Supreme Court New South Wales Medium Neutral Citation: In the matter of Kimberley Diamonds Limited (in liquidation) [2018] NSWSC 1106 Hearing dates: 11 July 2018 Date of orders: 11 July 2018 Decision date: 11 July 2018 Jurisdiction: Equity - Corporations List Before: Black J Decision: The liquidators are authorised to enter into the relevant agreements nunc pro tunc under s 477(2A)-(2B) of the Corporations Act 2001 (Cth). Direction made under s 90-15 of the Insolvency Practice Schedule (Corporations) that the liquidators would be justified in performing obligations under agreement. Catchwords: CORPORATIONS – winding up – conduct of liquidation – application for approval under ss 477(2A) and 477(2B) of the Corporations Act 2001 (Cth) to enter into relevant agreements nunc pro tunc – whether entry into transaction is a proper exercise of the liquidators' powers – application for direction under s 90-15 of the Insolvency Practice Schedule (Corporations) – whether liquidators would be justified in performing obligations under agreement. Legislation Cited: - Corporations Act 2001 (Cth) ss 477, 479, 511, 1322 - Personal Property Securities Act 2009 (Cth) ss 164, 165 Cases Cited: - Auburn Shopping Village Pty Ltd v Nelmeer Hoteliers Pty Ltd [2017] NSWSC 1230 - Re MF Global Australia Ltd (in liq) [2012] NSWSC 994; (2012) 267 FLR 27 - Re Octaviar Ltd (in liq); In the matter of Octaviar Administration Pty Ltd (in liq) [2016] NSWSC 16 - Re One.Tel Ltd [2014] NSWSC 457 Category: Principal judgment Parties: Katherine Elizabeth Barnet and Hugh Armenis in their capacity as joint and several liquidators of Kimberley Diamonds Limited (in liquidation) (First Plaintiff) Kimberley Diamonds Limited (in liquidation) (Second Plaintiff) Representation: Counsel: R Glasson (Plaintiffs) C J M Palmer (Interested Party) Solicitors: Watson Mangioni (Plaintiffs) Andelain Consulting Pty Ltd (Interested Party) File Number(s): 2018/211011 Judgment – ex tempore (revised 16 july 2018) 1. By Originating Process filed 9 July 2018, Ms Barnett and Mr Armenis as joint and several liquidators of Kimberley Diamonds Ltd (in liq) ("Company") seek a range of directions, relating to the entry into certain transaction agreements and dealings and a dealing with an asset of the Company, namely the shares in, and shareholder loans to, Alto Minerals SL ("Alto"). 2. The application is supported by an affidavit of Mr Armenis dated 9 July 2018 which indicates that the Company is sole shareholder of several companies, including an entity, Mantle Diamonds Ltd ("Mantle"), and is also the sole shareholder of Alto. Mr Armenis refers to the circumstances in which the Company entered a Loan Agreement and a Security Deed dated 25 May 2015 with a third party, Zhejiang Huitong Auction Co Ltd ("ZHA"). Pursuant to cl 2.1 of that Security Deed, the Company granted ZHA a security interest over its shares in Mantle and all proceeds of sale thereof. That result arises from cl 2.1 of the Security Deed, combined with the definitions of "Other Property", which in turn refers to the term "Secured Property" which is defined as the Company's interest in Mantle and all proceeds of sale of it. ZHA subsequently registered a security interest on the Personal Property Security Register, which recorded its collateral as extending to all present and if acquired property, with no exceptions, of the Company. There is a suggestion that the Company was involved in the preparation and registration of that security interest. That registration, on its face, extends beyond the terms of the security provided by the Security Deed. In subsequent correspondence, ZHA has relied on that registration as giving it wider security than that provided by the Security Deed. ZHA at one point contemplated intervening in the application today, but has not intervened, in circumstances that the liquidators have fairly offered an undertaking that will preserve the sale price arising from the transaction pending, broadly, the determination of any dispute as to the scope of the security between the Company and ZHA. 3. The Company has now entered an agreement which provides for the sale of certain of its assets, including its shares in Alto and associated assets. The circumstances of the Company's entry into that agreement are set out in the Confidential Affidavit of Mr Armenis sworn on 9 July 2018 to which I need not refer further. The Court need not express any view as to the commercial terms of that transaction, since it was a matter for the liquidators to form a view whether, and they have formed the view that, the entry into that transaction is in the Company's and its creditors' interest. 4. The issue which arises in this application is that the transaction involves the sale of Alto shares, which would not be prohibited by the terms of the Security Deed, but which might potentially be inconsistent with the wider form of registration recorded on the Personal Property Securities Register. I will first deal with that question, which will then provide the basis for dealing with the several directions that the liquidators have sought. 5. A similar question as to inconsistency between the terms of an underlying security and the registration in the Personal Property Securities Register was addressed by Ward J in Auburn Shopping Village Pty Ltd v Nelmeer Hoteliers Pty Ltd [2017] NSWSC 1230, in a comprehensive judgment. Her Honour there emphasised (at [66]), by reference to authority, that the purpose of the registration regime created by the Personal Property Securities Act 2009 (Cth) ("PPSA") is to give notice of a security interest to a person searching the register and that registration of a security under the PPSA does not itself create a substantive interest nor does registration constitute an encumbrance. Her Honour also observed (at [66]) that whether personal property is in fact encumbered by a security interest as registered on the Personal Property Securities Register must be determined by reference to the underlying transaction claimed to have given rise to the security interest in question. Here, that underlying transaction arises from the Security Deed which, as I have noted, created a security interest in shares in Mantle rather than in shares in Alto. 6. Her Honour also there noted, in a similar case where a registration on the Personal Property Securities Register had extended beyond the terms of the underlying security, that that was not sufficient to create a security in the way of terms of the registration. First, her Honour observed (at [85]) that the question whether a claimed security interest was established is to be determined by a review of the relevant security agreement which sits behind a registration, in this case, the Security Deed. Second, and alternatively, her Honour noted a question whether a registration recording a right that extended beyond the underlying security was itself defective for the purposes of ss 164 and 165 of the PPSA. I can see no reason to depart from her Honour's reasoning as to those matters, and every reason to accept that reasoning. The consequence of that reasoning, in this case, is that it is at least strongly arguable that a defect in the registration, so far as it describes a security interest that is wider than that which was created by the Security Deed, does not create a substantive right of ZHA which would not arise from the Security Deed. In those circumstances, it seems to me that the potentially wider description of the security interest on the Personal Property Securities Register would not be a strong reason for the liquidators, as a matter of law, not to proceed with the proposed transaction. 7. Turning now to the orders and directions which are sought, the first are orders under s 477(2A) and s 477(2B) of the Corporations Act 2001 (Cth) that the liquidators are authorised, nunc pro tunc, to enter into the relevant agreements. An order under s 477(2A) of the Corporations Act is sought because it may be (although perhaps only remotely) arguable that the terms of a Deed of Assignment that is part of the relevant transaction involve the compromise of a debt, so far as that debt is assigned to a third party, on the receipt of the payment under the relevant transaction. It is by no means clear to me that that transaction does amount to a compromise of that debt. However, to the extent that it may do so, and for more abundant caution, it seems to me that the requirements for an order under s 477(2A) of the Act are satisfied in this case. In determining whether to make that order, the Court has regard to the public interest and asks whether there is any lack of good faith, issue of law or substantial reason to doubt the prudence of the transaction. No such matter arises in this case. The order that is sought is retrospective in character. There is no doubt that the Court has power to make a retrospective order under that section and I am satisfied that such an order should be made. 8. The liquidators also seek an order under s 477(2B) of the Act, nunc pro tunc. The need for that order arises because the relevant arrangements have a term that may end after the three month period specified in that section. The circumstances in which the Court may make such an order are also well established, and involve an exercise in oversight by the Court to confirm that the entry into the transaction is a proper exercise of the liquidators' powers, having regard to whether it will unreasonably lengthen the liquidation and is in the interests of the liquidation. The Court does not substitute its judgment for the liquidators' judgment but again asks whether there is an error of law, bad faith, impropriety or other good reason to intervene. I am satisfied that none of those matters arises in this case. Again the order sought is retrospective in character but it is well established that the Court may make such an order and I am satisfied that I should do so. 9. An order was also sought under s 1322(4)(a) of the Corporations Act in respect of the liquidators' entry into the relevant agreements. It is not necessary to make such an order because the orders that I have made under ss 477(2A)–(2B) of the Corporations Act are retrospective in character and operate from the date of entry into the transaction. I would have made such an order under s 1322 of the Act had there been any necessity to do so. 10. Next, the liquidators seek a direction, under s 90-15 or s 90-20 of the Insolvency Practice Schedule (Corporations) that they are "acting properly" in causing the Company to enter into and perform its obligations under the Share Sale and Purchase Agreement in respect of the transaction. The form of the direction sought to the effect that the liquidators are "acting properly" in entering into and performing that agreement appears to reflect a condition precedent to that agreement. I am not satisfied that the direction should be made in that form, notwithstanding the terms of that condition precedent, and it seems to me that the Court's approach to this matter must be governed by precedent and principle rather than the terms of the parties' particular contractual arrangements. The case law has long established that the Court will not ordinarily give a direction that a liquidators is "acting properly" in a particular transaction, as distinct from a direction that the liquidator would be justified in taking a particular course of action, see, for example, Re One.Tel Ltd [2014] NSWSC 457 at [55]. Second, the Court will, generally not give such a direction retrospectively, so as to confer on a liquidator protection or immunity in respect of acts that he or she has already undertaken: see for example, Re Octaviar Ltd (in liq); In the matter of Octaviar Administration Pty Ltd (in liq) [2016] NSWSC 16 at [14]. 11. I summarised the scope of the Court's jurisdiction to make a direction of this kind under former ss 479 and 511 of the Corporations Act in Re MF Global Australia Ltd (in liq) [2012] NSWSC 994; (2012) 267 FLR 27 at [7]–[8], and the Court will apply the same principles in respect of a direction under s 90-15 of the Insolvency Practice Schedule (Corporations). The Court may give such a direction where it will be of advantage in the liquidation, and the effect of that direction is that the liquidator may adopt the particular course free from the risk of personal liability for breach of duty. The Court may exercise that power where it will assist the liquidator in the appropriate performance and discharge of his or her duties and functions, including giving its advice where a matter involves a legal issue of substance. In this case, the status of the relevant security involves an issue of that character, so far as there is disconformity between the Security Deed and the registration on the Personal Property Security Register to which I have referred above. I am satisfied, with the qualifications noted below, that it is to the advantage of the liquidation to give a direction where there is a genuine legal issue raised. 12. It seems to me that the direction here should be in the usual form that the liquidators are justified in taking a particular action and should not extend to the entry of the Share Sale and Purchase Agreement which has already been entered. That direction can, however, properly extend to the liquidators' performance of their obligations under that agreement, which is yet to occur, and that direction will then, in substance, deal with the legal issues raised by this application. I note, for completeness, that my attention was drawn to a term of the Share Sale and Purchase Agreement which requires the Company, and by extension the liquidators, to use all reasonable efforts in its own capacity to ensure that each condition is satisfied as soon as possible after the date of the agreement and prior to a specified date. One of those conditions is a direction by the Court in the wider form noted above. It seems to me that there can be no doubt that the Company and the liquidators have used all reasonable efforts to seek a direction in that form, where the direction was initially sought in that form and Mr Glasson, who appeared for the liquidators, has made vigorous submissions that it should be made in that form. It should, of course, be well understood that such vigorous submissions cannot guarantee that the Court would reach the result sought. 13. I will make orders in accordance with the Short Minutes of Order initialled by me and placed with the file. These have been amended to delete paragraph 2, relating to an order under s 1322(4) of the Act, which I have held as not necessary. Paragraph 2 is a direction under s 90-15 of the Insolvency Practice Schedule (Corporations) by which I direct that the First Plaintiffs are justified in causing the Second Plaintiff to perform its obligations under the relevant Share Sale and Purchase Agreement. I make order 3 that the confidential exhibit to Mr Armenis's Confidential Affidavit dated 9 July 2018 be returned. I am satisfied that the costs and expenses of this application are properly costs and expenses in the liquidation, and I so order. It is not necessary that the orders be entered forthwith. The proceedings will be adjourned, for the determination of any remaining issues between ZHA and the Company, to the Corporations Motion List on 23 July 2018 and I note the undertaking of the First Plaintiffs to ZHA to which I referred above. ********** 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 July 2018