Re Pilot Advisory Pty Ltd

Case [2019] FCA 2171

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]…

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AGLC
Re Pilot Advisory Pty Ltd [2019] FCA 2171
Case
[2019] FCA 2171
Decision Date

CaseChat Overview and Summary

In the case of Re Pilot Advisory Pty Ltd, the court was presented with an application to set aside a Deed of Company Arrangement (DOCA) under section 445D of the Corporations Act 2001 (Cth). The primary dispute involved the fairness of the DOCA to the plaintiff, Pilot Advisory Pty Ltd, and whether it was in the interests of creditors. The Administrators and Cloud 9 argued that the DOCA should proceed as it was beneficial to the creditors, while Pilot Advisory contended that the arrangement was unfairly prejudicial to it and should be set aside. The court was tasked with determining whether the DOCA met the criteria for unfairness under section 445D(1)(f) of the Act, as well as whether it could be set aside for other reasons under section 445D(1)(g) of the Act.

The court's reasoning focused on the nature and fairness of the DOCA to Pilot Advisory. It examined the distribution of sale proceeds from the sale of Cloud 9's assets and the implications of those distributions on Pilot Advisory's position as a creditor. The court found that the payments made to the shareholders and other persons, including Pilot Advisory, were not equitable and resulted in an unfair prejudice to Pilot Advisory. Furthermore, the court considered the potential for an increased tax refund, which could have significantly altered the financial position of the company and the claims of its creditors, including Pilot Advisory. Ultimately, the court determined that the DOCA was unfairly prejudicial to Pilot Advisory and should be set aside.

The final orders of the court included a mandate for the parties to prepare and submit a set of draft orders to be entered by the close of business on 17 January 2020. These orders were to reflect the findings and reasons provided in the court's decision. The court's ruling underscored the importance of equitable treatment of all creditors in corporate restructuring and highlighted the circumstances under which a DOCA may be deemed unfairly prejudicial and subject to termination.

Orders

Orders of the court

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.

Background

Background to the litigation

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.

Evidence

Evidence Before The Court

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Decision

Reasons for decision

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Ratio Decidendi

Legal Principle Established

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; andiii.[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)