Supreme Court New South Wales Medium Neutral Citation: In the matter of Hammoud Investments Pty Limited (In Liquidation) [2024] NSWSC 1636 Hearing dates: 16 and 18 December 2024 Date of orders: 18 December 2024 Decision date: 18 December 2024 Jurisdiction: Equity - Corporations List Before: Hammerschlag CJ in Eq Decision: The plaintiffs are not justified in, and justified in not, taking the steps described in [1]-[4] of the Originating Process and will not be justified in doing so unless either the contributory moves the Court for leave to bring a derivative action and fails, or another party moves the Court to terminate the winding up of the Company and fails Catchwords: CORPORATIONS – Corporations Act 2001 (Cth) sch 2 s 90-15(1) – Application for directions in the nature of judicial advice that liquidators would be justified in investigating and pursuing certain claims against a director and a Capital Gains Tax concession – Where the Company currently has a surplus sufficient to discharge all creditors, which surplus might be eroded or entirely eliminated if the Company failed against the director or succeeded and was unable to recover – Where the only person with an direct economic interest in the outcome is a contributory who has not given an indemnity to the Company for any liability for costs – HELD: Liquidators would not be justified in investigating and pursuing the foreshadowed claims and will not be justified in doing so, unless, within a reasonable time the contributory moves the Court for leave to bring a derivative action and fails, or another party applies for the termination of the winding up and fails Legislation Cited: Corporations Act 2001 (Cth) Cases Cited: Carpenter v Pioneer Park Pty Ltd (2008) 71 NSWLR 577 Category: Principal judgment Parties: Rajiv Ghedia and Shumit Banerjee in their capacity as Liquidators of Hammoud Investments Pty Ltd (In Liquidation) (ACN 085 584 247) (First Plaintiff) Hammoud Investments Pty Ltd (In Liquidation) (ACN 085 584 247) (Second Plaintiff) Representation: Counsel: P Reynolds (Plaintiffs) Solicitors: Hallcross Legal (Plaintiffs) File Number(s): 2024/00444346 Publication restriction: Nil JUDGMENT 1. HIS HONOUR: Section 90-15(1) of Schedule 2 to the Corporations Act 2001 (Cth) (known as the Insolvency Practice Schedule (Corporations)) provides that the Court may make such orders as it thinks fit in relation to the external administration of a company. This wide power includes the power to give directions in nature of judicial advice. 2. By Originating Process filed on 29 November 2024, Rajiv Ghedia and Shumit Banerjee in their capacity as liquidators (the liquidators) of Hammoud Investments Pty Ltd (In Liquidation) (the Company) apply under s 90-15 for a series of orders in the nature of judicial advice. The advice sought by the liquidators is whether it would be reasonable (or not reasonable as the case may be) on their part to investigate and pursue possible claims against the director of the Company in circumstances where the creditors can be paid in full and the substantial beneficiary of success by the Company would be the contributory, Ms Ji Sue Hammoud (Ms Kim). They also seek a direction that they would be justified in pursuing a Capital Gains Tax (CGT) concession which might be available to the Company. 3. The liquidators relied on affidavits of Mr Ghedia, sworn respectively on 27 November 2024 and 13 December 2024, and various exhibits, including a confidential one containing, amongst others, a written memorandum of advice from Mr Reynolds of counsel. 4. The Company operated as an investment vehicle generating income from three commercial warehouses which it owned (the Property). 5. The sole director of the Company is Mr Ali Hammoud (Ali). I use his first name intending no disrespect. 6. The Company has two classes of shares on issue: 1. ordinary shares of which there are 100 on issue which are owned by Ms Kim who inherited the shares from her late husband (Mr Abed Hammoud) and founder of the Company (who passed away on 1 June 2018). These shares have dividend rights but no voting rights. In a winding up they are entitled to participate equally with other ordinary shareholders, to the exclusion of all other shares, in the division of all surplus assets or profits of the Company; and 2. F class shares of which there are 1100 on issue of which 800 are held by Ali, 200 by one of his sister, and 100 by another sister. These shares have voting rights but no dividend rights. If there are no holders of ordinary shares and there are available funds they have rights of participation in a winding up on a progressive basis with other classes of shares. This is not presently relevant as there are ordinary shares on issue. 1. On 20 January 2022, Ms Kim brought proceedings in the Federal Court of Australia seeking the winding up of the Company on the just and equitable basis. Shortly thereafter, on 15 February 2022, Ali resolved to place the Company into voluntary administration and to have the liquidators appointed as voluntary administrators. A Deed of Company Arrangement was executed but not proceeded with and the Company went into liquidation. For the duration of their appointment as administrators, the liquidators continued trading. 2. The liquidators duly sold the Property (which was mortgaged to Westpac bank) for net sales proceeds of $3,131,835. If there were to be a distribution now, the creditors, including Ali, would be paid in full and there would be a surplus of cash left over. It is against this somewhat unusual background that this application is brought, in that the only person with a direct economic interest in the surplus is Ms Kim. The liquidators' reports disclose that there have been various proposals for resolution of the matter, one of which involved terminating the winding up. 3. The liquidators have identified a number of transactions in which it is said Ali, or parties related to him, were involved, and by which the Company was unlawfully impoverished. They include: 1. the Company advancing funds to Ali or family members exceeding $1.5 million; 2. the Company allowing two entities related to Ali to occupy Company premises for nil rent and without a lease; and 3. the Company transferring a vehicle to Ali by retaining the obligation to pay financing costs on it. 1. It is also said that Ali has not cooperated in producing the books and records of the company or in assisting the liquidators to obtain a CGT concession which may be available to the Company following the sale of the Property. 2. Ali hotly disputes any wrongdoing on his part. 3. The most recent financial information (derived from a letter dated 2 August 2024 from the liquidators to Ms Kim) is that the Company has cash at bank of $2,801,587 and that total creditors amount to $1,670,090. The unsecured creditors include the ATO ($51,137), a firm of solicitors ($5,500) and relatives of Ali in varying amounts. 4. Ali and his brother Mohammad, jointly, are, by far, the largest creditors of the Company having been admitted to proof for $1,236,232. That proof was unsuccessfully challenged by Ms Kim. 5. The liquidators' legal and accounting fees are estimated at $186,000. 6. The CGT liability without a concession is $871,902 and $295,152 with it. 7. This means that without the concession the present estimated funds available as a distribution to Ms Kim are only $156,243 and with it, $675,493. 8. The underlying commercial tussle is largely between Ms Kim and Ali. 9. The Originating Process seeks the following relief: 1. Pursuant to s 90-15 of the Insolvency Practice Schedule, a direction that the Plaintiffs as the liquidators of the Company would be justified, or not justified, in conducting investigations, including by way of examinations conducted pursuant to ss 596A and 596B of the Corporations Act 2001 (Cth) (CA), of pre-appointment transactions including the following: Transfers / advances / loans to related entities or persons (a) The transfer, advance or loan of approximately $380,518 to Foxy Bikes and Trailers Pty Ltd (ACN 142 330 078) (Foxy Bikes) in the period 2013-2016 and the non-recovery of those funds by the Company; (b) The transfer, advance or loan of approximately $20,518 to Foxy Trailers Pty Ltd (ACN 615 558 373) (Foxy Trailers) in the period 2016-2021 and the non-recovery of those funds by the Company; (c) The transfer, advance or loan of approximately $237,266 to C.S.I. Sydney Pty Ltd (ACN 146 829 530) as trustee of the CSI Sydney Trust in the period 2013-2018 and the non-recovery of those funds by the Company; (d) The transfer, advance or loan of approximately $130,543 to Beit Lif Pty Ltd (ACN 601 025 889) as trustee of the Beit Lif Unit Trust in the period 2014-2020 and the non-recovery of those funds by the Company; (e) The transfer, advance or loan of approximately $137,500 to The WBSCI Partnership in 2014 and the non-recovery of those funds by the Company; (f) The transfer, advance or loan of approximately $110,161 to Sarah Hammoud in the period 2015-2018 and the non-recovery of those funds by the Company; (g) The transfer, advance or loan of approximately $192,054 to Ji Sue Kim in the period 2015-2018 and the non-recovery of those funds by the Company; (h) The transfer, advance or loan of approximately $5,040 to the late Mr Abed Hammoud and Mariam Hammoud in the period 2017-2018 and the non-recovery of those funds by the Company; (i) The transfer, advance or loan of approximately $126,203 to the late Mr Abed Hammoud in the period 2016-2019 and the non-recovery of those funds by the Company; (j) The transfer, advance or loan of approximately $225,317 to Homecorp Developments Pty Ltd in the period 2013-2018 and the non-recovery of those funds by the Company; Lease of Company real property to related entities (k) The occupation and use of real property of which the Company was the registered proprietor, being 109 and 113 Lakemba Street, Belmore, NSW 2192 (Property), by Foxy Bikes and / or Foxy Trailers in the period 2012-2022 without a lease, and the quantum of the rent or license fee charged to Foxy Bikes and / or Foxy Trailers (to the extent that any was charged); (l) The occupation and use of the Property by Foxy Trailers and / or Foxy Bikes in the period 2014-2022 without a lease, and the quantum of the rent or license fee charged to Foxy Trailers and / or Foxy Bikes (to the extent that any was charged); Transfer of Company property to the director (m) The transfer of a vehicle (a 2014 BMW X5 with the VIN number WBAKS420600J43541) to the director, in circumstances where the Company, following that transfer, retained the obligation to pay Macquarie Leasing Pty Ltd for the finance obtained to procure the vehicle. 2. Pursuant to s 90-15 of the Insolvency Practice Schedule, a direction that the Plaintiffs as the liquidators of the Company would be justified, or not justified, in conducting investigations, including by way of examinations conducted pursuant to ss 596A and 596B of the CA, of the availability of the small business CGT concession in respect of the sale of the Property. 3. Pursuant to s 90-15 of the Insolvency Practice Schedule, a direction that the Plaintiffs as the liquidators of the Company would be justified, or not justified, in commencing recovery action following the conducting of the investigation referred to in order 1 or otherwise, in the event that the liquidators are of the opinion that such recovery action had reasonable prospects of success. 4. Pursuant to s 90-15 of the Insolvency Practice Schedule, a direction that, in the event that the creditors of the Company voted to remove and replace the Liquidators upon the commencement of the investigations referred to in order 1-2 and/or the proceedings referred to in order 3 pursuant to s 93-35(1) of the Insolvency Practice Schedule, the Plaintiffs as the liquidators of the Company would be justified, or not justified, in applying to the Court for reappointment pursuant to ss 90-35(4), 90-15 or 75-41 of the Insolvency Practice Schedule, or alternatively to apply to restrain the meeting in advance of it being held. 1. The liquidators say that they are on the horns of a dilemma brought about by the conflicting interests of the unpaid creditors, especially Ali, and those of Ms Kim, the contributory and only direct economic beneficiary of any recovery. The creditors would be paid in full if there was a distribution now, but if the liquidators proceed payment to the creditors will be delayed and there is the clear potential that the erosion of the surplus may have the ultimate effect that they might not be paid in full, or in an extreme case at all, if the Company loses or wins and there is no recovery. It is of course to be borne in mind that Ali is one of, if not the major, target of the claim. His opposition should be seen in this light. He has indicated proposing a resolution to remove and replace the liquidators. It is also to be borne in mind that if all the creditors are paid in full there would, it seems to me, no longer be a dilemma, but that eventuality has not yet come to pass. 2. Given that the F shareholders control the operation of the Company it cannot be said that they do not have an interest in the financial position of the Company and in the non-erosion of a surplus. There is no indemnity from Ms Kim in respect of the costs for which the Company might be liable if it fails in the litigation, which will no doubt be significant. In my view the liquidators could not investigate the claims and prosecute the proceedings to finality for an amount even vaguely as modest as the current surplus without the CGT concession, and if the Company were to lose the proceedings, its own costs and that of the successful defendants would largely, if not entirely, erode any surplus even with the CGT concession. There was no evidence about Ali's ability or inability to meet any verdict. He is, however, owed a substantial amount of money and does hold the majority of F class shares on issue. 3. Were Ms Kim to have leave to bring a derivative action on behalf of the Company she would, almost inevitably, have to indemnify the Company against any such loss. The Court has inherent jurisdiction on the application of a contributory to grant leave to bring proceedings on behalf of the Company in liquidation: see Carpenter v Pioneer Park Pty Ltd (2008) 71 NSWLR 577 (per Barrett J, as His Honour then was). That step has not been taken. 4. It also seems to me that the present application rests on the assumption that the Company will be finally wound up and the surplus distributed to Ms Kim. This does not take account of the possibility that in the light of the surplus, Ali or other shareholders may move the Court to terminate the winding up. 5. I have formed the conclusion that the liquidators are not justified in investigating or pursuing the foreshadowed claims (that is, taking the steps identified in [1(a)-(m)], [2], and [3] of the Originating Process) and will not be justified in doing so, unless, at least, within a reasonable time Ms Kim moves the Court for leave to bring a derivative action and fails, or another party applies for the termination of the winding up and fails. Indeed, in my opinion, the liquidators would be justified in not taking those actions unless either of those contingencies occurred. 6. I think a reasonable time for either of those applications to be made is by 21 February 2025. 7. At present, I also do not consider that I should make a direction in accordance with [4] of the Originating Process given the outcome of this application and, in particular, the possibility that the creditors might now be paid. 8. Counsel for the liquidators suggested that, at a minimum, the liquidators may be justified in pursuing the CGT concession which will necessitate seeking production of documents and further information from Ali. I do not think that they would be justified in doing that at this time. Were the Company to remain in liquidation they might well be justified in taking further steps but not otherwise. 9. I will stand this application over before the Corporations List Judge on 3 March 2025 with liberty to apply on 3 days' notice. 10. The application may be enlivened on the same papers (duly supplemented as may be required) before the Corporations List Judge at that time. 11. In the interim the landscape of this dispute may change including (as foreshadowed by counsel for the liquidators) by payment to all the creditors. Were that to happen it will be open to the liquidators to seek the positive directions which I have declined to give. 12. I do not consider that the liquidators have acted unreasonably in moving the Court for this advice, the costs of this application will be costs in the winding up of the Company. 13. I make the following orders: 1. In circumstances where the known creditors have not been paid in full, the plaintiffs are not justified in taking any of the steps described in [1(a)-(m)], [2], [3] and [4] of the Originating Process and will not be justified in doing so unless: 1. by 21 February 2025, the contributory initiates an application for leave to bring a derivative action and that application subsequently fails; or 2. by 21 February 2025, another party initiates an application for the termination of the winding up and that application subsequently fails, or no such application is brought by that time. 1. In circumstances where the known creditors have not been paid in full, the plaintiffs are justified in not taking any of the steps described in [1(a)-(m)], [2], [3] and [4] of the Originating Process unless: 1. by 21 February 2025, the contributory initiates an application for leave to bring a derivative action and that application subsequently fails; or 2. by 21 February 2025, another party initiates an application for the termination of the winding up and that application subsequently fails, or no such application is brought by that time. 1. The Originating Process is stood over before the Corporations List Judge on 3 March 2025 with liberty to apply on 3 days' notice. 2. The costs of these proceedings are costs in the winding up of the Company. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 18 December 2024