SMITH - [2020] SASC 54

Supreme Court of South Australia
(Civil)
In the Matter of YANCHEP ESTATES PTY LTD (IN LIQUIDATION)
SMITH
[2020] SASC 54
Judgment of Judge Dart a Master of the Supreme Court
16 April 2020
CORPORATIONS - WINDING UP - CONDUCT AND INCIDENTS OF WINDING UP - APPLICATIONS TO COURT FOR DIRECTIONS OR ADVICE
Liquidator's application for advice and direction - company part of group - company has a surplus of assets - no creditors - distribution to shareholders - articles of association amended - liquidator seeks to distribute surplus to ultimate shareholder - orders sought pursuant to s 90-15 Insolvency Practice Schedule (Corporation) - appropriate to allow liquidator to distribute to ultimate shareholder.
Held: The liquidator of Yanchep Estates Pty Ltd (In Liquidation) is authorised to distribute the surplus assets of the company, after payment of the costs of this application and the liquidator's remuneration, to Southern Equities Corporation Limited (In Liquidation)(ACN 008 721 926).
Corporations Act 2001 (Cth) s 479(3), s 501, s 511; s 90-15, s 90-20 of the Insolvency Practice Schedule (Corporations), referred to.
BM2008 Pty Ltd (in liq) [2010] VSC 337; FAI General Insurance Co Ltd & Ors v FAI Car Owners Mutual Insurance Company Pty Ltd & Ors (2009) 262 ALR 552; In Re Adelaide, Unley and Mitcham Tramway Co Ltd (In Liquidation) [1907] SALR 35; Re Hawden Property Group Ltd (in liq) (2018) 125 ACSR 355; Re Ansett Australia Ltd (No 3) [2002] FCA 90; Ritter v Godfrey [1920] 2 KB 47, considered.

SMITH
[2020] SASC 54
JUDGE DART:

This is an application by a liquidator for an order permitting the surplus assets of a company to be distributed in a particular way. There are five companies involved in the application. All of them are members of the Bond Group of Companies. It is appropriate to make the orders sought by the liquidator.
Background
The company with the assets is Yanchep Estates Pty Ltd. It was incorporated in 1968 and deregistered in 1993. By letter dated 28 October 2010 ASIC advised a former director that the company was the registered proprietor of land at Yanchep in Western Australia. The registration of the company was reinstated in 2011 and its two directors resumed the control of its affairs.
The company realised the land. It was placed into voluntary winding up by a special resolution of its members on 30 June 2019. The liquidator expects the surplus funds available for distribution to be approximately $1.9 million. The company has no creditors and, therefore, the surplus would in the ordinary course pass to its shareholders. The application of the liquidator seeks to permit payment of the surplus assets directly to the ultimate shareholder, rather than to intermediate shareholders.
The ultimate shareholder is Southern Equities Corporation Pty Ltd (“SECL”). The relevant corporate structure is set out on the following page:[1]
[1] Affidavit of Anthony Stevens Smith filed 22 November 2019, FDN2, Exhibit AS2.
If the liquidator were to distribute in what might be regarded as the usual way, the surplus would first go to Eveready and then to BCPL and BEPL. None of those three companies have any creditors. In the final result, BCPL and BEPL would distribute the surplus to SECL.
The legal issues
This is a voluntary winding up. The provisions of s 501 of the Corporations Act 2001 are applicable. That section provides as follows:
501Distribution of property of company
Subject to the provisions of this Act as to preferential payments, the property of a company must, on its winding up, be applied in satisfaction of its liabilities equally and, subject to that application, must, unless the company’s constitution otherwise provides, be distributed among the members according to their rights and interests in the company.
The rights of shareholders to a surplus are not created by s 501. In FAI General Insurance Co Ltd & Ors v FAI Car Owners Mutual Insurance Co Pty Ltd & Ors, an insolvent liquidation, Barrett J said: [2]
Except in special cases (see, for example, s 254B(2)), the entitlements referred to in s 485(2) are not dictated by or derived from legislation. In the case of a company limited by shares, they are the product of shareholding and any applicable provisions of the company’s constitution. As Wright J said of the English statutory provisions in Re Driffield Gas Light Co [1898] 1 Ch 451 at 455:
[They] do not of themselves supply any rule for the mode of adjusting loss of capital or of distributing surplus, but only supply the necessary powers for giving effect to the rights and interests of the parties. Those rights in the case of a company constituted under the Companies Act must, in the absence of any provision in the memorandum or articles of association, be ascertained, in the view of one of the noble and learned Lords who took part in the decision of Birch v Cropper (1889) 14 App Cas 525, by recourse to general principles of equity; in the view of another of them, by reference to the principles and provisions of the Companies Acts. But in either view the result is the same, namely, that the capital account must first be equalized, and then there remains no ground for appropriating the balance in any other way than according to the nominal amount of the shares in the capital.”
In the absence of any other specification, therefore, distribution of surplus among members was according to the nominal amounts of their shares. With the abolition of the par value concept in relation to shares by the Company Law Review Act 1998 (Cth) with effect from 1 July 1998, the position became that distribution of surplus among members is prima facie according to numbers of shares held: Re Yanollee Pty Ltd [2006] NSWSC 705; (2006) 24 ACLC 1087.
[2] (2009) 262 ALR 552 at [18]-[19].
We are here dealing with an application in a solvent winding up. The position appears to be the same. In BM2008 Pty Ltd (in liq)[3] Davies J said:
The right of a shareholder to a proportionate share of any surplus of assets is statutorily recognised in s 501 of the Act, which provides that the liquidators must distribute the surplus to the shareholders “according to their rights and interests in the company”. In Re Driffield Gas Light Company[4] Wright J stated in relation to the comparative English statutory provision:
The winding up sections ... do not of themselves supply any rule for the mode of adjusting loss of capital or of distributing surplus, but only supply the necessary powers for giving effect to the rights and interests of the parties. Those rights in the case of a company constituted under the Companies Act must, in the absence of any provision in the memorandum or articles of association, be ascertained, in the view of one of the noble and learned Lords who took part in the decision of Birch v Cropper (1889) 14 App Cas 525, by recourse to general principles of equity; in the view of another of them, by reference to the principles and provisions of the Companies Acts. But in either view the result is the same, namely, that the capital account must first be equalized, and then there remains no ground for appropriating the balance in any other way than according to the nominal amount of the shares in the capital.[5]
The same principle applies under Australian law. The right of shareholders to a company’s surplus is “not dictated by or derived from [s 501 of the Act]”.[6] Rather, the function of s 501 of the Act is to empower liquidators to make a distribution of surplus assets to shareholders in accordance with their respective entitlements.
[3] [2010] VSC 337.
[4] [1898] 1 Ch 451.
[5] [1898] 1 Ch 451.
[6] FAI General Insurance Company Ltd v FAI Car Owners Mutual Insurance Co Pty Ltd [2009] NSWSC 1350; (2009) 76 ACSR 164, 170 [18].
The right of a shareholder to share in a surplus is an ordinary incident of being a shareholder. It is a right which can be altered or amended. In FAI Barrett J also said:[7]
This prima facie position may be changed by the company’s constitution. The Corporations Act recognises this and, in some cases, requires that rights to participate in surplus assets be set out in the constitution (or approved by special resolution): see s 254A(2)(b). In Archibald Howie Pty Ltd v Commissioner of Stamp Duties [1948] HCA 28; (1948) 77 CLR 143 at 152, Dixon J recognised that a member’s right to have paid up capital returned in a liquidation is a right arising out of “the contract inter socios”.
Allocation of surplus among members in a winding up must be in the proportions indicated by the respective shareholdings, subject to any provisions of the constitution fixing or affecting proportions.
[7] FAI General Insurance Co Ltd & Ors v FAI Car Owners Mutual Insurance Company Pty Ltd & Ors (2009) 262 ALR 552 at [20]-[21].
No doubt in anticipation of this application to the Court, the company’s Articles of Association were amended on 18 June 2019. The articles were amended by a resolution of the company’s sole member, Eveready Finance. Article 116 now reads as follows:[8]
If the Company is wound up the liquidator:
(a)    must divide and distribute any surplus assets amongst the members, or amongst such other persons (the Non-Member Beneficiaries) as may have been determined by unanimous agreement of the members at or before the time of dissolution;
(b)    may, with the sanction of a special resolution of the Company, effect at such a division and distribution by way of a distribution in kind of the whole or any part of the assets of the Company (whether they consist of property of the same kind or not);
(c)    may for that purpose set such value as he or she deems fair upon any property to be divided as aforesaid and may determine how the division shall be carried out as between (as the case may be) the members, different classes of members or the Non-Member Beneficiaries;
(d)    may, with the sanction of a special resolution of the Company, vest the whole or any part of any such assets in trustees upon trusts for the benefit of the members or (as the case may be) the Non-Member Beneficiaries as the liquidator thinks fit, but so that no such person shall be compelled to accept any shares or other securities whereon there is any liability.
[8]    Affidavit of Anthony Stevens Smith filed 18 February 2020, FDN6, Exhibit AS-29.
Eveready Finance, in its capacity as the sole member of the company, consents to the liquidator distributing the surplus assets to SECL. Thus, it would appear that the liquidator is authorised by the Articles of Association of the company to proceed as he wishes.
Advice and direction from the Court
This application by the liquidator seeks the Court’s permission to distribute the surplus in the way now anticipated by the articles of association. There is a long history of liquidators seeking advice and direction from the Court.[9] Historically, a liquidator was an officer of the Court. The Court was always prepared to give advice and direction to its officer.
[9] See, for an example involving a similar issue, In Re Adelaide, Unley and Mitcham Tramway Co Ltd (In Liquidation) [1907] SALR 35.
Until recently the right of a liquidator to approach the Court for advice and directions was found in the Corporations Act. It was also provided for in predecessors to the Act. Such an application was made pursuant to s 479(3) or s 511 of the Corporations Act, depending on whether the liquidation was an insolvent winding up or a voluntary winding up. This matter is a voluntary winding up and therefore it is the latter provision that was applicable. Section 511 was in the following terms:
511    Application to Court to have questions determined or powers exercised
(1)     [Liquidator may apply to Court] The liquidator, or any contributory creditor, may apply to the Court:
(a)to determine any question arising in the winding up of a company; or
(b)to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court.
…
(2)     [Where Court may accede to exercise] The Court, if satisfied that the determination of the question or the exercise of power will be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the application as it thinks just.
The statutory provisions in s 479(3) and s 511 were repealed in 2017. This application is made under s 90-20 of the Insolvency Practice Schedule (Corporation), which is a schedule to the Corporations Act 2001 (Cth).
The application seeks to have the Court make orders under s 90-15:
90‑15Court may make orders in relation to external administration
Court may make orders
(1)The Court may make such orders as it thinks fit in relation to the external administration of a company.
Orders on own initiative or on application
(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;
(b)an order that a person cease to be the external administrator of the company;
(c)an order that another registered liquidator be appointed as the external administrator of the company;
(d)an order in relation to the costs of an action (including court action) taken by the external administrator of the company or another person in relation to the external administration of the company;
(e)an order in relation to any loss that the company has sustained because of a breach of duty by the external administrator;
(f)an order in relation to remuneration, including an order requiring a person to repay to a company, or the creditors of a company, remuneration paid to the person as external administrator of the company.
Matters that may be taken into account
(4)Without limiting the matters which the Court may take into account when making orders, the Court may take into account:
(a)whether the liquidator has faithfully performed, or is faithfully performing, the liquidator’s duties; and
(b)whether an action or failure to act by the liquidator is in compliance with this Act and the Insolvency Practice Rules; and
(c)whether an action or failure to act by the liquidator is in compliance with an order of the Court; and
(d)whether the company or any other person has suffered, or is likely to suffer, loss or damage because of an action or failure to act by the liquidator; and
(e)the seriousness of the consequences of any action or failure to act by the liquidator, including the effect of that action or failure to act on public confidence in registered liquidators as a group.
Costs orders
(5)Without limiting subsection (1), an order mentioned in paragraph (3)(d) in relation to the costs of an action may include an order that:
(a)the external administrator or another person is personally liable for some or all of those costs; and
(b)the external administrator or another person is not entitled to be reimbursed by the company or its creditors in relation to some or all of those costs.
Orders to make good loss sustained because of a breach of duty
(6)Without limiting subsection (1), an order mentioned in paragraph (3)(e) in relation to a loss may include an order that:
(a)the external administrator is personally liable to make good some or all of the loss; and
(b)the external administrator is not entitled to be reimbursed by the company or creditors in relation to the amount made good.
Section does not limit Court’s powers
(7)This section does not limit the Court’s powers under any other provision of this Act, or under any other law.
There has been some consideration of the differences between s 90-15 and s 511 of the Act. In Re Hawden Property Group Ltd (in liq) Gleeson JA stated: [10]
In Walley, In the Matter of Poles & Underground Pty Ltd (Admin Apptd) [2017] FCA 486 at [41], Gleeson J remarked that the question of whether to exercise the power in s 90-15 was “to be answered by reference to the principles applied to the exercise of the discretions previously contained in s 479(3) and s 511 of the Act”. That may be accepted insofar as the external administrator seeks the directions of the Court, but the power under s 90-15 to “make such orders as it thinks fit in relation to the external administration of a company” (s 90-15(1)) including “an order determining any question arising in the external administration of a company” (s 90-15(3)(a)), is wider and accommodates the determination of substantive rights. Of course, the Court would not do so without affording potentially affected parties an opportunity to be heard: Meadow Springs Fairway Resort Ltd (in liq) v Balance Securities Ltd [2007] FCA 1443, at [49]-[51] (French J, referring to Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (1994) 49 FCR 334 at 352 (Northrop J)); Re Willmott Forests Ltd (No 2) [2012] VSC 125; (2012) 88 ACSR 18 at [45]-[46] (Davies J); In the Matter of ICS Real Estate Pty Ltd (in liq) [2014] NSWSC 479 at [25] (Brereton J).
[10] (2018) 125 ACSR 355 at [8].
It is clear that the power given to the Court in s 90-15 is broad and not simply limited to the considerations contained in s 511. The reason that liquidators apply to Court for advice and direction is to obtain protection when acting in a particular way if the Court directs that they do so. In Re Ansett Australia Ltd (No 3) Goldberg J said: [11]
When liquidators and administrators seek directions from the Court in relation to any decision they have made, or propose to make, or in relation to any conduct they have undertaken, or propose to undertake, they are not seeking to determine rights and liabilities arising out of particular transactions, but are rather seeking protection against claims that they have acted unreasonably or inappropriately or in breach of their duty in making the decision or undertaking the conduct. They can obtain that protection if they make full and fair disclosure of all relevant facts and circumstances to the Court. In Re G B Nathan & Co Pty Ltd (1991) 24 NSWLR 674, McLelland J said at 679‑680:
“The historical antecedents of s 479(3) [equivalent to s 447D of the Act], the terms of that subsection and the provisions of s 479 as a whole combine to lead to the conclusion that the only proper subject of a liquidator’s application for directions is the manner in which the liquidator should act in carrying out his functions as such, and that the only binding effect of, or arising from, a direction given in pursuance of such an application (other than rendering the liquidator liable to appropriate sanctions if a direction in mandatory or prohibitrary form is disobeyed) is that the liquidator, if he has made full and fair disclosure to the court of the material facts, will be protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company in respect of anything done by him in accordance with the direction.
…
Modern Australian authority confirms the view that s 479(3) ‘does not enable the court to make binding orders in the nature of judgments’ and that the function of a liquidator’s application for directions ‘is to give him advice as to his proper course of action in the liquidation; it is not to determine the rights and liabilities arising from the company’s transactions before the liquidation’: [cases cited omitted].”
[11] [2002] FCA 90 at [44].

The amount of money involved here is significant. It is appropriate that the liquidator seeks the Court’s approval.
Consideration
The Court is asked to make an order under s 90-15(1). It allows the Court to make such orders as it thinks fit in relation to the external administration of a company. It is a broad discretion. When exercising a broad discretion a court regards itself as being bound to act in the interests of justice. That requires an appropriate factual foundation. As Lord Sterndale M.R. said in Ritter v Godfrey:[12]
The discretion must be judicially exercised, and therefore there must be some grounds for its exercise, for a discretion exercised on no grounds cannot be judicial.
[12] [1920] 2 KB 47 at 53.
Historically, pursuant to s 511, the Court would act if it was satisfied that to do so would be just and beneficial in the context of the winding up. If acting in a particular way would create a result which could be regarded as just and beneficial in the external administration of a company, it would almost always fall within the s 90-15(1) discretion. However, it would be wrong to regard the discretion in s 90-15 to be limited by that consideration.
The liquidator asks the Court to have regard to the following considerations in support of his application to distribute the surplus directly to SECL. The considerations are:
1The shareholder who would, in the ordinary course, receive all of the surplus consents to the liquidator distributing that surplus direct to SECL.
2If Eveready were to receive the surplus, it may be necessary to wind that company up, to ensure an efficient tax treatment of the distribution to its shareholders. There is a cost estimate of $20,000 to $30,000 provided to wind up Eveready. It has no creditors and would distribute to its shareholders.
3There are 10,647 redeemable preference shares issued by Eveready, with a paid-up capital of $1 each. BCPL holds 3516 of those shares. BEPL holds 7131 of the shares. BCPL holds 100% of the ordinary issued shares in Eveready. The practical effect of the ownership of the redeemable preference shares is that the sum of $7131 would need to be paid to BEPL. That company is presently deregistered. There would be a need to re-register it and subsequently deregister it after it receives and distributes the sum of $7131. The expense in undertaking that exercise would exceed the amount to be received. There is no practical utility in doing so.
4BCPL has no creditors. It would receive most of the surplus from Eveready. Upon receipt of the surplus, it would simply have to pay the surplus to its only shareholder, SECL.
The liquidator provided tax advice in respect of various scenarios. There appears to be no inappropriate or adverse consequences of making a payment of the surplus assets direct to SECL. The tax position appears similar, no matter which way the surplus is dealt with.
If the liquidator is obliged to pay the surplus through each of the shareholders before it can be paid to SECL, unnecessary delay and expense will be incurred. In addition to the matters referred to above, there will simply be administrative costs incurred by each company receiving and disbursing money and having to amend their financial records accordingly. In the circumstances where the companies have no creditors, there is simply no utility in requiring the liquidator to undertake that task.
The reference in s 90-15(1) to the external administration of a company is broad enough to extend to the external administration of each of the companies in the Bond Group affected by this application. The applicant is liquidator of each of those companies. In reality, it matters not to Yanchep how the surplus is distributed. It must distribute once, either way. It is the broader interests of the Bond Group that are advantaged by the direct distribution to SECL.
It is appropriate to make the orders sought by the liquidator to permit distribution of the Yanchep surplus directly to SECL.