New South Wales Supreme Court CITATION : Allstate Exploration v Batepro [2004] NSWSC 261 HEARING DATE(S) : 29 March 2004 JUDGMENT DATE : 2 April 2004 JURISDICTION: Equity JUDGMENT OF : Austin J DECISION : Orders made for enforcement and entry of award as judgment of Court; application for appointment of provisional liquidators declined CATCHWORDS : CORPORATIONS - just and equitable ground for winding up - standing of creditor - appointment of provisional liquidator on just and equitable ground - discretionary considerations LEGISLATION CITED : Corporations Act 2001 (Cth) ss 459C, 461, 472 CIC Insurance Ltd v Hannan & Co Pty Ltd (2001) 38 ACSR 245 Clemada Pty Ltd v Hire It Pty Ltd (No 2) (1990) 3 ACSR 202 Constantinidis v JGL Trading Pty Ltd (1995) 17 ACSR 65 Lubavitch Mazal Pty Ltd v Yeshiva Properties No 1 Pty Ltd (2003) 47 ACSR 197 CASES CITED : Re Freihart Pty Ltd [2001] ACTSC 95 Re McLennan Holdings Pty Ltd (1983) 7 ACLR 732 Re Petrochemical Industries Ltd (1989) 15 ACLR 636 Shum Yip Properties Development Ltd v Chatswood Investment and Development Co Pty Ltd (2002) 40 ACSR 619 Zempilas v JN Taylor Holdings Ltd (1990) 55 SASR 103 Allstate Explorations NL (P1) Allstate Prospecting Pty Ltd (P2) PARTIES : ACN 070 164 653 Pty Ltd (P3) Batepro Australia Pty Ltd (D1) Brown & Root Engineering & Construction Pty Ltd (D2) FILE NUMBER(S) : SC 2058/04 COUNSEL : A P Coleman (P) SOLICITORS : Clayton Utz (P) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION AUSTIN J FRIDAY 2 APRIL 2004 2058/04 ALLSTATE EXPLORATIONS NL & ORS V BATEPRO AUSTRALIA PTY LTD JUDGMENT HIS HONOUR: The proceeding and the application 1 By their originating process the plaintiffs, acting by their administrators under deed of company arrangement, seek the following relief: 1. An order giving leave to the plaintiffs to enforce as a judgment of this Court the interim award dated 22 January 2004 made by John Tyrill, arbitrator, in the arbitration between the plaintiffs and the defendants; 2. An order that the plaintiffs have leave to enter the award as a judgment of the Court; 3. An order for the winding up of the defendant companies, under the "just and equitable" ground (Corporations Act, s 461(1)(k)), and for the appointment of liquidators; 4. An order for the appointment of provisional liquidators under s 472(2), on the same ground. 2 The defendants have not appeared to contest the plaintiffs' application. I am satisfied that the second defendant has been served at its registered office. On 26 March 2004 its solicitors wrote to the plaintiffs' solicitors saying their instructions were not appear at the hearing of the application and to make no submissions in relation to the orders sought. Notwithstanding those instructions, the solicitors said in their letter that they had difficulty with the plaintiffs' assertion that the matter was sufficiently urgent to justify the appointment of provisional liquidators. 3 It appears that the first defendant was served at its registered office, the office of a firm of chartered accountants, but some confusion has arisen because the firm changed its address recently. To remove doubt, the documents were also served by delivery to the residence of its sole Australian director. It appears, however, that he was overseas at the time. The first defendant's solicitors wrote to the plaintiff's solicitors on 26 March 2004 referring to the present proceeding and saying they had been asked by their client to advise that service had not been effected on the Australian resident director, and that the papers left at his residence were being sent to them, although they had no instructions to accept service. 4 It is more likely than not, on this evidence, that the existence of the proceeding and the fixing of the hearing for 29 March 2004 were drawn to the attention of the first defendant. However, there is an element of uncertainty as to whether the documents have been brought to the attention of the people who would need to deal with them on behalf of the first defendant. I therefore believe it would not be appropriate to move immediately to consider a winding up order, although orders may be made for the enforcement and entry of the arbitrator's award as a judgment of the Court, and for the appointment of provisional liquidators, if grounds have been established. Facts 5 The second and third plaintiffs are both wholly-owned subsidiaries of the first plaintiff ("Allstate"). Allstate went into voluntary administration on 8 June 2001 pursuant to a resolution of its directors under s 436A. On 4 October 2001, at a meeting convened under s 439A, the creditors of Allstate resolved that the company execute a deed of company arrangement and that the administrators become administrators under the deed. The deed of company arrangement was subsequently varied on two occasions. The administrators of Allstate are now also the administrators of other Allstate entities including the second and third plaintiffs ("Allstate Prospecting" and "ACN"). 6 Allstate Prospecting and ACN are joint venturers in the Beaconsfield Mine Joint Venture, and together hold an interest in 51.51% of the joint venture. The remaining 48.49% interest in the joint venture is owned by three companies, namely Beaconsfield Gold NL (receiver and manager appointed), Beaconsfield Operations Pty Ltd (receiver manager appointed) and Beaconsfield Tasmania Pty Ltd (receiver and manager appointed) (together the "Beaconsfield entities"). 7 The joint venture owns and operates the Beaconsfield Gold Mine, in Beaconsfield Tasmania. Allstate has been appointed as the manager responsible for the day-to-day management of the joint venture and the goldmine. 8 The first defendant ("Batepro") and the second defendant (Brown & Root") (together "BBR") entered into a contract with the Allstate entities dated 5 August 1998, pursuant to which BBR was to design and construct a gold processing plant at the Beaconsfield Gold Mine. Clause 47 of the contract, as amended, is a dispute resolution clause which provides for negotiation, following which either party has the right to pursue arbitration. 9 On 16 March 2000 a notice of dispute was issued by the Allstate entities and the Beaconsfield entities, commencing arbitration against BBR under and in relation to that contract. The grounds of the claim were that BBR was liable to the Allstate entities and the Beaconsfield entities for breaches of the contract arising from late completion of processing plant, failure of the plans to meet performance guarantees and defective design and construction work. Claims were also made for the cost of rectification works on the processing plant and for misleading and deceptive conduct in breach of s 52 of the Trade Practices Act 1974 (Cth). 10 On 16 February 2001 Allen Allen & Hemsley ("Allens") wrote to Brown & Root care of its solicitors, confirming that Allens had been instructed by QBE Insurance Group ("QBE") in respect of the claim subject to arbitration. Allens confirmed that indemnity had been granted by QBE to BBR in respect of the claim, under a professional indemnity insurance policy taken out by BBR in relation to the contract. 11 The arbitrator convened a preliminary conference held on 9 May 2001. He made various directions including a direction that the arbitration commence on 29 April 2002. There were further preliminary conferences held in December 2001, June 2002 and August 2002, and on each occasion the arbitrator postponed the commencement of the arbitration hearing, so that after the last of these conferences the hearing was scheduled to commence on 9 December 2002. On 3 September 2002 the arbitrator amended his directions so that the hearing date was postponed again and set it down to commence on 12 April 2003. That commencement date was confirmed at a further preliminary conference held on 14 April 2003. 12 On 30 April 2003 Allens sent a facsimile to the arbitrator and the solicitors for the Allstate entities and the Beaconsfield entities, saying that Allens were likely to cease acting for BBR and QBE within the next few days and that there were "indemnity issues" to be resolved between BBR and QBE. In subsequent correspondence Allens said that neither BBR nor QBE was prepared to continue funding the defence of the arbitration proceedings, and that both the joint venture companies had no assets and were not trading. The solicitors for Batepro and Brown & Root each confirmed, in May 2003, that their clients would not be appearing at the arbitration or defending the claims brought against them. The solicitors for Batepro said that their client had no funds and that the insurer had withdrawn indemnity. 13 The arbitration eventually commenced on 20 May 2003 and was conducted on an ex parte basis, without attendance by Batepro or Brown & Root. The arbitrator then retired to consider the evidence and the submissions he had received. He published an award, which he described as an "interim" award, on 22 January 2004. He described it as an "interim" award only because the question of costs was still outstanding between the parties. The claim has now been finally determined and no appeal has been lodged by any party. In short, Mr Tyrill has awarded the plaintiffs and the Beaconsfield entities damages under various headings totalling $60,366,785, together with interest accruing from 17 January 2004 at the rate of $29,292 per week. Leave to enforce award and enter judgment 14 The plaintiffs' evidence is that their claim against BBR under the interim award is their most significant asset, and if the claim is successfully enforced, recoveries will be available to pay all of their creditors. They seek leave to enter and enforce the award as a judgment of the Court under s 33 of the Commercial Arbitration Act 1984 (NSW). 15 The evidence satisfies me that the parties, by entering into and amending it, agreed to submit to arbitration under clause 47 of the contract. There is evidence that the parties to the contract agreed to the appointed Mr Tyrill as arbitrator. Mr Tyrill's award is in evidence. I have decided that this is a proper case to grant the plaintiffs leave to enforce and enter the award as a judgment of the Court, under s 33. Are the defendants insolvent? 16 The evidence before me includes transcripts of the examination of a director of Batepro and directors of Brown & Root, conducted late in 2002. It appears that Batepro is winding down its existing business and its last remaining business has been to deal with the Beaconsfield issue. Brown & Root was not trading and continued in existence only because it was the defendant in litigation in New South Wales, presumably the arbitration, and would be wound up when the litigation was complete. It had reported losses of approximately $14 million in 1999 and 2000. 17 This evidence, when coupled with the statements by the solicitors for the first defendant in May 2003 that their client was without funds, and by Allens that both defendants were without funds, the fact that the defendants did not appear to contest the arbitration, and the evidence that the position of the companies has not changed since that time, indicates that the defendant companies may have been insolvent from about May 2003. However, the evidence as to the financial position of the defendant companies is very thin, and I would not intervene to appoint provisional liquidators on the ground of insolvency, even taking into account the arbitrator's award. As Kirby P observed in Constantinidis v JGL Trading Pty Ltd (1995) 17 ACSR 65, the Court "will not look in a narrow and particular way only at the position of identified debts or specified creditors", and will consider "the debtor's financial position in its entirety". There is simply insufficient evidence to perform this task in the case of the defendant companies. 18 To say this might seem perverse when I have just decided to grant leave to the plaintiffs to enter judgment against the defendants for over $60 million, with large amounts of interest accruing weekly. But what is missing, apart from evidence of the general financial position of the defendants, is evidence going specifically to the presence or absence of any arrangements for inter-company financial support within the corporate groups to which the defendants belong, or for any other access to finance. To say that a defendant was, in May 2003, without funds to defend an arbitration claim, effectively in consequence of the recent withdrawal of the insurer, is not to acknowledge insolvency. 19 Creditors in the position of the plaintiffs may overcome judicial hesitation on such matters by following the well-worn path of administering a statutory demand, failure to comply with which will create a presumption of insolvency under s 459C. The absence of any such presumption leaves too many questions at large. In any event, the plaintiffs have not relied upon the ground of insolvency, either in their originating process or in submissions, except as a matter going to the protection of the public interest for the purposes of the just and equitable ground. The plaintiffs' standing, as creditors, to seek winding up on the just and equitable ground 20 The plaintiffs claim to move for relief as creditors of the defendants, as a result of an award in their favour by Arbitrator Tyrill. As I have decided to grant the plaintiffs leave to enter judgment, and as they are entitled to accruing interest which stood at $263,628 at 22 March 2004, the plaintiffs are creditors for the purposes of Part 5.4 of the Corporations Act. 21 The appointment of provisional liquidators is justified, if at all, only on the just and equitable ground, which is the only ground relied upon by the plaintiffs. As creditors, the plaintiffs have standing to seek a winding up order on that ground under s 462(2)(b), and therefore they have standing to seek the appointment of provisional liquidators under s 472(2). 22 In Re Petrochemical Industries Ltd (1989) 15 ACLR 636 Master White in the Supreme Court of Western Australia referred to views expressed by the learned authors of McPherson's Law of Company Liquidation (see now 4th edition, 1999, by Andrew Keay, page 59) and Gower's Principles of Modern Company Law (4th edition, 1979, page 658 note 17), which he treated as suggesting that it is inappropriate for a creditor to seek to rely upon the just and equitable ground for winding up a company. The Master did not base his decision on that proposition, concluding only that there were serious difficulties in the way of the petitioner's success its application for a winding up order. 23 The editors of McPherson merely say that the just and equitable ground is "usually" relied on by contributories rather than by creditors. Then they consider some particular issues such as the practice adopted in the past, whereby a creditor seeking a winding up order on the insolvency ground would include an allegation in its application that it would be just and equitable for the company to be wound up. That, according to the authors, is an unnecessary addendum. 24 The learned authors of the 4th edition of Gower say, in the footnote cited, that "a creditor's petition on the just and equitable ground is clearly inappropriate". While I accept that it is likely to be much more common for the just and equitable ground to be invoked by contributories than by creditors, I respectfully disagree with the view expressed in the 4th edition of Gower. No reasons were advanced for their proposition. It is a curious statement, given that the United Kingdom legislation, like ours, expressly confers standing on a creditor to apply on this ground. In the current edition of Gower (6th edition, 1997, by Paul L Davies), the footnote has disappeared, and the authors say instead (at 749, note 71) that petitions may be brought by creditors, though such applications are rare. 25 In this country, courts have from time to time dealt with applications based on both insolvency and the just and equitable ground, without any apparent difficulty: see, for example, Clemada Pty Ltd v Hire It Pty Ltd (No 2) (1990) 3 ACSR 202; Re Freihart Pty Ltd [2001] ACTSC 95 (28 September 2001). From time to time, a provisional liquidator is appointed on the just and equitable ground: see, for example, CIC Insurance Ltd v Hannan & Co Pty Ltd (2001) 38 ACSR 245 (where it was also found that the company was insolvent); Zempilas v JN Taylor Holdings Ltd (1990) 55 SASR 103. 26 My conclusion is that the plaintiffs have standing, as creditors, to seek winding up and the appointment of provisional liquidators to the defendant companies on the just and equitable ground. Requirements for the appointment of a provisional liquidator 27 The appointment of a provisional liquidator is, of course, a discretionary remedy. However, in the exercise of its discretion the Court will look to two principal matters. The first, stated by Kirby P in Constantinidis (at 636), citing Re McLennan Holdings Pty Ltd (1983) 7 ACLR 732, is that a provisional liquidator will not usually be appointed unless it appears from the evidence, and in the absence of material to the contrary, to be reasonably likely that a winding up order will be made. 28 In my opinion, the plaintiffs have failed to satisfy this requirement. They rely upon the following matters as establishing the likelihood that the defendants will be wound up on the just and equitable ground at the final hearing: (a) that they have not traded for several years; (b) that they are without funds to face a $60 million award, from which no appeal has been made, and therefore it is in the public interest that the companies be wound up; (c) that they have not filed financial reports with ASIC since 2001, and apparently do not have current auditors, matters from which one can infer that the directors of the companies do not intend the companies to trade, and intend to wind them up; (d) that they have not attended at the interlocutory hearing. 29 Matters of these kinds can be building blocks in a case for winding up on the just and equitable ground. For example, failure to comply with the requirements of the Corporations Act with respect to financial records and reports is sometimes regarded as a component in a case on the just and equitable ground, although normally there is also evidence of other matters such as breaches of statutory and fiduciary duties on the part of the directors: see, for example, Shum Yip Properties Development Ltd v Chatswood Investment and Development Co Pty Ltd (2002) 40 ACSR 619. But the fact that the companies have not traded for some time is of no great weight unless it is combined with other factors, and the fact that the defendants chose not to appear in answer to an interlocutory application on very short notice seems to meet have no weight at all, especially if they appear at the final hearing. 30 The second requirement for the appointment of a provisional liquidator is that the applicant must point to some good reason for intervention prior to the final hearing. The reason must be compelling, because the appointment of a provisional liquidator is a drastic intrusion into the affairs of the company: see Constantinidis at 635 per Kirby P, and at 640 per Meagher JA (who described the appointment of a provisional liquidator as a judicial remedy "of a wholly extraordinary nature"). It should be shown that the appointment is needed in the public interest, or to preserve the status quo in relation to the affairs of the company, or to protect the company's assets. Frequently that will involve the Court considering the degree of urgency of intervention, and the balance of convenience: see Lubavitch Mazal Pty Ltd v Yeshiva Properties No 1 Pty Ltd (2003) 47 ACSR 197, 217-8. 31 The plaintiffs say that the following factors support the appointment of provisional liquidators on the just and equitable ground: (a) The companies have not traded for some two years and were only kept in existence to fight the arbitration. (b) The companies have no funds and, once the insurer withdrew indemnity, they did not in fact fight the arbitration claim. Conversely, the award against the defendants is the biggest potential asset of the plaintiffs companies. (c) BR has closed the site office at the Beaconsfield Gold Mine. The plaintiffs do not presently know where the books and records of the defendant companies are located. Some of the books and records were provided to Allens but they have ceased to act, and the plaintiffs are unaware whether they have retained those records. The appointment of provisional liquidators would ensure that the books and records of the companies could be gathered quickly, in circumstances where they might be difficult to recover. (d) In about September 2000 Brown & Root changed its name to an Australian Company Number, and according to the plaintiffs this suggests that the US parent company, Halliburton Inc, no longer wishes to be associated with its subsidiary. (e) Two firms have resigned as auditors of Brown & Root, namely Arthur Andersen in May 2002 and Ernst & Young in September 2002, and according to searches, no replacement auditors have been appointed. (f) Batepro does not appear to have lodged financial reports with ASIC since 2001. (g) The losses being suffered by BBR, according to the evidence of their directors during their examinations, may give rise to questions of parent company liability. (h) There may be assets or claims that can only be investigated for the benefit creditors following the appointment of provisional liquidators or liquidators, employing the powers conferred on them by the Corporations Act. (i) Based on evidence given by an officer of QBE at his examination, there is an arguable case that QBE should not have withdrawn its indemnity under its insurance policy issued in favour of BBR, and that the policy is therefore available to meet in part the arbitrator's interim award. Provisional liquidators should be appointed so that they can have access to the books and records of the companies, including documents relating to the insurance policy, to assess whether there is a claim against the insurer. In addition, according to the plaintiffs, there may be a cause of action under s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW), by which the amount of the defendants' liability is charged on all insurance money that may become payable. 32 In my opinion, none of these considerations satisfies the criteria for the appointment of a provisional liquidator, as set out in the case law which I summarised in the Lubavitch Mazal decision. 33 The facts that the companies have not traded for some time, and have had no funds to fight the arbitration claims since the insurer withdrew indemnity, provide nothing like the kind of basis needed for the drastic curial intervention sought by the plaintiffs. The fact that the award against the defendants is the biggest asset of the plaintiff companies seems to me irrelevant. Although the directors of the defendant companies have given some evidence that they kept the companies in existence only to fight the arbitration, it is open to them to change their minds, and the deregistration of the companies is essentially a matter for them. 34 If there were a factual basis for serious and immediate concern that the financial records of the companies might be spirited away, in the absence of external administration, the appointment of a provisional liquidator would probably be appropriate, but the factual basis is absent here. All we have is the closure of a site office, the fact that the companies are not trading, and the fact that only one of the directors of Batepro is an Australian resident. 35 The evidence before me does not entitle me to make the inference that the change of the second defendant's name from Brown & Root to an ACN number was implemented because the US parent did not want to be associated with the subsidiary. 36 The fact that two firms have resigned as auditors of Brown & Root is not of any consequence in itself, absent further facts. The fact that the appointment of a new auditor after September 2002 has not been publicly notified and may not have occurred is a possible cause for concern, although tempered by the fact that the company is not trading. Much the same observation can be made about the omission by Batepro to lodge financial records with ASIC since 2001. 37 If there are questions of parent company liability, they can be explored by a liquidator, if the case for winding up the companies is properly made out. That is equally so, with respect to assets and claims that might be investigated for the benefit of creditors if winding up orders are made. One can well understand that the plaintiffs wish to have the possibility of a claim by the BBR companies against QBE for its withdrawal of indemnity fully investigated, and that the best way of having that matter investigated might be for a liquidator or provisional liquidator to exercise his or her statutory powers of access to financial records, and their powers of examination, and for proceedings then to be launched by the liquidator in the companies' names. There is nothing inappropriate in the plaintiffs seeking to press for such investigations. But the fact that the investigations may be fruitful is not itself a basis for winding up, let alone for the appointment of provisional liquidators. 38 The letter of the second defendant's solicitors dated 26 March 2004 criticised the plaintiffs for delay in bringing their application. But the award was made only on 22 January 2004, and it is appropriate to bear in mind that the plaintiff companies are themselves under deeds of company arrangement, a factor which might be expected to slow down the decision-making process. Had I been prepared, on the merits of the case, to order the appointment of provisional liquidators, I would not have been deterred by any argument about alleged delay. But the plaintiffs have failed to make out their case on the merits. Conclusion 39 I shall make orders under s 33 of the Commercial Arbitration Act for the enforcement of the award and its entry as a judgment of the Court. But I shall not make any order for the appointment of provisional liquidators. Since the application for the latter relief was the main thrust of the interlocutory application, and plaintiffs have failed in that respect, I shall not make any order for costs in their favour. I shall stand the proceeding into the Registrar's list for directions. ********** Last Modified: 04/30/2004 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.