Universal Financial Group Pty Ltd v Mortgage Elimination Services Pty Ltd [2005] NSWSC 988

New South Wales Supreme Court

CITATION : Universal Financial Group Pty Ltd v Mortgage Elimination Services Pty Ltd [2005] NSWSC 988

HEARING DATE(S) : 26/09/05

JUDGMENT DATE : 26 September 2005

Equity Division JURISDICTION : Corporations List

JUDGMENT OF : Young CJ in Eq

DECISION : Order that the defendant be wound up; advertisement rules dispensed with to the extent they were not complied with.

CATCHWORDS : CORPORATIONS [229]- Application for winding up in insolvency- Company under administration- Whether in creditors' interests for company to continue under administration or be wound up.

LEGISLATION CITED : Corporations Act 2001 (Cth), ss 440A(2), 600A

Universal Financial Group Pty Limited (P) PARTIES : Mortgage Elimination Services Pty Limited (D)

FILE NUMBER(S) : SC 4084/05

J S Drummond (P) COUNSEL : R J Tassell (S) (D)

Hewitts Commercial Lawyers (P) SOLICITORS : Verekers (D)

LOWER COURT JURISDICTION :

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

YOUNG CJ in EQ

Monday 26 September 2005

4084/05 – UNIVERSAL FINANCIAL GROUP PTY LTD v MORTGAGE ELIMINATION SERVICES PTY LTD JUDGMENT 1 HIS HONOUR: This is an application by a creditor that the defendant company, Mortgage Elimination Services Pty Ltd, be wound up in insolvency. There is no doubt at all that the company is insolvent. However, the company is currently under administration. The company came under administration as a result of a resolution passed by the company's sole director, Mr Graham Smith, on 5 August 2005. 2 Up until late July not only was Mr Smith involved with the control of the defendant company, but there was also, very much involved, Mr Warren Turner and a Ms Lorraine Hilton. 3 The administrators appear to me to have been put in a rather invidious position. One of the administrators, Mr Michael Shannon of Brisbane, has sworn the principal affidavits for the opponents to the present application and he has been ably represented by Mr Tassell, solicitor, who has put before the Court, in a commendable way, and did not waste time with irrelevancies and got right to the core of the matter, why the company should not be wound up. 4 However, Mr Shannon and his partner are in an awkward position because they were put in by resolution passed by Mr Smith, it would seem, but most of the knowledge of the affairs of the company is with Mr Turner and Ms Hilton. The figures that the administrators received appeared to come from Ms Hilton, indeed after she had resigned as a director. The figures do not have any corroboration. The administrators do not have any books. The administrators have no way of checking the figures. However, they have done the best they can. 5 On 26 August 2005 the administrators caused to be sent, to persons they considered to be creditors of the company, a notice convening a second meeting. This notice set out what, on the information the administrators had, were the advantages or disadvantages of entering into a deed of company arrangement. The report to the meeting showed that the administrators were unable, from the information in their position, to identify any transactions which were uncommercial in nature or constituted preferences. This was strictly true, but what was not highlighted was that the administrators have been given such little information that they are unlikely to be able to form any opinion. 6 The documents set forth the material that is now considered to be erroneous by both parties for the present dispute, but if indeed a company arrangement was entered into, the ordinary unsecured non-related creditors receive 24¢ in the dollar, but if the company went into liquidation, they only receive 2¢. The true figures appear more likely to be something like 8¢ and 2¢. 7 However, there is a considerable amount of material before me to suggest that there were transactions in which the company's property was diverted to other corporations controlled by Mr Turner and Ms Hilton. This might show a prima facie entitlement to recover some hundreds of thousands of dollars. Furthermore, the company still has an income stream. 8 The company was trading in the mortgage industry and, as is common with such companies, it was entitled to a commission from the lender for putting business its way, which was payable by so much when the mortgage was entered into and so much each month while the mortgage was still in existence, the latter being called a trailing commission. Trailing commissions are still being received, or at least should be still being received. 9 If this is certain, as it appears to be on the evidence before me, then any liquidator of the company will have those trailing commissions to fund any recovery actions in addition to any moneys that the present applicant is willing to advance the liquidator. There appears not to be any other creditor who would be willing to advance the liquidator money. 10 I mention this because in this type of case it is often said that though there are moneys to be recovered from former directors, there is no one who is willing to put up seed capital in order that the liquidator or the administrator can recover them. In this case it would appear there may well be sufficient funding to enable these matters to be pursued. 11 Under the deed of arrangement there is to be an injection of $50,000, though we do not know from whence, and in addition to that $50,000 approximately $1.53 million of related company debts will not be paid. That is why about 8¢ in the dollar will flow through, even though there are no recoveries. On a liquidation, that $50,000 will not be contributed and the dividends to unsecured creditors will be diminished by the fact that the related company debts will also rank for dividends. 12 There is some attack on the related company debts. There is not enough material before me to be able to rule on whether there are proper claimants against the company or not. In the case of a large amount claimed for legal fees, the probabilities would be, on the evidence before me, that something is owing, but not necessarily to the person who has put in the present claim. But there are other large amounts about which there seems to be a lot of suspicion. In other words, although I cannot be precise, it seems to me that that $1.53 million figure may have to be discounted. 13 The prime argument before me is as to the application of s 440A of the Corporations Act 2001 (Cth). Subsection (2) of that section says that the Court is to adjourn the hearing of an application for an order to wind up a company, if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. Under that section the onus is on the company to convince the Court that that is the case. When one is working out what is best for the interests of the company's creditors, one looks at the company's creditors as a whole and one takes into account the various matters that I have already mentioned. 14 It seems to me that where one does have a claim for recovery, and (a) the probabilities are that there will be funding to enter some sort of proceedings; (b) there are doubtful related company debts; (c) one sees that there is only a small difference in dividend on the best case scenario between what would be recovered under the deed and what would be recovered under the liquidation; and (d) one bears in mind the public interest that the operation of insolvent companies should be investigated and insolvent companies not let back into the market place, the company has not satisfied me under section 440A that the administration should continue. 15 That being so, it seems to me unnecessary to look at section 600A as to whether the pre-conditions for setting aside the deed under that section have been made out. I will merely note that the applicant says that if one disregards related creditors, as it submits one should, then numerically there would be a 4 to 3 vote against the deed and furthermore, that creditors of a greater amount would have opposed the deed than were in favour. 16 The formal matters for winding up have been established subject to what I say below as to advertisement. Accordingly, the order of the Court is that the defendant company be wound up and that Mr Alan Lewis of Newcastle be appointed as liquidator. 17 The notice in the gazette was late, but it seems to me that all persons who were interested in opposing have done so. Mr S Jacobs of counsel, briefly appeared for Mr Turner, and Mr Tassell for the administrator has very capably argued the matter. Accordingly, I will dispense with the rules of advertisement so far as they have not been complied with. 18 Liberty to apply as to costs.