New South Wales Supreme Court CITATION : Application of Robert William Whitton (as liquidator of Global Gossip group of companies) [2006] NSWSC 163 HEARING DATE(S) : 6 March 2006 JUDGMENT DATE : 20 March 2006 JURISDICTION : Equity JUDGMENT OF : Austin J DECISION : Direction that liquidator would be justified in apportioning proceeds of sale to the group companies whose assets were sold, in proportion to their respective values, rather than to the group companies with priority employee creditors. CATCHWORDS : CORPORATIONS - creditors' voluntary winding up - liquidator's application for directions as to apportionment of proceeds of sale of assets amongst the group companies in liquidation - whether proceeds of sale to be apportioned so as to achieve equal rateable distribution to all priority employee creditors of group companies, or to reflect separate company ownership of assets sold LEGISLATION CITED : Corporations Act 2001 (Cth) ss 411, 447A, 510 Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 24 ACSR 79 CASES CITED : Re Dean-Willcocks; Alpha Telecom (Aust) Pty Ltd (in liq) (2004) 208 ALR 414; 50 ACSR 15 Re TVSN Ltd [2005] NSWSC 692 PARTIES : Robert William Whitton (P) FILE NUMBER(S) : SC 6550/05 COUNSEL : Mr F Gleeson SC (P) SOLICITORS : Piper Alderman (P) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATION LIST AUSTIN J MONDAY 20 MARCH 2006 6550/05 APPLICATION OF ROBERT WILLIAM WHITTON (AS LIQUIDATOR OF GLOBAL GOSSIP GROUP OF COMPANIES) JUDGMENT 1 HIS HONOUR: Robert Whitton is the liquidator in a creditors' voluntary winding up of the following six companies in the Global Gossip Group (which I shall call "the Liquidation Companies"): Global Gossip Pty Ltd (in liq) ("Global Gossip"); Global Sub (Victoria) Pty Ltd (in liq) ("GG Victoria"); Global Gossip Australia Pty Ltd (in liq) ("GG Australia"); Global Gossip Worldwide Pty Ltd (in liq) ("GG Worldwide"); Global Gossip Card Services Pty Ltd (in liq) ("GG Card Services"); Global Gossip International Pty Ltd (in liq) ("GG International"). 2 He was previously the administrator of the Liquidation Companies and of three additional companies: Global Gossip Communications Pty Ltd, Global Gossip (Byron Bay) Pty Ltd and Spectra Global Communications Pty Ltd (the first of which is in liquidation, while the other two are now deregistered). I shall refer collectively to the Liquidation Companies and those additional three companies, and also Global Gossip (NSW) Pty Ltd (which has not been placed into external administration) as "the Global Gossip Group" or "the Group". 3 Mr Whitton is holding approximately $304,000 as liquidator, of which about $177,000 is likely to be available for distribution to creditors, after allowance is made for unpaid remuneration, disbursements and expenses (including future costs). Those funds represent the proceeds of sale of two businesses held within the Global Gossip Group. The sale took place before Mr Whitton's appointment as liquidator, in circumstances I shall describe. Mr Whitton now seeks directions under s 511 of the Corporations Act as to the apportionment of those funds amongst the Liquidation Companies. He seeks directions as to whether he would be justified in apportioning the available funds in either of two alternative ways, though he prefers the first alternative to the second. 4 It is appropriate to state some background facts before considering the two alternatives. Background facts 5 Between 1997 and 2002 the Global Gossip Group developed a network of 13 stores located in tourist destinations throughout Australia. Each store offered e-mail and internet access and other communications services, focusing on budget travellers and backpackers. A new trading corporate entity was established for each new store. The Group entered into a joint venture in 1999 with Intrapac Consolidated Pty Ltd, subsequently unwound, to expand the business network into Victoria, and for the purposes of the joint venture GG Australia, GG Worldwide and GG International were incorporated. The Group established a telecommunications business in the year 2000, which provided phone products through GG Card Services, incorporated for that purpose. 6 In 2001 the Group's management embarked on a restructure to make the Group more tax effective and attractive for potential investors, and to reduce the costs of administration and accounting. The objective was to consolidate the Group into four companies, namely a head office management company (GG Worldwide), a holder of retail stores (GG Australia), a telecommunications business (GG Card Services) and a new company to be the holder of international operations. The restructure was partly implemented. The shares in various companies in the Group were transferred to Spectra Global Communications as holding company. The majority of assets and liabilities within the Group were transferred to GG Australia, GG Card Services and GG Worldwide, as particularised in Mr Whitton's affidavit dated 30 December 2005, para 16. Mr Whitton's evidence indicates that the transfers took place at fair value, and the consideration for them appears to have been properly recorded in the financial records of the various companies concerned. During the 2002 financial year, only GG Australia and GG Card Services were trading. The employees of other Group companies were transferred to GG Australia, although the employees of GG Worldwide and GG Card Services remained with those two companies. 7 However, the restructuring process came to an end on 14 June 2002, when the directors appointed Mr Whitton and David Lombe as voluntary administrators to the Group companies (other than GG NSW). Mr Whitton's affidavit ([17]-[21]) traces the developing financial difficulties that led to this decision. After the commencement of the voluntary administration, the directors prepared Reports as to Affairs for each of the companies in administration, separately stating the net realisable values of the assets of the companies. Only three companies were stated to have such assets: GG Australia in the sum of $211,225, GG Worldwide in the sum of $305,518 and GG Victoria in the sum of $2678. 8 The administrators reported to creditors, and the creditors resolved on 9 September 2002 that the Liquidation Companies execute deeds of company arrangement, which were executed on 25 September 2002. Mr Lombe and Mr Whitton were appointed deed administrators. The deeds of company arrangement made provision for employee entitlements (specifically, unremitted superannuation contributions) to be paid in full, out of the fund established from monthly contributions out of the trading profits of the Group. In the period from April to June 2003 the companies paid $58,579.49 into the fund but on 28 July 2003 one of the directors advised Mr Whitton that the July contribution would not be paid. 9 Subsequently Mr Whitton, who was by then the sole deed administrator, agreed in principle to the sale of assets of the Global Gossip businesses. An asset purchase agreement was entered into in August 2003. The ten Global Gossip Group companies and one other company were named as the vendors, even though, according to the directors' Report as to Affairs, only three of the Group companies held any business assets. 10 Mr Whitton reported to the Group's creditors by circular dated 11 September 2003, recommending that the deeds of company arrangement be terminated and that the Liquidation Companies be wound up. The calculations he made for the purposes of that report estimated the return to creditors on liquidation on a group basis rather than on a separate company basis. The calculations implied that the priority employee creditors in all of the Group companies would receive the same distribution per dollar, and that they would have priority over other unsecured creditors. 11 On 19 September 2003 meetings of creditors of the Liquidation Companies resolved to terminate the deeds of company arrangement and wind up the companies. Mr Whitton became liquidator. The creditors' decision, given on the basis of Mr Whitton's report, is consistent with an intention on the part of the creditors that the employee creditors should receive the same rateable distribution regardless of the Group company that employed them. But they did not address that matter in their resolutions, in express terms. 12 The directors of the Liquidation Companies made a further Report as to Affairs in December 2003. Mr Whitton received the proceeds of sale of the assets, by instalments, in the period from October 2003 to January 2004, the total amount being $400,000. Expenses have subsequently reduced that fund and now Mr Whitton estimates that the cash available for distribution to creditors is approximately $177,000. No further receipts are expected in the liquidations. 13 The secured creditor of the Liquidation Companies, the National Australia Bank, has been fully paid. Employees have priority claims under s 566(1)(e) of the Corporations Act for unremitted superannuation in the period from October 2001 to June 2002, in the total sum of $327,961.28. The claims arose in respect of the period after completion of the partial restructuring to which I have referred, and therefore at a time when all of the employees in the Group were employed by one of three companies, namely GG Australia, GG Worldwide and GG Card Services. In those circumstances it is possible to work out the employee claims on a separate company basis. In GG Australia, 190 employees have claims totalling $94,140.52. In GG Worldwide there are 231 employees with claims totalling $219,749.26. For GG Card Services there are 24 employees with claims totalling $14,071.50. Apart from intercompany loans, the only other unsecured creditor of any Liquidation Companies is the Australian Taxation Office ("ATO"). Relevantly for present purposes, GG Victoria owes the ATO $1289.59. 14 Clause 4.3 of the Asset Purchase Agreement of August 2003, which is in evidence, is as follows: " Apportionment of purchase price : the vendors shall be responsible for the apportionment of the purchase price between them." According to the evidence before me, no apportionment of the purchase price was made by the directors of the vendor companies at or before the time of receipt of the sale proceeds. Instead, the directors instructed the purchasers to pay the funds to Mr Whitton, who deposited the funds in an account in the name of GG Australia. 15 On 17 June 2005 Mr Whitton wrote to the directors of the Group companies/vendors setting out his understanding of the vendors' intentions regarding the business sale. He said he believed that "the sale proceeds of the business were intended to be distributed amongst priority creditors (employees) of the group companies, i.e. GGA, GGCS and GGW, for unremitted superannuation entitlements in the first instance and in all likelihood, the sale proceeds were expected to be insufficient to discharge these priority claims". He proposed two options for distribution, different from the two alternatives now presented to the court. 16 His first option was an application to the court for an order pooling the assets and liabilities of the Group companies and then distributing the assets in accordance with the priorities under the Corporations Act, with the result that the priority employees would be paid first. The second option was for the vendors to apportion the sale proceeds amongst themselves in accordance with clause 4.3 of the asset purchase agreement, in a manner that would achieve rateable distribution to all of the employees. 17 If the vendors were to apportion the sale proceeds only amongst the three Group companies that were subject to employee claims, in the same proportions as the employee claims of the individual companies bore to the total employee claims, then the available assets would be distributed rateably for the benefit of all of the Group employees. Mr Whitton asked the directors to confirm his recollection that the second option accurately reflected their intentions as the officers of the vendor companies. The directors signed written confirmations, dated respectively 22 June and 25 November 2005. But the confirmations were not expressed as confirmations that the directors had in fact made an apportionment at or before the time of receipt of the instalments of purchase money, and they did not purport to be a belated apportionment under clause 4.3 as at the time of signing the confirmations. They were merely confirmations that the directors' intention at the time of the sale was for the sale proceeds to be distributed rateably to all of the employees. The two alternative proposals for distribution 18 Under the first alternative, the available funds would be apportioned to GG Australia, GG Card Services and GG Worldwide, to the exclusion of the other three Liquidation Companies. The grounds for doing so are said to be that · only these three companies, out of the Liquidation Companies, have liabilities to employee creditors for unremitted superannuation contributions; and · the directors of the Global Gossip Group companies intended, at the time of the sale of the businesses, to apply the proceeds of sale in a manner that would give first priority to these employee claims, although no express apportionment of the sale proceeds amongst the Liquidation Companies occurred at the time of sale. The proposal is that the available funds would be apportioned amongst these three companies in the proportions that their respective liabilities for unremitted superannuation contributions bear to their total combined liability for unremitted superannuation contributions. The apportionment has been calculated to be: GG Australia 28.7%; GG Card Services 4.3%; GG Worldwide 67%. All priority employee claimants would receive a distribution of 54 cents in the dollar. 19 Under the second alternative, the funds would be apportioned amongst GG Australia, GG Victoria and GG Worldwide, to the exclusion of the other Liquidation Companies. This would be on the basis that only these three companies, out of the Liquidation Companies, held assets at the time of the sale. The available funds would be applied in the proportions that the estimated realisable value ("ERV") of the assets of each of the three companies at the time of sale bore to the combined ERV of the assets that were the subject of the sale. The ERVs would be taken from the directors' Reports as to Affairs. The apportionment has been calculated to be: GG Australia 41%; GG Victoria 1%; GG Worldwide 59%. The priority employee claimants against GG Australia would receive a dividend of 76 cents in the dollar (substantially better than under the first alternative), the priority employee claimants against GG Worldwide would receive a distribution of 47 cents in the dollar (less than under the first alternative), and the priority employee claimants against GG Card Services would receive nothing. There being no employee claimants against GG Victoria, the funds apportioned to it would be available to its only unsecured creditor, the ATO, which would receive a distribution of 71 cents in the dollar (that is, $911.15). 20 The first alternative is preferred by Mr Whitton, and the direction he seeks would authorise him to implement it. The first alternative has the same effect as the second option put to the directors, except that it would be achieved under directions of the court rather than by the vendor companies themselves making an ex post facto apportionment under the terms of the Assets Purchase Agreement. In his affidavit Mr Whitton explained that he did not proceed with the first option put to the directors, because that would have involved entry into a pooling deed with the Liquidation Companies, convening meetings of creditors and making an application to the court for appropriate directions and relief for the purpose of pooling the assets and liabilities of the Liquidation Companies - altogether estimated to cost $80,000, a figure disproportionate to the funds being held. He has not explained why he did not proceed with the second option, given that the directors had indicated their willingness to implement it. But I think there would have been problems in a belated apportionment of the proceeds of sale, after they had been paid over to the liquidator and partly expended by him. 21 No other alternative method of distribution has been put forward, and in my opinion there is no other viable alternative. Either the distribution is made on a principle that achieves pro rata distribution to all of the priority employee creditors, or it is made on a principle that reflects the separate company ownership of the assets to be distributed. It follows that the claims of unsecured creditors (if any) in the two Liquidation Companies that do not stand to receive apportionment on either method (that is, Global Gossip and GG International) can be disregarded. Notice to employees and the ATO 22 Notice of Mr Whitton's application to the court has been given to the priority employee creditors of the Liquidation Companies, to the extent that their addresses are known to the liquidator (although he has no addresses for a substantial number of them). None of the employees has sought to appear at the hearing of the application, although one of them telephoned to say he supports the first alternative. 23 The ATO has indicated its consent to apportionment under the first alternative, as recommended by the liquidator, even though it stands to receive a small amount under the second alternative but nothing under the first. It did not appear at the hearing of Mr Whitton's application. Analysis 24 If each of the vendor companies with assets, namely GG Australia, GG Worldwide and GG Victoria, had sold those assets independently of one another, the proceeds of each separate sale would have been an asset in the liquidation of the selling company, available to be distributed to the creditors of that company. That distribution would be to the exclusion of the creditors of the other two companies. In the absence of implementation of a pooling arrangement in a manner permitted by law, the liquidator and the court would have had no discretion to authorise a distribution in which the creditors of one company would benefit from the realised assets of another company, however fair and equitable it might seem to do so. 25 That reasoning implies that in the second alternative is the correct method of apportionment and distribution, even though it produces an unequal outcome amongst the employees of the three employing companies in the Group. The question is whether there is any basis, in the facts of this case, for adopting the first alternative, which is an approach to apportionment that disregards the proprietary rights of the companies whose assets were sold, and the creditors of those companies. 26 The fact that the three companies with assets were part of the same group does not provide a basis for preferring the first alternative, in the absence of a pooling arrangement authorised by law. Nor is the analysis affected by the fact that the three companies sold their assets by a single agreement. 27 If the deeds of company arrangement for the Liquidation Companies had not been terminated and the purchase money had been received as part of the funds to be distributed under the deeds, the provisions of the deeds would have governed entitlement to the fund, and so all of the priority employee creditors would have received a rateable distribution. But the deeds were terminated before the purchase money was received, and in any case, the deeds did not provide for the sale of the business and the distribution of the proceeds of sale. Therefore the provisions of the deeds governing distribution of the deed fund are not relevant. 28 The fact that the Asset Purchase Agreement contained a provision for apportionment of the proceeds amongst the vendor companies might have been significant, if an apportionment had taken place under that provision. But there was no apportionment. It has not been submitted (and could not be submitted, in light of the way the money was dealt with) that the confirmations given by the directors in 2005 amounted to apportionments under the apportionment clause in the Asset Purchase Agreement made in 2003. I cannot see how the court can give effect to the directors' intention as to the destination of the purchase money when they did not themselves act to give effect to that intention. Senior counsel for the liquidators submitted in that, so long as they made appropriate allowance for the sole creditor of GG Victoria (the ATO), it would have been open to the directors, acting reasonably, to apportion the sale proceeds amongst the three entities with employees. That seems to me to be correct. But the fact that they could lawfully have made an apportionment for the benefit of the employees does not enable the court or a liquidator to proceed on the basis that they did so. 29 The creditors' decision to terminate the deeds and wind up the companies implied that they contemplated an apportionment along the lines of the first alternative, as I have said, bearing in mind that Mr Whitton's circular dated 11 September 2003 presented figures to them on a consolidated basis. But their decision did not purport to govern the apportionment and distribution of the proceeds of sale. It merely placed the companies in liquidation so that the liquidator could deal with the purchase money in accordance with the rights of the creditors of the separate companies. 30 This is not a case where the creditors have selected one of the avenues for consolidated external administration of a group of companies, such as a scheme of arrangement under s 411(1) or an arrangement under s 510; nor have they resolved to place the company back in administration: see the discussion of the available alternatives for creditors who wished to achieve consolidated external administration in Re Dean-Willcocks; Alpha Telecom (Aust) Pty Ltd (in liq) (2004) 208 ALR 414; 50 ACSR 15. 31 In the Alpha Telecom case, Barrett J held that, where a creditors' voluntary winding up flows from an unsuccessful voluntary administration under s 446A, s 447A is available to alter the statutory incidents of that winding up. He pointed out (at [24]) that the courts have shown a willingness to alter the operation of Part 5.3A provisions so as to remove the need for certain procedural steps, where the ends to which those steps are directed have already been met in other ways. He used s 447A to modify the incidents of winding up so as to achieve liquidation on a consolidated basis, proceeding by analogy with s 510. In the case before his Honour, the creditors had resolved that the assets and liabilities of two companies be consolidated, and there was evidence that the affairs of the companies had been intermingled to such a degree that it was difficult or impossible to work out the separate positions of each of them. He allowed the consolidated external administration to proceed notwithstanding objections by some minority creditors. In other cases where courts have used s 447A to similar effect, significant factors have been the difficulty or impossibility of separate external administration and consent (or lack of objection) by creditors: Re TVSN Ltd [2005] NSWSC 692 (Young CJ in Eq) at [16]-[19], Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 24 ACSR 79. 32 In the present case, by virtue of the partial consolidation and restructuring to which I have referred, and the information provided in the directors' Reports as to Affairs, the liquidator has been able to identify the particular Group companies by which the employee creditors were employed, and the Group companies which held the assets that were the subject of the Asset Purchase Agreement. So the element of difficulty or impossibility in separate administration is not present. Further, while the creditors have resolved to terminate the deeds of company arrangement and wind up the companies on the basis of consolidated financial information, there is not any resolution of creditors expressly supporting a consolidation so as to achieve a rateable distribution to the priority employee creditors. 33 Therefore the hard reality is that the proceeds of the sale of assets received by the liquidator belonged to the companies whose assets were sold. This is not an irrational or whimsical outcome, nor is it unfair once the underlying principle is grasped. Creditors (including employees and the ATO) are entitled to deal with a company on the basis of their assessment of the company's net worth, made on the information available to them. If the company with which they deal has guaranteed the debts of another company, that contingent liability should be disclosed in its financial statements and those who deal with it can take the contingent liability into account. But they should not be required to make their commercial decisions in an environment of uncertainty created by the possibility that, at a later stage, a liquidator or a court, inspired only by what they consider to be fair, may make the company's assets available to meet the claims of creditors of other entities whose obligations the company has not guaranteed. 34 It follows that, in my view, the correct method of apportionment is the second alternative. Mr Whitton's evidence establishes that GG Australia, GG Worldwide and GG Victoria were the companies that held the assets at the time of sale. The assets subject to the Asset Purchase Agreement did not include inter-company loans of the vendor companies, and so these amounts can be properly ignored when assessing the value of the assets. The proposed method of apportionment, which relies on the estimated realisable value of the assets based on the directors' second Reports as to Affairs, prepared in December 2003, seems to me to be a fair and rational basis for allocation of the sale proceeds: see Re TVSN Ltd [2005] NSWSC 692 at [21]. 35 The net proceeds of sale are to be allocated between GG Australia, GG Worldwide and GG Victoria in the proportions that the value of their respective assets at liquidation (ignoring inter-company loans) bear to the combined value of the assets. The priority employee creditors of GG Card Services do not receive any dividends, but that is simply a consequence of the fact that as at the date of liquidation, GG Card Services held no assets other than inter-company debts, which on liquidation were of no value. 36 I shall direct the liquidator to prepare revised short minutes of orders to reflect these reasons for judgment. ********** 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.