Supreme Court New South Wales Medium Neutral Citation: In the Matter of 246 Arabella Investments Pty Limited (in Liq) [2012] NSWSC 1212 Hearing dates: Thursday 30 August 2012 Decision date: 30 August 2012 Jurisdiction: Equity Division - Corporations List Before: Brereton J Decision: Approve the liquidator's application to compromise a debt Catchwords: CORPORATIONS - external administration - approval of liquidator compromising a debt - Corporations Act, s 477(2A), s 477(2B) - application opposed by sole creditor - nature of opposition to compromise - whether in all the circumstances the compromise of the debt is a reasonable step to take - commercial merits or compromise generally a matter for the liquidator - factors in favour of approval - factors against approval - interests of creditors a guiding light Legislation Cited: (Cth) Corporations Act 2001, s 477(2A), s 477(2B), s 588FB, s 588FDA, s 588FE (NSW) Conveyancing Act 1999, s 37A Cases Cited: Re HIH Insurance Limited [2004] NSWSC 5 Re CIC Insurance Limited (2001) 38 ACSR 181 Category: Interlocutory applications Parties: Geoffrey Trent Hancock as liquidator of 246 Arabella Investments Pty Limited (plaintiff) Deputy Commissioner of Taxation Representation: Mr M Doble (solicitor) - Plaintiff Mr T Cleary - Deputy Commissioner Eakin McCaffery Cox - Plaintiff ATO Legal Services Branch - Deputy Commissioner File Number(s): 2011/ 397461 Judgment (ex tempore) 1HIS HONOUR: By originating process filed in court yesterday and made returnable instanter, the plaintiff Geoffrey Trent Hancock in his capacity as liquidator of the company 246 Arabella Investments Pty Limited ("the Company") seeks approval pursuant to (Cth) Corporations Act 2001, s 477(2A) and (2B), to enter into an agreement on the Company's behalf to compromise a debt owed to the Company. 2The plaintiff and Alan Godfrey Topp were appointed liquidators on 15 December 2008; Mr Topp resigned on 2 April 2009. The application is opposed by the sole creditor, the Deputy Commissioner for Taxation, who claims in the winding-up for a sum exceeding $10 million for unpaid tax. The tax debt arises pursuant to notices of assessment issued to the company on 3 November 2008, and penalties, interest, additional tax for late payment and general interest charge that have since increased the debt. 3Corporations Act, s 477, relevantly provides as follows: (2A) Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not compromise a debt to the company if the amount claimed by the company is more than: (a) ... (b) otherwise - $20,000. (2B) Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company's behalf (for example, but without limitation, a lease or a an agreement under which a security interest arises or is created) if: (a) without limiting paragraph (b), the term of the agreement may end; or (b) obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance; more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months. The background 4Before going into liquidation, the company entered into a number of transactions with related parties concerning a property formerly held by it at 513 South Dowling Street, Surry Hills ("the Property"). On 26 June 2007 - almost 18 months before the issue of the notices of assessment on 3 November 2008 - Christopher Lyndon Higgins and Timothy Hall Higgins, the directors of the Company, resolved to transfer the Property to interests associated with them, and that the Company advance the sum of $1.95 million to them as trustees of the CL Higgins Family Trust on an interest-free basis for 12 months, and advance on a like basis a further sum of $1.95 million to themselves as trustees of the TH Higgins Family Trust. On the same day, the trustees of those two trusts executed bills of exchange totalling $3.9 million, in respect of which the Company was the drawee. Simultaneously, those bills of exchange were endorsed in favour of two superannuation funds, namely THH Nominees Pty Limited as trustee of the THH Superannuation Fund, and TDE Nominees Pty Limited as trustee of the TDE Superannuation Fund, to be held by those funds for the credit of Helen Louise Higgins and Christopher Lyndon Higgins, as un-deducted superannuation contributions. Also, simultaneously, the Company, as the directors had resolved it would, made the two loans of $1.95 million to which I have referred. 5Three days later, on about 29 June 2007, the Company transferred the whole of its interest in the Property, to the following transferees as tennats-in-common: to TDE Nominees as trustee of the TDE Superannuation Fund, as to 5,000/10,000 shares, to THH Nominees as trustee of the THH Superannuation Fund, as to 2,833/10,000 shares, and to Timothy Hall Higgins as trustee of the TH Higgins General Trust, as to 2,167/10,000 shares. Those transferees became registered as proprietors of the Property on or about 13 August 2007. 6In the statement of affairs provided by the directors to the liquidator, the directors admitted debts due from the CL Higgins Family Trust of $1.95 million, and from the TH Higgins Family Trust of $1.95 million. The liquidator did not seek to recover those loan debts, but instead brought proceedings to recover the Property ("the Recovery Proceedings"), on the basis that the transactions to which I have referred were voidable as uncommercial transactions (under Corporations Act, s 588FB), or unreasonable director related transactions (under s 588FDA), or insolvent transactions (under s 588FE). Alternatively, the same relief was sought on the basis that the transactions amounted to an alienation of property with intent to defraud creditors (under (NSW) Conveyancing Act 1999, s 37A). 7The defendants in the Recovery Proceedings are Timothy Hall Higgins as trustee for the TH Higgins General Trust, THH Nominees Pty Limited as trustee of the THH Superannuation Fund, TDE Nominees Pty Limited as trustee of the TDE Superannuation Fund, Christopher Lyndon Higgins and Timothy Hall Higgins as trustees of the TH Higgins Family Trust, and Christopher Lyndon Higgins and Timothy Hall Higgins as trustees of the CL Higgins Family Trust. It is relevant to observe at this stage that the debts referred to in the report as to affairs are debts of the TH Higgins Family Trust and the CL Higgins Family Trust respectively. The transferees of the Property, on the other hand, were TDE Nominees as trustee for TDE Superannuation Fund, THH Nominees as trustee for THH Superannuation Fund, and Timothy Hall Higgins as trustee of the TH Higgins General Trust. 8The liquidator proposes to compromise the Recovery Proceedings, pursuant to Terms of Settlement of 17 July 2012, the effect of which is that - subject to the approval of creditors, which has not been forthcoming, or the approval of the court, which is sought by this application, and the provision of verified statements of assets and liabilities of the TH Higgins Family Trust and the CL Higgins Family Trust, which have been provided - the TH Higgins Family Trust, the CL Higgins Family Trust and TDE will jointly and severally pay to the liquidator $1.5 million. The Terms further provide that: (1)The liability to contribute of the TH Higgins Family Trust is limited to $750,000, of the CL Higgins Family Trust to $400,000, and of TDE to $350,000; (2)Payment is to be made as to $500,000 within 60 days of the date of agreement, as to $200,000 within 120 days, and as to $800,000 within 12 months; (3)The Higgins interests are to provide security over real estate for the payment that is deferred for 12 months; (4)The proceedings are to be dismissed, with each party to bear its own costs; and (5)In consideration for entering into the agreement, the parties in each of the proceedings release each other from all claims relating to the affairs and winding-up of the company, which would effect a release of the two debts of $1.95 million of the CL Higgins Family Trust, and the TH Higgins Family Trust (to which I have referred). 9The liquidator has outstanding remuneration and costs of about $500,000. If the settlement is approved, there is likely to remain about $900,000 for payment to the Commissioner as a dividend. Approval under s 477(2A), (2B) 10The settlement of a preference claim, or voidable transaction claim, is not the compromise of a debt, and if that were all the terms of settlement did, the approval of the court would not be required. That has implications for the approach of the court to the present application. In particular, it indicates that the court should focus on the compromise of the debt, and whether, having regard to all the circumstances, it is a reasonable step for the liquidator to take; rather than on the compromise of the Recovery Proceedings. 11Approval of the court is required, pursuant to s 477(2A), because the effect of the proposed settlement is to compromise debts that exceed $20,000. Approval under s 477(2B) is also required, because the second and third instalment payments are to be made more than three months after the date of the agreement. 12As Barrett J explained in Re HIH Insurance Limited [2004] NSWSC 5 (at [15]): Although the two provisions deal with different aspects of a liquidator's powers, both are concerned to ensure that the court exercises some oversight of the liquidator's actions and, in effect, confers or completes the necessary power only where it sees that a case for exercise of the power in the particular circumstances has been sufficiently shown. The court's assessment must be made in light of the purposes for which liquidators' powers exist. 13The court does not exhaustively or closely consider the commercial merits or otherwise of the transaction [Re CIC Insurance Limited (2001) 38 ACSR 181]. 14But while the court does not exhaustively judge the commercial merits of the liquidator's decision, which it largely entrusts to the liquidator, some examination of the merits cannot be avoided. If the liquidator were to amend the proceedings and sue for recovery of the two loans to which I have referred, then, given that those loans are admitted by the directors in the report as to affairs, it would seem very likely that summary judgment could be obtained for them in a very short time, and at little additional cost. The issue then becomes one of recoverability. The directors have provided statements of the assets and liabilities of the two trusts. The TH Higgins Family Trust owns a property said to be worth $1.85 million, and by way of liabilities owes land tax of $44,000, implying net assets of about $1.8 million. The CL Higgins Family Trust owns a real property said to be worth $1.4 million subject to a land tax debt of $44,000 and a mortgage apparently to a related company, which might be impugnable, of $900,000. However, the Commissioner has asserted that the CL Higgins Family Trust, at least, has significant taxation liabilities, to the extent that it would appear reasonable to suspect that it is insolvent. Accordingly, the precise amount that could actually be recovered from the trusts remains somewhat uncertain. However, it can be predicted with a reasonable amount of confidence that the starting point, for the purpose of proving in any insolvency, would be a judgment of $3.9 million in total. 15So far as concerns the preference claims in the Recovery Proceedings, the position is much less clear. First, the chronology to which I have referred indicates that the relevant transactions took place 18 months before the Commissioner issued the notice of assessment that established the relevant indebtedness. Secondly, it is far from clear that the transactions were without consideration, because the ultimate effect was that they were intertwined with the creation of the loans, so that, while the property was transferred away from the company, in return it received indebtedness of $3.9 million, which exceeds the value of the property, and which is owed by companies that apparently hold real property. Thirdly, counsel for the liquidator has, in a confidential advice, drawn attention to a potential defence not yet pleaded, which the relevant defendants properly advised would plead, and if pleaded would almost certainly defeat the preference claim, though not the s 37A claim. Accordingly, it seems to me that the prospects of the s 37A claim succeeding are less than those of a claim on the loan accounts, and those of the preference claim still less. That is not to say that the s 37A claim does not retain prospects of success. 16The court is required to consider in particular whether the power is being exercised, or would be exercised, lawfully and properly and free of inappropriate influences. One consideration that has caused me to approach this application with care, is the potential for there to be a conflict between the interests of the liquidator in securing a sufficient fund to enable his substantial outstanding remuneration and costs to be paid, and his duty to pursue diligently the interests of the creditor. 17Against approval of the proposed compromise of the debt is the prima facie strong case that the liquidator has to obtain a judgment for the whole of the loans of $3.9 million, which, even if the borrowers are insolvent, would provide a significantly stronger starting position than the settlement is for less than half that amount. Also against approval is the circumstance that the sole creditor, the Commissioner, does not support it. There is no doubt that the interests of creditors is the guiding light for the court in deciding whether or not approval should be given. But it is important to understand the basis of the Commissioner's opposition: it is not that the amount of the settlement is insufficient, but is referable to the source of the funds. The Commissioner claims to be a creditor of entities in the Higgins Group other than the Company, including some of those who will be contributing to the settlement. The Commissioner's concern is that the effect of the settlement is to remove from the Company an asset (namely the Property) that would otherwise be available for satisfaction of the Commissioner's claim against it, and at the same time remove assets from other group entities, which would otherwise be available to satisfy the Commissioner's claims against them. 18It needs to be borne in mind that if the compromise were not approved, and if the liquidator were to sue on and recover the loan accounts, rather than pursue the preference claim, the Property would still not be brought back into the company, and the Commissioner's claim would be satisfied out of whatever could be recovered from the debtor companies, at least one of which the Commissioner asserts is insolvent. The effect of the settlement is to bring into the assets of the Company some funds from third parties, not currently available to the Company. This has the effect of improving the Company's position and, therefore, objectively, also of improving the creditor's position, at least qua creditor of the Company. Subjectively, the Commissioner as a creditor has other interests extraneous to the Company. While it is true that one must look at the creditor's interests, that means the creditor's interests qua creditor of the company, and not in some extraneous capacity (such as creditor of another company). On that basis, it seems to me that the proposed settlement enhances the Company's position, by introducing into the company's resources assets from third parties, which would otherwise not be available to it. 19Also favouring approval is, first, the liquidator's commercial judgment; secondly, the circumstance that the liquidator has senior counsel's advice to the effect that this is a reasonable settlement in all the circumstances; and, thirdly, that the liquidator is not funded to continue the Recovery Proceeding. 20Although it has been said on behalf of the Commissioner that there is no reason why, if all requirements were met and all conditions satisfied, funding would not be forthcoming, there simply has not been any distinct offer of funding to the liquidator to pursue the Recovery Proceeding, and there can be no confidence that such an offer would be forthcoming, and thus that it will be practically impossible to prosecute those proceedings to finality. I have already referred to some of the potential difficulties that might affect the s 37A claim, and more likely would affect the preference claims. 21In the absence of a distinct offer to fund the liquidator to prosecute the Recovery Proceedings, and having regard to the basis of the Commissioner's opposition being essentially not qua creditor of the company but in a capacity that is relevantly extraneous to this company, and that that opposition is concerned more with the settlement of the preference claim than the release of the debt (because pursuit of the debt would involve greater resort to the CL Higgins Family Trust than that proposed in the settlement) it has not been shown that the liquidator's commercial judgment in this case is inappropriately influenced by his own interests, or otherwise so uncommercial as not to warrant approval. Orders 22Pursuant to Corporations Act, s 477(2A) and (2B), I approve the compromise by the liquidator of the indebtedness to the company of the TH Higgins Family Trust and the CL Higgins Family Trust, upon the terms contained in the terms of settlement of 17 July 2012 comprised in pages 89 to 94 of exhibit GTH1 to the affidavit of Geoffrey Trent Hancock sworn 28 August 2012 herein, notwithstanding that such indebtedness exceeds $20,000, and notwithstanding that the term of that agreement may end, and/or obligations of a party to it may be discharged by performance, more than three months after the agreement is entered into. [Counsel addressed] 23I order that costs of the application be costs in the winding up. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 15 November 2012