Shafston Avenue Construction Pty Ltd v McCann

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FEDERAL COURT OF AUSTRALIA

Shafston Avenue Construction Pty Ltd v McCann [2020] FCAFC 85

Appeal from: Shafston Avenue Construction Pty Ltd, in the matter of CRCG-Rimfire Pty Ltd (subject to deed of company arrangement) v McCann [2019] FCA 1426
File number: QUD 603 of 2019
Judges: FARRELL, DAVIES AND MOSHINSKY JJ
Date of judgment: 22 May 2020
Catchwords:

CORPORATIONS – deed of company arrangement – application to terminate deed of company arrangement pursuant to s 445D(1) of the Corporations Act 2001 (Cth) – where the primary judge refused to terminate deed of company arrangement – whether primary judge erred in finding that there was not a likely prospect of the creditors of the company receiving a better outcome in the liquidation of the company – whether the primary judge erred in making certain factual findings – whether the primary judge erred in the exercise of his discretion

PRACTICE AND PROCEDURE – new point on appeal – where the appellants sought to rely on certain Australian cases that had not been referred to at first instance to support the proposition that the requirement of reciprocity (for recognition of an Australian judgment in China) would be satisfied – whether the appellants’ submission amounted to a new point on appeal – whether the appellants should have leave to make the submission

Legislation:

Corporations Act 2001 (Cth), ss 444E, 445D, 447A, 461

Insolvency Practice Rules (Corporations) 2016 (Cth), s 75-115

Cases cited:

Bloemen v The Commonwealth (1975) 49 ALJR 219

Britax Childcare Pty Ltd v Infa Products Pty Ltd (2016) 115 ACSR 322

Coulton v Holcombe (1986) 162 CLR 1

House v The King (1936) 55 CLR 499

Lehman Brothers Holdings Inc v City of Swan (2010) 240 CLR 509

Linen House Pty Ltd v Rugs Galore Australia Pty Ltd [1999] VSC 126

Liu v Ma (2017) 55 VR 104

O’Brien v Komesaroff (1982) 150 CLR 310

Suttor v Gundowda Pty Ltd (1950) 81 CLR 418

Suzhou Haishun Investment Management Co Ltd v Zhao [2019] VSC 110

Date of hearing: 14 February 2020
Registry: Queensland
Division: General Division
National Practice Area: Commercial and Corporations
Sub-area: Corporations and Corporate Insolvency
Category: Catchwords
Number of paragraphs: 123
Counsel for the First, Second and Third Appellants: Mr P Dunning QC with Mr E Goodwin
Solicitor for the First, Second and Third Appellants: Macpherson Kelley
Counsel for the First, Second and Third Respondents: Mr SJ Webster
Solicitor for the First, Second and Third Respondents: Clayton Utz
Counsel for the Fourth Respondent: Mr P Franco QC with Mr D de Jersey QC
Solicitor for the Fourth Respondent: Baker McKenzie

ORDERS

QUD 603 of 2019
BETWEEN:

SHAFSTON AVENUE CONSTRUCTION PTY LTD (ACN 169 409 705)

First Appellant

28 BAXTER STREET CONSTRUCTION PTY LTD (ACN 611 160 215)

Second Appellant

LINCOLN STREET CONSTRUCTION PTY LTD (ACN 603 876 651)

Third Appellant
AND:

MICHAEL GERARD MCCANN

First Respondent

SAID JAHANI

Second Respondent

CRCG-RIMFIRE PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) (ACN 611 557 852) (and another named in the Schedule)

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Details
Case
[2020] FCAFC 85
Decision Date

CaseChat Overview and Summary

Shafston Avenue Construction Pty Ltd and Rimfire Constructions Pty Ltd appealed against the decision of the primary judge to refuse their application to terminate a deed of company arrangement (DOCA) under section 445D(1) of the Corporations Act 2001 (Cth). The primary judge had found that there was not a likely prospect of the creditors of the company receiving a better outcome in the liquidation of the company. The appellants argued that the primary judge had erred in making certain factual findings and in the exercise of his discretion. The appeal also included a new point on appeal, which the appellants sought to rely on certain Australian cases to support the proposition that the requirement of reciprocity (for recognition of an Australian judgment in China) would be satisfied.

The court rejected each of the appellants’ grounds of appeal and dismissed the appeal. The court found that the primary judge had not erred in making factual findings or in the exercise of his discretion. The court also found that the new point on appeal amounted to a new point on appeal and that the appellants should not have leave to make the submission. The court ordered that the appeal be dismissed and that the appellants pay the respondents’ costs of the appeal. The court also gave the appellants a short period of time to file a submission if they wished to seek a different costs order in relation to the interlocutory application.

The court held that the primary judge had not erred in finding that there was not a likely prospect of the creditors of the company receiving a better outcome in the liquidation of the company. The court found that the administrators had recommended that it would be in creditors’ best interests for the company to execute a DOCA due to the risks highlighted in enforcing the Deed of Covenant along with the level of a return and timing under a DOCA. The court also held that the new point on appeal amounted to a new point on appeal and that the appellants should not have leave to make the submission.

The court ordered that the appeal be dismissed and that the appellants pay the respondents’ costs of the appeal. The court also gave the appellants a short period of time to file a submission if they wished to seek a different costs order in relation to the interlocutory application. The court found that the primary judge had not erred in making factual findings or in the exercise of his discretion and that the new point on appeal amounted to a new point on appeal and that the appellants should not have leave to make the submission.

Orders

Orders of the court

1. The appellants be refused leave to rely on [25]-[29] of their outline of submissions dated 16 January 2020 (and the subsequent submissions relying on those paragraphs), which raise new points on appeal.

2. The fourth respondent’s interlocutory application dated 23 January 2020 be dismissed.

3. The appeal be dismissed.

4. The appellants pay the respondents’ costs of the appeal, as agreed or assessed.

5. In relation to the costs of the fourth respondent’s interlocutory application dated 23 January 2020:

(a) Subject to paragraph (b), the appellants pay the fourth respondent’s costs of the interlocutory application, as agreed or assessed.

(b) If the appellants wish to seek a variation of the costs order in paragraph (a), they must file and serve a written submission (of no more than two pages) seeking a different order within seven days.

(c) If the appellants file a submission as referred to in paragraph (b), the fourth respondent may file and serve a written submission (of no more than two pages) in response within a further seven days, and the issue of the costs of the interlocutory application will be determined on the papers.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

For the reasons that follow, we reject each of the appellants’ grounds of appeal. It follows that the appeal is to be dismissed.Background facts The following summary of the background facts is substantially based on the reasons for judgment of the primary judge (the Reasons).Relevant companies On 29 March 2016, the Joint Venture Company was incorporated. The purpose of the company was to engage in residential, commercial and infrastructure construction projects in Queensland. The two shareholders in the Joint Venture Company were China Rail (as at 55%) and a company named Rimfire Constructions Pty Ltd (Rimfire) (as at 45%). China Rail was (and is) a subsidiary of China Rail Construction Corporation Limited (CRCC), which is a State-owned entity under the administration of the State-owned Assets Supervision and Administration Commission of the State Council of China. CRCC is listed in Shanghai and Hong Kong. In the draft business plan for the joint venture, Rimfire was described as an Australian construction company with offices in Brisbane and Sydney that undertook construction work in the resource, commercial and residential sectors. Throughout the period in question, the directors of Rimfire were Danny Cain and Adam Moore. According to the executive summary in the administrators’ report to creditors dated 27 February 2018 (the February 2018 Report to Creditors), the following persons were directors of the Joint Venture Company:(a)Dapeng Zhao (current; appointed 24 February 2017);(b)Zaiqiang Lin (current);(c)Wentao Gao (current);(d)Kun Li (resigned 24 February 2017);(e)Fangnan Li (resigned 27 June 2017); and(f)Adam Moore (resigned 4 October 2017).The Queensland construction licence and the Deeds of Covenant On or about 7 July 2016, the Joint Venture Company obtained a category 7 licence from the Queensland Building and Construction Commission (the Commission) allowing it to undertake construction work in Queensland up to and exceeding the value of $240 million. To obtain the licence, each of China Rail and Rimfire entered into a deed of covenant and assurance (Deed of Covenant) with the Joint Venture Company and the Commission. Under each Deed of Covenant, the relevant company (i.e. either China Rail or Rimfire) covenanted that, in the event that the Joint Venture Company were wound up, it would pay a certain amount to the Joint Venture Company. The statutory context in which the Deeds of Covenant were entered into is outlined in the recitals. For example, in the Deed of Covenant executed by China Rail (the China Rail Deed of Covenant), which was dated 21 July 2016, the recitals were as follows (noting that “Licensee” referred to the Joint Venture Company and the “Covenantor” referred to China Rail):A.The Licensee is a licensee under the provisions of the Queensland Building and Construction Commission Act 1991 (Qld) (“the Act”) or is the applicant for such a licence (“the Licence”).B.The licence authorises the Licensee to conduct the business of carrying out or supervising building work of a class or classes specified in the licence.C.As a condition of the grant, renewal or upon compliance audit commenced by the Commission of a licence, the Licensee must comply with the Queensland Building and Construction Board policy “Minimum Financial Requirements” in relation to, among other things, a prescribed level or amount of net tangible assets. The Minimum Financial Requirements relating to the Licensee’s financial circumstances are referred to in the Act and are to be made or issued under the Act by the Queensland Building and Construction Board (“Minimum Financial Requirements”).D.The Commission is responsible for the administration of the Act and, among other things, compliance by Licensees under the Act with the Minimum Financial Requirements.E.The Covenantor has requested the Licensee to apply for the licence or comply with the provisions of the Act to enable it to continue to hold the licence. The Licensee has agreed to do so in consideration of, and conditional upon, the execution of this Deed by the Covenantor.F.This Deed is entered into to give effect to the agreement between the Licensee and the Covenantor referred to in recital E and also for the purpose of enabling the Licensee to comply with the Minimum Financial Requirements.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

For these reasons, ground 1 is rejected.Conclusion For the reasons set out above, each of the appeal grounds is rejected. It follows that it is unnecessary to deal with the notices of contention. Accordingly, we will order that the appeal be dismissed. There is no apparent reason why costs should not follow the event. We will therefore order that the appellants pay the respondents’ costs of the appeal. The costs of China Rail’s interlocutory application have not been addressed. Our preliminary view is that the appellants should pay China Rail’s costs of the interlocutory application, as it was responsive to the appellants’ submissions raising new points on appeal. We will make an order to this effect, but give the appellants a short period of time to file a submission if they wish to seek a different costs order. If the appellants file such a submission, China Rail will have a short period of time in which to file a responding submission, and the issue of the costs of the interlocutory application will be determined on the papers.

Ratio Decidendi

Legal Principle Established

In the February 2018 Report to Creditors, the administrators outlined the three options available to the creditors and provided their recommendation on each of those options as follows:In accordance with Section 75-225 of the Insolvency Practice Rules, the Administrators are required to make a recommendation to creditors as to which of the options available to them is in their best interests. The following options are available for creditors to vote on at the meeting pursuant to Section 439C of the Act:•That the administration should end;•That the company execute the proposed DOCA; or•That the company be wound up.1. The administration should endIt is possible that creditors may consider ending the Administration which would return the [Joint Venture] Company to the control of its Director. Ordinarily, the Director would resume control of the [Joint Venture] Company's assets and be able to deal with them as they deem appropriate.Administrator’s recommendation: It would not be in the creditors’ best interests for the Administration to end as the [Joint Venture] Company is insolvent and therefore requires a mechanism to deal with creditors’ claims.2. The [Joint Venture] Company executes a [DOCA]The provisions of Part 5.3A of the Act allow the [Joint Venture] Company and its creditors to negotiate a proposal to deal with the [Joint Venture] Company’s affairs and in such circumstances execute a DOCA.Details of the proposed DOCA are included at Section 8 of this report.Administrator’s recommendation: It is our recommendation that it would be in creditors’ best interests for the [Joint Venture] Company to execute a DOCA due the following:–A return under a DOCA is estimated to be higher than liquidation under both a optimistic and pessimistic scenario.–The return under liquidation is significantly risky with real prospects that there may be no return for employee superannuation and unsecured creditors, should litigation seeking enforcement of the [Deeds of Covenant] fail.–To commence proceedings to enforce the [Deeds of Covenant], substantial funding would be required which will need to be provided by creditors or a litigation funder, which is not guaranteed.–Even if funding is provided by a litigation funder, and successful judgment was obtained and enforced, then unsecured creditors would still not receive 100 cents in the dollar as the success fee of c.30% would be deducted along with legal and liquidation costs.3. The [Joint Venture] Company be wound up (liquidation)Creditors may resolve to wind up the [Joint Venture] Company which would result in the [Joint Venture] Company being placed into liquidation. If there is no alternative nominee, Said Jahani and I will be taken as having been nominated as Joint and Several Liquidators of the [Joint Venture] Company.A more detailed review of the [Joint Venture] Company’s financial affairs would be conducted and as a consequence a report on its affairs and the conduct of its officers would be prepared and the findings conveyed to ASIC.Further investigations in relation to voidable transactions and insolvent trading would be made as well as a determination to proceed with such claims, if any.To pursue recoveries under the Deed of Covenants executed by [China Rail] and [Rimfire] funding will be required. Whilst funding can be requested from creditors and/or government departments (such as the [Commission] or the ASIC) we believe that the source of any funding would likely be from a litigation funder who would require a premium and would require payment from funds recovered. Please refer to section X of this report in respect to pursuing amounts under the Deed of Covenants.In the event sufficient funds are recovered, monies would be distributed in accordance with the provisions of Section 556 of the Act.Administrator’s recommendation: Given the risks highlighted in this report in enforcing the [Deed of Covenant] along with the level of a return and timing under a DOCA we are of the view that it is not in the creditors’ best interests for the Company to be placed into liquidation.