Re Polat Enterprises Pty Ltd (in liq)
[2020] VSC 485
•31 July 2020 (given ex tempore, revised)
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2019 02456
IN THE MATTER OF POLAT ENTERPRISES PTY LTD (IN LIQUIDATION) (ACN 602 382 025)
| PETER ROBERT VINCE (in his capacity as liquidator of POLAT ENTERPRISES PTY LTD (in liquidation) (ACN 602 382 025)) & ORS (according to the attached Schedule) | Plaintiffs |
| v | |
| ASIYA KHASIM | Defendant |
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JUDGE: | Hetyey AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 31 July 2020 |
DATE OF JUDGMENT: | 31 July 2020 (given ex tempore, revised) |
CASE MAY BE CITED AS: | In the matter of Polat Enterprises Pty Ltd (in liq) |
MEDIUM NEUTRAL CITATION: | [2020] VSC 485 |
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CORPORATIONS – Corporations Act 2001 (Cth) – Part 5.7B – Unfair preference claim by liquidators under ss 588FA and 588FF – s 491 – Whether resolutions for voluntary winding up valid – Whether liquidators properly appointed – s 90-15 (Schedule 2, Insolvency Practice Schedule (Corporations)) – Declaration that resolutions for voluntary winding up invalid – s 459A – Whether company should now be wound up in insolvency – s 459P(2)(a) – Leave to former liquidators to apply for winding up – s 532(2)(b) – Leave to former liquidators as creditors to be appointed as liquidators – s 477(2B) – Application for approval of compromise involving payment over more than three months – s 90-15 (Schedule 2, Insolvency Practice Schedule (Corporations)) – Whether liquidators justified and acting reasonably in entering into proposed compromise.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P Miller | Hunt & Hunt |
| For the Defendant | Mr S Waldren | Nathan Brunt Consulting |
HIS HONOUR:
Introduction
This proceeding concerns an unfair preference claim brought by the first and second plaintiffs in their capacity as liquidators of Polat Enterprises Pty Ltd (in liquidation) (‘the Company’) under ss 588FA and 588FF of the Corporations Act 2001 (Cth) (‘the CorporationsAct’) in relation to payments received by a former director and shareholder of the Company which are said to constitute unfair preferences. However, since the filing of the claim, myriad other issues have arisen between the parties and in connection with the liquidation itself.
In short compass, the first and second plaintiffs were appointed liquidators by resolutions purportedly passed by the Company’s shareholder on 8 February 2017 under s 491 of the Corporations Act. In her defence, the defendant denied the validity of the resolutions and the legitimacy of the winding up. As a consequence, on 15 May 2020, the first and second plaintiffs filed an interlocutory process seeking declarations as to the validity of the relevant resolutions, along with alternative relief that the Company be wound up by Court order (‘the May interlocutory process’).
The May interlocutory process was listed before the Court on 4 June 2020 but adjourned on the day as a consequence of late filed material by the plaintiffs. Since that time, the plaintiffs filed an amended interlocutory process on 25 June 2020 seeking slightly amended orders (‘the June interlocutory process’). But more significantly, the parties have now agreed in principle to resolve the subject matter of the June interlocutory process and the proceeding generally.
By way of a further interlocutory process filed on 15 July 2020 (‘the July interlocutory process’), the plaintiffs now seek approval by the Court of their proposed compromise pursuant to s 477(2B) of the Corporations Act and ss 90-15 and 90-20 of the Insolvency Practice Schedule (Corporations) (‘the Practice Schedule’) at Schedule 2 of the Corporations Act.
Procedural history
On 4 June 2019, the plaintiffs commenced the proceeding by originating process seeking judgment in the amount of $547,400 against the defendant, Ms Asiya Kasim, pursuant to ss 588FA and 588FF of the Corporations Act. According to an historic company search, Ms Kasim is a former director and shareholder of the Company.[1] On 6 August 2019, the plaintiffs filed a statement of claim.
[1]Exhibit PRV-1 to the Affidavit of Peter Robert Vince sworn and filed on 19 May 2020 (‘Vince affidavit sworn 19 May 2020’).
The defendant filed her defence in the proceeding on 13 December 2019 asserting, among other things, that:
(a) she did not receive notice of, or attend, any meeting of members of the Company for 8 February 2017;[2]
[2]Defence of defendant dated and filed on 13 December 2019, 1D(a) and (b) (‘Defendant’s defence’).
(b) she did not vote in favour of any resolution to place the Company into liquidation or to appoint the plaintiffs as liquidators at any meeting on 8 February 2017;[3]
[3]Ibid 1D(c).
(c) as at that date, she remained the sole director and sole shareholder of the Company;[4]
(d) as a consequence, the relevant resolutions are invalid; [5] and
(e) further, the plaintiffs do not have standing to maintain the proceeding.[6]
[4]Ibid 1E, 1F, 1G, 1H, 1I.
[5]Ibid 1E, 1F, 1G, 1H, 1I.
[6]Ibid 1I.
By the June interlocutory process, the plaintiffs seek a direction or declaration that the special resolution made on 8 February 2017, that the Company be wound up voluntarily, and the accompanying ordinary resolution appointing the first and second plaintiffs as liquidators of the Company (together, ‘the resolutions’) are valid and effective. In the event the resolutions are determined not to be valid, the following alternative relief is sought:
(a) the form 205 and the form 505 lodged with the Australian Securities and Investments Commission (‘ASIC’) (notifying of the winding up of the Company and the appointment of the plaintiffs) be removed;
(b) the first and second plaintiffs have leave to apply for orders that the Company be wound up;
(c) the first and second plaintiffs be appointed provisional liquidators;
(d) alternatively, that the Company be wound up in insolvency, or on the just and equitable ground, or on the ground that it has suspended its business for a whole year (ss 459A, 461(1)(k) and 461(1)(c) of the Corporations Act, respectively);
(e) further, that the first and second plaintiffs be appointed liquidators of the Company for the purposes of the winding up; and
(f) lastly, an order that the relation-back day for the purposes of the winding up of the Company is 8 February 2017.
In the July interlocutory process, the plaintiffs seek the following orders:
(a) an order under s 477(2B) of the Corporations Act that the first and second plaintiffs may enter into a proposed deed of settlement prepared on 10 July 2020 and contained in exhibit PRV-32 to the affidavit of Peter Vince sworn on 15 July 2020 (‘the proposed deed’); and
(b) an order under ss 90-15 and 90-20 of the Practice Schedule that the first and second plaintiffs are justified and acting reasonably in executing and giving effect to the proposed deed.
The July interlocutory process is supported by the affidavit of Peter Vince sworn on 15 July 2020, together with exhibits, including a confidential exhibit containing legal advice received by the plaintiffs from counsel in respect of which the plaintiffs do not waive privilege.
The plaintiffs have taken a number of steps to bring the various interlocutory processes and supporting material to the attention of the defendant and interested parties. The May interlocutory process was served on the defendant, together with each of the creditors of the Company and ASIC.[7] The June interlocutory process and the July interlocutory process have also been served on the defendant, together with each of the creditors of the Company, ASIC, and other persons who were involved in taking steps to voluntarily wind the Company up; including Bolat Shadinuofu and Chiman Shadinuofu.[8]
[7]Affidavits of Service of Sharmin Haque, both affirmed and filed on 23 June 2020.
[8]Affidavit of Service of Georgina McWhae affirmed and filed on 9 July 2020; Second Affidavit of Service of Georgina McWhae affirmed and filed on 9 July 2020; Affidavit of Service of Mark Pennini affirmed and filed on 9 July 2020; Affidavit of Service of Sharmin Haque affirmed and filed on 9 July 2020; Affidavit of Service of Sharmin Haque affirmed and filed on 28 July 2020.
ASIC and the Australian Taxation Office (‘ATO’) have advised the plaintiffs’ solicitors that they do not intend to appear at the hearing today.[9] The City of Greater Dandenong, who is also a creditor of the Company, does not appear and has not indicated any opposition to the July interlocutory process. Nor have the individuals referred to above sought to be heard at today’s hearing.
[9]Affidavit of Mark James Pennini affirmed and filed on 30 July 2020.
History of the Company
The Company was incorporated on 17 October 2014.[10] Mr Bolat Shadinuofu was appointed the sole director and was recorded as the owner of all of its shares.[11] The investigations of the plaintiffs suggest the Company was involved in the development of two properties: a development of 149 Princes Highway and a development of 361 Princes Highway.[12] It appears that the defendant loaned monies to either Mr Shadinuofu or the Company for the purpose of these projects.[13]
[10]Exhibit PRV-1 to the Vince affidavit sworn 19 May 2020.
[11]Ibid.
[12]Affidavit of Asiya Khasim affirmed and filed on 22 June 2020, [17]-[18] (‘Khasim affidavit affirmed 22 June 2020’).
[13]Ibid [19]-[22].
According to the defendant, in February 2015, she met with Mr Shadinuofu and Minh Hoang Nguyen, an accountant. It was agreed the defendant would become the sole director and shareholder of the Company as a form of ‘security’ for her investment.[14]
[14]Ibid [22].
On 26 February 2015, ASIC’s database was updated to record Mr Shadinuofu’s resignation as director and the defendant’s appointment. In addition, the register was amended to record a reduction of Mr Shadinuofu’s shareholding to 1 share and an increase in the defendant’s shareholding to 99 shares.[15]
[15]Exhibit PRV-1 to the Vince affidavit sworn 19 May 2020.
The defendant alleges by about 4 July 2016 she had loaned $1,120,800 to the Company for use in the development of 361 Princes Highway.[16] On 20 December 2016 and 21 December 2016, the defendant caused the Company to make two payments to herself out of Company funds totalling $547,000.[17] It is these payments that are said by the plaintiffs to constitute unfair preferences.
[16]Khasim affidavit affirmed 22 June 2020, [25].
[17]Affidavit of Peter Robert Vince sworn on 3 June 2019 and filed on 4 June 2029 [6](c) (‘Vince affidavit sworn 3 June 2019’).
When the payments were made, the Company’s financial statements recorded that it had a net asset deficiency of $111,753 and owed around $200,000 to the ATO.[18]
[18]Formal Proof of Debt dated 26 September 2018, contained in Annexure J to the Solvency Report shown as exhibit PRV-29 to the Affidavit of Peter Robert Vince sworn and filed on 23 June 2020 (‘Vince affidavit sworn 23 June 2020’).
Uncertainty over liquidation
The ASIC record suggests that on 1 February 2017 the defendant resigned as a director of the Company and that Ms Chiman Shadinuofu was appointed as sole director on 8 February 2017.[19] Further, Ms Shadinuofu is recorded as having become the sole shareholder of the Company.[20] The Company’s accountant, ND Partners, lodged two Form 484 documents with ASIC to record these changes.[21]
[19]Exhibit PRV-1 to the Vince affidavit sworn 19 May 2020.
[20]Ibid.
[21]Ibid Exhibit PRV-2.
There is evidence before the Court of inquiries made by Mr Shadinuofu of the first and second plaintiffs’ office on 6 February 2017 concerning the possible liquidation of the Company (together with a related entity, Pol Constructions Pty Ltd).[22] Following some further exchanges, on 8 February 2017, Mr Shadinuofu and Ms Shadinuofu attended a meeting with Mr Ian Grant of the first and second plaintiffs’ office. Ms Shadinuofu confirmed that she wanted to liquidate the Company in her capacity as sole director and shareholder. Mr Grant undertook a company search to verify that Ms Shadinuofu was the sole director and shareholder. Subsequently, Ms Shadinuofu conducted a shareholders’ meeting and executed the resolutions.[23]
[22]Exhibit PRV-23 to the Vince affidavit sworn 23 June 2020.
[23]Vince affidavit sworn 19 May 2020, [10] and see exhibits PRV-3 and PRV- 4 to the Vince affidavit sworn 19 May 2020.
As previously noted, the defendant says she was not aware of, and did not agree to, the liquidation of the Company. She maintains that she was not aware that she had been removed as director or that her shares had been transferred to Ms Shadinuofu and she denies signing any forms to this effect.[24] It is notable that on 26 September 2019, more than two years after the defendant apparently gave up her interest in the Company, ND Partners sent an email to her solicitor attaching forms for her resignation as director and the transfer of her shares and requested that she sign them.[25]
[24]Khasim affidavit affirmed 22 June 2020.
[25]Exhibit AK-1 to the Khasim affidavit affirmed 22 June 2020.
It is apparent from the contemporaneous records available that the defendant did not appear to sign any share transfer form or resignation of director form prior to 8 February 2017, or at all.[26] In fact, the only form which bears a signature is a change of company detail form 484 recording the change in directorship in February 2017.[27] However, the signature on that document corresponds to the signature used by Ms Shadinuofu when signing the minutes of meeting of members to pass the resolutions on 8 February 2017.[28] Further, the share register for the Company does not show the Company’s shareholding as at 8 February 2017.
[26]Ibid see Vince affidavit sworn 19 May 2020, exhibits PRV-2 and PRV-28 to the Vince affidavit sworn 23 June 2020.
[27]Exhibit PRV-28 to the Vince affidavit sworn 23 June 2020.
[28]Exhibit PRV- 4 to the Vince affidavit sworn 19 May 2020.
A real question arises as to whether Ms Shadinuofu was in fact the sole director and shareholder on that date. The resolutions may well be irregular. It follows that there is attendant doubt as to the validity of the first and second plaintiffs’ appointment as liquidators of the Company. That is not to say the first and second plaintiffs acted unreasonably in taking their appointment. They relied, of course, upon the information recorded in the ASIC database.[29]
[29]Section 1274B of the Corporations Act 2001 (Cth) creates an evidentiary presumption that what is set out in the ASIC database is accurate.
In order to uphold the resolutions, the plaintiffs would need to demonstrate the defendant not only knew about, and agreed to, her resigning as director and the transferring of her shares, but also that she knew about, and consented to, the winding up of the Company by special resolution. Her direct evidence on these points indicates the contrary and goes further in suggesting she did not understand the nature of a winding up in any event.[30]
[30]Khasim affidavit affirmed 22 June 2020 [42].
Proposed compromise
The parties have now agreed in principle to resolve the subject matter of the June interlocutory process and the proceeding generally. In particular, they have agreed to consent orders that facilitate the proposed deed (‘proposed consent orders’)[31] which are found in the Schedule to these reasons. Importantly, the proposed consent orders contemplate, among other things, a declaration by the Court that the resolutions are invalid and ineffective. Orders are also sought by the plaintiffs that the Company be wound up, that the first and second plaintiffs be given leave to act as liquidators and that they be appointed as liquidators. Finally, orders and declarations are sought concerning the approval and efficacy of the proposed deed under s 477(2B) of the Corporations Act and s 90-15 of the Practice Schedule.
[31]Exhibit PRV-34 to the Affidavit of Peter Robert Vince sworn and filed on 15 July 2020 (‘Vince affidavit sworn 15 July 2020’).
The defendant consents to the winding up and does not oppose the liquidators being given leave to apply for such an order. The parties have also indicated that they will execute the proposed deed upon orders being made substantially in the same form as the proposed consent orders.[32]
[32]Email from Asiya Khasim’s solicitor dated 15 July 2020 shown as exhibit PRV-33 to the Vince affidavit sworn 15 July 2020. See Vince affidavit sworn 15 July 2020, [27].
The key terms of the proposed deed are as follows:
(a) the defendant agrees to pay the sum of $90,000 in full and final satisfaction of the claims made by the plaintiffs and the Company in the proceeding, including for costs and interest [cl 2.1];
(b) the settlement sum is payable by instalments of:
(i) $60,000 within 30 days; and
(ii) $30,000 within 120 days,
from the date on which the proposed deed is executed [cl 2.2];
(c) upon execution of the proposed deed, the first and second plaintiffs and the Company jointly and severally release and forever discharge the defendant from all claims arising out of or in any way connected with the proceeding, the subject matter of the proceeding, the liquidation of the Company, the relevant payments or any other payment made by or on behalf of the Company to the defendant or any party closely related to her [cl 4.1];
(d) upon the execution of the proposed deed, the defendant gives releases to the first and second plaintiffs and the Company and their agents, jointly and severally, from all claims arising out of or in any way connected with the proceeding, the subject matter of the proceeding or a costs order made in her favour on 24 June 2020; and
(e) the defendant agrees not to lodge a proof of debt in the liquidation of the Company [cl 5.1].
Relevant provisions and principles
Section 477(2B) of the Corporations Act provides that, except with the approval of the Court, the committee of inspection or a resolution of creditors, a liquidator must not enter into an agreement on the company’s behalf if the term of the agreement may end or the obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance, more than three months after the agreement is entered into.
In Re One Tel Ltd,[33] Brereton J described the purpose of s 477(2B) as follows:
Section 477(2B) … is concerned with long-term agreements which might protract the liquidation, and has the effect that the liquidator cannot enter such agreements without the approval of the committee of inspection, the creditors, or of the court. Its rationale is that the interests and wishes of those affected, particularly creditors, should be highly influential in determining whether the liquidator should assume a contractual obligation that could interfere with the expeditious completion of the winding up: Re G A Listing & Maintenance Pty Ltd (1994) 15 ACSR 308; CIC Insurance; HIH Insurance at [15]. Thus in considering giving approval under s 477(2B), the main consideration is the impact of the agreement on the duration of the liquidation, and whether that is, in all the circumstances, reasonable in the interests of the administration: Re Opel Networks Pty Ltd [2013] NSWSC 1245.[34]
[33](2014) 99 ACSR 247, 253 [26].
[34]Ibid [30] (Brereton J).
In Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher,[35] Bathurst CJ (with whom Beazley P, Macfarlan JA, Meagher JA and Barrett JA agreed) said:
[I]t is not generally the function of the Court, in granting approval under s 477(2B) of the Act, to review a liquidator’s commercial judgment or to second guess its decision. The Court will generally not interfere unless there seems to be some lack of good faith, some error of law or principle, or a real or substantial ground for doubting the prudence of the liquidator’s conduct [citing Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85-86; Re HIH Insurance Ltd [2004] NSWSC 5 at [15]; Re McGrath at Appendix 1 par (13)]. However, as was pointed out in each of the cases cited, the Court does not act as a mere rubber stamp and will confer the power only when it is satisfied that a case for its exercise, in the particular circumstances, has been shown.[36]
[35](2015) 105 ACSR 581.
[36]Ibid, 600 [125].
Section 90-15 of the Practice Schedule relevantly states:
(1)The Court may make such orders as it thinks fit in relation to the external administration of a company.
…
(2)The Court may exercise the power under subsection (1):
(a) on its own initiative, during proceedings before the Court; or
(b) on application under section 90- 20.
Examples of orders that may be made
(3)Without limiting subsection (1), those orders may include any one or more of the following:
(a)an order determining any question arising in the external administration of the company;
…
Section 90-20 specifies who may apply for an order under s 90-15. Those persons include:
(a)a person with a financial interest in the external administration of the company;
(b) if the committee of inspection (if any) so resolves—a creditor, on behalf of the committee;
Section 90-15 is broad in its scope and contemplates not only the exercise of judicial discretion but also the determination of substantive rights.[37] The provision is described in Crutchfield’s Voluntary Administration as being more expansive than the equivalent section under the repealed regime (s 447D) and as conferring broad power similar to s 447A.[38] The text further notes:
Notwithstanding the wording in s 90-15, the courts have tended to interpret the particular issues that arise when it has been used in a similar way to the existing case law under the equivalent former provisions: see for example Re Hawden Property Group Pty Ltd (in liq) (2018) 125 ACSR 355; [2018] NSWSC 481; Re Gothard [2019] FCA 1289.[39]
[37]See Michael Murray and Jason Harris, Keay's Insolvency: Personal & Corporate Law and Practice (Lawbook, 10th ed, 2018) [10.345].
[38]Thomson Reuters, Crutchfield’s Voluntary Administration (at Update 23) [35.90–15.10].
[39]Ibid.
Additionally, the principles which were applicable to the giving of directions under the former and analogous ss 447D(1), 479 and 511 of the Corporations Act are applicable to the giving of directions under ss 90-15 and 90-20.[40]
[40]El Saafin v Franek (No 2) [2018] VSC 683, [110] (Lyons J).
In Re Ansett Australia Ltd,[41] Goldberg J said:
[T]he prevailing principle adopted by the courts, when asked by liquidators and administrators to give directions, is to refrain from doing so where the direction sought relates to the making and implementation of a business or commercial decision, either committed specifically to the liquidator or administrator or well within his or her discretion, in circumstances where there is no particular legal issue raised for consideration or attack on the propriety or reasonableness of the decision in respect of which the directions are sought. There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, the decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised.
[41](2002) 40 ACSR 433, 451 [65].
In Sanderson v Classic Car Insurances Pty Ltd,[42] a case concerning the scope of the former s 379(3) of the Companies Code (NSW), Young J identified a number of categories of cases in which directions might properly be given to a liquidator. Those categories can be summarised as follows:
[42](1985) 10 ACLR 115, 117 (Young J), referred to in Re One Tel (2014) 99 ACSR 247, 255 [34] (Brereton J), In the matter of AWA Limited [2014] NSWSC 249, [15], and in El-Saafin v Franek (No 2) [2018] VSC 683, [113].
(a) guidance on matters of law;
(b) guidance on questions of legal procedure;
(c) whether a liquidator should postpone a sale in order to achieve a better price; and
(d) where there are two competing offers for assets and a liquidator wishes to gain court directions in order to avoid a subsequent allegation that he or she has acted improperly in choosing one over the other.
In Re One Tel, Brereton J referred to these categories[43] and said further:
[W]hile the court will not generally give a direction where the matter relates to the making or implementation of a business or commercial decision, or where no legal issue is raised and there is no attack on the propriety or reasonableness of the liquidator’s decision, it may do so in the context of a proposed compromise (Spedley Securities at 85), and/or where the decision is likely to be contentious (Ansett at [65]; 7 Steel Distribution at [20]; S&D International at [58]-[59]).[44]
[43]Re One Tel (2014) 99 ACSR 247, 255-256 [34] (Brereton J).
[44]Ibid 256 [35] (Brereton J).
Consideration
Invalidity of resolutions
As already observed, the parties have agreed to resolve the uncertainty surrounding the resolutions on the basis that they be declared invalid. This would seem to be sensible in light of the observations I have already made concerning the features and deficiencies of the contemporaneous records and the unequivocal evidence of the defendant that she was unaware she had been removed as director, or that her shares had been transferred, or that the Company was to be placed into liquidation. Accordingly, it is appropriate to make orders by consent pursuant to s 90-15 of the Practice Schedule providing that the resolutions are invalid. The first and second plaintiffs have standing to seek such orders in their capacity as current officers of the Company (see s 90-20(1)(d)) and also as persons with a financial interest in the external administration of the Company (see s 90-20(1)(a)) given they are owed remuneration for their work as liquidators (as to which see further below). As a consequence of the invalidity of the resolutions, orders will also be made under s 1322(4)(b) of the Corporations Act to rectify the ASIC database.
Winding up of the Company
I accept the submission that the first and second plaintiffs have standing to apply to wind up the Company under s 459P(1)(b) of the Corporations Act because they are creditors in respect of remuneration they have incurred in its winding up since 8 February 2017.
In his affidavit of 15 July 2020, Mr Vince deposes that the first and second plaintiffs have incurred remuneration fees, costs and disbursements (excluding legal costs) totalling $71,268.01 between 8 February 2017 and 12 July 2020. Of this amount, $64,846.77 relates to unbilled work in progress. None of the remuneration has been approved by creditors of the Company or the Court. In addition, legal costs associated with the litigation and the liquidation more generally are calculated at approximately $100,000. Mr Vince further explains that the liquidation of the Company is unfunded and the costs and expenses incurred by the plaintiffs in the proceeding are also unfunded.[45] Given the extent of remuneration and disbursements which remain unpaid, it is apparent there will be no funds available to creditors from the settlement sum of $90,000.
[45]Vince affidavit sworn 15 July 2020, [29].
A liquidator has standing to apply to wind up a company on the basis that he / she is a creditor, even where the validity of the winding up is in doubt.[46] There is sufficient and longstanding authority to support the view that a liquidator or administrator who has been invalidly appointed is still entitled to remuneration, including on a quantum meruit or restitutionary basis and in circumstances where the work performed was of incontrovertible benefit to the company.[47]
[46]Re Kreab Gavin Anderson (Australia) Ltd [2017] FCA 300, [15].
[47]Allison Johnson & Foster Ltd; Ex parte Birkenshaw [1904] 2 KB 327; Craven-Ellis v Canons Ltd [1936] 2 KB 403; Re Kyra Nominees Pty Ltd [1981] WAR 120; Re Wood and Martin (Bricklaying Contractors) Ltd [1971] WLR 293; Monks v Poynice Pyt Ltd (1987) 9 NSWLR 662; Sutherland v Take Seven Group Pty Ltd (1998) 29 ACSR 201, 204; Sherred v McDonald [2005] QSC 153, [22]; Re The Dominion Insurance Company of Australia Ltd (2013) 276 FLR 338, [43]; Re Lime Gourmet Pizza Bar (Charlestown) Pty Ltd (formerly under administration) [2015] NSWSC 244, [88]; Correa v Whittingham (No 3) [2012] NSWSC 526, [224]; Re Warwick Keneally as administrator of Australian Blue Mountain International Cultural & Tourist Group Pty Ltd [2015] NSWSC 2037; Blackadder v McQuinn (No 2) [2017] NTSC 57, [38]; Re Kreab Gavin Anderson (Australia) Ltd (No 3) [2017] FCA 1473, [21]-[34].
Because of this unpaid remuneration, I accept the submission that the first and second plaintiffs are likely contingent or prospective creditors of the Company and therefore require leave under s 459P(2)(a) of the Corporations Act to make the winding up application. It is appropriate to grant them leave. The first and second plaintiffs also require leave under s 532(2)(b) to be appointed liquidators of the Company given they are creditors of the Company in respect of their unpaid remuneration. Again, it is appropriate to grant them such leave. Their claim against the Company arises only in their capacity as persons who were previously acting as liquidators of the Company and not for any other reason. The first and second plaintiffs have provided a proposed consent to act, which is an exhibit to an affidavit,[48] and will attend to its separate filing.
[48]Exhibit PRV-30 to the Vince affidavit sworn 23 June 2020.
Turning to the question of whether the Company should be wound up in insolvency under s 459A of the Corporations Act, I have closely read the first and second plaintiffs’ insolvency report dated 17 June 2020 which is exhibited to the affidavit of Peter Vince sworn on 23 June 2020.[49] In particular, the following matters suggest the Company is insolvent:
[49]Ibid exhibit PRV-29.
(a) the Company’s ATO running balance account increased from $4,908 on 26 August 2015 to $213,715.05 as at 8 February 2017, but no payments were made to the ATO during that period;
(b) the Company received a number of demands from the ATO from October 2015 seeking payment of its debt;
(c) externally prepared financial statements for the Company disclose it incurred net losses totalling $111,763 from its inception until 30 June 2016. At no stage did it make a profit;
(d) the financial statements also disclose the Company had a deficiency of assets from its inception until 30 June 2016; and
(e) the first and second plaintiffs believe the Company failed to maintain adequate books and records that correctly record and explain its transactions, financial position and performance, and which would enable true and fair financial statements to be prepared and audited. They maintain the Company may be presumed to be insolvent pursuant to s 286 of the Corporations Act. I tend to agree with that view.
Having regard to the above, there is sufficient evidence to suggest the Company was insolvent from at least August 2015 and remains so. The Company will therefore be wound up under s 459A of the Corporations Act and the first and second plaintiffs appointed as liquidators.
Approval of the proposed deed
The proposed consent orders seek a declaration that the plaintiffs are justified in entering into and giving effect to the proposed deed. I accept the submission that the Court’s jurisdiction under s 90-15 is properly engaged. The proposed deed will effect a compromise between the plaintiffs and the defendant of the issues in dispute in the June interlocutory process and the proceeding more generally. Further, given the validity of the first and second plaintiffs’ appointment is impugned, the decision to enter into and give effect to the proposed deed is to some extent contentious. The proceeding certainly raises a legal issue of substance or procedure which is sought to be addressed by the proposed deed and the proposed consent orders.
I accept the plaintiffs’ submission that it is necessary and appropriate to approve the proposed deed under s 477(2B) for the following reasons.
Firstly, once the proposed deed is executed, it will take more than three months to perform the obligations under it (given the first payment of $60,000 is due in 30 days, and the second payment of $30,000 is due in 120 days). I consider that the duration of the proposed deed is reasonable in all the circumstances and will cause little or no prejudice to the administration of the winding up of the Company.
Secondly, the compromise of the unfair preference claim in the amount of $90,000 was negotiated in circumstances where all parties were represented by solicitors and counsel. The proposed deed was also prepared after the return of material under subpoena, the exchange of extensive affidavit material between the parties and after the making of opening submissions on 24 June 2020 in respect to the May interlocutory process.
Thirdly, there is evidence that the liquidation of the Company is unfunded and the costs and expenses incurred by the plaintiffs in the proceeding are similarly unfunded.
Fourthly, the unfair preference claim is attended by a degree of risk, which is more fully addressed in confidential advice from counsel.[50]
[50]Confidential exhibit PRV-35 to the Vince affidavit sworn 15 July 2020.
For the same reasons, it is appropriate to declare that the first and second plaintiffs are acting reasonably and are justified in entering into and giving effect to the proposed deed under s 90-15 and 90-20. In addition, such a declaration is appropriate given a fully contested hearing of the unfair preference claim and the June interlocutory process will likely occupy multiple court days and involve further significant legal costs for both parties. An adverse outcome for the plaintiffs may result in the Court making a costs order against them in favour of the defendant. Such a costs order could be significant and, given the liquidation of the Company is unfunded, the first and second plaintiffs would not have any indemnity or recourse to funds to meet such an order.
Further, despite the fact creditors will not receive a return as a consequence of the payment of the settlement sum under the proposed deed, there are no creditors before the Court objecting to the compromise. Nor has any creditor been willing to fund the litigation itself. Accordingly, there is no reason to decline the making of the declaration on that basis.
Conclusion
I will make orders in the terms set out in the Schedule to these reasons. Although not an issue for today, an interesting question arises as a consequence of the orders the Court will make. It is unclear whether the first and second plaintiffs can claim priority under s 556 of the Corporations Act in respect of payment of their remuneration and expenses incurred during the period prior to the Court’s declaration that the resolutions pertaining to their appointment are invalid. It may be that s 513D of the Corporations Act and s 90-15 of the Practice Schedule can be called in aid by the first and second plaintiffs to validate all proceedings in the former winding up of the Company and to enable their fees and expenses to be treated in priority. But I am not asked to make any orders in that regard. The first and second plaintiffs may ultimately need to apply for further directions in relation to those matters at an appropriate time. I will give them liberty to do so.
SCHEDULE
THE COURT DECLARES BY CONSENT THAT:
Pursuant to sections 90-15 and 90-20 of the Insolvency Practice Schedule (Corporations) (“Schedule”), the following are invalid and ineffective:
(a) the cessation of the Defendant as director and secretary of the Third Plaintiff on or around 1 February 2017;
(b) the appointment of Chiman Shadinuofu as director of the Third Plaintiff on or around 1 February 2017;
(c) the transfer of 99 shares in the Third Plaintiff by the Defendant to Chiman Shadinuofu on or around 8 February 2017;
(d) the special resolution of the Third Plaintiff that it be wound up voluntarily dated 8 February 2017; and
(e) the ordinary resolution of the Third Plaintiff appointing the First and Second Plaintiffs as liquidators of the Third Plaintiff dated 8 February 2017.
THE COURT ORDERS BY CONSENT THAT:
Rectification of Register
Pursuant to section 1322(4)(b) of the Corporations Act 2001 (Cth) (“Act”), the register of the Third Plaintiff kept by the Australian Securities and Investments Commission be rectified to remove the entry of:
(a) the form 484E being a change to the company details of the Third Plaintiff processed on 8 February 2017 and bearing document number 7E8751104;
(b) the form 484N being a change to the company details of the Third Plaintiff processed on 8 February 2017 and bearing document number 7E8751855;
(c) the form 205M being a notification of resolution of winding up of the Third Plaintiff processed on 8 February 2017 and bearing document number 7E8752290; and
(d) the form 505J being a notification of appointment of liquidator processed on 8 February 2017 and bearing document number 7E8752273.
THE COURT ORDERS NOT BY CONSENT, BUT UNOPPOSED, THAT:
Pursuant to sections 459P of the Act, the First and Second Plaintiffs have leave to apply for an order that the Third Plaintiff be wound up on the ground of insolvency under section 459A of the Act.
Pursuant to section 532(2)(b) of the Act, the First and Second Plaintiffs have leave to seek to be appointed and act as joint and several liquidators of the Third Plaintiff.
THE COURT ORDERS BY CONSENT THAT:
Winding Up Order
Pursuant to section 459A of the Act, the Third Plaintiff be wound up in insolvency.
Pursuant to section 472 of the Act, the First and Second Plaintiffs be appointed as joint and several liquidators for the purposes of the winding up.
Compliance with the rules under Order 5 of the Supreme Court (Corporations) Rules 2013 (Vic) be dispensed with to the extent those rules have not been complied with.
Settlement Agreement
Pursuant to sections 90-15 and 90-20 of the Schedule, the First and Second Plaintiffs are justified and acting reasonably in executing and giving effect to the Settlement Agreement.
Pursuant to section 477(2B) of the Act, the First and Second Plaintiffs may enter into and give effect to the Settlement Agreement.
Other Orders
The Plaintiffs’ Amended Interlocutory Process dated 25 June 2020 is dismissed with no orders as to costs.
The proceeding is dismissed with no order as to costs, and with a right of reinstatement to the Plaintiffs limited to enforcing the terms of the Settlement Agreement.
There is otherwise no order as to costs.
SCHEDULE OF PARTIES
| S ECI 2019 02456 | |
| BETWEEN: | |
| PETER ROBERT VINCE (in his capacity as liquidator of POLAT ENTERPRISES PTY LTD (in liquidation) (ACN 602 382 025)) | First Plaintiff |
| PAUL WILLIAM LANGDON (in his capacity as liquidator of POLAT ENTERPRISES PTY LTD (in liquidation) (ACN 602 382 025)) | Second Plaintiff |
| POLAT ENTERPRISES PTY LTD (in liquidation) (ACN 602 382 025) | Third Plaintiff |
| - v - | |
| ASIYA KHASIM | Defendant |
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