In the matter of Trans Pacific Insurance Corporation [2009] NSWSC 554

Reported Decision : 72 ACSR 327

New South Wales Supreme Court

CITATION : In the matter of Trans Pacific Insurance Corporation [2009] NSWSC 554

HEARING DATE(S) : 15 June 2009

JUDGMENT DATE : 17 June 2009

JURISDICTION : Equity

JUDGMENT OF : Austin J

DECISION : Orders made for winding up and appointment of liquidator

CATCHWORDS : CORPORATIONS - winding up - foreign company as "Part 5.7 body" - standing to apply for winding up order - standing of body itself - whether body made a valid decision to apply - standing of sole director/shareholder as contributory - grounds for winding up under s 583 - inability to pay debts and just and equitable ground - relevant considerations

LEGISLATION CITED : Corporations Act 2001 (Cth), ss 9, 459A, 459P, 461, 462, 467, 583, 585, 586

CATEGORY : Principal judgment

Loch v John Blackwood Ltd [1924] AC 783 New Cap Reinsurance Corporation Ltd v A E Grant [2008] NSWSC 1015 CASES CITED : Re Inkerman Grazing Pty Ltd (1972) 1 ACLR 102 Re United Medical Protection Ltd [2002] NSWSC 413 Titchfield Management Ltd v Vaccinoma Ltd [2008] NSWSC 1196 Trans Pacific Insurance Corporation & Anor [2009] NSWSC 308

PARTIES : Trans Pacific Insurance Corporation (in prov liq) (First Plaintiff) Ian Lindsay Douglas (Second Plaintiff)

FILE NUMBER(S) : SC 2480/09

COUNSEL : J Baird (Plaintiffs)

SOLICITORS : Carneys Lawyers (Plaintiffs)

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

AUSTIN J

WEDNESDAY 17 JUNE 2009

2480/09 IN THE MATTER OF TRANS PACIFIC INSURANCE CORPORATION & ANOR JUDGMENT 1 HIS HONOUR: By an originating process filed on 23 April 2009, the plaintiffs, Trans Pacific Insurance Corporation ("TPIC") and Mr Douglas seek an order for the winding up of TPIC. There is evidence that all appropriate formal procedural steps for the making of a winding up order have been taken. The plaintiffs also seek an order for the appointment of Mr Silvia as liquidator. Mr Silvia is currently the provisional liquidator of TPIC. His consent to act as liquidator is in evidence. Barrett J made the decision to appoint Mr Silvia as provisional liquidator on 23 April 2009, and delivered reasons for that decision, to which I shall refer: Trans Pacific Insurance Corporation & Anor [2009] NSWSC 308. The corporate status, business and affairs of TPIC 2 In his affidavit made on 21 April 2009, Mr Douglas said he is the sole director and shareholder of TPIC and that the company was incorporated in the Cayman Islands in or about 2000, though the documentary evidence is somewhat patchy. The evidence includes a "certificate of incumbency" issued by the Assistant Registrar of Companies for that country showing that it was in existence on 5 March 2009 and certifying that its director was at that time Mr Douglas. A document in evidence before me but not made available to Barrett J is the memorandum and articles of association of TPIC, bearing the date 19 December 2000. Barrett J noted in his judgment, para 2, that there was evidence in earlier and unrelated proceedings that the date of incorporation of the company was 21 December 2000. Taken together, this evidence satisfies me that TPIC is an incorporated company formed under the laws of the Cayman Islands in about December 2000. 3 TPIC was registered as a foreign company (overseas) under the Corporations Act on 7 April 2009 and a certificate of registration was issued on that day. An extract from ASIC's database dated 16 April 2009 confirms that status and shows Mr Douglas as the sole director. 4 TPIC carried on business in Australia, from about 2000, as a foreign general insurance underwriter specialising in legal liability cover (and so in the absence of foreign company registration until 7 April 2009, there appears to have been a default under s 601CD for something in the order of eight years, as Barrett J noted at para 27). Originally there were two shareholders and directors, Mr Douglas and Mr Bunt, but Mr Bunt resigned as a director and transferred his shares to Mr Douglas in November 2006. 5 All of TPIC's business in Australia was sourced from Triton Underwriting Insurance Agency Pty Ltd, a company of which Mr Douglas and Mr Bunt were the directors and shareholders. Mr Douglas gave evidence that TPIC carried on insurance activities from 2000 until about December 2005, when he said it became clear to him that Triton was not able to market the offshore facility in Australia. Since that time, he said, the remaining risks have been administered in "run-off" mode and no new business has been written by TPIC. Claims have progressively been settled through various panel solicitors engaged by TPIC. At the time of his affidavit, sworn on 21 April 2009, there were about 60 claims outstanding with an estimated exposure, he said, of between $7 million and $15 million. He attached to his affidavit a schedule of claims and contingency amounts allowed. The total in the "Outstanding Est" column is $6,278,500. He estimated that a further $80,000 of legal expenses were outstanding. 6 Mr Douglas estimated the company's assets as at 21 April 2009 at $5,141,859 in total, comprising cash in bank in Australia, cash held by an agent in the Cayman Islands, some money held in Australian solicitors' trust accounts and sundry debtors. He said the company maintained some reinsurance but it was not expected that any significant money would be recovered from reinsurers. 7 Therefore, by Mr Douglas' account, in April 2009 the company had assets of about $5,141,859 and liabilities estimated to be at least $6,358,500 and possibly as much as $15 million. He said that all known creditors of the company, comprising claimants under policies subject to litigation and Australian solicitors, are located in Australia. He gave evidence that most of the assets are in Australia and the money held by the agent in the Cayman Islands is in the process of being remitted to Australia. 8 There are some (apparently) draft financial statements for the years to 30 June 2005 and 30 June 2006 annexed to his affidavit, but it is not clear from the documents themselves whether they have been audited, as the attached auditors' certificate appears to be for an earlier year. There are no more recent financial statements in evidence. 9 By an e-mail to TPIC's Cayman Islands agents dated 13 February 2009, Grant Thornton Cayman Islands indicated their intention to resign as auditors of TPIC. They said they had concluded that they would be unable to gain sufficient comfort to form an audit opinion, having regard to a limitation of scope in many audit areas and an absence of adequate evidence, particularly with respect to novated losses relating to the period prior to the year 2000 which would make $14.7 million of claims very difficult or impossible to test. That was followed up by a formal letter of resignation from Grant Thornton addressed to the directors of TPIC, purporting to be effective immediately, dated 19 February 2009, indicating an intention to notify the Cayman Islands Monetary Authority. 10 On 14 April 2009 the Cayman Islands Monetary Authority wrote to Mr Douglas in his capacity as director of TPIC, saying that the company continued to be out of compliance under the terms of the Insurance Law (2008 Revision) of the Cayman Islands. The Authority expressed its extreme concern with the situation and asked him to take urgent corrective action. It listed a number of outstanding issues including non-filing of annual audited financial statements for the years ended 30 June 2006, 2007 and 2008, and the absence of any business plan for the approval of the Authority to authorise inter-company loans. The Authority noted that the company's auditors had resigned, and that the Authority's Statement of Guidance required a minimum of two directors. The letter demanded a response by 5 March and threatened regulatory action. 11 On 21 April 2009 Mr Douglas purported, as sole director and shareholder, to cause TPIC to resolve that it be wound up. The provisional liquidator's reports 12 Mr Silvia wrote a report to the court as provisional liquidator dated 26 May 2009, and a supplementary report dated 11 June 2009. 13 In his May report he noted that the director, Mr Douglas, had not supplied him with a Report as to Affairs as required by s 475(1) of the Corporations Act. Nor had Mr Douglas provided him with audited financial statements. He said he understood the most recent financial statements completed for TPIC were for the year to 30 June 2006 and he attached what he described as draft financial statements for that year, the same document as Mr Douglas annexed to his affidavit, including the draft auditor's certificate apparently for the previous year. Not surprisingly Mr Silvia said he did not have sufficient information to determine whether the financial statements provided were true and fair, and therefore he placed no reliance on them in assessing the company's current financial position. 14 Essentially Mr Silvia made his assessment of TPIC's financial position on the basis of correspondence with the panel solicitors engaged by TPIC to defend insurance claims, and a review of the files for each active claim, together with various discussions and correspondence. I am satisfied that the approach that he described has been reasonable in the circumstances. 15 His conclusion was that the total assets of the company comprised an amount in the range from $8,063,000 to $7,817,000, comprising cash at bank, policy excesses recoverable from the insured, reinsurance claims, and a favourable costs order. He estimated total liabilities as in the range from $11.755 million to $27.535 million, comprising claims by plaintiffs in insurance matters, unpaid legal costs, and unfavourable costs orders. The bulk of the liabilities were the plaintiffs' claims and as Mr Silvia explained, there are obvious difficulties in quantifying those claims. 16 Mr Silvia recommended that TPIC be wound up on the basis that it was unlikely to be in a position to meet all its potential liabilities from its available assets and was therefore insolvent. 17 In his June supplementary report Mr Silvia drew attention to some significant changes to the company's financial position. One matter was that Mr Douglas had lodged his Return as to Affairs in which he claimed that the book value of the company's total assets was $4,554,259 and that the estimated realisable value of the assets was $4,342,009. Mr Douglas did not provide an estimate of the value of unsecured creditors, or total liabilities, or the estimated deficiency. Mr Silvia said that his estimate of liabilities, and of TPIC's deficiency, remained as stated in his May report. 18 It appears from Mr Silvia's evidence that there is about $926,174 held by TPIC's agent in the Cayman Islands, and in his supplementary report Mr Silvia reported on plans to appoint a co-liquidator in the Cayman Islands to collect assets there, as suggested by the Cayman Islands Monetary Authority. Section 583 19 For reasons given below, TPIC is a Part 5.7 body under the Corporations Act 2001 (Cth), and therefore s 583, which is in Part 5.7 of the Corporations Act, applies to the winding up application. Section 583 is in the following terms: "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 I 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." Plaintiffs' standing to seek a winding up order (a) Standing of TPIC 20 TPIC seeks an order for its own winding up. As Barrett J noted (para 17), neither s 583 nor any other provision of Part 5.7 deals expressly with the question of who may apply for the winding up of a Part 5.7 body, and so under s 583 the general provisions of Chapter 5 apply subject to such adaptations as are necessary. Under s 459P(1)(a) an application to the court that a company be wound up in insolvency may be made by the company itself, and under s 462(2)(a) the company itself may make an application for winding up on any of the grounds in s 461, including the just and equitable ground in s 461(1)(k). The only adaptation necessary to those provisions is that in the case of winding up of a Part 5.7 body in insolvency or on the just and equitable ground, it is the Part 5.7 body that is authorised to make the application, as Barrett J found (para 17). Therefore TPIC has standing to seek a winding up order in insolvency or on the just and equitable ground. 21 As a general proposition, where an application is made by a company for its own winding up, the court needs to be satisfied that the corporate organ with power to commit the company to the making of an application for winding up has validly made a decision to that effect (see Re Inkerman Grazing Pty Ltd (1972) 1 ACLR 102 at 103; applied, notwithstanding some intervening authorities noted by Barrett J at para 23, in Re United Medical Protection Ltd [2002] NSWSC 413; (2002) 41 ACSR 623, and by Barrett J at [23]). In interlocutory circumstances Barrett J, not having evidence about the content of the constitution of TPIC or the law of the Cayman Islands, was nevertheless prepared to infer that where a particular person is the sole shareholder and sole director of a corporation, a clearly expressed decision of that person with respect to an act of the corporation should be recognised as the corporation's decision (para 24). As noted above, Mr Douglas (the sole director and shareholder) purported to pass a special resolution that TPIC should be wound up by the court, and Barrett J found that was a sufficient basis for concluding that TPIC had made an effective decision to apply to the court for an order for its own winding up. 22 I would, if necessary, accept and apply that reasoning for the purposes of the application for final relief, but now the court has the benefit of additional evidence. First, there is a letter from Mr Douglas dated 12 June 2009 and addressed to "the Relevant Judicial Officer", in which he said that he had extensive meetings with Mr Silvia's staff after Mr Silvia's appointment as provisional liquidator. He said it was clear to him that TPIC is insolvent, and he asked the court to place it into liquidation. Obviously that evidence is far from conclusive, and may be inadmissible to the extent that it expresses an opinion about solvency, but it is some evidence that Mr Douglas as sole director has made a decision that TPIC should seek a winding up order. 23 Second, the court now has the corporate constitution of TPIC, its memorandum and articles of association dated 19 December 2000. Article 77 provides for a board of directors consisting of no fewer than one nor more than 10 persons. Therefore a single director is expressly contemplated. Article 89 is the usual management clause providing that the business of the company is to be managed by the directors who may exercise all such powers of the company as are not from time to time required to be exercised by the company in general meeting. The articles give certain powers to the shareholders if the company is wound up (articles 143 and 144) but they do not take away from the directors the power to cause the company to decide to make an application for its winding up. Though the question is governed by Cayman Islands law, it appears as a matter of construction of these provisions that Mr Douglas as sole director has the power to make the company's decision to apply for winding up, and it is unlikely that Cayman Islands law would affect that construction. The evidence, considered together, shows that he has made that decision. 24 Therefore TPIC has standing to make the application and is properly before the court. (b) Standing of Mr Douglas 25 Mr Douglas is also a plaintiff seeking an order that TPIC be wound up. Under s 459P(1)(c) a contributory may apply to the court for a company to be wound up in insolvency, although under s 459P(2)(b) a contributory needs the leave of the court to make the application. Under s 462(2)(c) a contributory may apply for an order to wind up a company on any of the grounds provided in s 461, including the just and equitable ground that s 461(1)(k). Section 583 applies these provisions to the winding up of a Part 5.7 body with such adaptations as are necessary, and so a contributory of a Part 5.7 body is authorised to apply for a winding up order. Therefore if Mr Douglas is a "contributory" for the purposes of these provisions, adapted to the Part 5.7 context, then he has standing to apply for a winding up order on the just and equitable ground and he also has standing, with the court's leave, to apply for a winding up order in insolvency. 26 In s 9, "contributory" is defined to mean, in relation to a Part 5.7 body: (i) a person who is a contributory by virtue of s 586; and (ii) before the final determination of the persons who are contributories by virtue of that section - a person alleged to be such a contributory". 27 Section 586(1) provides: "On a Part 5.7 body being wound up, every person who: (a) in any case - is liable to pay or contribute to the payment of: (i) a debt or liability of the Part 5.7 body; or (ii) any sum for the adjustment of the rights of the members amongst themselves; or (iii) the costs and expenses of winding up; or (b) if the Part 5.7 body has been dissolved or deregistered in its place of origin - was so liable immediately before the dissolution or deregistration; is a contributory and every contributory is liable to contribute to the property of the Part 5.7 body all sums due from the contributory in respect of any such liability." 28 Therefore the standing of Mr Douglas to seek a winding up order as a contributory depends, under s 586(1)(a), on whether he is liable to pay or contribute to the payment of TPIC's debts, or adjustment of the rights of members inter se, or the costs and expenses of winding up. As Barrett J observed (para 21), the liability to which the section refers is a liability arising outside Part 5.7 itself, and the body's constitution may be a source of such a liability. His Honour had no evidence about TPIC's constitution, nor about the law governing liabilities created by that constitution, and so he was unable to conclude that Mr Douglas was a contributory and therefore a person with standing, as such, to seek a winding up order. 29 As previously noted, the memorandum and articles of association of TPIC were in evidence at the final hearing. Clause 5 of the memorandum states that the liability of each shareholder is limited to the amount from time to time unpaid on such shareholder's shares. Clause 6 of the memorandum and article 7 state that the share capital is A$1,500,000 divided into 1,500,000 ordinary shares of A$1 par value. The copy of the articles of association that is in evidence omits page 7, which may well have contained some provisions relevant to making calls on shares. On the basis of what is before the court, however, it seems that the memorandum and articles of association are based fairly closely on typical memoranda and articles of association of Australian proprietary companies in use prior to the amendments to corporations legislation that replaced the old Table A with replaceable rules and abolished a par value, and consequently the liability of shareholders under TPIC's constitution is the same or closely similar to the liability of a shareholder of an Australian proprietary company prior to those statutory amendments and under the typical constitution. 30 In short, I infer from the evidence before me that a shareholder in TPIC has, according to its constitution, a liability upon winding up of TPIC to pay or contribute up to $1 per share held to the company's debts and liabilities, the adjustment of the rights of members amongst themselves and the costs and expenses of winding up. If the shares are fully paid there is no further contributory liability. 31 Although the nature and extent of the liability is governed by the law of the Cayman Islands, the place of formation of TPIC, of which there is no evidence before the court, I am prepared having regard to the text of the memorandum and articles of association to infer that Cayman Islands law does not alter the liability of the shareholders provided for in the document. In my view the shareholder's liability comes within the wording of s 586(1)(a), and therefore Mr Douglas is a contributory. 32 My conclusion, therefore, is that both plaintiffs have standing to seek a winding up order of TPIC, though Mr Douglas needs the court's leave for a winding up order in insolvency. I can think of no possible reason for denying that leave, given that TPIC itself is entitled to apply for the order without leave, and therefore I propose to grant leave to Mr Douglas. Part 5.7 body 33 In s 9 the expression "Part 5.7 body" is defined to mean, so far as relevant: "(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". 34 The definition of "foreign company" in s 9 includes a body corporate that is incorporated outside Australia and the external territories, which is not a corporation sole or an exempt public authority. Clearly TPIC is not a corporation sole or an exempt public authority, and the evidence to which I have referred shows that it is a body corporate incorporated outside Australia and the external territories. It is therefore a foreign company. Consequently it is a registrable body, for the definition of "registrable body" in s 9 includes a foreign company. I have noted the evidence showing that, as at 7 April 2009, it was registered under Division 2 of Part 5B.2. It is therefore a Part 5.7 body. Grounds for winding up 35 The originating process identified three grounds for the winding up of TPIC, namely adaptations, by virtue of s 583, of the grounds for winding up: in insolvency under s 459A; on the ground that the body had by special resolution resolved to be wound up by the court (s 461(1)(a)); and on the just and equitable ground (s 461(1)(k)). 36 Barrett J, addressing the question whether a provisional liquidator should be appointed, considered whether there was a reasonable prospect that a winding up order would be made. He decided that there was a reasonable prospect that a winding up order in insolvency or on the just and equitable ground would be made, but he held (para 14) that the ground in s 461(1)(a) was not available because s 583(c) contains "an exhaustive list of the grounds upon which a Part 5.7 body may be wound up" and that list does not include anything constituting or analogous to s 461(1)(a). 37 At the hearing of the winding up application counsel for the plaintiffs did not challenge Barrett J's conclusion as to the s 461(1)(a) ground, and therefore the application proceeded only on the insolvency and just and equitable grounds. Insolvency 38 The precise ground, stated in s 583(c)(i), is that "the Part 5.7 body is unable to pay its debts". Barrett J held (para 37) that the decision of White J in New Cap Reinsurance Corporation Ltd v A E Grant [2008] NSWSC 1015; (2008) 68 ACSR 176, to the effect that an insurer's obligation to indemnify the insured in respect of an insured loss should be regarded as a debt for the purposes of the definition of insolvency in s 95A, is applicable to the assessment of whether an insurer which is a Part 5.7 body is unable to pay its debts, even though s 95A is not itself applicable. I respectfully agree. Therefore the assessment of whether the ground is satisfied must include an assessment of the quantum of TPIC's liability to meet insurance claims made against it. 39 Having regard to the evidence of Mr Douglas (summarised above) according to which the company's assets stood at $5,141,859 and it had liabilities of at least $6,358,500, Barrett J found that there was a reasonable prospect that a winding up order would be made on the ground that TPIC was unable to pay its debts. 40 As counsel submitted at the hearing before me, the financial position of TPIC has deteriorated since that time. It appears from Mr Silvia's reports, considered above, that TPIC has a deficiency of liabilities over assets in the range of $3.692 million to $19.718 million. Even on the most optimistic assessment, and allowing for the difficulty of assessing the plaintiffs' claims, the evidence strongly indicates that TPIC is insolvent, and unable to pay its debts for the purposes of s 583(c)(i). The just and equitable ground 41 This ground is expressly stated in s 583(c)(ii). 42 Barrett J found that there was a reasonable prospect that the court would make a winding up order on the just and equitable ground having regard to the e-mail from Grant Thornton dated 13 February 2009 followed by their letter of resignation of 19 February 2009, coupled with the letter from the Cayman Islands Monetary Authority dated 14 April 2009, all of which I have considered above. He found in light of this evidence that there were good prospects of it being shown that it was no longer possible for the business to be carried on, and that there was a "justifiable lack of confidence in the conduct and management of the company's affairs", to quote Lord Shaw in Loch v John Blackwood Ltd [1924] AC 783. I respectfully agree. Discretion 43 In winding up proceedings in insolvency or by the court under Ch 5, the court has a discretion to dismiss the application even if a ground has been proved upon which a winding up order could be made (s 467(1)). That discretion applies, by virtue of s 583, to the winding up by the court of a Part 5.7 body. Barrett J held (para 39) that in circumstances where, according to the evidence before him, all of the insurance claimants and almost all of the assets were in Australia, a winding up order under Australian law was likely to be made as a matter of discretion (citing Titchfield Management Ltd v Vaccinoma Ltd [2008] NSWSC 1196; (2008) 68 ACSR 448). There were therefore good prospects that a case for winding up would be made out at trial on both the insolvency ground and the just and equitable ground, as made available by s 583(c). 44 The evidence to which his Honour referred is also before the court now, and I respectfully agree that it supports the conclusion that there is no discretionary reason for declining to make the order on both the insolvency ground and the just and equitable ground. Conclusions 45 The plaintiffs have standing to apply for the winding up of TPIC on the just and equitable ground under s 583(c)(ii) and (subject to my granting leave to the second plaintiff, Mr Douglas) they also have standing to apply for a winding up order in insolvency (on the ground that the Part 5.7 body is unable to pay its debts) under s 583(c)(i). They have established both of those grounds and there are no discretionary reasons for declining to make a winding up order. I shall therefore order that TPIC be wound up both on the ground that it is unable to pay its debts and on the just and equitable ground, and make an order for the appointment of Mr Silvia as liquidator. 46 My orders will be: 1. Under ss 583 and 459P(2) of the Corporations Act 2001 (Cth), grant leave to the Second Plaintiff to make an application under s 459P(1) for an order for the winding up of the First Plaintiff on the ground that it is a Part 5.7 body that is unable to pay its debts. 2. Under s 583, order that the First Plaintiff, a Part 5.7 body, be wound up on the grounds: (a) that it is unable to pay its debts; and (b) that the Court is of opinion that it is just and equitable that it should be wound up. 3. Under ss 583 and 472(1), that Brian Raymond Silvia, an official liquidator, be appointed liquidator of the First Plaintiff. 4. Under ss 583 and 556(1)(b), order that the Plaintiffs' costs of and incidental to these proceedings be costs in the winding up of the First Plaintiff. 5. Direct that these orders be entered forthwith. **********