New South Wales Supreme Court CITATION : Crouch re Heritage Fine Wines Pty Ltd [2007] NSWSC 1055 HEARING DATE(S) : 10/09/07 Written submissions 14/09/07 JUDGMENT DATE : 21 September 2007 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : Direction sought by liquidators refused. Costs of liquidators' application to be paid out of assets of company as expense of winding up. CATCHWORDS : CORPORATIONS - winding up - creditors voluntary winding up - company sold wine to investors and stored it for them in expectation of future profit making by sale - company often effected such sales for investors' account - after winding up, investors' wine collected and preserved by liquidator as court appointed receiver - some such wine sold by receiver for investors' account - other wine delivered to investors or to new storage facility for their account - receiver (who was also liquidator) developed expertise in selling wine - whether liquidator may now offer selling services to persons to whom wine has been delivered or for whom it is held in new storage facility LEGISLATION CITED : Corporations Act 2001 (Cth), Part 5.3A, ss.420(2)(b), 446A(2), 477(1)(a), 477(2)(m), 493(1), 506(1)(b), 511 Crouch v Abell; Application of Crouch [2005] NSWSC 1308 Re Bairnsdale Food Products Ltd [1948] VLR 264 CASES CITED : Re Cambrian Mining Co (1882) 48 LT 114 Re Wreck Recovery and Salvage Co (1880) 15 ChD 353 Rutledge v Inland Revenue Commissioner (1929) 14 TC 490 Nicholas James David Crouch - First Plaintiff PARTIES : Shabnam Amirbeaggi - Second Plaintiff Heritage Fine Wines Pty Ltd (in liquidation) - Third Plaintiff FILE NUMBER(S) : SC 2928/05 COUNSEL : Mr M.R. Aldridge SC - Plaintiffs SOLICITORS : Parry Carroll - Plaintiffs IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J FRIDAY, 21 SEPTEMBER 2007 2928/05 NICHOLAS JAMES DAVID CROUCH & 2 ORS JUDGMENT 1 Mr Crouch and Ms Amirbeaggi are the liquidators of Heritage Fine Wines Pty Ltd ("Heritage") under a creditors voluntary winding up that followed on from voluntary administration under Part 5.3A of the Corporations Act 2001 (Cth). In that capacity they seek guidance from the court in relation to a certain course of action they propose to take. 2 When Heritage passed into liquidation, Mr Crouch became the sole liquidator. At times relevant to the present application, he alone was liquidator. So far as matters of history and background are concerned, it will be sufficient to refer to Mr Crouch only. 3 Soon after Heritage became subject to voluntary winding up, Mr Crouch was appointed by the court the receiver and manager of certain property, being wine held by Heritage as bailee and wine claimed by persons in contractual relationships with Heritage but in the possession of third parties. Mr Crouch held the two appointments – as liquidator of Heritage and as receiver and manager appointed by the court – at all relevant times. 4 What I have just said will be better understood in the light of a brief description of the activities of Heritage. Such a description may conveniently be found in a judgment of Campbell J (as he then was) in Crouch v Abell; Application of Crouch [2005] NSWSC 1308: "The company had a business under which it invited members of the public to purchase from it wine of superior quality, and to engage the company to store that wine on behalf of the purchasers. The wine was located in several different spots. The records relating to ownership of stored wine were inadequate to enable a complete matching of investors to individual bottles of wine which were held in storage. In some cases, investors had agreed to purchase, and paid for, wine of a particular description (and by description I mean the identification of wine by reference to its manufacturer, brand name and vintage year), but no wine of that description is to be found in the warehouses which the company used. There is, however, in certain of those cases, wine which meets the description, save for the vintage year." 5 Campbell J also said: "There have been some shortfalls in the wine which is able to be allocated, of a particular description, to the investors in wine of that description. Some of the wine, in general the more valuable wine, was individually bar coded, and bar codes enabled a matching to be made between particular investors and particular bottles of wine. The receiver has carried out a vast task of analysis and matching, and has taken the matching exercise as far as is practical to do. Broadly, it has been possible to match the bar coded wine with individual investors. The receiver will give that wine in specie to the investors entitled to it." 6 The reference here to "a vast task" should be noted. At the time of Campbell J's judgment, there were 2,911 defendants to the proceedings before him. They were "investors" who were the owners of wine in the possession (or under the control) of Heritage or, at least, persons claiming to be owners of such wine. More than 1.5 million bottles of wine were involved. 7 After Campbell J delivered the judgment from which I have just quoted, arrangements were concluded which saw the proceedings resolved without a final hearing. The arrangements evolved over a long period. Under those arrangements, individual investors were identified and recognised as the owners of particular bottles of wine. Each of them was given the option to take delivery of the identified wine ("Option A"), to have the wine stored by Heritage ("Option B") or to have Heritage sell the wine for the investor's account ("Option C"). 8 The terms on which Heritage did business with investors appear from documents exhibited to one of Mr Crouch's affidavits. While the precise basis may have differed from person to person and from time to time, the constant features seem to have been that Heritage solicited from interested persons orders for the purchase of wine from Heritage; and that, upon Heritage's acceptance of an order, a contract (in the nature of an investment contract) between Heritage as seller and the investor as buyer came into existence and provided for Heritage, as bailee, to store the wine for the investor's benefit for a specified period. At the end of the period, the wine (already owned by the investor) became deliverable to the investor unless the term of the storage arrangement was extended. It is made clear by promotional material, however, that investors were encouraged to utilise the services of Heritage in on-selling the wine acquired by them from Heritage. There is, for example, reference to Heritage's providing its "investment clients with a range of distribution options to help them on sell their portfolios". One relevant passage reads: "We offer the facility not only to buy premium wine, but also to sell. Our brokerage service will enable you to sell your wine via our network of Australian and international private buyers or through auction." 9 Persons who entered into arrangements of this kind with Heritage are referred to in the evidence and in contemporary documents as "investors". The appellation is apt. It is clear that many individuals acquired quantities of wine greater than even the most avid drinker of wine could ever consume or the most generous host could ever share with guests. Some of the persons were corporations incapable of consuming wine. Others, according to the evidence, were the trustees of superannuation funds denied by the regulatory regime the right to allow the wine to be consumed. Just as an individual's acquisition of one million rolls of toilet paper could be consistent only with a trade transaction (Rutledge v Inland Revenue Commissioner (1929) 14 TC 490), so the quantities involved and the characteristics of some of the acquirers indicate that acquisitions of wine from Heritage in the context of the storage arrangements were motivated principally by expectation of profit. The wine was expected to be an appreciating asset. 10 After the winding up and receivership commenced, pre-existing arrangements for the storage of wine by Heritage for investors were, as it were, overtaken by the regime which involved, for investors, the three options referred to at [7] above. As I have said, the regime in question caused the wine to which each pre-liquidation investor was entitled (in the ownership sense) to be identified and subjected to one of the outcomes involved in Option A, Option B and Option C. 11 Where an investor chose Option B, the wine attributable to that investor was retained by Heritage under a storage contract made between Heritage and the investor. Heritage received storage fees from these investors and, as Mr Crouch makes clear in his affidavit of 10 September 2007, those fees were received "for the benefit of creditors of Heritage". The number of investors choosing Option B and entering into storage contracts of this kind was, Mr Crouch says, sufficient "to generate a wine storage business capable of being sold". In fact, Mr Crouch did sell the wine storage operations in October 2006 to Wine Investment Services Pty Ltd ("WIS"). The sale entailed assignment to WIS as purchaser of all the continuing wine storage contracts with investors and the investor wine management database developed by Mr Crouch as receiver. 12 Mr Crouch's activities in the course of his administration also involved the sale of substantial quantities of wine owned by investors (those who chose Option C). To assist in that aspect of the activities, a panel or committee of wine experts was assembled to offer advice, to provide market intelligence and to identify sales opportunities. 13 The administration has now reached a point where all wine to be disposed of for investors who elected Option C has been sold or is in the process of being sold; where investors who elected Option A have taken possession of their wine; and where the wine of investors who chose Option B is held for them in storage by WIS as a result of the sale transaction to which I have referred. 14 Against this background and before turning to the relief now sought, I should refer in more detail to orders made by the court over the period May 2005 to February 2007. The position may be summarised as follows: 1. On 16 May 2005, it was ordered that Mr Crouch be appointed "receiver and manager of all wine over which [Heritage] is the bailee", with the powers specified in s.420(1) and s.420(2)(a), (d), (e), (j), (k), (m), (n), (o), (p) and (q) of the Corporations Act . The court made a direction authorising Mr Crouch to relocate the wine to premises suitable for its storage. There was also a direction for an inventory to be taken. Mr Crouch undertook to the court that he would not sell or dispose of wine, or part with possession, until further order. 2. On 9 August 2005, the court authorised Mr Crouch to "impose a voluntary levy on investors of wines over which [Mr Crouch] is appointed receiver and manager" up to a certain sum per bottle. There were also orders as to the remuneration of Mr Crouch as receiver and manager and certain of the fees and expenses incurred by him "in his capacity as liquidator of Heritage Fine Wines Pty Ltd (in liquidation)", being fees and expenses of "preserving, securing and maintaining the investor wine". 3. On 22 September 2005, the court made a direction specifying a time limit to be imposed by Mr Crouch for acceptance of "disputed claims to wine over which he is receiver". Certain related measures of a machinery kind were also put in place. 4. On 17 October 2005, the court ordered that Mr Crouch "be appointed receiver and manager over" 269,882 specifically identified bottles of wine "subject to the lawful rights and claims of other persons". There was a grant of powers in respect of that wine corresponding with the powers conferred by the orders of 16 May 2005 and a grant of specific authorities concerning storage. 5. On 31 October 2005, orders were made concerning the receiver and manager's remuneration and expenses. Further orders on that subject were made on 4 September 2006. 6. Orders made on 1 February 2007 (following sale of the wine storage operations of Heritage to WIS in October 2006) directed that Mr Crouch (a) as liquidator of Heritage, was justified in retaining the net proceeds of the sale of the storage operations of Heritage; (b) as receiver and manager, was justified in retaining a stated sum from those net proceeds; (c) as receiver and manager, was entitled to receive the on-storage of wine and insurance income derived from investors since 1 February 2006; and (d) as liquidator of Heritage, was justified in giving effect to (b) and (c) above. There were also orders regarding remuneration and expenses of the receiver and manager. 15 The liquidators now seek the direction of the court (presumably by way of the court's determination of a question of the kind referred to in s.511 of the Corporations Act) that they, in their capacity as liquidators of Heritage, are "justified in continuing to carry on the sale of wine operations of Heritage for the limited purpose of: (a) contacting investors to notify investors of sale opportunities for the sale of investor wine; (b) inviting investors on a voluntary basis to engage the liquidator to negotiate the sale of investor wine as bulk quantities; (c) entering into contracts with investors and third parties for the sale of investor wine; (d) charging investors a commission or fee and associated costs relevant to the sale of investor wine as disclosed to and agreed with investors; (e) accounting to investors for the proceeds of such sales; (f) in the alternative, forming and selling a business of the operations associated with the sale of investor wine for the benefit of creditors of the Heritage." 16 As Mr Crouch's evidence makes clear, this proposed course of action relates to wine owned by investors (or, more accurately, former investors) which is now held in the investors' possession or for them by WIS. The subject matter of the proposal is wine that Heritage formerly held for those investors who chose Option A or Option B. Under the proposal, Heritage, through its liquidators, would seek to make new arrangements with former investors by whom wine is now held directly or through WIS. Under the new arrangements, Heritage would, for reward, provide to those persons services in connection with the sale of their wine. 17 There is reference in the affidavit to the expertise built up by the liquidators in relation to the marketing of large quantities of good quality wines. There is also reference to preliminary approaches to potential customers and to enhancements generated by the skills brought to bear by the expert panel or committee. If the proposal were implemented, the panel or committee would continue to be consulted. Mr Crouch deposes: "20. It is my opinion based on my investigations and inquiries during the course of the Heritage liquidation and receivership that there is merit in selling investor wine collectively in that economies of scale could be achieved with respect to: a. Movement of wine. b. Negotiating reduced or reduce of sales commissions in relation to sale of the wine. c. Creating opportunities for the sale of wine as bulk quantities that are unlikely to exist for individual investors." 18 Mr Crouch also says that he continues to receive requests from investors "to assist them in the sale of their investor wine". He is speaking, of course, of investors who continue to own wine, albeit wine in relation to which Heritage no longer plays any role. Ms Tkachenko, an employee of Mr Crouch's firm, had contact with a great number of the investors over a period of more than two years. She deposes, that since the sale of the wine storage operations to WIS, she has received "several hundred" communications from investors many of whom "want to know when the liquidator will assist them with the sale of their wine". In the last six months, Ms Tkachenko received about 350 such inquiries. Given the interest expressed by so many investors, Mr Crouch has it in mind to proceed in the way described in his affidavit as follows: "24. I propose to contact all investors whose email contact details remain on my database as relevant parties in my receivership for the purposes of inviting investors to voluntarily sell specific labels of wine. For this purpose I will inform investors of the average price I have achieved in the auction sale of the [sic] each relevant specific label of wine by Grays and provide to them an outline of costs associated with the sale of the relevant wine. Investors will be entitled to nominate a reserve price for their wine. Where sufficient numbers of investors elect to sell specific wine labels I will endeavour to consolidate such wine and offer it for sale by pallets of wine to prospective purchasers including major chains of stores, independent liquor stores, retailers and third parties. In circumstances, where a satisfactory price cannot be negotiated I will realise the wine by unreserved price at auction with a minimum price guarantee. 25. After deduction of agreed costs associated with the sale I will remit by cheque the balance of the net sale proceeds for the sale of the relevant wine to the relevant investor. The entire process will be completely voluntarily on the part of investors and will enable investors to realise all or part of their wine portfolio and utilise economies of sale with respect to: a. costs associated with the transportation of wine from the current storage facilities to Grays on Line; b. the negotiation of reduced commissions in relation to the sale of the wine; b. the ability to sell bulk quantities to achieve higher prices and avoid or incur reduced sales commission; or d. providing a streamlined process to investors as an easy option for sale of investors wine. e. Should sufficient numbers of investors seek to utilise the services I am offering, there is a potential for the creation, namely for the sale of a bulk quantity of wine which can be realised with the proceeds forming an asset in the liquidation of Heritage for the benefit of creditors." 19 When the application for directions came before me for hearing, I inquired as to the power the liquidators would exercise or the function they would perform in embarking upon the activities envisaged. The answer given in written submissions subsequently furnished by Mr Aldridge SC on behalf of the liquidators referred to ss.477(1)(a) and 477(2)(m) of the Corporations Act. The first of these sections empowers a liquidator, subject to s.477 as a whole, "to carry on the business of the company so far as is necessary for the beneficial disposal or winding up of that business". The second provision (s.477(2)(m)) empowers a liquidator, again subject to s.477 as a whole, "to do all such other things as are necessary for winding up of the affairs of the company and distributing its property". 20 I digress briefly at this point to consider whether sales of wine made by Mr Crouch in the course of administration should be regarded as having been made by Heritage (through Mr Crouch as liquidator) or in pursuance of the powers conferred by the court on Mr Crouch as receiver and manager (a power of sale being, by virtue of s.420(2)(b), among those granted by the orders of 16 May 2005 and 17 October 2005). The answer must be, I think, that Mr Crouch was acting predominantly as receiver and manager in relation to property owned by investors and in consequence of investors' elections in terms of Option C. I accept nevertheless that some of the selling activity may have been engaged in by Heritage through its liquidator and I am content to proceed on the basis not only that Heritage arranged sales for investors before the winding up (see [8] above) but also that selling wine for investors formed part of the activities properly undertaken by the liquidator (as distinct from the receiver) in the course of winding up. 21 Reliance on s.477(1)(a) as a foundation for the proposal on which the liquidators seek the court's guidance is, in a sense, misplaced. I say this because s.477(1)(a) (which appears in Division 2 of Part 5.4B) has direct application only to a liquidator in a court-ordered winding up. But s.506(1), which applies to a voluntary winding up such as the present, empowers a liquidator in such a winding up to exercise any of the powers conferred by the Act on a liquidator in a court-ordered winding up: see s.506(1)(b). Section 477(1)(a) therefore has an indirect application to this case – or, rather, application brought about by s.506(1)(b). But in the voluntary winding up context, the liquidator's power "to carry on the business of the company so far as is necessary for the beneficial disposal or winding up of that business" exists and is exercisable in the context of s.493(1): "The company must, from the passing of the resolution, cease to carry on its business except so far as is in the opinion of the liquidator required for the beneficial disposal or winding up of that business, but the corporate state and corporate powers of the company, notwithstanding anything to the contrary in its constitution, continue until it is deregistered." 22 In the case of a voluntary winding up, the matter of carrying on of the company's business is thus the subject of two statutory specifications. In the first place, there is a directive that the company "cease to carry on its business" from the time the resolution for winding up is passed (which, in a case such as the present stemming from Part 5.3A, is the point identified by s.446A(2)) – subject, however, to an exception to the extent that the liquidator considers continuation of the business to be "required" for the "beneficial disposal or winding up of that business". Second, the liquidator has, through s.506(1)(b) the s.477(1)(a) power to carry on the business to the extent "necessary" for its "beneficial" disposal or winding up. Taken together, the two provisions pay attention to the business actually carried on by the company at the time the winding up resolution is passed (or, as here, is deemed passed) and to require that the carrying on of that business be terminated at that point, except to such extent, if any, that the liquidator, acting rationally and reasonably, considers continuation of that business to be conducive to the advantageous disposal or winding up of that business itself. The liquidator has an express power to carry on the business to that extent only. 23 It was submitted on behalf of the liquidators of Heritage that, having regard to events after commencement of the winding up, the activity of collecting together wine stocks owned by different persons and selling them in bulk so as to take advantage of economies of scale was part of the activities making up the business of Heritage to which the power arising from s.477(1)(a) (through s.506(1)(b)) extends. I am unable to accept that submission. As I have said, the power of a liquidator to carry on the business in a voluntary winding up is, because of s.493(1), confined to the business as it existed when the resolution for winding up was passed or is taken to have been passed. The business of Heritage, as it existed at the time of the deemed passing of the resolution for winding up, had, as far as it entailed selling of wine, extended only to wine that was either owned by Heritage or, being owned by an investor, had been the subject of an investment arrangement entailing for the investor acquisition of the wine from or through Heritage, storage of the wine by Heritage as bailee and subsequent sale of the wine by the investor through the agency or intermediation of Heritage. Ultimate sale for the investor was an adjunct to the investment arrangement. 24 Before the advent of the winding up, it was no part of Heritage's business to approach owners of wine with a view to soliciting them to retain Heritage to provide services directed towards the advantageous sale of that wine. But that is what is now proposed. If the proposal were implemented, Heritage would be seen to have entered upon a new field of activity related to wine which, while purchased in the first instance from Heritage and stored by it for the buyer, had later passed out of Heritage's possession and ceased to be the subject of any contractual relationship between the owner and Heritage. That wine would be indistinguishable from wine owned by any member of the public as a result of acquisition from any source – except by reason of the purely historical circumstance that it had formerly been the subject of a now completed and fully performed contract between its current owner and Heritage. 25 In summary, while effecting or assisting sales of wine owned by other persons was an activity that formed part of Heritage's business before winding up, the business included that activity only in relation to wine acquired by those persons from Heritage and held by Heritage for the persons as a result of other aspects of the carrying on of its business. To engage in the activity in respect of wine sold and delivered by Heritage which has therefore ceased to play any part in Heritage's business would not be something falling within the scope of Heritage's business. On that basis, implementation of the proposal by the liquidators would be inconsistent with s.493(1) and beyond the s.477(1)(a) power. 26 The alternative basis put forward by Mr Aldridge in submissions is s.477(2)(m) which, as I have said, empowers a liquidator "to do all such other things as are necessary for winding up of the affairs of the company and distributing its property". Again, this power is available to a liquidator in a voluntary winding up because of s.506(1)(b). 27 As Mr Aldridge has pointed out, the word "necessary" has, in this context, been given a broad meaning. It is not synonymous with "essential" or "indispensable": see, for example, Re Wreck Recovery and Salvage Co (1880) 15 ChD 353 at p.362 per Thesiger LJ. The power is not confined to matters without which the winding up of affairs and distribution of property cannot occur. The test is rather, one of what "may be thought expedient with reference to the assets of the company": Re Cambrian Mining Co (1882) 48 LT 114 per Kay J. The later case of Re Bairnsdale Food Products Ltd [1948] VLR 264 provides an example of the scope of the power. That case concerned a company which had a right of first refusal in respect of land occupied by it as lessee. After commencement of the winding up, the lessor offered the company the opportunity to purchase. On the evidence, it would have been advantageous to the winding up for the liquidator to buy the land and re-sell it, thus realising the value of the right of first refusal. It was held that the purchase was justified as an incident of the subsequent sale and was therefore comprehended by the liquidator's power to sell. There was subsidiary reliance upon the equivalent of s.477(2)(m). 28 In the present case, Heritage has no continuing interest in or connection with the wine in respect of which it would offer selling services. Winding up of the affairs of Heritage and distribution of its property will not be assisted or facilitated or made more advantageous if Heritage provides selling services to the present owners of wine previously owned by it. It is true that provision of those services by Heritage for reward would enhance the assets in the hands of the liquidators and therefore be to the advantage of creditors. But that cannot be enough to bring the case within s.477(2)(m). For that provision to apply, what is done must have its source in the affairs of the company as they exist when resort is had to the s.477(2)(m) power. In the present case, the persons concerned and the wine they own are now unconnected with Heritage's affairs. 29 For these reasons I am not satisfied that the functions and powers of the present applicants as liquidators of Heritage are such as to justify the course of action they have it in mind to pursue. The court will therefore determine in the negative the question posed by the application (see [15] above) but, as the application was responsibly brought, there will nevertheless be an order that the applicants' costs of the application be paid out of the assets of Heritage as an expense of the winding up. ********** 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. 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