Reported Decision : 68 ACSR 448 New South Wales Supreme Court CITATION : Titchfield Management Ltd v Vaccinoma Inc [2008] NSWSC 1196 HEARING DATE(S) : 27/10/08, 10/11/08 JUDGMENT DATE : 14 November 2008 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : Winding up order. Order appointing liquidator. CATCHWORDS : CORPORATIONS - foreign company - winding up - whether Part 5.7 body - business no longer carried on in Australia but foreign company registration extant - no assets or activities in Australia - company dissolved in place of incorporation - application by creditor for winding up order - whether of any utility - where cogent basis for claims against former directors - sufficient to activate discretion to order local winding up despite dissolution Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (US) Bankruptcy Code (US), ss 1501, 1517, 1521(a) LEGISLATION CITED : Corporations Act 2001 (Cth), Division 1 of Part 2D.1, Division 2 of Part 5B.2, Part 5.7, ss 9, 57A, 178(1), 180 to 184, 186, 462(2)(b), 466(2), 556(1)(b), 582(3), 583, 588FE, 588FF(1), 588G, 588M(2), 598, 601CL(1), 601CX Cross-border Insolvency Act 2008 (Cth) UNCITRAL Model Law on Cross Border Insolvency CATEGORY : Principal judgment Konamaneni v Rolls Royce Industrial Power (India) Ltd [2002] 1 WLR 1269 Mercantile Credits Ltd v Foster Clark (Australia) Ltd [1964] HCA 66; (1964) 112 CLR 169 Peninsular Group Ltd v Kintsu Co Ltd (1998) 44 NSWLR 534 CASES CITED : Pergamon Press Ltd v Maxwell [1970] 1 WLR 1167 Re Compania Merabello San Nicholas SA [1973] 1 Ch 75 Re The Company or Fraternity of Free Fishermen of Faversham (1887) 36 Ch D 329 Re Wayland as liquidator of ABC Containerline NV [2005] NSWSC 1; (2005) 52 ACSR 750. Russian and English Bank v Baring Brothers and Company Ltd [1936] AC 405 PARTIES : Titchfield Management Limited - Plaintiff Vaccinoma Inc - Defendant FILE NUMBER(S) : SC 5170/08 COUNSEL : Mr A Ivantsoff, Solicitor - Plaintiff SOLICITORS : Piper Alderman - Plaintiff IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J FRIDAY, 14 NOVEMBER 2008 5170/08 TITCHFIELD MANAGEMENT LIMITED v VACCINOMA INC JUDGMENT 1 The defendant (which I shall call "Vaccinoma") was incorporated in the State of Delaware, United States of America, on 6 April 2006 and registered under Division 2 of Part 5B.2 of the Corporations Act 2001 (Cth) on 13 April 2006. 2 By form 407 dated 18 June 2007, Vaccinoma notified Australian Securities and Investments Commission pursuant to s 601CL(1) of the Corporations Act that it had, on that day, ceased to carry on business in "this jurisdiction" - that is, in terms of the s 9 definition of that expression, the States of Australia, the Australian Capital Territory and the Northern Territory. ASIC thereafter initiated action to strike the name of Vaccinoma off the register. Search materials in evidence show that that action has not been completed and that Vaccinoma remains registered. The evidence also shows that Vaccinoma was dissolved in the place of its incorporation on 1 August 2008. 3 Even though Vaccinoma no longer carries on business in Australia and has been dissolved in the place of incorporation, the plaintiff ("Titchfield") seeks an order that Vaccinoma be wound up under the Corporations Act and an order that a liquidator be appointed. 4 The winding up application is advanced under s 583 of the Corporations Act: "Subject to this Part, a Part 5.7 body may be wound up under this Chapter and this Chapter applies accordingly to a Part 5.7 body with such adaptations as are necessary, including the following adaptations: (a) the principal place of business of a Part 5.7 body in this jurisdiction is taken, for all the purposes of the winding up, to be the registered office of the Part 5.7 body; (b) a Part 5.7 body is not to be wound up voluntarily under this Chapter; (c) the circumstances in which a Part 5.7 body may be wound up are as follows: (i) if the Part 5.7 body is unable to pay its debts, has been dissolved or deregistered, has ceased to carry on business in this jurisdiction or has a place of business in this jurisdiction only for the purpose of winding up its affairs; (ii) if the Court is of opinion that it is just and equitable that the Part 5.7 body should be wound up; (iii) if ASIC has stated in a report prepared under Division 1 of Part 3 of the ASIC Act that, in its opinion: (A) the Part 5.7 body cannot pay its debts and should be wound up; or (B) it is in the interests of the public, of the members, or of the creditors, that the Part 5.7 body should be wound up; (d) if the Part 5.7 body is a registrable Australian body--the winding up must deal only with the affairs of the body outside its place of origin." 5 The ground relied on by Titchfield is that Vaccinoma, in the words of s 583(c)(1), "has ceased to carry on business in this jurisdiction". That ground is established by Vaccinoma's own Form 407 dated 18 June 2007 to which I have referred. 6 It follows that it will be open to the court to make a winding up order under s 583 if Vaccinoma is in truth "a Part 5.7 body". Furthermore, that jurisdiction will then be available to be exercised even though Vaccinoma has been dissolved under the laws of the place of its incorporation. This is the effect of s 582(3): "A Part 5.7 body may be wound up under this Part notwithstanding that it is being wound up or has been dissolved, deregistered or has otherwise ceased to exist as a body corporate under or by virtue of the laws of the place under which it was incorporated." 7 The winding up jurisdiction created by s 583 is discretionary. But as I have said, the threshold question of its availability turns on the question whether Vaccinoma is within the s 9 definition of "Part 5.7 body": "'Part 5.7 body' means: (a) a registrable body that is a registrable Australian body and: (i) is registered under Division 1 of Part 5B.2; or (ii) is not registered under that Division but carries on business in this jurisdiction and outside its place of origin; or (b) a registrable body that is a foreign company and: (i) is registered under Division 2 of Part 5B.2; or (ii) is not registered under that Division but carries on business in Australia; or (c) a partnership, association or other body (whether a body corporate or not) that consists of more than 5 members and that is not a registrable body; but does not include an Aboriginal and Torres Strait Islander corporation. Note: The winding up of Aboriginal and Torres Strait Islander corporations is dealt with in Part 11-5 of the Corporations (Aboriginal and Torres Strait Islander) Act 2006." 8 The definition of "foreign company" in s 9 is: "'foreign company' means: (a) a body corporate that is incorporated in an external Territory, or outside Australia and the external Territories, and is not: (i) a corporation sole; or (ii) an exempt public authority; or (b) an unincorporated body that: (i) is formed in an external Territory or outside Australia and the external Territories; and (ii) under the law of its place of formation, may sue or be sued, or may hold property in the name of its secretary or of an officer of the body duly appointed for that purpose; and (iii) does not have its head office or principal place of business in Australia." 9 The definition of "registrable body" is: "'registrable body' means a registrable Australian body or a foreign company." 10 Because it was created as a corporation by the law of Delaware, Vaccinoma came within paragraph (a) of the definition of "foreign company". That, without more, caused it to be a "registrable body". The circumstance that Vaccinoma became registered under Division 2 of Part 5B.2 and that that registration continues means that it is within paragraph (b)(i) of the definition of "Part 5.7 body". 11 I am satisfied that Vaccinoma is a Part 5.7 body and that the court therefore has power to make the orders sought; and, in the light of s 582(3), this is so even though Vaccinoma has been dissolved under the law of Delaware. The legislature has proceeded on the basis that "a non-existent company may be the subject of a winding up order". These are the words of Lord Macmillan in Russian and English Bank v Baring Brothers and Company Ltd [1936] AC 405 at 438-439. The concept thus created by Parliament is one that his Lordship thought could be faced with equanimity by a legal system that had for so long recognised the non-existent John Doe and Richard Roe as suitors in its courts. 12 Before turning to the question whether the court should, in this case, exercise the winding up jurisdiction in the way Titchfield seeks, I observe that the application has been served in accordance with s 601CX by being delivered to the registered office of Vaccinoma in Australia. There has been no appearance by or on behalf of Vaccinoma – not surprisingly, one might think, if it no longer exists as a juristic entity. 13 An important consideration in assessing whether the winding up jurisdiction should be exercised in this case is utility. The general principle to be applied is that stated by Bowen LJ in Re The Company or Fraternity of Free Fishermen of Faversham (1887) 36 Ch D 329 at 343: "[I]f putting in motion the statutory machinery for winding-up cannot possibly accomplish the purpose for which such machinery was invented by the Legislature, the Court will not make the order for winding-up." 14 With Vaccinoma no longer carrying on business in Australia and having been dissolved in the place of incorporation, what useful purpose will be served by winding up under the Corporations Act? 15 Submissions made on behalf of Titchfield address the question of utility by reference to a number of matters. An understanding of them makes it necessary to refer to aspects of the activities of Vaccinoma as described in the affidavits filed and read by the plaintiff. In the description that follows, I am, of course, accepting at face value the untested evidence led by Titchfield. 16 Shortly after its incorporation in Delaware and registration under the Corporations Act in April 2006, Vaccinoma lodged a prospectus with ASIC. The prospectus was dated 26 April 2006. It invited subscription for 17 million shares in Vaccinoma at an issue price of $1.00 each. It was intended that Vaccinoma be admitted to the official list of Australian Securities Exchange and that the newly issued shares be listed for quotation on the stock market maintained by that exchange. 17 According to the prospectus, Vaccinoma's principal asset was an exclusive licence from Maanex LLC ("Maanex") under which Vaccinoma was entitled to make, use, exercise and vend vaccines for the treatment and prevention of breast cancer and melanoma. 18 On or about 6 October 2006, Titchfield and Vaccinoma entered into an agreement pursuant to which Vaccinoma appointed Titchfield as a corporate adviser and transaction co-ordinator in relation to the proposed share issue. The agreement contained provisions under which Vaccinoma was to become liable to pay fees to Titchfield. 19 On 29 November 2006, Titchfield arranged an introduction and initial meeting between Vaccinoma's chief executive officer and representatives of CK Life Sciences International Holdings Inc ("CK Life"), a potential investor in Vaccinoma shares. Thereafter, Vaccinoma and CK Life entered into negotiations with a view to investment by CK Life in shares of Vaccinoma. 20 On 2 January 2007, CK Life made a proposal to Vaccinoma for the acquisition of Vaccinoma's business and assets. The proposal was to the effect that a new company would be formed to take over all Vaccinoma's intellectual property; that existing shareholders in Vaccinoma would become shareholders in the new company (along with CK Life); that CK Life would inject $US40 million into the new company in return for a 66.7% interest in that company; and that, of that $US40 million, $US2million could be used to reimburse Vaccinoma for out of pocket expenses already incurred in connection with the prospectus proposal and to pay out selected minority shareholders if necessary. 21 This proposal was made by CK Life to Vaccinoma on 2 January 2007. The following day, 3 January 2007, Titchfield invoiced Vaccinoma for fees totalling $3,262,986, being amounts it alleged were due for work completed pursuant to the agreement between Vaccinoma and Titchfield. 22 On or about 6 January 2007, CK Life issued draft heads of agreement to give effect to the proposal of 2 January 2007. That document made provision for the payment of $US2million by CK Life to Vaccinoma to enable Vaccinoma to pay debts incurred in relation to the prospectus transaction and to buy out minority shareholders if necessary. It is the contention of Titchfield that, at this time, Vaccinoma's directors must have been aware, or should be taken to have been aware, of Titchfield's claim for $A3,262,986 and that the sum of $US2 million would have been insufficient to cover that debt (the evidence suggests that, at the time, the exchange rate was approximately $A1.00 to $US0.7939). 23 It is also the contention of Titchfield that, some time after 6 January 2007, CK Life and Vaccinoma completed a transaction substantially in terms of the heads of agreement. While Titchfield does not have direct evidence of this, it points to a number of matters from which it says an inference should be drawn. There is material to indicate that Polynoma LLC ("Polynoma") is probably the new company contemplated by the arrangement with CK Life. Materials in evidence show that Polynoma, which was incorporated in Delaware on 4 April 2007, is a subsidiary of CK Life and that the business of Polynoma consists, at least in large measure, of the same kinds of activities as were envisaged for Vaccinoma. 24 Titchfield points to aspects of the heads of agreement produced by CK Life on or about 6 January 2007 which, if given effect to by the final contracts, would have caused the licence held by Vaccinoma from Maanex to be assigned or novated to Polynoma. Furthermore, Titchfield alleges, the fact that $US2 million apparently represented the only funds to be received by Vaccinoma under the agreement with CK Life may well indicate that Vaccinoma did not receive more than $US2 million for its rights as licensee. If, as postulated, the consideration was $US2 million or less, it is the contention of Titchfield that the transaction took place at a considerable undervalue, having regard to the fact that CK Life paid $US40 million for a 66.7% interest in Polynoma. 25 In the light of all the matters to which I have referred, Titchfield contends that: (a) it is a creditor of Vaccinoma in the sum of $3,262,986; (b) it is likely that, in early 2007, Vaccinoma transferred all of its assets, including the licence it held from Maanex, for either no consideration or at a substantial undervalue; (c) the licence from Maanex now appears to be held by Polynoma; (d) in early 2007, Vaccinoma received the sum of $US2 million for the purpose of paying debts that it had incurred in connection with the prospectus transaction; (d) at all material times, the directors of Vaccinoma were aware, or must be taken to have been aware, that the transfer of assets by Vaccinoma was made without consideration or at a substantial undervalue; (e) objectively viewed, the transfer conferred no benefit on Vaccinoma; and (g) the sum of $US2 million would not be sufficient for Vaccinoma to pay all of its creditors, having regard, in particular, to the alleged debt to Titchfield for fees. 26 At the times relevant to the events just described, there were, on the evidence, at least three directors of Vaccinoma. One resides in California; another resides at Northbridge in Sydney; and the third resides at Lane Cove in Sydney. Searches undertaken at the Land Titles Office show that each of the directors resident in Sydney is the registered proprietor of land in New South Wales of not insignificant value. 27 Titchfield's position is that, in the whole of the circumstances, there is a need for proper inquiry to be made into the transaction which apparently saw the business and assets of Vaccinoma (including, in particular, the licence from Maanex) transferred to Polynoma (or otherwise) in accordance with the transaction proposed by CK Life and apparently agreed to by Vaccinoma. Titchfield maintains that there is at least a distinct possibility that directors of Vaccinoma may, in connection with that transaction, have failed to discharge the duties to which they were subject as directors. It is also said that it may be open to a liquidator of Vaccinoma to proceed under s 588G or s 598 of the Corporations Act. 28 It is with a view to proper investigation of these possibilities that it is, in Titchfield's view, appropriate to bring into operation in relation to Vaccinoma the several provisions available to a liquidator designed to assist investigations by liquidators with possible view to recoveries in the interests of creditors. 29 Titchfield also refers to the fact that the UNCITRAL Model Law on Cross Border Insolvency is now in force as part of the domestic law of the United States. 30 It is necessary, at this point, to consider the avenues that would become available to a liquidator appointed in a winding up of Vaccinoma in a winding up under s 583. Only if it appears that such a liquidator has reasonable prospects of producing some tangible and useful result could a winding up order be considered an appropriate exercise of the court's discretion. On the evidence as it stands, there is no property of Vaccinoma itself within the jurisdiction to which a liquidator could lay claim. That, of itself, is not a barrier to the exercise of the discretion, as long as there is a realistic possibility of some other form of recovery. 31 This makes it necessary to look at the nature, scope and incidents of a winding up under s 583. The opening words of the section refer to winding up of a Part 5.7 body "under this Chapter". The reference to "this Chapter" is a reference to Chapter 5 (s 410 to s 600F). But some of those provisions do not concern winding up. Part 5.3A, for example, deals with voluntary administration. But when s 583 goes on to say that "this Chapter applies accordingly to a Part 5.7 body with such adaptations as are necessary", including particularly specified adaptations, it indicates that the winding up process is to be that applicable in a winding up of a company by the court, subject to the adaptations mentioned. In Peninsular Group Ltd v Kintsu Co Ltd (1998) 44 NSWLR 534, the effect and operation of s 583 were described by Sheppard AJA (with whom Meagher JA and Sheller JA agreed) in these terms": "Section 583 deals with the winding up of Pt 5.7 bodies. Because of the definitions to which reference has been made it includes the winding up of foreign companies. But it needs to be borne in mind that it applies to a great many other types of association, using that expression broadly, some incorporated and some not. A wide range of undertakings is involved yet the same provisions apply to all notwithstanding that there may be substantial differences in their character and the nature of their activities. Section 583 provides that, subject to Pt 5.7, a Pt 5.7 body may be wound up under Ch 5 (that is the whole chapter) and the chapter applies (presumably as a whole in so far as it is applicable) to a Pt 5.7 body with such adaptations as are necessary including a number of adaptations which are specified." 32 Certain provisions outside s 583 itself cast light on the process of winding up a Part 5.7 body once an order for winding up is made under that section. For example, paragraph (c) of the s 9 definition of "company" says that a reference to a "company" in Part 5.7B or Part 5.8 (each of which is within Chapter 5) includes a reference to a Part 5.7 body. It is thus made clear that the liquidator of a Part 5.7 body under a s 583 winding up may make application under s 588FF(1) (a provision within Part 5.7B) for an order in favour of the Part 5.7 body and that the court may make such an order if satisfied that a transaction of the Part 5.7 body is a voidable transaction within s 588FE. This opens up, in relation to a Part 5.7 body, the same recovery possibilities under Division 2 of Part 5.7B as exist in the winding up of a company formed and registered under the Corporations Act. 33 The same process of analysis shows recovery possibilities under s 588M(2) (another provision within Part 5.7B) for insolvent trading to be likewise available consequent upon an order for the winding up of a Part 5.7 body. 34 The applicability of certain other provisions commonly resorted to by a liquidator in the winding up of a company formed and registered under the Corporations Act is indicated by the fact that those provisions refer to a "corporation". The particular Part 5.7 body with which I am here concerned (which, as I have said, is within paragraph (a) of the s 9 definition of "foreign company") is a "corporation", as defined by s 9, because of paragraph (a) of the definition of that term in s 57A. 35 A particular possibility mentioned in submissions is resort to s 598, a provision within Part 5.9 and thus beyond the contemplation of paragraph (c) of the s 9 definition of "company". Under s 598, an "eligible applicant" may seek an order against a person found to be "guilty of fraud, negligence, default, breach of trust or breach of duty in relation to a corporation". A liquidator is, in terms of s 9, an "eligible applicant" in relation to a "corporation". The fact that s 598 refers to "a corporation" shows that it is intended to have a wider application than provisions concerned only with "a company". 36 When s 598 refers to "breach of duty", it may well extend to breaches of the several statutory duties created by Division 1 of Part 2D.1 (the main provisions of which are s 180 to s 184). That division refers throughout to "a corporation". It forms part of Chapter 2D the scope of which is indicated by s 179(1): "This Part sets out some of the most significant duties of directors, secretaries, other officers and employees of corporations." 37 Any attempt by a liquidator of Vaccinoma appointed under s 583 to rely on any perceived breach of a statutory duty arising under Division 1 of Part 2D.1 would have to negotiate any obstacle created by the general law principle that the extent of the duties owed by a director of a foreign company is a matter governed by the law of the place of incorporation and that the courts of that place are very likely to be the appropriate forum: Pergamon Press Ltd v Maxwell [1970] 1 WLR 1167; Konamaneni v Rolls Royce Industrial Power (India) Ltd [2002] 1 WLR 1269. Against that, however, stands the fact that Division 1 of Part 2D.1 makes specific reference to the case of a foreign company. Section 186 says that s 180 to s 184 – the main provisions imposing duties – do not apply to an act or omission by a director or other officer of a foreign company unless the act or omission had one of several precisely defined connections with Australia. The general law principle would have to be viewed in the light of the clear provision of legislation. 38 A particularly significant aspect of Vaccinoma's status as a "corporation" must now be mentioned. The mechanisms for examining officers and others made available to liquidators by Part 5.9 of the Corporations Act apply in relation to "corporations". The examination process is one that would be available to a liquidator of Vaccinoma; and investigation of the availability of causes of action for the benefit of creditors would be a legitimate use of that process. Access to that process seems to have been the reason that a winding up order under s 583 was made in 1999 in respect of the Belgian company that became the subject of the subsequent judgment in Re Wayland as liquidator of ABC Containerline NV [2005] NSWSC 1; (2005) 52 ACSR 750. 39 It is submitted on behalf of Titchfield that a liquidator in a winding up of Vaccinoma ordered under s 583 might also obtain access to United States courts with a view, in the first instance, to examining the United States resident director of Vaccinoma and other persons involved in relevant respects of the affairs of Vaccinoma. 40 The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Title 11, USC (2005)) added Chapter 15 to the US Bankruptcy Code (11 USC, sec 1501, et seq) with effect from 17 October 2005. That chapter caused the provisions of the UNCITRAL Model Law on Cross Border Insolvency to become part of the domestic law of the United States. It is the counterpart in that country of the Cross-border Insolvency Act 2008 (Cth). 41 It is true that, if a winding up of Vaccinoma under the Corporations Act became the subject of an order under s 1517 of the Bankruptcy Code that it be recognised as a "foreign main proceeding" or a "foreign non-main proceeding", the Australian liquidator would have standing under s 1521(a) of the Bankruptcy Code to seek in the United States an order of the kind described in s 1521(a)(4), that is, an order "providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor's assets, affairs, rights, obligations or liabilities". 42 I am in no position to judge whether a United States court would or might make a recognition order and, thereafter, an examination order of the kind outlined. Issues that might be ventilated on such an application include, first, that the s 583 winding up of Vaccinoma was not based on insolvency but on cessation of business in Australia (the purpose of Chapter 15 of the Bankruptcy Code is stated by s 1501 to be concerned with "cases of cross-border insolvency"); and, second, that the "debtor" entity in respect of which the United States court was invited to exercise jurisdiction had been dissolved under the law of the State in which it had been incorporated and therefore presumably did not exist in the eyes of United States law. 43 Despite these doubts about the United States position, I am satisfied that Titchfield has made out a case for the exercise of the discretionary winding up jurisdiction. In the case of a foreign company, as in the case of a local company, a creditor has a prima facie right to a winding up order: Mercantile Credits Ltd v Foster Clark (Australia) Ltd [1964] HCA 66; (1964) 112 CLR 169. 44 Titchfield has, to the requisite standard, shown itself to be an unsatisfied creditor of Vaccinoma. It therefore has standing to seek winding up under s 462(2)(b), as applied by s 583. While there does not appear to be property of Vaccinoma within Australia, Titchfield has shown that causes of action are potentially available to Vaccinoma or to a liquidator of Vaccinoma against persons who were directors of Vaccinoma. On the materials presented, there is a clear case for further investigation of that possibility by a liquidator. Titchfield has thus established that there is a "reasonable possibility of benefit accruing to creditors from making the winding up order", to quote words used by Megarry J in Re Compania Merabello San Nicholas SA [1973] 1 Ch 75 at 92. 45 The consent of Mr R W Whitton to act as liquidator has been filed. There is no indication of how he might be funded, but the fact that Titchfield has brought this application and has a large amount at stake may mean that it will offer some form of financial assistance. 46 The orders of the court are as follows: 1. Order pursuant to s 583 of the Corporations Act 2001 (Cth) that Vaccinoma Inc ARBN 119 273 326 be wound up. 2. Order that Robert William Whitton of Lawler Partners, Level 9, 1 O'Connell Street, Sydney be appointed liquidator of Vaccinoma Inc. 47 The court would normally make an order that the defendant pay the plaintiff's costs. I do not consider it appropriate to make such an order against an entity I know to be non-existent. Rather, s 466(2) and s 556(1)(b) should be allowed to take effect in due course, assuming that s 583 causes them to do so. ********** 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.