In the matter of LJAC Energy Pty Ltd (In Liquidation) [2013] NSWSC 1231

Supreme Court New South Wales

Medium Neutral Citation: In the matter of LJAC Energy Pty Ltd (In Liquidation) [2013] NSWSC 1231 Hearing dates: 22, 23 August 2013 Decision date: 23 August 2013 Jurisdiction: Equity Division Before: Lindsay J Decision: Order, on terms, that the winding up of the defendant company be terminated Catchwords: CORPORATIONS - Winding up - Termination of winding up order - Factors to be considered - Public interest - Solvency - Interests of present and future creditors - Order for termination made on terms - Corporations Act 2001 (Cth), s 482 Legislation Cited: Corporations Act 2001 Cth, s 482; 95A(1), 95A(2) Supreme Court (Corporations) Rules 1999 NSW, Rule 2.8 Cases Cited: O'Sullivan v Farrer (1989) 168 CLR 210 at 216, citing Water Conservation and Irrigation Commission (NSW) v Browning (1947) 74 CLR 493 at 505 In the matter of 311 Hume Highway Liverpool Fund Pty Ltd (In Liquidation) [2013] NSWSC 465 (1 May 2013), esp paras 4-8 Texts Cited: - Category: Principal judgment Parties: Lila Hou Yuk Chan (Plaintiff) LJAC Energy Pty Ltd (In Liquidation) (Defendant) Representation: AG Martin (Plaintiff) Cam Ly & Co Solicitors (Plaintiff) Champion Legal Solicitors (Defendant) File Number(s): 2013/00232172

Judgment 1By Originating Process filed on 31 July 2013 Lila Hou Yuk Chan (the plaintiff) applies for an order that the winding up of LJAC Energy Pty Ltd (in liquidation) ("the company") be terminated under s 482 of the Corporations Act 2001 Cth. 2So far as material, s 482 is in the following terms: "SECT 482 Power to stay or terminate winding up (1) At any time during the winding up of a company, the Court may, on application, make an order staying the winding up either indefinitely or for a limited time or terminating the winding up on a day specified in the order. (1A) An application may be made by: (a) in any case - the liquidator, or a creditor or contributory, of the company: ... (b) ... (c) ... (2) On such an application, the Court may, before making an order, direct the liquidator to give a report with respect to a relevant fact or matter. (2A) ..." 3The plaintiff has standing to apply for a termination order, by virtue of s 482(1A)(a), because she is a creditor/contributory of the company. The term "contributory" is defined by s 9, relevantly, to include a shareholder. The plaintiff holds all the shares (1,000 in toto) in the company. She is also the sole director of the company. 4The company was incorporated on 8 August 2008. The plaintiff has been a shareholder and director of the company since that time. She is, and has been since its incorporation, the principal - the alter ego - of the company. 5The business of the company mirrors the character of its principal asset: land and improvements in Goulburn, New South Wales, from which the company derives rental income and which the plaintiff, through the company as her corporate vehicle, has been developing. 6The company has substantial assets; but it is, and appears always to have been, dependent upon provision of funding by the plaintiff, to supplement its rental cash flow, in order to pay its debts as and when they become due and payable. Thus it is that the solvency of the company has in the past depended, and continues to depend, critically on the plaintiff. 7Section 95A(1) of the Corporations Act 2001 provides that "[a] person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable". Section 95A(2) provides that [a] person who is not solvent is insolvent". The company is a "person" within the meaning of this section. 8Assessments of the solvency, or otherwise, of an entity have regard to both the net asset (balance sheet) position of the entity and its cash flow. 9On the evidence adduced in support of the plaintiff's s 482 application, the company always to have been able (and if a s 482 order is now made, would continue to be able) to meet its financial obligations with the plaintiff's support. 10Accordingly, a focus for attention in these proceedings is the relationship between the company and the plaintiff upon a determination of the company's solvency. 11In compliance with Rule 2.8 of the Supreme Court (Corporations) Rules 1999 NSW, the plaintiff has served notice of her s 482 application on the Australian Securities and Investments Commission ("ASIC"). ASIC has taken the position that it does not seek to be heard on the application. 12The liquidator appointed to the company at the time of the making of a winding up order (Mr NR Cussen) opposes the plaintiff's s 482 application because he contends that the company is insolvent, both in terms of its net asset position and cash flow projections. His assessment is based, ultimately, on scepticism about the capacity of the plaintiff to fund the company and about the current status of the Goulburn development. 13The liquidator's expression of opinion of "insolvency" is counterbalanced by an expert opinion from another registered liquidator (Mr Jamieson Louttit) to the effect that the company is "solvent". 14The respective competing opinions of the experts can be rationalised by the observation that both depend on whether the evidence adduced from the plaintiff, personally, is reliable. 15The Goulburn development appears, on the evidence, to merit characterisation as one of substance. The evidence suggests that it is moving steadily, if slowly, to completion as a viable source of net wealth and income. 16Its viability in the medium to longer term depends upon arrangements being made to formalise the occupation of different parts of the property by tenants with whom the plaintiff either has an established commercial relationship or is in the process of negotiating one. 17Although the liquidator has, via cross-examination of the plaintiff, tested assumptions underlying the plaintiff's evidence, he has stopped short of contending that the project lacks substance. 18The liquidator's scepticism runs to an expression of doubt about whether the plaintiff's personal resources have been sufficiently identified, and valued, for the purpose of permitting an independent verification of her assertion, under oath, that she is able to provide full support for the operations of the company. 19At the end of the day, much depends upon the Court's assessment of the credibility and reliability of the plaintiff. 20The Court must, itself, approach with scepticism any arrangement for the provision of capital, or support for a company, that depends upon a discretionary decision by a principal or promoter of the company. The public interest generally and, in particular, the interests of future creditors of a company such as that presently under consideration, require no less. 21No creditors of the company appeared on the hearing of the plaintiff's s 482 application, a fact relied upon by the plaintiff in support of her application. 22The non-appearance of creditors can reasonably be supposed to have an explanation, at least in part, related to steps taken by the plaintiff, after the making of the winding up order referable to the company, to ensure that, from her own resources, all outstanding creditors of the company have been paid. 23The Court's power to make an order under s 482 terminating a winding up order is discretionary. 24Section 482(2A) provides that, if an application for such an order is made in relation to a company subject to a deed of company arrangement, then, in determining the application, the Court must have regard to specified matters. This is not such a case. 25The general discretion for which s 482(1) provides is not constrained by s 482(2A) or any similar provision. It is unconfined except by the subject matter and scope and purpose of s 482, read in the context of the Corporations Act 2001 as a whole (O'Sullivan v Farrer (1989) 168 CLR 210 at 216, citing Water Conservation and Irrigation Commission (NSW) v Browning (1947) 74 CLR 493 at 505, and the duty of the Court to act judicially in the exercise of the power. 26A body of case law has developed to provide guidance in the exercise of jurisdiction under s 482. The principal authorities are helpfully canvassed in a recent judgment of Black J: In the matter of 311 Hume Highway Liverpool Fund Pty Ltd (In Liquidation) [2013] NSWSC 465 (1 May 2013), especially at paragraphs 4-8. 27The Court must always be alive to public interest considerations upon an exercise of jurisdiction under s 482. By their nature, both an order that a company be wound up and an order that a winding up be terminated affect interests of persons beyond particular parties who participate in the Court's proceedings. Both types of orders may affect property rights of those other than the company the subject of them and parties who seek to be heard as to the status or fate of the company. The community has an interest in ensuring, so far as practicable, that the only companies permitted to conduct business are those that are solvent and responsibly managed. 28In the exercise of s 482 jurisdiction, the Court must be mindful of the interests of those (including existing and, very importantly, future creditors) who may not be represented in the proceedings. The Court must also be mindful that s 482 jurisdiction looks, particularly, to the future in so far as a consequence of an order for the termination of a winding up is that the company is able to resume operations at large. Although a company's future conduct of business might be constrained by the imposition of terms on the making of a Court order, or by undertakings given to the Court, the primary focus of the Court must remain on whether, notwithstanding past lapses, there is a solid foundation for an assessment that the company is and will remain solvent, and that its affairs will be conducted responsibly. 29An applicant for a 482 order bears the onus of satisfying the Court that, in all the circumstances, an order can, and should, be made under the section. 30Where, as in these proceedings, a company's solvency has been, and remains, dependent upon financial support from a contributory, the applicant for a s 482 order may, in practical terms, be required: (a) to pay, or make provision for payment of, outstanding debts of the company in advance of the making of a termination order; (b) to provide the company with sufficient working capital to ensure that anticipated debts of the company will be paid, in a timely manner, in due course; and (c) to identify the source and stability of prospective cash flows available to the company. 31Although the Court's focus may be directed particularly to the present and prospective circumstances of the company, an assessment of the company's present and future standing in the world of business may be critically informed by past events. 32It is generally incumbent upon an applicant for a s 482 order to explain how, and why, the company the subject of the application came to be the subject of a winding up order. Any such explanation must be the subject of critical review. 33The process of critical review may have a particular character when, as here, the solvency and general operation of a company have depended upon the support of one or more parties within whose discretion the ability of a company to pay its debts, as and when debts fall due, resides. 34It is not enough that such a party state an intention to support the company financially, or logistically, in the future or, even to provide an assurance that such support will be forthcoming. Particularly is it not enough when a company's benefactor is under no contractual obligation to provide support or, for whatever reason, has failed in the past to provide timely support. 35The Court generally needs to be satisfied that the company's ability to pay its debts as and when they fall due is grounded upon a foundation in net assets and a cash flow not contingent upon a promoter's discretion. 36Furthermore, guarding against both the well-intentioned and those less so, the Court generally requires independent corroboration of evidence adduced by an applicant about the present and future prospects of a company the subject of a s 482 application. 37Support from a liquidator who has investigated the affairs of the company is an important consideration. The Court is entitled to rely, and generally does rely, upon the professional qualifications, experience and judgement of a liquidator bearing upon an assessment of the company's current state of affairs and, should a s 482 order be made, the likely course of future operations. 38That support is not available here, but the liquidator's opposition has crystallised the case that the plaintiff has to meet, and it is counterbalanced by a competing expert opinion. 39In response to the fact of the winding up and to the liquidator's investigation of the affairs of the company, the plaintiff has taken the following steps: (a)She has paid all known creditors of the company. (b)She has executed in favour of the company a document described as a "Deed of Loan and Subordination" designed to provide formal expression to her intention that: (i)She will, in a timely manner, provide working capital, for the future operations of the company, in a sum of $250,000, contemplated to be payable in a first instalment of $200,000 and a second instalment of $50,000. (ii)She will, for a time, subordinate her rights as a creditor of the company to the claims on all other unsecured creditors of the company. (iii)In substance, she undertakes to the Court that she will comply with the terms of the Deed, on the terms set out in the Deed. (iv)Further, and independently of that undertaking, she undertakes to the Court that, for the period of 12 months from any termination of the winding up of the company, she will personally guarantee that all debts of the company will be paid as and when they fall due. 40These undertakings have been reinforced by the plaintiff's personal assurance, given by counsel and by her personally in the witness box, that, whilst ever she is a shareholder or director of the company she will support it so as to ensure that it always pays its debts as and when they fall due. 41A degree of scepticism about such an assurance naturally suggests itself in the context of a person who has, by an earlier failure, omitted to provide the company with timely support to ensure that the company was able to pay, and did pay, the debt (a land tax liability referable to two years) upon the basis of which a winding up order was made. 42The plaintiff has explained that lapse by reference to cash flow difficulties experienced by her in the realisation of personal property for the purpose of the provision of financial support to the company. She initially suggested that the non-payment of the outstanding land tax was an oversight caused by her reliance on office staff and her absence overseas. There may have been an element of that as an explanation for what occurred but, upon a more critical review, the reality appears to be that the plaintiff was endeavouring to marshall her resources for the purpose of ensuring that the company could be put in funds. 43Had the plaintiff not taken the course of explaining her operations over the past few years, and her proposals for future conduct of the business of the company, by a personal appearance before the Court, and by her subjection of herself to cross-examination on behalf of the liquidator, and questions from the Bench, I could not have been satisfied that she could be trusted in the future administration of the company's affairs. 44I mention this specifically to remind her, and others who may be associated with the company, of the critical importance of ensuring that a company is not left dependent upon the whim of somebody who stands in a close relationship to it. There is an element of trust that underlies the privilege allowed to people to conduct business affairs through a corporate structure. 45Ordinarily, the Court can be expected not to favour an application for termination of a winding up under s 482 where the company concerned has been, and remains, dependent for its solvency on the support provided or promised by a promoter. 46The present case is, I am prepared to accept, out of the ordinary for a number of reasons. 47First, the plaintiff has already, personally, invested a substantial amount of money in the company and the underlying development of the land at Goulburn. Secondly, since the appointment of the liquidator she has, in consultation with him and with the benefit of legal advice, taken steps to pay all creditors of the company. Thirdly, she has made an arrangement, formal in character, to provide working capital for the company. Fourthly, she has given undertakings to the Court designed to secure those arrangements and, more generally, to confirm her personal liability for debts of the company. 48Fifthly, during the 12 month period within which the plaintiff's formal guarantee, by an undertaking to the Court, will operate there is a reasonable prospect that the Goulburn project will be completed. Sixthly, that project is of such a character, and the plaintiff has devoted sufficient personal and financial resources to it, that her interests (let alone considerations of honour, which are independently important) are likely to be best served by her provision of support for the company. 49In weighing up these factors it is not unimportant to observe that the plaintiff is a Chinese born Australian citizen who has expressed, in her evidence, a strong commitment to the Australian community and its ongoing relationship with the Chinese community. Nor is it unimportant to notice that she has three children, all born in Australia, and she appears to have involved at least some, if not all of them in bringing the Goulburn project to fruition. 50In deciding, as I have decided, to grant the plaintiff's application, upon terms, it is important for her, and her family, to appreciate the importance attributed by the Court to her ongoing demonstration of trust and reliability in the responsible conduct of the affairs of the company. 51As a price of obtaining the relief she seeks the plaintiff will need, not only to give the undertakings I have already recorded, but also security for the remuneration and expenses of the liquidator. 52I will allow the parties an opportunity to bring in Short Minutes to give effect to these reasons before making formal orders. Prima facie those Short 53Minutes should take the following form: (1)A notation of the undertakings of the plaintiff to provide working capital of $250,000 by two instalments, the first of $200,000, the second of $50,000. (2)A notation of her undertaking to guarantee the debts of the company personally over the 12 months to come. (3)Upon those undertakings, and subject to the plaintiff providing security for the remuneration and expenses of the liquidator of the company, an order that the winding up of the company be terminated. (4)An order, subject to further order, for the provision in favour of the liquidator of an amount of security for payment of the amount claimed by the liquidator for remuneration and expenses. (5)If necessary, an order that the termination order be stayed until such time as the security is provided. (6)A reservation of liberty to apply. 54[SHORT ADJOURNMENT AND FURTHER ARGUMENT] 55I make the following notations and orders: (1)Note that the plaintiff undertakes to the Court that she will pay to LJAC Energy Pty Ltd ("the Company"), by way of working capital, the total sum of $250,000 by way of instalments, with: (a)$200,000 paid no later than 10 September.2013; and (b)a further $50,000 paid no later than 31 October 2013. (2)Note that the plaintiff undertakes to the Court that she will, for a period of 18 months following termination of the winding-up of the Company pursuant to Order 5 hereof, subordinate to the interests of all unsecured creditors of the Company any debts, whether incurred now or hereafter, owed to her by the Company other than dividends duly declared. (3)Note that the plaintiff undertakes to the Court that (without prejudice to any other liability she may have for debts of the Company) she will guarantee the due and timely payment of any and all debts incurred by the Company in the 12 month period following termination of the winding-up of the Company pursuant to Order 5 hereof. (4)Note that, without admissions, the Liquidator agrees to accept from the Company (and the plaintiff undertakes to the Court that she will cause the Liquidator to be paid) in full satisfaction of the Liquidator's fees the payment of $90,000, including GST payable as follows: (a)The payment of $45,000 from the Liquidator's trust account, which the Liquidator has already received from the Company. (b)By close of business on 23 August 2013, the Liquidator will accept payment from the Company the sum of $45,000 by way of bank cheque. (5)Upon the plaintiff giving to the Court the undertakings noted in paragraphs 1, 2, 3 and 4 hereof, order that the winding-up of the Company be terminated, with effect on and from today. (6)Reserve liberty to apply, generally, for orders for the enforcement of the undertakings noted in paragraphs 1, 2, 3 and 4 hereof and the agreement noted in paragraph 4. (7)Direct that these Orders be entered forthwith. ADDENDUM 56On 2 September 2013 Lindsay J directed that a copy of these Reasons for Judgment, including the notations and orders made in consequence of them, be provided to ASIC.