Supreme Court New South Wales Medium Neutral Citation: In the matter of Living Creatively Exhibitions Pty Ltd (in liquidation) (subject to deed of company arrangement) [2013] NSWSC 717 Hearing dates: 13 May 2013, 20 May 2013 (supplementary oral submissions) Decision date: 04 June 2013 Jurisdiction: Equity Division - Corporations List Before: Black J Decision: If a specified undertaking is provided to the Court within seven days, an order will be made terminating the winding up. Catchwords: CORPORATIONS - winding up - order sought for termination of a winding up where company subject to a deed of company arrangement - whether company will be solvent - whether undertaking given to deed administrator sufficient to bring about solvency - undertaking to Court required. Legislation Cited: - Corporations Act 2001 (Cth) ss 439C, 482, 482(1), 482(1A), 482(2A), 482(4) Cases Cited: - Brolrik Pty Ltd v Sambah Holdings Pty Ltd [2001] NSWSC 1171; (2001) 40 ACSR 361 - Deputy Commissioner of Taxation, Re Directcorp Pty Ltd (in liq) v Directcorp Pty Ltd [2006] FCA 1020; (2006) 58 ACSR 398 - GIO Workers Compensation (NSW) Ltd v Advance International (Aust) Pty Ltd [2002] NSWSC 261 - Leveraged Equities Ltd v Hilldale Australia Pty Ltd [2008] NSWSC 190; (2008) 26 ACLC 182 - Mercy & Sons Pty Ltd v Wanari Pty Ltd [2000] NSWSC 756; (2000) 157 FLR 107; (2000) 35 ACSR 70 - Owners Strata Plan 70294 v LNL Global Enterprises Pty Ltd [2006] NSWSC 1386; (2006) 60 ACSR 646 - Re Data Homes Pty Ltd (in liq) [1972] 2 NSWLR 22 - Re Nardell Coal Corporation Pty Ltd [2004] NSWSC 292; (2006) 57 ACSR 103 - Re Pine Forests of Australia (Canberra) Pty Ltd [2010] NSWSC 1127 - Re SNL Group Pty Ltd (in liq) [2010] NSWSC 797 Category: Principal judgment Parties: Savluc Pty Limited (Plaintiff) Living Creatively Exhibitions Pty Limited (in liquidation) (subject to deed of company arrangement) Representation: Counsel: Mr G. Mackey (Plaintiff) Solicitors: Tomaras Lawyers (Plaintiff) File Number(s): 2013/117780 Judgment 1By Originating Process filed on 16 April 2013, the Plaintiff, Savluc Pty Limited ("Savluc") seeks an order that the winding up of Living Creatively Exhibitions Pty Limited (in liq) (subject to deed of company arrangement) ("Company") be terminated under s 482(1) of the Corporations Act 2001 (Cth). Savluc has standing to make that application under s 482(1A), since it is a creditor of the Company. Savluc also seeks an order that its costs of the application form part of the costs, charges and expenses of the winding up. 2The application is supported by an affidavit of Mr Keith Noack, who is a director of Savluc, dated 16 April 2013 and by two affidavits of Mr Murray Godfrey, who was originally the Company's liquidator and subsequently its deed administrator. Savluc has given notice of the application to the Australian Securities and Investments Commission which has indicated it does not propose to intervene in the proceedings or seek leave to appear at the hearing. Background 3The Company previously conducted stitches and craft show exhibitions throughout Australia and, in July 2008 entered a sale agreement with Reed Exhibitions Australia Pty Limited ("Reed") to purchase intellectual property relevant to staging that show and granted Reed a fixed and floating charge as security for the payment. The Company was wound up and Mr Godfrey was appointed as its liquidator on 18 August 2009 pursuant to an order made by this Court. On 8 December 2009, Reed resumed title to the relevant exhibitions, following a breach of the licence agreement arising from the liquidator's appointment. 4In April 2012, the Company's creditors resolved that the Company execute a deed of company arrangement ("DOCA") under s 439C of the Corporations Act and Mr Godfrey was appointed as deed administrator. The DOCA was signed on 15 May 2012 and provided for Savluc to pay a contribution of $25,000 to the deed administrators within 35 days of the execution of the deed and to defer an unsecured claim of $600,000 against the Company. Savluc is also a creditor of the Company for an amount of $400,000 that is secured. 5Clause 5.1 of the DOCA provided for a distribution fund (as defined) to be established as soon as possible following the Termination of Winding Up Date (as defined) from surplus funds held by the liquidator or administrator as at that date and to be distributed in a specified manner, broadly in the order of payment of costs of the winding up, payment of the administrator and deed administrator's remuneration, payment to preferred employee creditors and a pro rata dividend to participating creditors. Clause 11 of the DOCA provided for an application to be made to the Court to terminate the winding up. The time period for such an extension was subsequently extended by the deed administrator until 19 April 2013 and an application was filed within that time. Clause 12.2 of the DOCA provides that the deed would terminate, inter alia, if, the Court ordered that the Company remain in liquidation. Applicable principles 6Section 482 of the Corporations Act provides that, at any time during a Company's winding up, the Court may make an order, inter alia, staying the winding up indefinitely or terminating the winding up on the day specified in the order. Section 482(2A) specifies certain matters that the Court must consider where an application under that section is made in relation to a company that is subject to a deed of company arrangement. In particular, s 482(2A) of the Corporations Act requires that, where an application to terminate a winding up is made in relation to a Company subject to a deed of company arrangement, the Court must have regard, inter alia, to whether the deed of company arrangement is likely to result in the Company becoming or remaining insolvent. I will address that issue below. 7Generally, the Court will not terminate a winding up unless a company will have additional financial strength and stability to provide confidence that it can continue without an appreciable risk of returning to liquidation: Re Data Homes Pty Ltd (in liq) [1972] 2 NSWLR 22 at 27; Leveraged Equities Ltd v Hilldale Australia Pty Ltd [2008] NSWSC 190; (2008) 26 ACLC 182; Re SNL Group Pty Ltd (in liq) [2010] NSWSC 797. A question will arise as to whether sufficient steps have been taken to recapitalise a company or restore its solvency so that, in the language of Re Pine Forests of Australia (Canberra) Pty Ltd [2010] NSWSC 1127 at [3], its "financial health" is such that it may safely be released from the form of external administration focussed mainly on the interests of creditors and returned to the mainstream of commercial life where it may, under the control of its directors, incur new debts that have to be paid as and when they fall due. Similarly in Re SNL Group Pty Ltd (in liq) above at [24] Bergin CJ observed that: "it is clear that in determining whether to terminate the winding up of a company, it is usual that the most significant matter for consideration is the solvency of the company. The other considerations, such as the extent of the creditors, the status of the debts and the nature of the company's business will be taken into account in determining whether the company has returned to, or will be returned to solvency." 8Savluc contends that "[i]t is not intended that the Company continue to carry on business or trade after the liquidation has been terminated" and the purpose of extinguishing the liquidation is merely to avoid incurring further costs in the liquidation. However, the effect of terminating the winding up is, under clause 2.8 of the DOCA, initially to restore the Company to Savluc's control, while the administrator retains certain rights. Clause 12.1 of the DOCA provides that the operation of the DOCA will then be terminated after certain steps have been completed and, it appears, the Company will neither be in liquidation or subject to a DOCA. It will have been returned to commercial life for all purposes, notwithstanding Savluc's present intention is not that the Company should continue to carry on business or trade after that occurs. The authorities make clear that, where this is to occur, the question of the Company's solvency and the interests of future creditors is a critical issue. 9Savluc points out that the effect of the DOCA is that all debts and claims against the Company will be released and extinguished, with the exception of Savluc's secured claim of $400,000. Mr Godfrey's second affidavit of 24 May 2013 expresses the view that the Company will be solvent and able to pay its debts as and when they fall due, in reliance on an undertaking given to Mr Godfrey, in his capacity as deed administrator of the Company, by Mr Noack on his own behalf and as a director of Savluc that: "Upon the termination of the winding up of [the Company] any liabilities incurred by the Company will be paid in full by [sic] prior to the repayment of Savluc's secured debt." It seems to me that an undertaking given to the deed administrator is not sufficient in this regard, since he will eventually retire from that office and would not then be in a position to enforce the relevant undertaking, and any such undertaking would at least need to be given to the Court. 10There are some cases in which the Courts have been prepared to accept such undertakings in respect of subordination arrangements: GIO Workers Compensation (NSW) Ltd v Advance International (Aust) Pty Ltd [2002] NSWSC 261; Brolrik Pty Ltd v Sambah Holdings Pty Ltd [2001] NSWSC 1171; (2001) 40 ACSR 361. In Deputy Commissioner of Taxation, Re Directcorp Pty Ltd (in liq) v Directcorp Pty Ltd [2006] FCA 1020; (2006) 58 ACSR 398, the Court was prepared to accept undertakings given by a shareholder in respect of the capitalisation of loans and the repayment of debts in support of an application to terminate a winding up under s 482 of the Corporations Act. There are other cases where the Courts have required relevant steps to be completed prior to an order being made to terminate the winding up: Owners Strata Plan 70294 v LNL Global Enterprises Pty Ltd [2006] NSWSC 1386; (2006) 60 ACSR 646; Re SNL Group Pty Ltd (in liq) above. In the particular circumstances, it seems to me that the Court may properly accept such an undertaking in this case. 11Other relevant factors in an application to terminate a winding up under this section were identified in Mercy & Sons Pty Ltd v Wanari Pty Ltd [2000] NSWSC 756; (2000) 157 FLR 107; (2000) 35 ACSR 70, Re Nardell Coal Corporation Pty Ltd [2004] NSWSC 281; (2004) 49 ACSR 110 and summarised by Austin J in Vero Workers Compensation (NSW) Ltd v Ferretti Pty Ltd [2006] NSWSC 292; (2006) 57 ACSR 103 at [17] as including the interests of the Company's creditors, including the interests of the liquidator, particularly with regard to costs; the interests of contributories and the interests of "the public", including the public interest in matters of commercial morality, and the public interest that insolvent companies should be wound up. 12The evidence does not indicate that there is any barrier to the termination of the winding up by reason of the interests of the liquidator, who supports the application, or contributories or any public interest reason not to terminate the winding up. The control and management of the Company following termination of the winding up will be addressed by the appointment of a director of Savluc, Mr Keith Noack, as director of the Company. Clause 2.8(a) of the DOCA relevantly provides that: "After the Termination of Winding Up Date, [Savluc] shall be responsible for the day to day trade, operations, management, control, supervision and administration of the business and affairs of the Company but subject always to the Deed Administrator's right and entitlement, in his sole discretion, to exercise all or any of the powers conferred by this Deed to the exclusion of the powers of the Company or its directors from time to time." Mr Godfrey's evidence is that he will exercise his powers as deed administrator, under clause 2.2(k) of the deed of company arrangement, to hold a meeting of members and appoint Mr Noack as the Company's director. 13Where an application for termination of a winding up is brought in relation to a company the subject of a deed of company arrangement, then the factors specified in s 482(2A) of the Corporations Act and the policy underlying Part 5.3A of the Corporations Act are also relevant. In Mercy & Sons Pty Ltd v Wanari Pty Limited above at [53] Austin J observed that: "If the company applies for an order terminating the winding up after its creditors have approved a deed of company arrangement, the objects of Pt 5.3A are relevant matters, and in many cases they will be matters of great importance. Young J acknowledged their importance in Re Depsun, for example. Section 435A cannot be disregarded where the question of termination of a winding up arises in an administration context, whether the issue is presented under s 482 or under some provision of Pt 5.3A, such as s 447A. The concerns reflected in the case law, including the pre-1993 case law which was mainly decided in the context of creditors' schemes of arrangement, will remain, but the court will evaluate the application for termination in light of all the facts, including the terms and effect of the deed." 14In Vero Workers Compensation (NSW) Ltd v Ferretti Pty Ltd above at [18], Austin J accepted that, where termination is sought of the winding up of a company that is subject to a deed of company arrangement, the public interest must be viewed in the context of the purposes of Pt 5.3A and, specifically: "...it is relevant to consider whether the arrangements adopted in the deed of company arrangement are likely to maximise the chances of the company, or as much as possible of its business, continuing in existence: see s 435A(a). In assessing these matters, there is no absolute rule that a winding up cannot be terminated as long as one or more debts of the company remain undischarged: Mercy v Wanari at [48]." 15In Sutherland v Rahme Enterprises Pty Ltd (in liq) [2003] NSWSC 673; (2003) 46 ACSR 458, Barrett J recognised the relevance of that matter, although also pointing to the significance of public interest factors, observing (at [27]) that: "Part 5.3A's objective of obtaining for creditors a better return than they would receive in an immediate winding up may be accepted as a factor to be taken into account in a case where a deed of company arrangement is promoted and termination of winding up forms part of the overall plan in which the deed of company arrangement plays a part. But it seems to me that the public interest factors of the Data Homes kind are in no way relegated when the application to terminate the winding up eventually comes before the court. The interest of creditors (or, as it is here, a section of them) in obtaining a more favourable return through the deed of company arrangement cannot, to my mind, justify the court's re-launching a company which, viewed alone and in the context of its future activities or likely activities, presents a potential for a new group of creditors to be unacceptably prejudiced by legacies from its former life." 16In this case, Mr Godfrey as liquidator and deed administrator supports the application for termination; the decision of the Company's creditors to resolve that the Company execute the DOCA contemplating the termination of the winding up supports the application; and the only remaining creditor, after the DOCA is implemented, Savluc, is the proponent of the application. Mr Godfrey expresses the view that, if the liquidation were to proceed, there will be no return to any of the Company's unsecured creditors and the payment under the DOCA on termination of the winding up provides the best commercial return to creditors and this supports a termination of the winding up. The GST refund 17An issue also arose in the application as to the treatment of a GST refund by the Company. It appears that the application is intended to secure Savluc the benefit of that refund, which had devoted efforts to obtaining that refund. Savluc frankly submits that, as it expended time and effort in ascertaining that the GST refund could be obtained and has put up its own funds to enable that refund to be repaid, "it wishes to ensure its entitlement, to the exclusion of other creditors" to the balance of that amount. 18In his first affidavit, Mr Godfrey refers to the time and costs incurred by Savluc in preparation of a business activity statement which led to the GST refund being obtained by the Company, which he says is held in part "in trust" for Savluc and was in part contributed to the deed fund. Mr Godfrey's evidence in his further affidavit dated 24 May 2013 is that: "A portion of the GST refund is being held on trust for Savluc, on the basis that it is the only remaining creditor and is a secured creditor (pursuant to the fixed and floating charge registered in 0.1740564)." Mr Godfrey also points out that all debts and claims against the Company that arose on or before 18 August 2009 will be released and extinguished once the terms of the DOCA is effected, other than Savluc's rights as a secured creditor, and contends that "on this basis the GST refund and other surplus funds are to be paid to Savluc". 19While I accept that Savluc incurred time and costs which allowed the lodgement of the business activity statement in order to secure the refund of GST, the basis on which the amount recovered should be "held in trust" for it (as distinct from it having some claim, for example, to recompense for its efforts in securing the refund) is not clear. Savluc seeks to support the proposition that money is held on trust for Savluc on the basis that the Company has no remaining creditors once the terms of the DOCA are effected. However, that does not seem to me to answer the question how the receipt of the monies should be treated under the DOCA when received by the deed administrator. In particular, it is not clear to me why the amount recovered by way of GST would not be required to be included in the distribution fund to be established under the DOCA on termination of the winding up, as monies owing to the Liquidator and/or administrator for the purposes of clause 5.1 of the DOCA. Although Savluc is a secured creditor, the question whether its security extends to that amount was not addressed in submissions. 20It does not seem to me that this issue is an obstacle to the termination of the winding up, since the Court may properly proceed on the basis that Mr Godfrey as deed administrator must, and will, comply with the requirements of the DOCA so far as the GST refund is concerned. Conclusion 21I will afford Savluc 7 days in which to provide an undertaking to the Court in the terms of the undertaking given to the deed administrator (subject to correcting the misprint in it) and, if that undertaking is given, I will make an order terminating the winding up on that basis. Savluc also seeks an order under s 482(4) of the Corporations Act, which provides that the costs of proceedings to terminate a winding up may, if the Court so directs, form part of the costs, charges and expenses of the winding up. I do not consider that such an order should be made where it would have the result that other creditors would bear the costs of an application which appears to have been substantially brought so as to advance Savluc's interests. ********** 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: 11 June 2013