Re VFS Group Pty Ltd (No. 2); (No. 2)
[2010] VSC 593
•16 December 2010
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
LIST E
No. 0079 of 2010
IN THE MATTER of VFS GROUP PTY LTD (ACN 121 880 751)
| VFS GROUP PTY LTD (ACN 121 880 751) | Plaintiff |
| v | |
| BM2008 PTY LTD (IN LIQUIDATION)(ACN 005 762 685) | Defendant |
LIST E
No. 0080 of 2010
IN THE MATTER of PERTH FREIGHT LINES PTY LTD (ACN 129 516 990)
| PERTH FREIGHT LINES PTY LTD (ACN 129 516 990) | Plaintiff |
| v | |
| BM2008 PTY LTD (IN LIQUIDATION)(ACN 005 762 685) | Defendant |
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JUDGE: | Davies J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 29-30 November 2010 | |
DATE OF JUDGMENT: | 16 December 2010 | |
CASE MAY BE CITED AS: | Re VFS Group Pty Ltd (No. 2); Re Perth Freight Lines Pty Ltd (No. 2) | |
MEDIUM NEUTRAL CITATION: | [2010] VSC 593 | |
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CORPORATIONS – Application to set aside a statutory demand –– Whether offsetting claim – Whether “some other reason” - Alleged cross-claim arising by virtue of an entitlement to share in a distribution of company surplus upon completion of a voluntary winding up – Entitlement accruing under a transfer of shares - Whether transfer of shares void under s 493A of the Corporations Act 2001 (Cth) – Whether equitable interest in distributable surplus– Assets of company said to include causes of action against former directors and related company – Corporations Act 2001 (Cth) ss 459G, 459J, 493A – Supreme Court (Corporations) Rules 2003 r 16.5(1) – Supreme Court (General Civil Procedure) Rules 2005 r 77.06(7) – Corporations Regulations 2001 (Cth) 5.6.70
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr. D H Denton SC with Ms. P Djohan | Belleli King & Associates |
| For the Defendant | Mr. G T Bigmore QC with Mr. D C Harrisson | Cooper Mills Lawyers |
HER HONOUR:
A. Introduction
On 12 July 2010 Efthim J dismissed the plaintiffs’ applications under s 459G of the Corporations Act2001 (Cth) (“the Act”) for orders setting aside statutory demands served on them by the liquidator of the defendant company (“BM”).[1] The plaintiffs have appealed the orders of Efthim AsJ. The appeals have been heard together as they arise out of the same facts and the issues are the same.
[1]Perth Freightlines Pty Ltd v BM2008 Pty Ltd (Unreported, Supreme Court of Victoria, Efthim AsJ, 12 July 2010).
The statutory demands were for payment of an amount of $2,577,072.49 that the plaintiffs were ordered by the Supreme Court of Victoria to pay BM. The order was made in enforcement of a final award given in an arbitration between the parties. BM had sold its business to Perth Freight Lines Pty Ltd (“PFL”)[2] pursuant to a Business Acquisition Agreement signed on 25 June 2008. PFL’s performance of the agreement was guaranteed by VFS Group Pty Ltd (“VFS”)[3] and PFL’s director, Steve Iliopoulos (“SI”). Although the sale of business settled in August 2008, PFL disputed its obligation to pay some of the monies due under the agreement, which remained outstanding because of the dispute. The dispute was arbitrated, following which the arbitrator made an award in favour of BM in the amount of $2,320,485.20 plus interest. On 11 August 2009 PFL, VFS and SI sought leave under s 38(4)(b) of the Commercial Arbitration Act 1984 (Vic) to appeal to the Supreme Court of Victoria against the award of the arbitrator. On 19 November 2009, Hargrave J refused leave to appeal and gave leave to BM to enforce the award as a judgment debt. The judgment debt has not been paid.
[2]The plaintiff in proceeding no. 80 of 2010
[3]The plaintiff in proceeding no. 79 of 2010
The plaintiffs applied to set aside the statutory demand on the basis that they have, within the meaning of s 459H of the Act, “offsetting claims” against BM that exceed the amount of the judgment debt and that there is, within the meaning of s 459J(1)(b) of the Act, “some other reason” as to why the demands should be set aside. They do not dispute the judgment debt, although senior counsel for the plaintiffs raised with the Court during the course of his oral submissions, that the orders of Hargrave J on the enforcement of the award of the arbitrator were challengeable because the form of the order did not accord with the award of the arbitrator. He submitted that BM’s evidence in these appeals did not explain how the final award of the arbitrator became a joint and several liability of the plaintiffs and that this “tension” constituted “some other reason” why the statutory demands should be set aside. Those submissions should be rejected. No evidence was required to be furnished by BM to explain the orders made by Hargrave J. Both plaintiffs were represented before Hargrave J and have never sought to have the form of the order varied. The orders are binding on them and the judgment debt is enforceable.
Efthim AsJ held that the plaintiffs have an offsetting claim to the value of $628,555.95 but his Honour was not satisfied that “some other reason” had been shown. His Honour made orders varying the demands by reducing the amount claimed in the demands to $1,948,516.54 but otherwise dismissed the plaintiffs’ applications under s 459G to set aside the statutory demands.
The offsetting claim found by Efthim AsJ was the plaintiffs’ claim to a proportionate share of the distributable surplus of BM’s net assets when the liquidation of BM is completed. BM was placed into voluntary liquidation on 22 December 2008, on a member’s winding up and has a surplus of assets over liabilities estimated to be in excess of $8,000,000. Shareholders will receive a distribution of the surplus assets, although the final amount has yet to be determined.
The plaintiffs are not registered shareholders of BM but they claim to have an entitlement to share in BM’s distributable surplus as beneficial owners of “A” class and “B” class shares that they purchased from a shareholder (“Sartori”) for $2,500 under a Share Sale Agreement that was entered into on 28 November 2008.
They also claim that they have rights as assignees under a Deed of Assignment, also entered into on 28 November 2007, under which Sartori assigned to PFL, VFS and SI “as joint proprietors” all of his “right, title and interest” in all causes of action that he had against BM, its directors or former directors and other entities. These include:
(a) an action commenced in the Federal Court in Western Australia[4] (“the WA proceedings”) in which Sartori seeks an order for the rectification of BM’s share register, amongst other relief. Sartori has alleged that BM invalidly issued “A” class and “B” class shares to other shareholders, which had the effect of reducing his proportionate shareholding and, thereby, reducing his proportionate entitlement to payment of a dividend and a return of capital on the winding up of BM. PFL, VHS and SI have recently been joined as applicants to that proceeding based on their rights as beneficial owners of Satori’s shares and as assignees of the cause of action;[5]
[4]Proceeding number WAD 299 of 2008.
[5]Sartori v BM2008 Pty Ltd (No 2) [2010] FCA 1160 (27 October 2010).
(b) causes of action described in the Deed of Assignment as “derivative actions” that Sartori is entitled to bring in the absence of those claims being pursued by BM. They are:
· an amount of $1,000,000 that a former director, Ms Cox, was alleged to have received from BM in contravention of s 200B of the Act relating to a redundancy payment that she received in respect of prospective services (“the Cox claim”);
· an amount of $1,398,000 being the estimated “profit” that a company Ataquil Pty Ltd as trustee for the HI Investment Trust was paid by BM under an alleged sham factoring scheme run by BM’s directors (“the Ataquil claim”); and
· (although not expressly mentioned in the deed of assignment) a claim for the recovery of a loan of $750,000[6] owed by PFL Properties Pty Ltd to BM.
[6]The evidence was that the initial amount outstanding was $2,692,444.63 but that $1.8m has since been paid.
It was submitted that the assessment of the value of the plaintiffs’’ offsetting claim is more than $628,555.95 and should take into account:
(a) that the plaintiffs, arguably, have a proportional share of 25% of the distributable surplus; and
(b) that the pool of distributable assets includes, arguably, the choses of action that BM has against Ms Cox, for recovery of $1m, Ataquil Pty Ltd for recovery of $1,398,000 and PFL Properties Pty Ltd for recovery of $750,000.
It was submitted that the aggregate sum of the total pool of assets is $11,178,657 of which a 25% share amounts to $2,794,664. The plaintiffs have contended in these appeals, which proceed as hearings de novo,[7] that the evidence genuinely puts into issue that their proportionate share of the distributable surplus of BM’s net assets exceeds the judgment debt and that the statutory demands should accordingly be set aside altogether and not merely reduced.
[7]Supreme Court (Corporations) Rules 2003 r 16.5(1); Supreme Court (General Civil Procedure) Rules 2005 r 77.06(7).
B. Further evidence
The plaintiffs sought to rely on additional evidence that was not before Efthim AsJ. Senior counsel for the plaintiffs argued that the plaintiffs could rely on that further evidence as of right, without the need to obtain special leave from the Court under r 77.06(7)(b) of the Supreme Court (General Civil Procedure) Rules2005 (Vic). It is unnecessary to consider whether that proposition is correct as I am of the view that the plaintiffs should be given special leave under r 77.06(7)(b) to rely upon those additional affidavits. I do so in view of the fact that there have been some developments since the hearing before Efthim AsJ that are clearly relevant to the plaintiffs’ appeals and the matters deposed to in those supplemental affidavits for the most part contain material that is pertinent to those matters. I also grant special leave to BM to rely on a further affidavit from the liquidator updating his earlier evidence.
C. Decision
The plaintiffs contend that they have an entitlement to share in the distribution of BM’s surplus as equitable owners of Sartori’s shares. The correctness of that proposition appears not to have been challenged before Efthim AsJ or in the WA proceeding, which to date has been conducted on the premise that the plaintiffs have a proprietary interest in Sartori’s shares. In the WA proceeding, Sartori applied for joinder of the plaintiffs and SI as applicants. The application was put on the basis that “they are members of [BM] whose shareholding would be adversely affected by the relief sought in the proposed amended statement of claim”.[8] It was argued, amongst other things, that PFL, VHS and SI, hold the equitable interest in Sartori’s shares and that they are entitled, as equitable assignees of the rights that attach to those shares, to enforce Sartori’s claim of invalidity against BM. McKerracher J in Sartori v BM2008 Pty Ltd[9] accepted that this was “arguable”, although a careful consideration of his Honour’s reasons indicates that his Honour’s conclusion was based on an assumed foundation for the plaintiffs’ equitable rights existing. The correctness of the proposition was also not challenged in a application by SI to set aside a bankruptcy notice based on the same judgment debt (“the bankruptcy proceeding”). For the purposes of his application SI was “treated by the parties … as being the full beneficial owner both of the shares for liquidation purposes and of the choses in action”.[10]
[8]Sartori v BM2008 Pty Ltd (No. 2) [2010] FCA 1160 (27 October 2010) [30].
[9]Ibid.
[10]Iliopoulos v BM2008 Pty Ltd (In Liquidation) [2010] FCA 787 (27 July 2010) [10].
In these appeals, however, the plaintiffs’ asserted equitable interests were put into issue by senior counsel for BM who argued that the plaintiffs do not have rights as shareholders because of s 493A of the Act and therefore that they have no offsetting claim against BM because they have no right to share in the distributable surplus of the company.
It was common ground that the plaintiffs are not registered as the holders of Sartori’s shares because the plaintiffs had not met a condition that the liquidators imposed on their consent to the transfer. Consent is required by s 493A for the transfer to be valid.[11] Section 493A of the Act prescribes that a liquidator may only give consent to a transfer of shares if he or she is satisfied that the transfer is in the best interests of the company’s creditors as a whole[12] and the consent may be conditional.[13] The section also provides that a transfer of shares in a company that is made after the passing of a resolution of the members for the voluntary winding up of the company is void, except if the liquidator has consented to the transfer and any condition attached to the transfer has been satisfied.
[11]Corporations Act 2001 (Cth) s 493A.
[12]Corporations Act 2001 (Cth) s 493A(2).
[13]Corporations Act 2001 (Cth) s 493A(1)(b).
On 3 December 2009, the plaintiffs’ solicitors wrote to the liquidators seeking their consent to the transfer of shares. On 16 December 2009, the liquidators gave their consent conditional on PFL, VHS and SI paying to BM all amounts owing by them under the Business Acquisition Agreement made on 25 June 2008 (being the amounts subject to the award of the arbitrator and the decision of the Supreme Court of Victoria in proceeding no. 8280 of 2009). The plaintiffs and SI commenced proceedings in the Supreme Court of Victoria to seek an order from the Court setting aside the condition. The application was determined after Efthim AsJ handed down his decision and was unsuccessful. Judgment was delivered on 11 August 2010 in Re BM2008 Pty Ltd (In Liquidation).[14]
[14][2010] VSC 337 (11 August 2010).
In order to succeed on that application, the plaintiffs had to satisfy the Court that the condition imposed on the consent to the transfer was “not in the best interests of the company’s creditors as a whole”.[15] The Court formed the view that the condition imposed by the liquidators was in the best interests of the company’s creditors as a whole “because payment of the judgment debt will augment the assets that the liquidator must distribute amongst the shareholders, being the persons entitled to the surplus of the company’s property after payment of all debts … [t]he shareholders would clearly benefit from the plaintiffs’ compliance with the condition for transfer of the shares to them”.[16] Accordingly the condition was not set aside and the condition attached by the liquidators to their consent to the share transfer remains unfulfilled. Until the condition is satisfied, the share transfer is void by operation of law. That is the legal effect of s 493A.
[15]Corporations Act 2001 (Cth) ss 493A(4) and (6).
[16]Re BM2008 Pty Ltd (In Liquidation) [2010] VSC 337 (11 August 2010) [14] – [19].
Senior counsel for the plaintiffs relied on Jordanlane Pty Ltd v Kitching and Ors[17] for the proposition that s 493A did not operate to render the contract to transfer the shares void. It may be accepted for present purposes that personal rights of the parties may not be affected by s 493A(1) of the Act, but no transfer of proprietary rights in those shares can be effected if the share transfer is void by operation of the section. That consequence flows from the failure of the plaintiffs to comply with the condition that attached.
[17][2008] VSC 426 (20 October 2008).
As a consequence of s 493A(1), the transfer of shares pursuant to the Share Sale Agreement has not founded any proprietary interest in the plaintiffs in Sartori’s shareholding. In the circumstances, the assignment of Sartori’s causes of action against BM has also not been effective to transfer to the plaintiffs the incidences that attached to Sartori’s rights as shareholders.
In my view, the submission that the plaintiffs have an equitable interest in Sartori’s shareholding cannot be accepted in light of the operation of s 493A of the Act. It follows that the plaintiffs have not established that they have an entitlement to any share of BM’s distributable surplus. Accordingly, they have not succeeded in demonstrating that they have an offsetting claim against BM, being a right to share in the distributable surplus, as the offsetting claim is predicated on establishing their standing as shareholders to share in any distributable surplus. Accordingly, there is no warrant for any variation to the amount claimed in the statutory demands.
It was submitted, nonetheless, that there is an appeal pending against Re BM2008 Pty Ltd (In Liquidation) and that this constitutes “some other reason” for setting aside the statutory demand. I disagree. In Meehan v Glazier Holdings Pty Ltd[18] it was held that the reasons for a Court to set aside a statutory demand for “some other reason” must be consistent with the legislative intent of Part 5.4 of the Act:
The legislative intent of Pt 5.4 was explained succinctly in Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290 at 294-5, 11 ACSR 362 at 366, (1993) 11 ACLC 1062. Its essence is to be found in the proposition that a winding-up application is not to be used for the improper purpose of compelling a solvent company to pay a disputed debt.[19]
No reason is advanced independent of the fact that the decision in Re BM2008 Pty Ltd (In Liquidation) is on appeal but the pending appeal does not stay the condition imposed by the liquidators on consenting to the transfer of shares or the consequence that the transfer of shares is void by operation of s 493A because the plaintiffs have not paid the judgment debt. Accordingly there is in my view no warrant for setting aside the demands “for some other reason” simply because there is an appeal pending from the decision in Re BM2008 Pty Ltd (In Liquidation).
[18](2005) 53 ACSR 229.
[19]Ibid [47].
This is sufficient to dispense with the appeals but I should say something about Sartori’s claims against BM on the assumption that, contrary to my finding, the plaintiffs do have an equitable interest that founds their entitlement to receive a proportional share of the net distributable assets of BM.
I accept that the plaintiffs have demonstrated an arguable case that Sartori is entitled to a 25% share in the distributable surplus and accordingly that they have a similar entitlement claiming through him.
I do not, however, accept that the plaintiffs have demonstrated an arguable case that there are other assets to be brought to account in determining the amount of distributable surplus available for distribution. In the bankruptcy proceeding, Finn J dealt with the same contentions made by SI in the context of his application to set aside a bankruptcy notice that the liquidators of BM served on SI based on the judgment debt. SI argued that he had a set off or cross demand equal to or exceeding the amount of the judgment debt. Part of his argument relied on the contention that the three “assets” added to the value of the distributable fund. Finn J refused the application to set aside the bankruptcy notice because his Honour was not satisfied that any of those three assets would add to the value of the distributable fund. His Honour’s reasons in Iliopoulos v BM2008 Pty Ltd (In Liq)[20] are apposite to the claims of the plaintiffs in this matter.
[20][2010] FCA 787 (27 July 2010).
His Honour concluded that on the evidence there may well be an arguable case that Ms Cox owes BM $1,000,000 but that the claim belonged to BM, not to Sartori or to SI as assignee from him. Finn J went on to observe that once BM went into voluntary liquidation, Sartori lost his right to bring a derivative action under Part 2F.1 A of the Act. His Honour cited Chahwan v Euphoric Pty Ltd[21] for that proposition. His Honour concluded that whether a claim is to be made by BM against Ms Cox is a matter for the liquidators to decide and the evidence before Finn J was that the liquidator was reluctant to sue.
[21](2008) 227 FLR 43.
Finn J applied the same reasoning that the other two claims were causes of action available to BM but not to Sartori by way of a derivative action.
Senior counsel for the plaintiffs argued that Finn J wrongly held that once BM went into voluntary liquidation Sartori lost his right to bring a derivative action. Reliance was placed on Malhotra v Tiwari[22] in which the Victorian Court of Appeal referred to the “ordinary rule” in the “ordinary case” that it is inappropriate to allow derivative proceedings to be brought when a company is in liquidation.[23] It was contended that this was a correct statement of the law and that Finn J fell into error by applying Chahwan v Euphoric Pty Ltd rather than Malhotra v Tiwari. The Court was informed that the “conflict” between the decisions was the basis of an application by SI for special leave to appeal to the High Court. I note however that the application for special leave has since been heard and that special leave was not granted.[24]
[22][2007] VSCA 101 (23 May 2007).
[23]Ibid [77].
[24]Iliopoulos v BM2008 Pty Ltd (In Liquidation) 2010 HCA Trans 326, 10 December 2010.
It may be assumed for present purposes that BM has an arguable case for recovery of the three “assets” but the claims nonetheless are claims of the company. The evidence before the Court in these appeals was that the liquidators did not intend to commence a proceeding in respect of any of the claims because they consider that there is no or little merit in them. Senior counsel submitted that it is not to the point that the claims are claims of the company. It was submitted that the point was that the value of the choses of action accruing to BM should be taken into account in the computation of the distributable surplus that the plaintiffs are entitled to receive.
There are a number of flaws in this argument. First, if the liquidators do not take action, the claims can only be enforced if commenced by way of a derivative action. Secondly, the plaintiffs would have to persuade a court that the ordinary rule that derivative proceedings cannot be brought when a company is in liquidation should not apply. Senior counsel for the plaintiffs sought to support a case as to why leave may be granted. He was highly critical in a number of respects about the liquidators’ conduct. However it is purely speculative at this stage as to what a court would do on an application for leave to commence a derivative action. Thirdly, as it is purely speculative, the plaintiffs have not made out that there is an arguable case that these “assets” should be taken into account in valuing the plaintiffs’ “offsetting claim”: viz their share of the distributable assets.
Senior counsel for the plaintiffs also argued that the putative conduct of the liquidators in relation to their failure or refusal to seek to collect the “assets” constituted “some other reason” for setting aside the demands. I disagree. I could not on the strength of the evidence before me conclude that the liquidators, in not seeking to collect the three assets, were acting improperly or in breach of their statutory duties.
Finally, reliance was placed on a Form 550 that Sartori signed during the course of the hearing of the appeals. That form irrevocably directed the liquidators to pay to PFL, VFS and SI, Sartori’s proportional share of the distributable surplus if and when a dividend is payable. It was argued that this created an offsetting claim or some other reason for setting aside the demands as Regulation 5.6.70 of the Corporations Regulations2001 (Cth) requires the liquidators to comply with that direction and pay the dividend to the person to whom payment is directed by that authority. However the obligation on the liquidators to comply with the direction arises only at the stage that the dividend is to be paid so that there is no present obligation to pay the plaintiffs anything pursuant to that direction.
No additional reason is put forward in the present case as to why the demands should be set aside for “some other reason”. In essence the proposition amounted to no more than the submission that if the material did not support the plaintiffs’ case that they have an offsetting claim then they rely on the same material to support their case that there is “some other reason”. That is not a justification for setting aside the demands under this head.
C. Orders
The orders that I will make are as follows:
(1) The Plaintiffs have special leave to rely on the following affidavits:
(i) Second Affidavit of Loukia Sideris sworn 3 June 2010;
(ii) Fourth Affidavit of Garry James Sartori sworn 3 June 2010;
(iii) Third Affidavit of David Arthur Rewell sworn 3 June 2010;
(iv) Third Affidavit of Loukia Sideris sworn 3 June 2010;
(v) Fourth Affidavit of David Arthur Rewell sworn 9 July 2010;
(vi) Fifth Affidavit of David Arthur Rewell sworn 27 August 2010;
(vii) Sixth Affidavit of David Arthur Rewell sworn 28 October 2010;
(viii) Fifth Affidavit of Garry James Sartori sworn 4 November 2010;
(ix) Seventh Affidavit of David Arthur Rewell sworn 5 November 2010;
(x) Eighth Affidavit of David Arthur Rewell sworn 19 November 2010.
(2) The Defendants have special leave to rely on the Second Affidavit of Victor Raymond Dye sworn 12 November 2010.
(3) The appeals are dismissed.
(4) The order of Efthim AsJ varying the demands by reducing the amount claimed to $1,948,516.54 is set aside.
(5) The applications to set aside the statutory demand are dismissed.
Subject to any argument, I also order the plaintiffs to pay the defendants’ costs of the appeals.
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CERTIFICATE
I certify that the 11 preceding pages are a true copy of the reasons for Judgment of Davies J of the Supreme Court of Victoria delivered on 16 December 2010.
DATED this sixteenth day of December 2010.
Associate
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