Winding Up Terminated After Creditors' Trust Established

The winding up of a company was terminated after a creditors' trust was established and creditors' claims were repaid. The court considered the interests of creditors, the liquidator, contributories, and the public before making the decision.

Reported Decision : (2006) 24 ACLC 635

New South Wales Supreme Court

CITATION : [NAME] v [NAME] [2006] NSWSC 415

HEARING DATE(S) : 8 May 2006

JUDGMENT DATE : 11 May 2006

JURISDICTION : Equity

JUDGMENT OF : Austin J

DECISION : Winding up terminated.

CATCHWORDS : CORPORATIONS - winding up - termination of winding up after completion of deed of company arrangement - deed and accompanying [COMPANY] provide for recapitalisation of company and payment of subscription amount into a trust for the benefit of participating creditors, while releasing the company from its obligation to pay them - interests of existing and future creditors, contributories and the public - relevant considerations in a case involving a [COMPANY] : Corporations Act 2001 (Cth), s 482

[COMPANY] v [COMPANY] (2000) 35 ACSR 70 [COMPANY] (2006) 56 ACSR 690 CASES CITED : Re [COMPANY] (2004) 49 ACSR 110 [NAME] v [COMPANY] (2003) 46 ACSR 458 Vero Workers Compensation v Ferretti [2006] NSWSC 292

[COMPANY] (P) PARTIES : [NAME] (in liq) (D) [NAME], as liquidator of [NAME] (in liq) (A) [COMPANY] (contributory, by leave)

FILE NUMBER(S) : SC 4822/04

SOLICITORS : [redacted] [NAME] (contributory)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

AUSTIN J

THURSDAY 11 MAY 2006

4822/04 [COMPANY] V [NAME] (IN LIQ)

JUDGMENT

1 HIS HONOUR: [NAME], the liquidator of the defendant company, [NAME], has applied by interlocutory process for an order under s 482 of the Corporations Act terminating the winding up of the company. He has standing to make the application, under s 482(1A)(a). At the hearing of the application, a contributory called [COMPANY] appeared by leave, and supported the application. The creditor that applied for and obtained the order for the winding up of [NAME], [COMPANY], has provided a letter supporting the application. The Australian Securities and Investments Commission has informed the court by letter that it neither consents to nor opposes the application.

2 [NAME] was a listed public company. On 30 September 2004 its shares were suspended from trading on the Australian Stock Exchange, and on 22 December 2004 this court made an order for the winding up of the company and the appointment of [NAME] as its liquidator. At that time [NAME] was in the process of acquiring tenement assets for the purpose of gold exploration in Australia and Fiji, as well as the acquisition of a producing copper mine in Chile.

3 [NAME] called for proofs of debt, eventually receiving proofs totalling about $5.8 million. In January and February 2005 he advertised for expressions of interest in the assets of [NAME], receiving some 91 expressions of interest, some of which were confidential. He convened a meeting of creditors, which was held on 31 March 2005, at which a Committee of Inspection was appointed.

4 On 11 April 2005 the Committee of Inspection met and considered the expressions of interest for acquisition of [NAME]'s assets. The Committee resolved to accept an offer from [NAME] to recapitalise [NAME] by subscribing $1.53 million in return for a majority shareholding, by a process involving voluntary administration and the deed of company arrangement, and a trust for creditors.

5 On 10 June 2005 a subscription agreement was entered into between [NAME] and [NAME]. Under the terms of that agreement, [NAME] was required to pay [NAME] $1.53 million in three tranches, subject to the satisfaction of a number of conditions. The conditions included the court's approval to appoint the liquidator as voluntary administrator, a resolution of the creditors of [NAME] to enter into a deed of company arrangement ("DOCA"), and the appointment of a new board of directors of [NAME] comprising nominees of [NAME]. There were also conditions directed to resolving a dispute between [NAME] and various parties associated with a company called [COMPANY], arising out of [NAME]'s announcement of the takeover bid for [COMPANY], which need not be further particularised here. According to the subscription agreement, the subscription amount was to be used to pay the costs of the recapitalisation, and to repay creditors of [NAME] pursuant to the proposed DOCA and a contemplated [COMPANY], under which the subscription amount would be held for the benefit of creditors of [NAME].

6 On 18 June 2005 this court granted leave to [NAME] to be appointed administrator of [NAME]. At that time [NAME] gave evidence to the court estimating that, if the subscription agreement could be completed by the process of administration it contemplated, the unsecured creditors of [NAME] would receive a dividend of approximately 57% of the value of their debts. The current estimate, noted below, is lower.

7 [NAME] reported to creditors as administrator, and convened a meeting under s 439A. The report addressed negotiations for the sale of the business/corporate shell and the subscription agreement with [NAME], a copy of which was annexed to the report. The report noted that an application was contemplated to this court to permit the company to be placed into administration. There was some relatively detailed analysis of potential actions against directors and for recovery in respect of voidable transactions. The report recommended that the creditors approve the [COMPANY], and stated why the proposed DOCA would involve a [COMPANY] (essentially, to permit the immediate resumption of trading on the ASX, since the creditors' claims would be commuted into claims against the trust, by force of the DOCA). The report also gave an account of the administrator's attempt to ensure that the DOCA and the [COMPANY] were in compliance with ASIC's guide for registered liquidators appointed under Part 5.3A, External administration: Deeds of company arrangement involving a [COMPANY] (May 2005).

8 On 13 September 2005 the creditors resolved to approve the proposed DOCA and the attached form of [COMPANY]. In the usual fashion, the DOCA purported to bind participating creditors, whose claims related to circumstances occurring before [NAME]' appointment as administrator. Under clause 4.4 of the DOCA, participating creditors were required to accept their entitlements under the Trust in full satisfaction and discharge of their debts. Under clauses 11 and 32, the company was required to pay to the Trust the proceeds of the issue of shares to [NAME] under the subscription agreement, and the participating creditors were entitled to prove their claims against the Trust as beneficiaries in accordance with the terms of the trust deed. Clause 14 provided that the DOCA would terminate within 2 business days of satisfaction of the conditions for payment prescribed by the subscription agreement, and the payment of the subscription amount accordingly.

9 A general meeting of shareholders of [NAME] was held on 11 January 2006, to approve the issue of shares to [NAME] and certain other parties, and to appoint new directors of [NAME]. The proposals that were put to shareholders were supported by an independent expert's report by [COMPANY], which attached an appraisal of mineral assets by a firm of consulting geologists. The shareholders approved the proposals.

10 It appears from the minutes of the meeting that there were some heated exchanges which might lead to litigation involving the company and/or [NAME]. [NAME] exhibited to his affidavit of 27 April 2006 a letter threatening legal proceedings arising out of the meeting, but said that at the date of swearing his affidavit, he had not been served with any originating process. The evidence regarding those matters does not appear to me to affect the issues raised by the proposed termination of the winding up. Any cause of action that may have accrued against the company will continue to be available after termination of the winding up.

11 The [COMPANY] contemplated by the DOCA was established on 4 April 2006, with [NAME] as trustee. In the period from 5 April to 26 April 2006, [NAME] as trustee received the balance of payments due from [NAME], and after deduction of his costs and expenses, he transferred the net proceeds of $1,010,373.48 into the [COMPANY] account. According to the terms of clause 14 of the DOCA, to which I have referred, the deed automatically terminated on 28 April 2006.

12 It appears that the company has not engaged in any trading activity since the commencement of its voluntary administration. It has, however, incurred some debts (in addition to the cost of administration) during that period, which would not be claims of participating creditors for the purposes of the DOCA and the [COMPANY]. However, I was informed from the bar table that these debts are of relatively minor amounts, such as recurrent fees for the preservation of mining tenements. Additionally there is the prospect that the company will incur debts in the course of its re-establishment as a listed entity. In a letter dated 5 April 2006 directed to [NAME]'s liquidator, [NAME] refers to the present application for termination of the winding up and says: "As disclosed in the Short Form Prospectus [not in evidence, but perhaps prepared in connection with the application for admission of [NAME]'s new shares to quotation on the ASX], [COMPANY] shall pay any debts of the Company after the termination of the liquidation as and when they fall due, until the Company is able to do so on its own behalf."

13 The evidence includes some correspondence between [NAME]' solicitors and a firm of solicitors called [NAME], whose client is [COMPANY]. It appears that MGG alleges an entitlement to 15 million shares in [COMPANY]. As mentioned above, [NAME] made a takeover bid for all the issued shares in [COMPANY] before the commencement of its winding up. On 3 April this year [NAME] wrote to [NAME] threatening an urgent application to the duty judge for interlocutory injunctive relief. On 5 [NAME]' solicitor replied, saying that [NAME] did not accept MGG's asserted entitlement, and claiming that even if there was such an entitlement, MGG would now be estopped from pressing the assertion in the face of its delay, and the prejudice it would cause other creditors of [NAME], in view of the steps taken by [NAME] towards recapitalisation of the company and the establishment of the [COMPANY] for the benefit of creditors. Subsequently on 7 and 11 [NAME] wrote to [NAME]' solicitors putting to them a series of "requisitions" seeking information with respect to their client's claim. On 12 April 2006 [NAME]' solicitors replied, asserting that [NAME] was under no obligation to provide the information or documents requested in declining to do so. In his affidavit made on 27 April 2006, [NAME] said that at that date, [NAME] had made no application to any court in relation to the allegations contained in the correspondence. On the basis of the limited evidence that is before me, I can see no foundation in the correspondence for the court declining to deal with the application for termination forthwith.

14 Because of the effect of the [COMPANY], [NAME] presently has no significant body of creditors. It still holds assets (apart from the value of its capital) in the form of mining tenements to an approximate value of $1.843 million, according to [NAME]'s valuation. It is therefore solvent. [NAME] has advertised for creditors to lodge their claims against the Trust. He says that total creditors' claims, after adjudication has been completed, will be somewhere between $2,142,095 62 and $2,709,630.50. The estimated dividend to creditors is between 40.73% and 25.43% of the total creditors' claims.

15 In my opinion the case for termination of the winding up has been made out. In the exercise of its discretion whether to terminate the winding up, the court considers in the interests of creditors (including future creditors), the liquidator, contributories and the public: generally, see [COMPANY] v [COMPANY] (2000) 35 ACSR 70, Re [COMPANY] (2004) 49 ACSR 110, [NAME] v [COMPANY] (2003) 46 ACSR 458.

16 Here the interests of the company's creditors at the time of [NAME]' appointment as administrator had been addressed by the DOCA and the [COMPANY], which were approved by the creditors at their meeting. The evidence is that these creditors will receive a substantial distribution from the Trust, whereas if the company had remained in liquidation, they would have received little or no return. There is no significant body of post-administration creditors.

17 The interest of future creditors, if the company were permitted to resume trading and incur future debts, was an important criterion in cases such as [NAME] v [NAME], Re Nardell Coal, [NAME] v [NAME], [COMPANY] (2006) 56 ACSR 690 and Vero Workers Compensation v Ferretti [2006] NSWSC 292. In those cases, there was a deed of company arrangement which had not yet been concluded, and there were creditors of the company who would remain as creditors if the winding up was terminated (although the creditors, typically related creditors, were subject to various forms of purported subordination or deferral). Because of the continued existence of substantial debts which might prejudice their prospects of recovery, the court was not satisfied that it was in the interests of future creditors that the winding up be terminated.

18 Here, on the other hand, the effect of the DOCA and the [COMPANY] is to transfer the creditors' claims to the Trust and release the company from liability to pay those debts. The arrangements appear to me to conform to ASIC's guidelines for creditors' trusts, and ASIC chose not to appear to oppose the application. I can see no reason for regarding the relevant provisions as ineffective. Therefore the concern over the interests of future creditors, if a company with substantial existing debts is permitted to resume trading, is not a relevant concern in the present case. Moreover, creditors whose debts arise in the short term have the protection, such as it is, of [NAME]'s letter of 5 April 2006.

19 Termination of the winding up is not contrary to the liquidator's interests, as he is the applicant and his evidence is that his fees have been fully paid. Any costs he incurs in acting as trustee of the [COMPANY] are to be borne by the Trust rather than the company. As to contributories and the public, if the liquidation were to continue [NAME] would be unable to lift the suspension on trading of its shares on the ASX. This would be to the disadvantage of its shareholders, including [NAME], and would prevent investors on the ASX from buying and selling [NAME]'s shares. The contributories have approved the issue of new shares for the purpose of recapitalising the company. In these circumstances, and in the absence of any identifiable prejudice, it is in the public interest, as well as the interests of contributories, that the winding up be terminated.

20 Therefore the appropriate course is to order that the winding up of [NAME] be terminated.

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