FEDERAL COURT OF AUSTRALIA Food Improvers Pty Ltd v BGR Corporation Pty Ltd (in Liq) (No 10) [2011] FCA 1476 Citation: Food Improvers Pty Ltd v BGR Corporation Pty Ltd (in Liq) (No 10) [2011] FCA 1476 Parties: THE FOOD IMPROVERS PTY LIMITED ACN 003 474 280 and JOHN STEPHEN BAX v BGR CORPORATION PTY LIMITED ACN 059 820 807 (IN LIQUIDATION) , THE TRIAD HEALTH PRODUCTS GROUP OF COMPANIES PTY LTD ACN 002 688 897, CORDATO PARTNERS (SERVICES) PTY LIMITED ACN 075 518 964, MAIN CAMP HOLDINGS PTY LIMITED ACN 061 573 804, MAIN CAMP CORPORATION PTY LIMITED ACN 054 989 516, SNP NATURAL PRODUCTS PTY LIMITED ACN 094 464 490, ADVANCED TECHNOLOGY RESEARCH PTY LIMITED ACN 088 655 163 and BUSINESS & RESEARCH MANAGEMENT LIMITED ACN 070 946 664 File number: NSD 1140 of 2005 Judge: RARES J Date of judgment: 23 November 2011 Legislation: Corporations Act 2001 (Cth) ss 477(2B), 488(1), 488(2), 556(1), 1322(4) Corporations Regulations 2001 (Cth) reg 5.6.71 Cases cited: Birch v Cropper; In Re Bridgewater Navigation Company Limited (1889) 14 App Cas 525 applied Brealey v Shields [2009] NSWSC 1148 followed Donne v Lewis (1805) 11 Ves Jun 601 referred to Emanuele v Australian Securities Commission (1997) 188 CLR 114 applied The Food Improvers Pty Ltd v BGR Corporation Pty Ltd (No 3) [2007] FCA 97 cited Date of hearing: 23 November 2011 Place: Sydney Division: GENERAL DIVISION Category: No catchwords Number of paragraphs: 18 Counsel for the Liquidator of the First, Fourth, Fifth, Sixth, Seventh and Eighth Defendants: Mr AP Spencer Solicitor for the Liquidator of the First, Fourth, Fifth, Sixth, Seventh and Eighth Defendants: Gadens Lawyers IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1140 of 2005 BETWEEN: THE FOOD IMPROVERS PTY LIMITED ACN 003 474 280 First Plaintiff JOHN STEPHEN BAX Second Plaintiff AND: BGR CORPORATION PTY LIMITED ACN 059 820 807 (IN LIQUIDATION) First Defendant THE TRIAD HEALTH PRODUCTS GROUP OF COMPANIES PTY LTD ACN 002 688 897 Second Defendant CORDATO PARTNERS (SERVICES) PTY LIMITED ACN 075 518 964 Third Defendant MAIN CAMP HOLDINGS PTY LIMITED ACN 061 573 804 Fourth Defendant MAIN CAMP CORPORATION PTY LIMITED ACN 054 989 516 Fifth Defendant SNP NATURAL PRODUCTS PTY LIMITED ACN 094 464 490 Sixth Defendant ADVANCED TECHNOLOGY RESEARCH PTY LIMITED ACN 088 655 163 Seventh Defendant BUSINESS & RESEARCH MANAGEMENT LIMITED ACN 070 946 664 Eighth Defendant JUDGE: RARES J DATE OF ORDER: 23 NOVEMBER 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Pursuant to s 477(2B) of the Corporations Act 2001 (Cth) (the Act) the Court approves nunc pro tunc, the entry by the Liquidator of the first, fourth, fifth, sixth, seventh and eighth defendants (the Liquidator) into the agreement with the first and second plaintiff on behalf of the first defendant contained in the letters between the solicitors for the first and second plaintiff and the solicitors for the Liquidator dated 28 August 2007, 3 September 2007, 5 September 2007 and 10 September 2007 (the Funding Agreement). 2. Declares pursuant to s 1322(4)(a) of the Act that the first defendant's entry into the Funding Agreement is not invalid by reason of the failure by the Liquidator to obtain prior approval under s 477(2B) of the Act. 3. Directs pursuant to s 479(3) of the Act that the Liquidator would be justified in making the distributions to the unsecured creditors of the following companies in the following order: (a) firstly, distribute the funds available to unsecured creditors of the fifth defendant (Main Camp Corporation Pty Limited) by paying any dividend to its unsecured creditors; (b) secondly, distribute the funds available to unsecured creditors of the fourth defendant (Main Camp Holdings Pty Limited) by paying any dividend to Anthony Cordato, such dividend be in full satisfaction of all amounts claimed by him against the Companies; (c) thirdly, distribute the funds available to unsecured creditors of the first defendant (BGR Corporation Pty Limited) by paying a dividend to Hunter Premium Funding Limited. 4. Directs pursuant to s 479(3) of the Act that the Liquidator would be justified in: (a) as liquidator of the fifth defendant (Main Camp Corporation Pty Limited), withdrawing the fifth defendant's proof of debt lodged in the liquidation of the first defendant (BGR Corporation Pty Limited); (b) as liquidator of the fourth defendant (Man Camp Holdings Pty Limited), withdrawing the fourth defendant's proof of debt lodged in the liquidation of the first defendant (BGR Corporation Pty Limited); and (c) as liquidator of the first defendant (BGR Corporation Pty Limited), consenting to the withdrawals specified in sub-paragraphs 4 (a) and (b) of this direction. 5. Orders pursuant to s 564 of the Act that the indemnifying creditor, being the first plaintiff (The Food Improvers Pty Ltd) (Funder): (a) be repaid by the first defendant (BGR Corporation Pty Limited) the sum of $154,958.79, together with any interest accruing on that amount, being the total amount of funds advanced to the liquidator for the conduct and defence of the following applications (together referred to as the applications): (i) for each of the interlocutory applications made in the primary proceedings from 26 September 2007 to 21 August 2008, being Federal Court of Australia proceedings number NSD 1140 of 2005; (ii) Federal Court of Australia proceedings number NSD 2288 of 2007, being an application by the second defendant for an extension of time to appeal from the primary judgment; (iii) Federal Court of Australia proceedings number NSD 2361 of 2007, being an application by the second defendant for leave to appeal from an interlocutory judgment; (iv) Supreme Court of NSW proceedings number 5605 of 2007, being an application by the second defendant to set aside a statutory demand served by the first defendant; and (b) that such payment be given an advantage or priority for the amount of $154,958.79, together with any interest accruing on that amount, over all other unsecured creditors in the winding up of the first defendant (BGR Corporation Pty Limited) ranking behind those specified in sub-sections 556(1)(a) to (h) inclusive of the Act and Hunter Premium Funding Limited, by the distribution to the Funder by way of dividend from: (i) the net amount recovered as a result of the applications; and (ii) other amounts held, realised or recovered by the liquidator of the first defendant (BGR Corporation Pty Limited). 6. Directs: (a) pursuant to reg 5.6.71(1) of the Corporations Regulations 2001, that the order authorising distribution of surplus to a person entitled to it need not have annexed to it a schedule in accordance with Form 551; (b) prior to any such distribution the Liquidator file an affidavit identifying the calculations and basis upon which they were made in arriving at the surplus payable. 7. Orders pursuant to s 488(2) of the Corporations Act 2001 that the Liquidator have special leave to distribute the surplus in the winding up of the fourth defendant to the first defendant after the payments prescribed under sub-sections 556(1)(a) to (h) inclusive of the Act. 8. Orders that the Liquidator may recoup his costs and expenses of this application on the indemnity basis out of the assets of the company before striking the surplus to be distributed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1140 of 2005 BETWEEN: THE FOOD IMPROVERS PTY LIMITED ACN 003 474 280 First Plaintiff JOHN STEPHEN BAX Second Plaintiff AND: BGR CORPORATION PTY LIMITED ACN 059 820 807 (IN LIQUIDATION) First Defendant THE TRIAD HEALTH PRODUCTS GROUP OF COMPANIES PTY LTD ACN 002 688 897 Second Defendant CORDATO PARTNERS (SERVICES) PTY LIMITED ACN 075 518 964 Third Defendant MAIN CAMP HOLDINGS PTY LIMITED ACN 061 573 804 Fourth Defendant MAIN CAMP CORPORATION PTY LIMITED ACN 054 989 516 Fifth Defendant SNP NATURAL PRODUCTS PTY LIMITED ACN 094 464 490 Sixth Defendant ADVANCED TECHNOLOGY RESEARCH PTY LIMITED ACN 088 655 163 Seventh Defendant BUSINESS & RESEARCH MANAGEMENT LIMITED ACN 070 946 664 Eighth Defendant JUDGE: RARES J DATE: 23 NOVEMBER 2011 PLACE: SYDNEY REASONS FOR JUDGMENT (REVISED FROM THE TRANSCRIPT) 1 The liquidator of each of the six companies forming part of the BGR Corporation Pty Limited (BGR) group that I ordered be wound up, for reasons I gave in my principal decision in these proceedings (The Food Improvers Pty Ltd v BGR Corporation Pty Ltd (No 3) [2007] FCA 97), has applied to the Court under two interlocutory applications for directions so as to assist in the practical finalisation of the windings up. The applications for directions 2 First, the liquidator has sought an order under s 488(2) of the Corporations Act 2001 (Cth) that any surplus funds available in the winding up of Main Camp Holdings Pty Limited (Holdings) be paid to its sole shareholder, BGR, after any payments under s 556(1) of the Act have been deducted, and the one external creditor, Anthony Cordato is paid in full the amounts owed to him either jointly or solely by Holdings. Mr Cordato is also owed some of those sums by BGR and Main Camp Corporation Pty Limited (Corporation) jointly. 3 The second interlocutory process seeks a number of orders for the subsequent orderly distribution of assets and the finalisation of what is a complex inter-company winding up. First, when making earlier applications for directions, the liquidator overlooked the necessity for him to apply under s 477(2B) for approval to enter into a funding arrangement with the plaintiffs in the principal proceedings, The Food Improvers Pty Limited and John Bax. Food Improvers had agreed to fund a number of recovery actions. The duration of those arrangements exceeded, and was always likely to exceed, three months, and, as a result, leave to enter into them was required. Secondly, the liquidator seeks directions about the orderly distribution of moneys owing to unsecured creditors of the companies in the group, and advice as to whether he would be justified in withdrawing all inter-company proofs of debt for the purposes of facilitating that distribution. Thirdly, he seeks orders entitling Food Improvers to be repaid the amounts it funded in respect of the recovery actions, together with interest at bank overdraft rates, in priority to Food Improvers' right to any dividend in the available balance. Background 4 For the purposes of deciding these applications, it suffices to summarise in broad terms the financial positions of the various companies in the group, and their external creditors. I will deal with the position in respect of the s 488 application first. Holdings' financial position is that at 29 April 2011 it had $177,452.63 in cash. Its only creditor is Mr Cordato. The liquidators admitted Mr Cordato to proof for $32,003.95 against each of Holdings, BGR and Main Camp owed to him by the three companies as a joint and several debt. He has also admitted Mr Cordato to proof, solely as against Holdings for an additional debt of $16,698.45, making him a creditor of Holdings in a total sum of $48,702.40. The liquidator proposes to pay Mr Cordato's debt in full from the surplus in Holdings. This will then leave just the liquidator's entitlement to remuneration to be satisfied before Holdings' finances will be finalised. The liquidator will be able to claim no more than about $67,000 in total for his remuneration in respect of Holdings, some of which has already been quantified and the rest is yet to be approved. The application under S 488(2) 5 Holdings is likely to have a surplus in the order of $70,000 after payment of the debt owed to Mr Cordato and the liquidator's remuneration. Its only shareholder is BGR. However, despite its prescriptive complexity, the Act does not provide expressly for the manner of payment of the surplus assets or property of a company other than in s 501 in respect only of voluntary windings up. The liquidator has not been able to find the constitution of Holdings. Therefore, there is no evidence as to how its members, being effectively BGR, intended any surplus assets to be distributed after the company was fully wound up. 6 As a matter of general law, the shares in a company represent, in the hands of shareholders, a congeries of rights governed, in ordinary circumstances, by the terms of its constitution. In principle, once the purpose of the company is exhausted and it is wound up, absent a provision to the contrary in its constitution, any surplus remaining ought be payable rateably to its shareholders, as its owners. That was the result arrived at in Birch v Cropper; In Re Bridgewater Navigation Company Limited (1889) 14 App Cas 525. There, the House of Lords determined that, subject to the payment of the costs, charges and expenses of the winding up, including the costs of all parties to the application before their Lordships, the par value of their shares to the shareholders, the remaining assets of the company ought be distributed to the shareholders in proportion to their shares. Their Lordships considered that this treated both the ordinary and preference shareholders equally. Both classes of shareholders, having paid their shares up in full, were entitled to participate equally in distribution of the surplus assets. As Lord Macnaghten said (Birch 14 App Cas 546-547): "... it rather leads to confusion to speak of the assets which are the subject of this application as "surplus assets" as if they were an accretion or addition to the capital of the company capable of being distinguished from it and open to different considerations. They are part and parcel of the property of the company—part and parcel of the joint stock or common fund—which at the date of the winding-up represented the capital of the company. It is through their shares in the capital, and through their shares alone, that members of a company limited by shares become entitled to participate in the property of the company. The shares in this company were all of the same amount." (emphasis added) 7 Section 488(2) provides that, despite anything in the rules or regulations made for the purpose of s 488(1), a liquidator may distribute a surplus only with the Court's special leave. The purpose of that requirement was to except the distribution of a surplus from the general power to delegate certain powers, conferred on the Court by the rules and regulations for the purposes of the winding up, to the liquidator, as an officer of the Court who always remained subject to its control. When a surplus is realised in a winding up, the Parliament intended that the Court, and it alone, exercise its supervisory function in ensuring the proper and final distribution of surplus assets. Hence, the requirement for the Court's "special leave" ensures that a liquidator must apply to, and receive the leave of, the Court before he or she is authorised to make a distribution of a surplus from a winding up. This accords with the way in which the authorities have approached the requirement in s 488(2). In Brealey v Shields [2009] NSWSC 1148 at [4], Barrett J said: "The requirement for "special leave" means no more than that the court's permission be sought by an application specially made by the liquidator: Re DS Millard & Sons Pty Ltd (1997) 27 ACSR 71." 8 There, his Honour held that the liquidator of a company ought receive a dispensation from the requirement of full compliance with reg 5.6.71 of the Corporations Regulations 2001 (Cth). That regulation requires the liquidator to distribute any surplus, pursuant to special leave granted by the Court, in accordance with a schedule in Form 551, and to send to any person to whom a surplus is distributed a notice in accordance with Form 552. In that case, his Honour dispensed with those requirements, and did not insist on the liquidator identifying a particular sum in the schedule. He found that because there were only two contributories to whom a payment could be made, there was no need for adjustments between them. They would be paid equally by dividing by two, a sum quantified at the end of the winding up. 9 I am of opinion that common sense suggests I should follow a similar course in these windings up. The only shareholder of Holdings is BGR. After Mr Cordato is paid in full, the liquidator will be the only person entitled to any payment, being his fees and expenses before the balance constituting a surplus will be payable to BGR. It will suffice if I direct that the liquidator file and serve an affidavit at the time of making a final payment, identifying how that payment has been arrived at by setting out his fees, the available balance, and any payments that he has made in the course of the further winding up of Holdings, and that he otherwise be authorised to pay any resultant surplus to BGR. The s 477(2B) application 10 In August 2007, it had become apparent that the liquidator would need to be put in funds to recover amounts from the majority shareholders in BGR which I found had oppressed Food Improvers, namely Mr Cordato's company, Cordato Partners (Services) Pty Limited and the principal defendant in the proceedings, The Triad Health Group of Companies Pty Limited. A number of interlocutory proceedings ensued. The liquidator came to an arrangement with Food Improvers and Mr Bax, under which Food Improvers would fund the liquidator in pursuing those recovery proceedings and associated actions. This was on the basis that at their conclusion, the liquidator would apply under s 564 of the Act for an order that the funders be paid out of any moneys recovered as consideration for the risk they had assumed. 11 That arrangement, self-evidently, was for the benefit of each member of the group of the companies in liquidation that was seeking to recover assets owed to BGR by Triad and Mr Cordato's company or defend proceedings brought by the latter to set aside statutory demands. I had directed that the liquidator would be justified in serving those statutory demands in order to recover the moneys owed to BGR pursuant to orders I had made in consequence of the principal judgment in these proceedings. 12 The liquidator overlooked applying to the Court for leave under s 477(2B) to enter into arrangements that might endure for more than three months in that context. As he pointed out, because Food Improvers and Mr Bax had offered to fund BGR for those purposes, it was not appropriate for the liquidator to resort to Holdings' surplus assets to do so, particularly since in August and September 2007 he had not yet called for proofs of debt in Holdings' winding up. At that time, Holdings and Corporation were creditors of BGR, for about $4.3 million and $1.7 million respectively. Any recovery actions funded by Food Improvers and Mr Bax against BGR's debtors would benefit those two subsidiaries of BGR. As the liquidator said when he entered into the funding arrangement on 10 September 2007, it was likely that a meeting of those creditors, who had lodged proofs of debt, would have approved any funding arrangement, by majority in number and value. In these circumstances it is necessary to decide whether I should exercise the power under s 1322(4) of the Act to extend the period in which the liquidator can make an application under s 477(2B). 13 I am satisfied that no substantial injustice has been, or is likely to be, caused to any person if this application is granted. Plainly, it was in the interests of BGR for the liquidator to make the funding arrangements. In those circumstances, I am of opinion that I should approve that application nunc pro tunc: Emanuele v Australian Securities Commission (1997) 188 CLR 114 esp at 132 where Toohey J referred to remarks of Lord Eldon LC in Donne v Lewis (1805) 11 Ves Jun 601 at 601 [32 ER 1221 at 1222] that the Court will enter a decree nunc pro tunc if satisfied, from its own official documents, that it is only doing now what it would have done then. That encapsulates the position here. 14 The substantive financial positions of the six defendants are that once the order under s 488(2) is given effect, Holdings will have net assets of about $70,000 and all its creditors including the liquidator will have been paid in full. The position of the other companies in the BGR group is easily stated, based on their positions as at late April 2011. Each of SNP Natural Products Pty Limited and Business & Research Management Pty Limited had no funds and no creditors. Advanced Technology Research Pty Limited had assets of only about $400 in cash. Corporation had about $250 in cash and was owed about $200,000 by Holdings. BGR had about $400,000 in cash while owing Hunter Premium Funding $3,751.14 and both about $200,000 due under the funding arrangement, including interest and a dividend of $550,000 to Food Improvers as well as the amounts due to Holdings and Corporation to which I have referred. 15 If the liquidator were to engage in the exercise of declaring dividends around the BGR group, it is obvious that, with the inter-company debt position as it is, there would be a need for a number of distributions. These would serve no apparent purpose. The only substantive external creditor of the subsidiaries of BGR, after the debt to Mr Cordato is paid by Holdings, will be the liquidator in respect of his fees. Once those fees are paid, BGR will have no competing claims against its 100% interest in its other five subsidiaries. Any cascade of distribution around the BGR group ought be disregarded for the purposes of arranging a practical and effective finalisation of the group's winding up. 16 I am satisfied that it is appropriate for the liquidator to apply, as he has, for a direction that he would be justified in withdrawing the inter-company proofs of debt so as to allow the surplus from Holdings to be paid directly to BGR. That will leave all of BGR's subsidiaries effectively with no assets after the liquidator is paid, and will allow BGR then to pay its creditors in the order contemplated by s 556(1), so that both Hunter Premium Funding and Food Improvers will be paid their debts in full, in the amounts they funded together with interest, before the liquidator distributes any balance in the payment of his own fees, costs and expenses, and then, what remains, in respect of the dividend due to Food Improvers. 17 I am satisfied that I should declare the liquidator's entry into the funding arrangement to be valid, notwithstanding leave to do so was not sought earlier under s 477(2B). That failure was essentially of a procedural nature. In any event, I am satisfied that both Mr Bax, as the controlling mind of Food Improvers, and the liquidator acted honestly and that it is just and equitable that the order be made for the purpose of s 1322(6)(a). COnclusion 18 For these reasons I will make the orders and directions that are appropriate for the liquidator to finalise the windings up of the group members. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares. Associate: Dated: 19 December 2011