Pilot [Advisory] in a timely manner. Given the significant amount of work conducted by Pilot [Advisory], we are of the view that [Cloud 9] could have taken direct steps to settle the amount outstanding and come to a commercial resolution prior to the litigation.
…
[Cloud 9] distributed dividends to its shareholders of $2.2 million and $209,834 in the financial years ended 30 June 2015 and 30 June 2016 respectively. As a result of this high cash use, [Cloud 9] was unable to satisfy its creditors as and when they fell due. This raises an issue as to whether the Directors breached their duties to [Cloud 9] at this time by making the payments rather than retaining the funds to meet the claims of creditors and in particular the claim from Pilot [Advisory].
(Errors in original)
The financial position of the Company
According to the analysis of the company’s balance sheets contained in the Administrators’ second report to creditors dated 2 July 2018, the company had an excess of liabilities over assets as shown in its annual financial accounts from June 2014 to December 2017 (draft financial account for December 2017), in the following amounts, as at the following dates:
30 June 2014
($)30 June 2015
($)30 June 2016
($)30 June 2017
($)31 December 2017
($)(2,156,925) (2,162,314) (1,952,068) (1,525,738) (1,637,289) (Extracted from the Balance Sheet Analysis table)
In that report, the Administrators went on to express the following views in respect of this analysis:
•The net asset position consistently increases from the financial year ended 30 June 2015 to 31 December 2017 in the amount of $525,025 (i.e. increase of 24%), which is mainly due to [Cloud 9’s] receipt of proceeds from the sale of its business and assets and reduced payment of trading expenses. A condition of the sale agreement was the payment of employment related expenses and entitlements by the Purchaser and therefore for the financial year ended 20 June 2016, [Cloud 9] did not record wages.
•[Cloud 9’s] current ratio (current assets/current liabilities) for the financial year ended 30 June 2014 to 31 December 2017 was 0.01, 0.25, 0.14, 0.30 and 0.17 respectively. Often if a current ratio below 1 is recorded, it indicates that there are insufficient current assets to meet current liabilities and that [Cloud 9] is insolvent. I note that the ratios may be misleading due to the timing of the proceeds received from the sale.
•The working capital of a company is calculated by deducting current liabilities from current assets. [Cloud 9] has a working capital deficiency for the financial years ended 30 June 2014 to 30 June 2017 and for the year ended 31 December 2017 in the amount of ($2,156,925), ($2,162,314), ($1,952,068), ($1,525,738) and ($1,637,289) respectively.
•The working capital analysis for the above indicates that, during the above periods, there may have been insufficient assets available to discharge [Cloud 9’s] debts as and when they fell due.
As to the effect that the distribution of dividends to the company’s shareholders had on the company’s capacity to satisfy its creditors, the Administrators expressed the following views:
[Cloud 9] distributed dividends to its shareholders of $2.2 million and $209,834 in the financial years ended 30 June 2015 and 30 June 2016 respectively. As a result of this high cash use, [Cloud 9] was unable to satisfy its creditors as and when they fell due. This raises an issue as to whether the Directors breached their duties to [Cloud 9] at this time by making the payments rather than retaining the funds to meet the claims of creditors and in particular the claim from Pilot [Advisory].
The Administrators returned to this issue in their supplementary report to creditors dated 3 September 2018. In that report they expressed the following views:
As detailed in our Second Report, we were of the opinion that [Cloud 9] based on the financial history of [Cloud 9], it is likely that a Liquidator could successfully argue that the Directors may have traded [Cloud 9] whilst insolvent and could potentially be liable for an insolvent trading claim, however, there were a number of factors to consider, which are highlighted below for creditors ease of reference:
•When [Cloud 9’s] business and assets were sold, [Cloud 9] had sufficient funds to pay its creditors, given that the cash receipts from the sale totalled approximately $10.8 million;
•[Cloud 9] ceased trading following the sale in December 2014 of its business and assets;
•Attempts were made by the Directors of [Cloud 9] to negotiate a settlement with Pilot [Advisory] to address the amount due to Pilot [Advisory]; and
•[Cloud 9] did not pay the debt owed to Pilot [Advisory] due to the ongoing dispute in respect of works completed until a judgement was obtained in May 2018.
•The amount of an insolvent trading claim may not be particularly large as the debt owing to Pilot [Advisory], which is the largest creditor, all appears to have been incurred prior to [Cloud 9] selling its business and assets. [Cloud 9] therefore likely was solvent when it incurred these debts.
•Furthermore, in quantifying an insolvent trading claim against the Directors, a Liquidator is required to take into account recoveries from any other legal actions prosecuted by him. Thus, if the Liquidator is successful in recovering monies for the benefit of creditors from voidable transactions, then the claim against the Directors for any insolvent trading claim would be reduced by the amount recovered.
Creditors should note that any recovery of a trading whilst insolvent claim will attract substantial accounting and legal fees. This would require substantial third-party funding and any Liquidator would be unlikely to commence any action based on the defences without an indemnity for costs.
Finally, in the same report, the Administrators expressed the view that there had not been any unfair preference payments made to any unsecured creditors of the company such as to constitute voidable transactions under s 588FA of the Act. Their views about whether the payments to InforMedix and eHealth constituted uncommercial transactions under s 588FB of the Act are already set out above (see at [21]–[22] and [26] above respectively).
The voluntary administration
As is mentioned at the outset of these reasons, the Administrators were appointed to Cloud 9 on 1 June 2018 by resolution of its sole director (Mr Goldman) acting under s 436A of the Act. At that time, Mr Goldman provided an indemnity of $110,000 to the company to cover the costs connected with the voluntary administration.
The following is a chronology of the more significant steps that have been taken in the administration process:
(a)5 June 2018 – the Administrators provided their first report to creditors;
(b)14 June 2018 – the first meeting of creditors was held under s 436E of the Act;
(c)2 July 2018 – the Administrators provided their second report to creditors;
(d)9 July 2018 – the second meeting of creditors was held under s 439A of the Act. That meeting was adjourned for 45 days;
(e)3 September 2018 – the Administrators provided a supplementary report to creditors;
(f)10 September 2018 – the adjourned second meeting of creditors was held. At that meeting, the resolution was passed to execute the DOCA.
Two other matters of significance should be noted. First, early in the administration process, Pilot Advisory raised an issue with respect to the company’s tax liability. Initially it did that in a letter to the Administrators on 25 June 2018 where it expressed the opinion that, if its debt were recorded in the financial statements and taxation returns for Cloud 9 for the year ended 30 June 2015, there would be a taxation refund due to the company. In a further letter to the Administrators on 27 June 2018, Pilot Advisory repeated its view that, if an amended taxation return were to be lodged, there would be a taxation refund due to Cloud 9 of approximately $295,000. It claimed this amount could then be offset against the current debt owing to the Deputy Commissioner of Taxation.
With respect to this taxation issue, in his second affidavit filed in this proceeding, Mr Naidenov deposed to having received advice from Mr John Kritikos of Kamper Chartered Accountants to the following effect:
(a)if we amended the tax return and BAS of [Cloud 9] for the financial year ending 30 June 2015, we would need to amend all subsequent tax returns and BAS.
(b)amending [Cloud 9’s] tax returns and BAS would involve changing accounting methods from cash to accruals. Historically, [Cloud 9] utilised the cash method of accounting when it lodged its Business Activity Statements. If [Cloud 9] were to amend its tax return for the year 2015, it would need to change its accounting method from cash to accruals.
(c)it was appropriate for [Cloud 9] to account on a cash basis because:
i.of the simplicity of the transactions to which [Cloud 9] was a party;
ii.[Cloud 9] was not trading at the time; and
iii.[Cloud 9] generated no income apart of the from receipt of the sale proceeds.
(d)amending all of [Cloud 9’s] tax returns and BAS since 30 June 2015 would likely trigger an audit of [Cloud 9] by the ATO.
(e)an audit of [Cloud 9] would result in [Cloud 9] incurring significant costs, including accounting fees of approximately $15,000 per year and remuneration payable to the deed administrators.
(f)there was a risk that the ATO would dispute the amended tax returns and BAS because amending all of [Cloud 9’s] tax returns and BAS since 30 June 2015 is an unusual thing to do and may appear suspicious.
(g)the administrators would need to authorise and sign off on all of the amended tax returns and BAS and would be personally liable for costs associated with the amended tax returns and BAS, and subsequent costs of an audit.
(h)the amendment of [Cloud 9’s] tax return and BAS for 30 June 2015 would likely result in a GST refund of approximately $240,000, which would reduce the Deputy Commissioner of Taxation’s claim to nil and provide a net refund of approximately $80,000 to [Cloud 9]. Given that the amendment of [Cloud 9’s] tax returns and BAS would likely incur significant costs of approximately $50,000 to $80,000, the deed fund may increase by approximately 2 cents in the dollar, which in effect reduces the Deputy Commissioner of Taxation’s claim to nil.
(Errors in original)
Accordingly, Mr Naidenov went on to express these views:
(a)it was not in the interests of the creditors for [Cloud 9] to incur the costs of an audit if the administrators amended the tax returns and BAS.
(b)in the absence of an indemnity, the administrators were not prepared to incur personal liability for the costs associated with the amended tax return by authorising and signing off on those returns.
(c)the benefit to creditors in undertaking the amendment to the tax returns and BAS, which was approximately an increase of 2 cents in the dollar, could still be obtained by including a term in the DOCA requiring the director of [Cloud 9] to lodge the amended tax return and include any refund as part of the Deed Fund.
The second matter of significance was contained in Pilot Advisory’s further letter to the Administrators on 27 June 2018 mentioned above. In that letter, it expressed its willingness to fund litigation against the directors of the company, as follows:
In the event the Liquidator considered recovery action was unlikely to be successful we … would propose to either fund the liquidator to take action against the directors personally under sections 180-183 of the Act, or with the Court’s approval, take an assignment (on appropriate terms) of such rights of action against the directors personally.
The directors’ assets
It can be seen from Mr Naidenov’s views set out above (at [23]) that he formed the view that the utility of any recovery proceedings against the directors of Cloud 9 was affected by the assets they may have available to meet a judgment if those proceedings were successful. On that topic, in his first affidavit filed in this proceeding, Mr Naidenov deposed to holding the following view:
I formed the view that based on the available equity and potential sale of shares (taking into consideration the selling costs associated) that the maximum amount recoverable from [Mr Goldman] and Mr Bisseh would be approximately $470,000 to $480,000.
The process by which Mr Naidenov came to this view was as follows. On 26 June 2018, Mr Bisseh declared in a statutory declaration that he had real property worth $2,767,000, motor vehicles worth $50,000, held cash totalling $8,000, held shares to the value of $110,000, owned jewellery, artworks and antiques to the value of $15,000 and owned household effects valued at $40,000. He claimed that his only liability was a real property encumbrance of $2,240,000.
As for Mr Goldman, in a statutory declaration he made on 24 July 2018, he declared that he had $1,800,000 in real property, motor vehicles worth $42,000, held cash totalling $50,100, owned jewellery, artworks and antiques to the value of $1,000 and owned household effects valued at $5,000. He also claimed that he had a real property encumbrance of $1,386,500, secured creditors of $32,000 and credit card liabilities of $14,000.
Based on the calculations undertaken by a member of his staff, Mr Naidenov said in his affidavit that he estimated Mr Bisseh and Mr Goldman had the following net equities in real property:
(a)Mr Bisseh – $263,000; and
(b)Mr Goldman – $206,750.
Mr Naidenov went on to say that, shortly prior to the adjourned second meeting of creditors, he arranged to obtain an updated asset and liability statement from Mr Bisseh. Based upon discounting the realisable value of household effects and motor vehicles, he then summarised his views as to the net asset positions of Mr Bisseh and Mr Goldman as set out above (at [43]).
The second creditors’ meeting
As is mentioned a number of times above, the adjourned second creditors’ meeting was held on 10 September 2018. The creditors and the value of their debts admitted by the Administrators for voting purposes at that meeting were as follows:
Creditor Value Deputy Commissioner of Taxation $162,243.88 Alf Tornatore $18,339.38 Kazi Portolesi Lawyers $17,363.63 Lighthouse Australia Pty Ltd $14,080.00 Vincent M Aboud & Associates $11,152.18 Abraham Bisseh $5,076.04 Mark [sic – Marc] Goldman $1,570.00 Pilot Advisory $1,100,000.00 [TOTAL $1,329,825.11]
Of the above, Kazi Portolesi Lawyers were Cloud 9’s lawyers, Vincent M Aboud & Associates were its external accountants and Messrs Tornatore, Bisseh and Goldman were shareholders of the company.
At that meeting, in his capacity as its chairperson, Mr Naidenov held proxies for the Australian Taxation Office (ATO), Mr Tornatore, Lighthouse Australia Pty Ltd, Mr Bisseh and Mr Goldman. With the exception of Pilot Advisory, all of the other creditors (including those voting by proxy) voted in favour of the resolution to execute the DOCA. The total value of the debts owed to those creditors was $229,825.11.
In the end result, with a majority of the creditors by number voting in favour of the resolution and a majority of the creditors by value voting against it, the vote was tied. As is already mentioned above, Mr Naidenov then exercised his casting vote (under r 75-115(3) of the Insolvency Practice Rules (Corporations) 2016 (Cth)) in favour of the resolution. In his first affidavit filed in this proceeding, Mr Naidenov explained why he took that course. He said:
(a)The return under the DOCA was far greater than liquidation given the difficulties which I have expressed above in paragraphs 88 to 91, in relation to recovering any funds through claims against [Mr Goldman] and Mr Bisseh or voidable transaction claims.
(b)If [Cloud 9] was placed in liquidation, there was a significant risk of long protracted litigation which would deplete the personal financial resources of [Mr Goldman] and Mr Bisseh and any potential recovery.
(c)I had no assessment of the merits of the causes of actions that may be pursued in a liquidation.
(d)The majority of creditors, including the Deputy Commissioner of Taxation, voted in favour of the DOCA.
(e)The return under the DOCA would provide a more accelerated return to creditors (within three months) as opposed to liquidation which may be protracted and uncertain.
(f)Some of the claims by [Cloud 9] would have to be made in foreign jurisdictions which would add an extra layer of costs and delay.
The “difficulties” expressed at [88]–[91] of that affidavit (see at [51(a)] above) essentially revolved around Mr Goldman’s and Mr Bisseh’s net asset positions as follows:
88.In the Supplementary Report, I formed the view and made the recommendation that the creditors of [Cloud 9] resolve that [Cloud 9] enter into a DOCA as proposed by [Mr Goldman]. My reasoning for that recommendation was as follows:
(a)The DOCA provided certainty of a dividend of 20 cents in the dollar to participating unsecured creditors compared with a possible 10 cents in the dollar in an optimistic liquidation scenario.
(b)The DOCA allowed for a quicker return to creditors as the contribution to the DOCA fund was payable within three months of executions. This was in contrast to a liquidation scenario which was likely to involve protracted litigation against [Mr Goldman] and/or Mr Bisseh and other persons with an estimated return to creditors not for a period of at least 12 to 24 months.
(c)The personal assets of [Mr Goldman] and Mr Bisseh was likely to be insufficient to meet the quantum of any claim against them and would likely be eroded away as a consequence of [Mr Goldman] and Mr Bisseh defending any claims.
(d)The insolvent trading claim against [Mr Goldman] and Mr Bisseh was defensible.
(e)Any potential claims against InfoMedix and Mr Abar were likely to be difficulty to pursue and ensure a recovery given jurisdictional issues. Likewise, any claim against eHealth was not possible given the deregistration of that entity.
89.In making my recommendation in favour of the DOCA, I also had regard to the fact that [Cloud 9] lacked the funds to prosecute the various potential claims identified in the Report and the Supplementary Report.
90.In making my recommendation in favour of the DOCA, I also had regard to the position of [Pilot Advisory] who was willing to either fund or take an assignment of the following potential claims:
(a)against [Mr Goldman] and Mr Bisseh of [Cloud 9] in respect of payments made to InfoMedix;
(b)against [Mr Goldman] and Mr Bisseh for payment of dividends; and
(c)against Mr Abar in respect of the loan owed to [Cloud 9].
91.I did not consider an assignment to [Pilot Advisory] of the above claims would be in the interest of creditors because:
(a)The claims (other than perhaps the action for recovery of loan from Mr Abar) are not, in my experience, simple claims and would take a significant amount of time to prosecute and thus any benefit to creditors would not be as immediate as the return under the DOCA;
(b)[Mr Goldman] and Mr Bisseh lacked sufficient assets to satisfy judgment and some of those assets would be expended in defence of the action; and
(c)The longer the external administration of [Cloud 9] continues, the more fees would be incurred in respect of liquidator remuneration and internal disbursements.
(Errors in original)
The execution and performance of the DOCA
The DOCA was executed on 26 September 2018. For present purposes, it contained the following salient features:
(a)the Administrators were appointed as Administrators of the Deed under cl 3(a);
(b)the obligations of the directors of the company under the Deed, including their obligations to pay $420,000 to the Administrators, were set out in cll 6(b) – (g) inclusive as follows:
(b)The Directors’ must pay the Directors Payments.
(c)The Directors’ Payments are:
i.$100,000 immediately upon execution of the Deed (which it is acknowledged is currently being held by the Administrators; and
ii.$320,000 within three (3) months of execution of the Deed;
(d)[Cloud 9], by separate deed poll, conditionally releases the Deferred Creditor of any Claims it may have against them.
(e)Such release in clause 6(d) above will not apply if the Deed is terminated pursuant to clause 18(a).
(f) The Administrators are hereby authorised to treat the $100,000 payment contemplated by clause 6(c)(i) above.
(g)[Cloud 9] guarantees the payment of the Directors Payments and the performance of the Directors in respect thereto and hereby grants to the Administrators a PPSA Security Interest over all PPSA Personal Property to secure the payment of the secured money and the performance of the Directors obligations to make the Directors Payments.
(Errors in original)
The expression “Deferred Creditor” (see at 6(d) above) was defined elsewhere in the Deed to mean “either or both of the current and former Directors”.
(c)Clause 18(a), which is referred to in cl 6(e) above provided that:
This Deed terminates:
(i) upon resolution according to section 445E of the Act: or
(ii)upon the making of an order by the Court under section 445D of the Act in respect of this Deed.
(Emphasis in original)
(d)under cll 6(a) and 8, extracted below, the assets and control of the company reverted to the directors once the Deed was executed:
6 Directors’ obligations
(a)Upon this Deed commencing to operate, the assets of the Company revert to the Directors. The Directors must collect all money representing any realisation of assets owed by the Company and all money outstanding to the Company prior to the Relevant Date by debtors, which include all retentions held by third parties with respect to works performed by the Company. Such money will revert to the Company for working capital purposes.
…
8 Control and business of the Company
(a)Upon the execution of this Deed, control of the Company will return to the Directors.
(b)The Directors must ensure that all documents in relation to the business of the Company or the Company itself bear the notation “Subject to deed of company arrangement”.
(c)The Directors will take all reasonable steps to procure the compliance by [Cloud 9] with its reporting obligations to the Australian Taxation Office as at the Relevant Date;
(d)The Directors will take all reasonable steps to procure the lodgment by [Cloud 9] of the Amended tax lodgments;
(e)The Directors will attend on the Administrators and give the Administrators such information as the Administrators reasonably require, from time to time in respect of the Deed.
(Emphasis in original)
(e)cl 10 of the Deed prevented the company’s creditors proceeding with an application to wind up the company as follows:
10 Moratorium
(a)This Deed commences on the date it is signed by all parties and continues until all the obligations of the parties under this Deed are fulfilled.
(b)During the period of this Deed, each Creditor, must not:
(i)make or proceed with any application for an order to wind up the Company; and
(ii)without the leave of the Court, and then, only in accordance with terms as the Court imposes:
(A)begin or proceed with a proceeding against the Company or in relation to any of the Company’s property or property used or occupied by, or in the possession of, the Company, either in a court or in an arbitration; and
(B)begin or proceed with any enforcement process in relation to any of the Company’s property, or property used or occupied by, or in the possession of, the Company
(iii)exercise any right of set off to which the Creditor would not have been entitled had the Company been wound up with the Relevant Date being the day on which the winding up was taken to have begun.
(c)During the period of this Deed, the Company, including its members and its officers, must not make or proceed with any application for an order to wind up the Company and the Company must take steps to ensure this.
(d)If any of the Directors’ Payments is not made within the time provided for in cl 6(c) then the Administrators may serve the Directors a notice specifying the default and requiring the Directors to rectify the default within twenty (21) days of the date of service of the notice.;
(e)If the Directors fail to comply with a notice issued under the above clause, the Administrators may, in their absolute discretion, convene a meeting of Creditors of the Company in order that the Creditors may consider whether to vary or terminate this Deed.
(f)Nothing in this clause limits the operation of section 444D(2) or section 444D(3) of the Act.
(g)This clause has effect in addition to, and not in derogation of section 444E of the Act.
(Emphasis in original; errors in original)
(f)cl 7 of the Deed described the rights and obligations of deferred creditors, including the current and former directors of the company, as follows:
(a)While this Deed remains in operation, each Deferred Creditor will defer his, her or its claim against the company and will not participate, or seek to participate, in any distribution by the administrators.
(b)Nothing in this clause affects or alters the entitlement of a Deferred Creditor to recover from the company any amount properly owing to him, her or by the company after the termination of this Deed.
(c)Any Deferred Creditor may have assigned to him or her or it any Claim save that they will remain a Deferred Creditor.
(Emphasis in original)
(g)the Deed did not determine what payments were to be made to creditors, but it required the Administrators to apply the funds in the stated order of priority set out in cl 17, as follows:
(a)The Administrators are to apply the Fund in the following order of priority:
(i)first, payment of the Administrators’ expenses, costs and remuneration for acting as Administrators of the Company;
(ii)second, payment of the Administrators’ expenses, costs and remuneration for acting as Administrators under this Deed;
(iii)third, payment of Priority Creditors’ Claims (other than those Priority Creditors who have waived their rights to receive priority payment); and
(iv)last, in payment of the Claims of remaining Creditors on a pari passu basis according to the amount for which each respectively shall be admitted to proof;
(b)For the purposes of application by the administrators of the fund, any eligible employee creditors are entitled to a priority equal to what they would have been entitled to if the fund were applied in accordance with sections 556, 560 and 561 of the Act;
(c)The Administrators may make interim distributions out of the Fund at their discretion;
(d)The Administrators will make a final distribution out of the Fund within two (2) months of receipt of the final payment or at such further time as deemed appropriate by the Administrators
(Emphasis original; errors in original)
(h)under cll 19 and 20 of the Deed, extracted below, the company’s creditors were prevented from pursuing winding up proceedings against the company and they were required to accept their entitlements under the Deed in full satisfaction and complete discharge of their debts:
19 Discharge of debts
The Creditors must accept their entitlements under this Deed in full satisfaction and complete discharge of all debts or any Claim which they have or claim to have against the Company as at the Relevant Date and each of them will, if called upon to do so, execute and deliver to the Company forms of release of any Claim as the Administrators require.
20 Release of Creditors’ Claims
(a)If the Administrators have paid to Creditors their full entitlements under this Deed and this Deed terminates in accordance with clause 18(a) all Claims are released in full and extinguished.
(b)Upon termination of this Deed for whatever reason, other than according to clause 18(a), the Company is forever released and discharged by each Creditor who has received payment in partial satisfaction of a claim to the extent of that payment and each Creditor will, If called upon do so, execute and deliver to the Company form of release of any claim as the Administrators require.
(c)This Deed may be pleaded in set off or in answer to any action suit claim demand or other proceeding as fully and effectively as if the Creditor has executed a binding covenant under seal not to sue for payment of the amounts referred to in clause 20(a) or 20(b), nor to appeal from, challenge or review the decision of the Administrators.
(Emphasis in original)
Accordingly, the only order necessary at this stage is that, by the close of business on 17 January 2020, the parties are to consult, prepare and submit to my chambers a set of draft orders to reflect the contents of these reasons.
I certify that the preceding one hundred and sixteen (116) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Reeves. Associate:
Dated: 20 December 2019
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