Supreme Court New South Wales Medium Neutral Citation: In the matter of Colorado Products Pty Limited [2011] NSWSC 1225 Hearing dates: 14 October 2011 Decision date: 14 October 2011 Jurisdiction: Equity Division - Corporations List Before: Barrett J Decision: See paragraph 29 Catchwords: CORPORATIONS - winding up - application for appointment of provisional liquidator and associated freezing order - pending application for winding up on several grounds including just and equitable ground - evidence of recent discovery of events grounding suspicion that one director has diverted company money and property to himself - business has been disposed of so that shareholders agreement exhausted - seriously arguable case for winding up on the just and equitable ground - cogent evidence that company assets in jeopardy - relief granted Category: Interlocutory applications Parties: Clare Huang - First Plaintiff CH Design Solutions Pty Limited - Second Plaintiff Colorado Products Pty Limited - First Defendant HY International (Aust) Pty Limited - Second Defendant Phoenix Explorer Pty Limited - Third Defendant Kenway Investments (Australia) Pty Limited - Fourth Defendant Wen Kai Tan - Fifth Defendant Representation: Mr J Horowitz - Plaintiffs Mr F Assaf - First Defendant Yau & Wang Lawyers - Plaintiffs Jackson Lalic Lawyers - Defendants File Number(s): 2011/00214522 Judgment 1The first defendant (which I shall call "Colorado") formerly carried on a business of selling accessories for bathrooms and related products. 2There are three directors: Lao Ning Huang, Wen Kai Tan (known as "Ken") and Clare Huang ("Clare"). 3Clare and companies controlled by the other two directors are the shareholders of Colorado. Disregarding interposed entities, Lao Ning Huang and Ken each hold eight shares and Clare holds four shares. 4The business to which I have referred is no longer carried on. The assets, including the stock, were sold to a third party in June of 2011. 5Clare, by her originating process filed in June, seeks the winding up of Colorado on various grounds, including the just and equitable ground. A company controlled by Clare is a co-plaintiff apparently in respect of the insolvency ground, as it is a former landlord of Colorado. 6There is a cross-claim by Colorado and its other two shareholders against Clare, alleging what I might call, in broad terms, misfeasance including wrongful taking of company property and money. 7Clare and her company, as plaintiffs, have pending an application for the appointment of a provisional liquidator. It is listed for hearing on 28 October, that is to say, two weeks from today. 8The plaintiffs, by their counsel, Mr Horowitz, have come before the court urgently this morning pressing for an immediate appointment of a provisional liquidator upon the pending application. They have also filed a further interlocutory process seeking a freezing order against Ken who, it is alleged, has wrongfully taken property and money of Colorado. 9The claim for a freezing order is, in reality, a claim of Colorado and could not be maintained by Clare without leave under s 237 of the Corporations Act 2001 (Cth). 10Mr Assaf of counsel has appeared this morning for Colorado but not for any other party and has indicated that the company would not oppose the grant of such leave, from which I infer that the statutory condition concerning probability that the company itself will not bring the proceedings (s 237(2)(a)) is accepted as satisfied. 11The complaints that have prompted Clare's urgent application today may be briefly described. I note that much of the evidence is hearsay (derived from stated sources) but, of course, admissible on this interlocutory application. 12The first matter concerns the movement of a large quantity of stock out of Colorado's warehouse before the business was sold. Clare says that, on about 21 March 2011, she noticed during a stocktake that there were no bathroom accessories in the warehouse. She made an enquiry of Ken who said, "They are all sold". The stocktake confirmed that there were no bathroom accessories when, according to Clare and her appraisal of invoices and trends, there should have been over 1,000 items. 13On 30 September 2011, Clare's solicitor, Mr Yau, had a conversation with a young man who formerly worked for Colorado as a truck driver and is now employed by the purchaser of the business, a company called "Osmans". The driver told Mr Yau that, just before Christmas 2010, Ken had instructed him to fill his truck with bathroom accessories from Colorado's warehouse and to take them to a house at Chatswood, which he did. This happened outside normal hours. When the driver arrived, Ken met him and the two of them unloaded the stock into the garage of the house at Chatswood. 14There is evidence that Ken lives in a house at Chatswood. The inference that is suggested is that stock was taken to Ken's house at Chatswood and that, when Ken later told Clare that the stock had been sold, he told her an untruth. 15Next, there is evidence concerning several occasions on which Clare, on behalf of Colorado, chased up people who owed money to Colorado from the days when it was still trading. Upon making her enquiry, Clare was told on each of those occasions that the money had already been paid and that, at Ken's direction, the payment had been made to a company called "Kenway Investments Australia", which he represented as a new name of Colorado. There is evidence from both Clare and Mr Yau about these matters involving enquiries made by them in very recent days. 16Separately, there is evidence of relevant matters from the principal of the company that bought the Colorado business, Mr Osman. His affidavit is dated 11 October 2011. He refers to several occasions before the sale of the business in June 2011 on which isolated sales of stock were made by Colorado to his company, with Ken saying that a better price would be given for cash. His affidavit has annexed to it a Colorado invoice for $2,600 endorsed by him as having been paid in cash. Clare's evidence is that there is no record within Colorado of either the invoice or any receipt of $2,600 in respect of it. 17Mr Osman also gives evidence of Ken having demanded that he, Ken, be given a car as the price, as it were, of obtaining rectification by means of a payment from Colorado of an error in the stocktake associated with the sale of the business, being an error by which Osmans had been financially disadvantaged. 18Mr Horowitz submits that, in the light of this evidence, a provisional liquidator should be appointed now and that a freezing order should be made for Colorado's benefit against Ken. Alternatively, he says, there should be a freezing order only. 19Mr Assaf says that matters should await the scheduled hearing on 28 October, that there may be innocent explanations and that Colorado has not had time to consider relevant matters. He also says that the provisional liquidator application is an abuse of process because it is calculated to stultify the cross-claim that Colorado has brought against Clare. 20This last matter may be dealt with briefly. The appointment of a provisional liquidator, if made, will stultify nothing. There is no black hole into which meritorious claims somehow disappear just because a company passes into the hands of a provisional liquidator or liquidator. Mr Assaf says that there may be no funding. As to that, one need only say that if those now promoting the cross-claim are willing to fund it today there is no apparent reason, if it is meritorious, why they should not be so willing in the future. 21As to the point that the question of the appointment of a provisional liquidator should simply wait two weeks, the reality is that, if new and compelling evidence is presented, then the matter must be dealt with immediately on its merits and by reference to that evidence. 22That brings me to another aspect of the evidence. Ken's house at Chatswood is on the market. An advertisement by a real estate agent has been put into evidence. He may thus be presumed to be intending to go to live somewhere other than the Chatswood address. 23The first condition for the appointment of a provisional liquidator is that a seriously arguable case for winding up be shown. That condition is satisfied. There is clear evidence of serious rupture among the shareholders, added to which it seems reasonably clear that the company's substratum has probably gone. In that connection, I note that there was a shareholders' agreement that defined the business in which the shareholders would become associated (that is, the bathroom and associated accessories business) and that it is that business that was disposed of to Osmans, with the result, it appears, that the purpose for which the shareholders had associated themselves together has come to an end. 24That leads to the second condition and the question whether it has been shown that the assets of Colorado are in jeopardy. The answer is "yes". The evidence grounds a clear inference for a suspicion that Ken has, in the past, diverted to himself property and money of Colorado (by the delivery of stock to the house at Chatswood, by making cash sales of stock and not paying the cash into the company and by directing company customers owing money to the company to make payment to someone else and); also, that this has happened on several occasions, from which one might infer propensity. Added to that there is evidence that Ken is planning to move away from his Chatswood house and the evidence about his having demanded the car from Mr Osman. 25It is said by Mr Assaf that time should be allowed for Colorado itself to enquire into these matters. I disagree. The evidence is cogent. It shows that, although relevant events have only recently come to Clare's knowledge, they took place some time ago - sufficiently long for a company with proper controls in place to have discovered them or, at least, formed a suspicion of irregularity and followed it up. That strengthens the finding of jeopardy. 26The balance of convenience favours the imposition of external administration. The company is not trading and so has no external profile that might be harmed. Nor has it been suggested that any enforcement action will be precipitated by appointment of a provisional liquidator. Circumstances warrant such an appointment now and a case for urgent action has been made out. 27The same conclusions apply to the application for a short-term freezing order, by which I mean one that will be in place only until a provisional liquidator has had a chance to take matters in hand. 28Finally, I record in relation to the matter of Clare's application under s 237(2) for leave to bring on Colorado's behalf the application for a short-term freezing order, that, as I have said, I may infer from what Mr Assaf has said that the condition in s 237(2)(a) is satisfied; also the circumstances satisfy me that, as regards the freezing order application, that Clare is acting in good faith (in that it is her intention to see the company have the benefit of a freezing of Ken's assets for a short time to stabilise matters pending the provisional liquidator's taking control); that, for the same reason, she is acting in good faith; and that, again on the same basis and having regard to the short-term nature of the relief, that it is in the best interests of the company that Clare be granted leave to seek it. As to the final criterion (s 237(2)(d)) about a serious question to be tried, what I have already said covers that. [Counsel addressed on costs. Mr Assaf sought a stay of the appointment of a provisional liquidator for seven days; Mr Horowitz indicated that the plaintiff consented to such a stay. Both counsel also consented to certain other orders regarding progress of the matter to trial.] 29I make the following orders: 1. Upon the first and second plaintiffs by their counsel giving to the court the usual undertaking as to damages order that Blair Pleash of Level 29, 31 Market Street, Sydney, an official liquidator, be appointed liquidator of Colorado Products Pty Limited provisionally. 2. Upon the first plaintiff by her counsel giving to the court the usual undertaking as to damages: 2.1 Grant leave to the first plaintiff to bring on behalf of Colorado Products Pty Limited proceedings for order 4 in interlocutory process filed in court today. 2.2 Make orders in the form marked "A" which I initial and date today. 3. Make order 3 in the interlocutory process filed in court today. 4. Order that Colorado Products Pty Limited as a defendant pay the plaintiffs' costs of the application for the appointment of a provisional liquidator. 5. By consent order that the order for the appointment of a provisional liquidator of Colorado Products Pty Limited and the order with respect to the costs of the application for a provisional liquidator be stayed up to and including 21 October 2011. 6. Note that certain subpoenas issued on the application of Colorado Products Pty Limited and returnable on Friday 21 October 2011 are by consent of the parties to be stood over to 4 November 2011. 7. I order that orders 2, 3 and 4 of the orders of 26 September 2011 be stayed up to and including 4 November 2011. ********** 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. Decision last updated: 17 October 2011