Supreme Court New South Wales Medium Neutral Citation: In the matter of Rubix Investments Group Pty Ltd (in liq) [2018] NSWSC 1184 Hearing dates: 26 July 2018 Decision date: 02 August 2018 Before: Gleeson JA Decision: (1) Pursuant to s 477(2A) of the Corporations Act 2001 (Cth) (as applied by s 506(1A)), the applicants, David Nicholas Iannuzzi and Vincent Joseph Pirina, as liquidators of and on behalf of Rubix Investments Group Pty Ltd, have the approval of the Court to enter into the deed of settlement and release which is in or substantially to the effect of the form which is Annexure A to the affidavit of Adam John Lysle sworn 23 July 2018. (2) Direct pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) the applicants, David Nicholas Iannuzzi and Vincent Joseph Pirina, as liquidators of and on behalf of Rubix Investments Group Pty Ltd, would be justified in entering into and performing, and causing Rubix Investments Group Pty Ltd to enter into and perform, the deed which is in or substantially to the effect of the form which is Annexure A to the said affidavit of Adam John Lysle. (3) The applicants' costs of the application be costs in the liquidation of Rubix Investments Group Pty Ltd. Catchwords: CORPORATIONS – liquidators – compromise of debt – application by liquidators for approval of deed of compromise – Corporations Act 2001 (Cth), s 477(2A) – where the debt claimed by the company is more than $100,000 – Corporations Regulations 2001 (Cth), reg 5.4.02 – where there is no committee of inspection – where creditor approval of the deed not obtained - whether the deed is an appropriate compromise –Corporations Act, Sch 2 – Insolvency Practice Schedule (Corporations), s 90-15 – whether direction should be given that the liquidators would be justified in entering into and performing the deed Legislation Cited: Corporations Act 2001 (Cth), ss 447D, 477(2A), 479(3), 506(1A)(a), 553C, Pt 5.7B Sch 2- Insolvency Practice Schedule (Corporations), ss 90-15, 90-20 Corporations Regulations 2001 (Cth), reg 5.4.02 Cases Cited: Green v All Motors Limited [1917]1 KB 625 Keene v Thomas [1905] 1 KB 136 Re One.Tel Limited [2014] NSWSC 457 Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409; [2002] FCA 90 Re HIH Insurance Ltd and related matters [2004] NSWSC 5 Re HIH Casualty & General Insurance Ltd (in liq) [2002] NSWSC 1036 Re FAI Traders Insurance Co Pty Ltd [2002] NSWSC 1080 Re GA Listing & Maintenance Pty Ltd (1994) 15 ACSR 308 Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674; (1991) 5 ACSR 673 Re Luxtrend Pty Ltd (in liq) (1996) 135 FLR 170; [1997] 2 Qd R 86 Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 Re Tietyens Investments Pty Ltd (in liq) (rec and mgr apptd) [1999] FCA 206; (1999) 31 ACSR 1 Category: Principal judgment Parties: David Nicholas Iannuzzi (in capacity as liquidator of Rubix Investments Group Pty Ltd) (First Applicant) Vincent Joseph Pirina (in capacity as liquidator of Rubix Investments Group Pty Ltd) (Second Applicant) Gogetta Equipment Funding Pty Ltd (Cross-Defendant) Representation: Counsel: Mr J Rose (First and Second Applicants) Mr EAJ Hyde (Cross-Defendant) Solicitors: Hall & Wilcox (First and Second Applicants) Jones Day (Cross Defendant) File Number(s): 2017/285457 Judgment 1. GLEESON JA: Application is made by Mr David Iannuzzi and Mr Vincent Pirina, in their capacity as liquidators of Rubix Investments Group Pty Ltd (Rubix) for approval of the Court under s 477(2A) of the Corporations Act 2001 (Cth) in relation to aspects of a deed of settlement and release, plus directions under s 90-15 of the Insolvency Practice Schedule (Corporations), being Sch 2 to the Corporations Act. 2. While the deed had not been entered into as at the date of the hearing, the parties informed my Associate by email on 27 July 2018 that the deed had been exchanged on that day. 3. The deed contains a suspensory provision in the form of a condition precedent in cl 2.1 declaring that the terms of the deed are of no legal force and effect unless and until the liquidators obtain approval to enter into the deed under s 477(2A) of the Corporations Act or a resolution of the creditors of Rubix to the effect that the liquidators have approval to enter into the deed. The condition precedent in cl 2.1 is stated to be for the benefit of each of the parties and cannot be waived: cl 2.9. The existence of the suspensory condition is sufficient to justify the conclusion that, pending its satisfaction, the act of agreement with which s 477(2A) is concerned, should be regarded as not having occurred: Re HIH Insurance Ltd and related matters [2004] NSWSC 5 (Re HIH Insurance) at [3] (Barrett J); Re HIH Casualty & General Insurance Ltd (in liq) [2002] NSWSC 1036; Re FAI Traders Insurance Co Pty Ltd [2002] NSWSC 1080. 4. The parties to the deed are Gogetta Equipment Funding Pty Ltd (Gogetta), Rubix and the liquidators. The recitals to the deed record that the liquidators were appointed as the joint and several liquidators of Rubix on 30 October 2017, following their earlier appointment as joint and several administrators of Rubix on 21 July 2017. The recitals further record that on 20 September 2017, Gogetta commenced proceedings against Rubix and the liquidators; that an amended originating process was filed on 7 November 2017; that Rubix filed a cross-claim against Gogetta on 11 December 2017 to which Gogetta filed a defence; and that on 27 June 2018, the Court made orders dismissing the amended originating process as against Rubix and the liquidators and reserved costs. 5. The terms of the deed are expressed to be confidential, but it was common ground between the liquidators and Gogetta (which was represented by counsel on the hearing) that reference to the terms of the deed could be made in open court on the present application, given the exception in cl 9(a) of the deed. 6. The deed provides for a settlement sum of $40,000 to be paid by Gogetta to Rubix within two days of notice of satisfaction of the condition precedent in cl 2.1, in consideration of the releases given by Rubix: cl 4.1. The deed contains mutual releases by the parties in respect of all claims (which expression is a widely defined expression) in connection with the originating process, the cross-claim, the proceeding, the equipment (as defined) and any other property of Gogetta: cl 6. The expression "Equipment" is defined as the motor vehicles and other assets in working order recovered by Gogetta from two other entities – Galaxy Auto Repairs Pty Ltd (Galaxy) and Kwikfix Mechanical Pty Ltd (Kwikfix). 7. A brief description of the proceedings will suffice to explain the context of the deed. Gogetta claimed relief against Rubix and the liquidators in detinue and/or conversion alleging that Rubix and the liquidators had detained or converted 64 motor vehicles and two photo booths. The background to that claim was an agreement between Gogetta and Rubix dated 8 May 2016 styled "Preferred Partner Agreement" under which Rubix agreed to provide remarketing services to Gogetta in relation to returned equipment (which included vehicles) by lessees of Gogetta. The agreement provided that Rubix was to receive, hold and remarket the equipment as consignee, that title of the returned equipment would also remain with Gogetta, that Rubix would provide quotations for the repair of the equipment, and within 30 days complete repairs to the assets, that "Gogetta will pay the invoice for completion of the repairs, to the nominated repairer, within 7 days", and that Rubix would advertise the equipment on its advertising platforms, either for rental or sale (as the case may be). Under the agreement, Rubix was entitled to a commission of 25 percent of the rental price or 10 percent of the sale price of the equipment (as the case may be). 8. Rubix entered into agreements with Galaxy and Kwikfix for those companies to complete any repairs to Gogetta's vehicles and equipment at their repair facilities. 9. The property of Gogetta the subject of its claim against Rubix and the liquidators was in the possession of either Galaxy or Kwikfix. On 7 November 2017, Gogetta joined Galaxy and Kwikfix as additional defendants. Galaxy and Kwikfix refused to return the vehicles and equipment to Gogetta. They claimed a lien over the vehicles and equipment in respect of unpaid repair costs and storage costs owing by Rubix. As to the circumstances and extent of the common law lien of a repairer against the owner of a chattel see: Keene v Thomas [1905] 1 KB 136; Green v All Motors Limited [1917]1 KB 625. 10. Part of the cross-claim concerned a claim for payment of invoices rendered by Rubix to Gogetta for repairs to Gogetta's vehicles and equipment that Rubix had arranged under the terms of the preferred partner agreement. Those invoices included a margin (typically in the order of 30 percent of the sub-contractor's invoice). The inclusion of a margin was not disclosed on the face of the quotations submitted by Rubix to Gogetta and accepted by Gogetta. 11. A large part of Rubix's claim against Gogetta for repair costs ($150,660.22 out of the claim of $193,103.41) covered the costs charged by Galaxy and Kwikfix to Rubix for conducting repairs to Gogetta's vehicles. In addition to claiming a lien over Gogetta's vehicles, Kwikfix and Galaxy also lodged proofs of debt against Rubix in respect of their claims for unpaid repair costs. 12. Gogetta disputed that Rubix was entitled to include a margin in its invoices and asserted that it was entitled to a set-off under s 553C of the Corporations Act in respect of the amount Rubix had overcharged (or wrongfully charged) Gogetta, relating to the margin included in the invoices the subject of the cross-claim by Rubix. 13. The other parts of the cross-claim concerned claims against Gogetta for the storage cost and damages for termination of the preferred partner agreement. Those claims were abandoned by Rubix shortly before the trial began on 27 June 2018. 14. Gogetta settled its claims against Kwikfix in November 2017. Kwikfix agreed to return 15 vehicles to Gogetta and to release all claims it had against any person (including Rubix) in exchange for $100,527.53 and the transfer to it of one item of equipment. The liquidators only became aware of the terms of that settlement a few days before the trial began. On 24 June 2018, Gogetta settled its claim against Galaxy on the basis that Galaxy would return 45 vehicles to Gogetta and release all claims it had against any person (including Rubix) in respect of Gogetta's vehicles, in exchange of $140,000. 15. At the commencement of the hearing on 27 June 2018, Gogetta was given leave to discontinue the proceedings against Galaxy and Kwikfix. 16. There were two significant issues at trial with respect to the cross-claim: one relating to whether Rubix was entitled to recover against Gogetta for repair costs in circumstances where Rubix had not paid the relevant amounts to the sub-contractors – Galaxy and Kwikfix – who had released their claims, both in debt and for liens, against Rubix; the other relating to the entitlement of Rubix to include a margin on the sub-contractors' invoices. Rubix contended that the margin of 30 percent of the subcontractor's invoices totalled in the order of $45,000 of its cross-claim against Gogetta. Gogetta contended that the impugned margin was in the order of $84,000. On Gogetta's case, the only amount payable to Rubix was the amounts payable (and paid) by Rubix to Kwikfix and Galaxy, which had been reduced to zero because of the releases given by Kwikfix and Galaxy. 17. Mr Adam Lysle, a senior manager with responsibility for the day-to-day conduct of the liquidation of Rubix, has sworn affidavits dated 23 and 26 July 2018 in which he deposed that, during an adjournment of the hearing on the morning of 27 June 2018, counsel and the solicitors acting for Rubix provided (oral) confidential legal advice to one of the liquidators, Mr Pirina (who was on the telephone) and that, taking into account various matters, including the costs incurred to date, the future costs, the risks associated with the cross-claim, the length of the dispute, and the alternative avenues for the recovery available to the liquidators, the liquidator gave instructions to settle the cross-claim on the basis that Gogetta paid Rubix a sum not less than $40,000 inclusive of costs in full and final settlement of the cross-claim and any outstanding questions of costs. An offer on those terms involving a payment by Gogetta to Rubix of $40,000 was ultimately accepted by Gogetta. 18. The liquidators attempted to obtain creditor approval of the deed at a meeting convened on 12 July 2018 and an adjourned meeting on 19 July 2018. On each occasion, no creditors attended and the meeting failed for want of a quorum. 19. In advance of those meetings, one of the liquidators (Mr Pirina) provided a detailed report to creditors containing an update on the litigation involving Gogetta and the reasons why the liquidators recommended that the creditors should approve the proposed settlement including: * that significant time costs had been incurred by the liquidator (in excess of $50,000) and legal costs in excess of $150,000 incurred in relation to the dispute with Gogetta; * that earlier attempts to negotiate a settlement with Gogetta had been unsuccessful. (That was a reference to a mediation held on 22 March 2018 which was unsuccessful.); * that even if the cross-claim against Gogetta was successful, there was minimal prospect of any recovery of sufficient monies to enable a distribution to preferred employee creditors that would extinguish their claims in full and there would be no distribution to any other unsecured creditors. 1. The liquidator gave the following reasons for the settlement being more beneficial to the administration as opposed to continuing the legal proceedings: 1. the lengthy proceedings with Gogetta will be closed; 2. further costs of the liquidators, the solicitors and barristers will be avoided; and 3. it would allow the liquidators to focus on exploring other avenues for recoveries, including any potential recoveries pursuant to Pt 5.7B of the Corporations Act. Legal principles – s 447(2A) 1. Section 477(2A) of the Corporations Act provides that, except with the approval of the Court, the committee of inspection or 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, relevantly, the prescribed amount of $100,000: Corporations Regulations 2001 (Cth), reg 5.4.02. 2. Section 506(1A)(a) provides, relevantly, that s 477(2A) applies in relation to the liquidator (in a voluntary winding-up) as if he or she were a liquidator in a winding-up insolvency or by the Court. 3. The liquidators seek approval of the Court given that the amount claimed by Rubix as a debt due by Gogetta is more than $100,000, there is no committee of inspection, and two attempts to convene a meeting of creditors to vote on a resolution approving the compromise have failed for want of a quorum. 4. Section 477(2A) applies only in relation to a "debt" strictly so called: Re Luxtrend Pty Ltd (in liq) (1996) 135 FLR 170; [1997] 2 Qd R 86; Re Tietyens Investments Pty Ltd (in liq) (rec and mgr apptd) [1999] FCA 206; (1999) 31 ACSR 1; Re HIH Insurance at [12]. The course of dismissing a s 477(2A) application on the basis that the particular claim is not, strictly speaking, a "debt" should only be followed in a clear-cut case: Re HIH Insurance Ltd at [12]. Here, the relevant claim by Rubix against Gogetta in respect of unpaid repair costs answers the description of a "debt". The compromise contained in the release by Rubix in the deed of "all claims" against Gogetta would include that debt. 5. The essential purpose of the requirement of approval under s 477(2A) is to ensure that the interests and wishes of those affected by a compromise, chiefly the creditors, are a major consideration in making such a compromise: Re One.Tel Limited [2014] NSWSC 457 at [28]. 6. The approach that the Court is to take in deciding whether to grant approval under s 477(2A) is well-established. As Barrett J explained in Re HIH Insurance at [15], s 477(2A) is concerned to ensure that the Court exercises some oversight of the liquidators' actions, and the Court's assessment must be made in light of the purposes for which liquidators' powers exist. One overriding purpose is to serve "the interests of those concerned in the winding-up – here, the creditors": Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85 (Giles J); the other is to do whatever needs to be done "for the proper realisation of the assets of the company" or to assist its winding-up: Re GA Listing & Maintenance Pty Ltd (1994) 15 ACSR 308 at 311 (Young J). 7. The Court does not concern itself with the commercial desirability of the transaction. As Giles J said in Re Spedley Securities Ltd (in liq) at 85: The court pays regard to the commercial judgment of the liquidator (Re Chase Corporation (Australia) Equities Ltd (1990) 8 ACLC 1118). That is not to say that it rubber stamps whatever is put forward by the liquidator, but, as is made clear in Re Mineral Securities Australia Ltd [1973] 2 NSWLR 207 at 231-2, the Court is necessarily confined in attempting to second-guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct. 1. In Re One.Tel Limited, Brereton J remarked at [26]: … The role of the court is to grant or deny approval to the liquidator's proposal, not to reconsider every issue considered by the liquidator, nor to develop some alternative proposal which might seem preferable. In reviewing the liquidator's proposal, the court pays due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, but satisfies itself that there is no error of law or ground for suspecting bad faith or impropriety, and evaluates whether the proposal is consistent with the expeditious and beneficial administration of the winding up. … 1. Counsel for the liquidators has provided detailed submissions drawing the Court's attention to all relevant matters to the grant of approval under s 477(2A) of the Corporations Act. Having considered the liquidator's reasons for the compromise given in his report to creditors, the evidence of Mr Lysle and the terms of the deed, I am satisfied that the deed is an appropriate compromise; it is commercially realistic and sensible, and there is nothing to suggest any lack of good faith, error in law or principle, or real or substantial grounds for doubting the prudence of the liquidators' proposal. Directions under s 90-15 1. Section 90-15(1) of the Insolvency Practice Schedule (Corporations) provides that the Court may make such orders as it thinks fit in relation to the external administration of a company. The liquidators have standing to make such an application: s 90-20(d). 2. The authorities on the predecessor provision in s 479(3) of the Corporations Act again emphasise that it is not the function of the Court to pass an opinion on the liquidators' commercial judgment. In Re HIH Insurance, Barrett J said at [19], "generally speaking, such directions are appropriate only where there is some doubt or difficulty going beyond the question of what is commercially desirable". His Honour cited with approval the statement by Goldberg J (in the context of a voluntary administrator's application for directions under s 447D) in Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409; [2002] FCA 90 at [65]: There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, the decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised. It is insufficient to attract an order giving directions that the liquidator or administrator has a feeling of apprehension or unease about the business decision made and wants reassurance. There must be some issue which arises in relation to the decision. A court should not give its imprimatur to a business decision simply to alleviate a liquidator's or administrator's unease. There must be an issue calling for the exercise of legal judgment. 1. In Re Spedley Securities Ltd (in liq), after noting that a court will not make a liquidator's commercial decision for him, Giles J said at 85, "it is nonetheless common for a liquidator to seek directions as to whether he is justified in entering into a particular compromise". 2. While the Court may give a direction in the context of a proposed compromise and/or where the decision is likely to be contentious, there is an important distinction between a direction such as under s 90-15 and an approval under s 477(2A), namely, that the former exonerates the liquidator from personal liability: Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674; (1991) 5 ACSR 673 at 678. This means that a closer examination of the liquidator's decision is required under s 90-15 because a direction that the decision is proper and reasonable involves a wider enquiry than is required by s 477(2A). Usually this will necessitate consideration of the liquidator's reasons, and the process by which the decision has been reached: Re One.Tel Limited at [35]-[36]. 3. The reasons given by the liquidators for settling the cross-claim and the outstanding questions of costs have been referred to above. The essence of those reasons concern the uncertainty of the outcome of the cross-claim given the settlements between Gogetta and Kwikfix and Galaxy and the other defences raised by Gogetta, as well as the risk that Gogetta might obtain a costs order on its claim (for conversion or detinue) notwithstanding that this claim had been dismissed by consent. 4. It can be accepted that the amount of the settlement sum ($40,000, inclusive of costs) relative to the amount of the claim (approximately $193,000, plus costs) implies a judgment that while the proceedings are not devoid of prospects of success, they are attended by very considerable risk. Those risks included both evidentiary and legal risks. 5. The evidentiary risks largely centred around the difficulty in Rubix establishing an amendment to a written agreement (the preferred partnership agreement) by relying upon verbal communications or a course of conduct in circumstances where: (1) there was a risk that large parts of the liquidators' evidence (Mr Lysle's affidavits) may have been rejected on objection, as either hearsay from the company's director (who did not give evidence in the proceedings) or because of the late service of the evidence; (2) the liquidators had been unable to serve a subpoena to attend to give evidence on the director of Rubix; and (3) the forensic decision by counsel for Gogetta on the morning of the hearing to no longer call many of Gogetta's previously advised witnesses significantly diminished the liquidators' ability to obtain concessions in cross-examination, in support of their claim that the terms of the preferred partnership agreement had been varied by an oral agreement or a course of conduct). 6. The legal risks included the effect of the settlement of Gogetta's claims against Galaxy and Kwikfix on Rubix's cross-claim against Gogetta under the invoices it was relying upon; and the s 553C set-off defence, the quantification of which ($84,000 approximately) had been advised to the liquidators only shortly prior to the hearing. 7. Taken together, the cumulative risk associated with the above matters warranted an assessment that the continuation of the cross-claim was attended by a high degree of risk for Rubix. 8. Counsel for the liquidators submitted that there was a possibility that the liquidators may be criticised for having compromised the proceedings on the terms of the deed in circumstances where the costs incurred in conducting the proceedings exceeded the settlement amount, with the effect that there is no monetary benefit for creditors. Counsel emphasised that the concern that the reasonableness, if not the proprietary, of the liquidators' decision may be called into question by creditors, was reinforced by the absence of any creditors attending the two meetings which had been convened by the liquidators to approve the compromise. That may be accepted. 9. The decision of the liquidators involved more than making a commercial decision; it also involves the exercise of legal judgment in assessing the merits of settlement against the prospects of success in the proceedings. I accept that the decision to compromise Rubix's claim is likely to be contentious. 10. Taking into account the risks attendant on the cross-claim, the process of commercial negotiation between legally represented parties that has led to the settlement, the liquidators have received the benefit of advice from experienced lawyers, the benefit of a prompt settlement albeit for a small return to the company, and the savings in legal costs associated with what otherwise would have been a lengthy trial with the possibility of an appeal, I am satisfied that the liquidators would be justified in entering into the deed. Conclusion and Orders 1. I am satisfied that the Court should give its approval under s 477(2A) to the liquidators entering into the deed with Gogetta compromising the debt claimed against Gogetta in respect of unpaid repair costs. 2. I am also satisfied that it is appropriate that the liquidators be given a direction pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) that they would be justified in entering into the deed with Gogetta. 3. Accordingly, the Court orders that: 1. Pursuant to s 477(2A) of the Corporations Act 2001 (Cth) (as applied by s 506(1A)), the applicants, David Nicholas Iannuzzi and Vincent Joseph Pirina, as liquidators of and on behalf of Rubix Investments Group Pty Ltd, have the approval of the Court to enter into the deed of settlement and release which is in or substantially to the effect of the form which is Annexure A to the affidavit of Adam John Lysle sworn 23 July 2018. 2. Direct pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) the applicants, David Nicholas Iannuzzi and Vincent Joseph Pirina, as liquidators of and on behalf of Rubix Investments Group Pty Ltd, would be justified in entering into and performing, and causing Rubix Investments Group Pty Ltd to enter into and perform, the deed which is in or substantially to the effect of the form which is Annexure A to the said affidavit of Adam John Lysle. 3. The applicants' costs of the application be costs in the liquidation of Rubix Investments Group Pty Ltd. ********** 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: 02 August 2018