FEDERAL COURT OF AUSTRALIA

Commonwealth of Australia, in the matter of ACN 093 117 232 Pty Ltd (in liquidation) v ACN 093 117 232 Pty Ltd (in liquidation) [2018] FCA 1922

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to section 90-15 of the Insolvency Practice Schedule Jack James (Special Purpose Liquidator) be appointed as an additional liquidator to the Company for the following purposes:

(a)    conducting investigations into any of the matters set out in the Annexure to these orders, including by:

(i)    inspecting the books and records of the Company, excluding any files and working papers of the Second Defendant;

(ii)    conducting (further) public examinations pursuant to section 596A or 596B of the Act (other than of the Second Defendant or her staff, save for the events occurring prior to the Second Defendant’s appointment as liquidator of the First Defendant), or obtaining orders for production pursuant to section 597(9) of the Act or under the relevant provisions of the Uniform Civil Procedure Rules 1999 (Qld);

(iii)    requiring statements (other than of the Second Defendant or her staff) to be provided pursuant to section 475(2) of the Act;

(b)    pursuing any claim, including commencing legal proceedings, that may be available to the Company or the Special Purpose Liquidator in relation to any of the matters set out in the Annexure, including considering and obtaining legal advice in respect of pursuing any such claim;

(c)    taking any steps in relation to any matters set out in the Annexure, including by commencing legal proceedings, to recover, preserve or to protect the assets of the Company, whether or not in the possession of the Company; and

(d)    exercising any powers conferred on the liquidator of the Company by sections 477 and 506(1)(b) of the Act, including the power to seek relief under section 588FF, 596AC, 1317E and 1317H of the Act, in relation to any matters set out in the Annexure, except for the powers contained in section 477(1)(a) of the Act.

2.    Pursuant to section 90-15 of the Insolvency Practice Schedule the Second Defendant, as liquidator of the Company:

(a)    must refrain from exercising any of the powers of the Special Purpose Liquidator in order 1 above, except with prior written consent of the Special Purpose Liquidator (such consent not to be unreasonably withheld) or by leave of the Court;

(b)    must use her reasonable endeavours to assist the Special Purpose Liquidator to exercise the powers given to them by order 1 above, including by providing any documents or information previously prepared or obtained by her in investigating or pursuing any claim in relation to any of the matters set out in the Annexure.

3.    Pursuant to section 90-15 of the Insolvency Practice Schedule the Special Purpose Liquidator shall, in accordance with the requirements of the Act, report to creditors of the Company and any liquidator of the Company then in office on the terms of their appointment and subsequently once every six months during the course of their appointment.

4.    Pursuant to Part VAA of the Federal Court of Australia Act 1976 (Cth) annexure “CONFIDENTIAL HC-35” be suppressed and not be made available to any party without the leave of the Court on the ground that the order is necessary to prevent prejudice to the proper administration of justice.

5.    The costs of the proceedings of the Plaintiff and the Second Defendant be costs in the liquidation of the Company.

6.    Any party effected by these orders may apply to the Court at any time for any variation substitution or addition to them.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

DERRINGTON J:

Introduction

1    The application before the Court today is made pursuant to s 90-15 of Sch 2 of the Corporations Act 2001 (Cth) for the appointment of a special purpose liquidator to the first defendant company. The company was formerly known as Intelara, and I will refer to it by that name. The Commonwealth seeks the appointment because it is concerned the present liquidator of Intelara, Ms Joanne Dunn, is either unwilling or unable to pursue causes of action which will recover funds from which the Commonwealth’s claim to be a creditor of Intelara might be met.

2    The urgency of this matter arises because the Commonwealth is concerned that certain causes of action which Ms Dunn will not pursue either in her capacity as liquidator of Intelara, or will soon become time barred. If the special purpose liquidator is appointed it is apparent that they will take steps to preserve those limitation periods by obtaining extensions of time or by commencing proceedings.

3    The Commonwealth claims to be a creditor of Intelara because it administers the Fair Entitlements Guarantee Act 2012 (Cth) pursuant to which it advances funds to liquidators to meet the unpaid employee entitlements of employees who are terminated through the insolvency of their employer. For the reasons which follow, the orders sought ought to be made, subject to some minor variations. The Commonwealth has established, at least in a prima facie sense, substantive grounds for supporting its concern that the present liquidator will not pursue the causes of action or the investigations which will benefit it because the present liquidator is prevented from doing so because of an actual or perceived conflict of interest.

4    It should be stated in the strongest terms that applications of this nature occur very quickly with very limited time for any affected parties to respond. The Court is not called upon to make any final determination about the rights and wrongs of the matter or the allegations made. All that needs to be demonstrated is that there is a good reason for the appointment of a special purpose liquidator and, that usually involves the assertion of some suspicion as to the inability of the general purpose liquidator to fully administer the winding up. In that way, nothing said in these reasons should be taken as being in any way a final finding of fact. The parties involved have not had the opportunity, and in some cases nor the entitlement, to adduce evidence in response to the allegations or suspicions which underpin the application.

Background

5    In brief terms,     Intelara had two directors, being Mr Neil Burnell and Mr Michael Lethlean. All of the shareholding in Intelara is held by Intelara Holdings Pty Ltd. Messrs Burnell and Lethlean are the sole directors of that company as well as being its sole shareholders. It is apparent that in the latter part of 2015 Intelara was experiencing financial difficulties. It also appears that in or around September 2015 it entered into an agreement with a Mr Robert Saunders who operated an entity called Facility Care Pty Ltd.

6    Although the precise nature of the services which Facility Care provided are not clear, it may be that the entity falls within that group of insolvency practitioners who hold themselves out as “restructuring” consultants. A document purporting to be an agreement between Intelara and Facility Care was entered into on 30 September 2015. The terms of the agreement are somewhat opaque and, one might say, resplendent with management speak. However, the purpose of the agreement appears to assist Intelara out of its financial difficulties in one way or another.

7    The evidence before the Court included a number of emails between Messrs Burnell and Lethlean on the one hand and Mr Saunders on the other. The content of that correspondence tends to suggest that Mr Saunders was providing advice and direction as to the management of Intelara and, in particular, a proposed restructure. The word “restructure” is obscure and can cover a variety of sins. It has become now a common phenomena to see the word “restructure” used as not referring to the restructure of a company’s business, but to the wholesale transfer of a company’s business to other entities.

8    On 22 November 2015, Mr Saunders sent to Messrs Burnell and Lethlean an email which identified three potential courses of action for Intelara. The second read as follows:

NEWCO – Do a Legal “phoenix” with a minimum of 15-20 staff if they are willing and it can be achieved in a time frame not prohibitive of them disbursing [sic]. Relocate or strike a new agreement via David with the landlord. Use Neil’s $400k to capitalise the company/pay down some of the NAB debt.

9    The email then identified that establishing the NEWCO, which is shorthand for new company, was the only suitable option. Mr Saunders then said:

I suggest we focus on the following:

•    Do a backup of IP this week that could be useful in NEWCO.

•    Appoint Liquidator (Joanna at FTI presumably, she seemed very competent)

•    Inform staff Intelara is in Liquidation taking advice from David/Joanna on the communication method. Staff are very agitated and something has to happen now.

•    Initiate David (AMR) to push the button immediately on setting up NEWCO entity/ABN/Bank Account/ATO Registration etc. This could be LHO Group (if not too entangled, and the name Intelara isn’t important.) David will have to advise.

10    From that email it is apparent that there had already been contact between the accounting firm, FTI Consulting, being the firm at which Ms Dunn is the senior managing director, and Intelara, or those persons engaged by it. Documents produced by Messrs Burnell and Lethlean at public examinations conducted by the Commonwealth, show that on or about 11 November 2015 Mr Saunders had contacted FTI and Ms Dunn had confirmed that she could meet with Messrs Saunders, Lethlean and Burnell on 12 November 2015 at 10.30am. Subsequently, Mr Saunders sent an email to Ms Dunn in which he thanked her for her help and asked her to provide details as to AMR and the person at that company who may be able to assist with personal issues.

11    Following that exchange it appears that towards the end of 2015, Intelara also engaged the services of Mr Rosenblum of ARM Commercial Pty Ltd. Again it is not entirely clear what services Mr Rosenblum provided, although they also appear to be in the form of “restructuring” advice.

12    A number of emails were produced at the public examinations conducted by the Commonwealth and, it appears, Ms Dunn was a party to some of them. The communications were sent in the latter part of 2015. An important email relied upon by the Commonwealth is an email of 4 December 2015 from Mr Rosenblum to Messrs Lethlean, Burnell and Saunders which included the statement:

Joanne has researched the definition of phoenix and what we are doing is clearly not a phoenix.

13    The reference to “Joanne” is a reference to Ms Dunn whom, it must be emphasised, was not a party to that email and, indeed, she has, in correspondence, denied that she had said any such thing to Mr Rosenblum. In the context of the present application the email is significant as it would suggest that Ms Dunn had advised Intelara and its directors as to the veracity of an anticipated restructure which would be achieved by transferring assets of Intelara to a new entity.

14    On 7 December, being four days after that email, Intelara went into voluntary liquidation and Ms Dunn was appointed as its liquidator. Also on 7 December 2015, albeit immediately prior to the voluntary liquidation and appointment of Ms Dunn, Intelara entered into a transaction in the nature of an asset sale agreement with a company called Intelara Engineering Consultants Pty Ltd. That company had been created five days earlier on 2 December 2015. Its sole directors were Messrs Lethlean and Burnell and it appears that companies controlled by them were its shareholders. By the asset sale agreement, Intelara transferred to Intelara Engineering all of its assets as well as 24 of its employees. By the terms of the agreement Intelara Engineering assumed Intelara’s liability for payment of the employee entitlements which had accrued to that date. The consideration payable under the agreement is somewhat unclear, but it appeared to be either $1 or negative $412,574. How consideration can be in a negative amount I am yet to understand, unless it meant that Intelara was to pay the identified amount to Intelara Engineering, although that did not appear to be the case. Nevertheless, it appears that Intelara Engineering had no substantial assets and nor did it have any working capital. It is, therefore, unsurprising that it lasted for a period of only 44 days.

15    On 21 January 2016, Intelara Engineering sold its assets to Intelara Holding Pty Ltd. It is to be remembered that Intelara Holding Pty Ltd was the holding company of Intelara and of which Messrs Lethlean and Burnell were directors and shareholders. The terms of that agreement were very similar to the agreement by which the assets of Intelara were transferred to Intelara Engineering. However, a significant difference was that only the directors’ employment was transferred to Intelara Holding. I assume that meant the directors’ employment entitlements were also transferred. Unfortunately for the 22 employees of Intelara Engineering who had been transferred from Intelara, neither their employment nor their entitlements were transferred to Intelara Holding.

16    On 22 January 2016, being the day after the sale of the assets to Intelara Holding, Intelara Engineering passed a special resolution pursuant to s 491 of the Corporations Act that it be wound up. Liquidators were appointed and they terminated the employment of the 22 employees. Intelara Engineering had no substantial assets when the s 491 resolution was passed with the consequence that it could not pay the employee entitlements which it had assumed under the sale agreement with Intelara and which had accrued in the subsequent 44 days. As a consequence, the Commonwealth advanced the sum of $676,777.31 to the liquidators under the Fair Entitlements Guarantee Act to meet the employees’ claims and entitlements.

17    It should also be noted that a number of employees of Intelara had not been transferred to Intelara Engineering and their employment was terminated by Ms Dunn in her capacity as the liquidator. The Commonwealth also paid approximately $200,000 to those employees in respect of their employee entitlements.

18    As a consequence of the foregoing, the Commonwealth has lodged proofs of debt with both Intelara and Intelara Engineering in relation to the amounts it paid in respect of the employee entitlements for those companies. The claimed indebtedness arose pursuant to ss 29, 556(1), 560 and 561 of the Corporations Act and the effect is that the Commonwealth is a subrogated priority creditor of those entities and has a first ranking claim to the assets of the company, including those assets which are the subject of any circulating security interest.

19    It seems to be apparent that, when Ms Dunn was appointed as liquidator, Intelara had substantial assets in the nature of receivables and approximately $1.2 million has been recovered by her in that respect. Given the Commonwealth’s priority claim to payment, it received approximately $200,000 in respect of the sum that it had paid to Intelara’s employees in respect of their entitlements.

20    On the other hand Intelara Engineering had no assets at all to meet any of its the creditors’ claims including the claims of the 22 employees. The liquidators of that entity have indicated that the Commonwealth will not receive anything in return on its proof of debt of approximately $677,000.

21    It is of significance that the directors of Intelara had given personal guarantees to the company’s major creditor, the National Australia Bank which had provided finance facilities to the company. In the period immediately following Ms Dunn’s appointment as the liquidator, she has collected substantial funds from the company’s debtors and utilised approximately $500,000 of that to pay the NAB in discharge of the company’s debt. The NAB held a circulating security interest over the assets of the company, but, more importantly, the company’s debt was secured by guarantees given by the directors. As the Commonwealth submitted, had the asset sale agreements not been entered into, the liability for employee entitlements would have remained with Intelara and they could have been met from the funds recovered by the liquidator. The employees would have enjoyed priority ahead of the NAB in relation to the funds collected by the liquidator with the consequence that the Commonwealth would not have been required to meet those unfulfilled entitlements under the Fair Entitlements Guarantee scheme. However, in that scenario, the NAB’s debt would not have been discharged and the directors would have remained liable on their personal guarantees. As it is, as a consequence of the transaction the 22 employees who were transferred to Intelara Engineering were denied their right to prove in the winding up of Intelara, and they were left with their right to prove in the liquidation of Intelara Engineering, of course, subject to the benefits obtained under the Fair Entitlements Guarantee Act.

22    Since her appointment, the solicitors for the Commonwealth engaged in prolonged communication with Ms Dunn in her capacity as Intelara’s liquidator. There is no need to set out the detail of that correspondence. It suffices to observe that the Commonwealth was quite naturally concerned about the asset sale agreement and whether it was voidable or even effective to transfer the obligations of Intelara to Intelara Engineering. The Commonwealth, through its solicitors, also raised the question of Ms Dunn’s involvement in the transaction.

23    Without doing injustice to Ms Dunn’s responses to the inquiries made by the solicitors for the Commonwealth, it suffices to observe that she claims to have considered the transaction and determined that it was not an uncommercial transaction. She also asserts that it was an “arm’s length” transaction and was in the interests of the creditors as a whole. The Commonwealth sought from Ms Dunn documents and information about the transactions so that it can assess Ms Dunn’s conclusions for itself. It is fair to say they were not provided.

24    At that the date of the abovementioned correspondence with Ms Dunn the Commonwealth was not aware of the circumstances surrounding the engagement of restructuring consultants and the entry into of the various asset sale agreements. Nevertheless, it sought “eligible applicant” status from ASIC, which was granted. That had the consequence it was able to undertake investigations, including the conducting public examinations. It is apparent that some examinations of the directors of Intelara and their advisors occurred. The result was that the Commonwealth secured the documentation and information concerning the relevant events. It is now desirous of pursuing claims in respect of the transactions in question. It perceives that it might bring actions against persons who have contravened s 596AB of the Corporations Act which prohibits persons from entering into an agreement or a transaction with the intention or with intentions that include preventing the recovery of entitlements of employees of a company or significantly reducing the amount of entitlements of employees of a company that can be recovered.

25    That is obviously something directed at Messrs Burnell and Lethlean, and it is quite possible that others might have been involved in that contravention and presumably the Commonwealth will pursue them as well. Another claim sought to be investigated and possibly pursued by the Commonwealth are speculative breaches of s 180 and 181 of the Corporations Act in respect of the conduct of Messrs Burnell and Lethlean. The Commonwealth may also seek to pursue Messrs Saunders and Rosenblum on the basis that they were involved in the alleged contraventions. It is also said that the Commonwealth wishes to investigate whether the transactions were voidable transactions under s 588FE of the Corporations Act because they were either insolvent and uncommercial transactions; an insolvent transaction to which a related entity was a party; or, an insolvent transaction which was entered into for the purposes of defeating, delaying or interfering with rights of any or all of the creditors.

26    All of these things are, as I say, at the investigation stage, but the Commonwealth is concerned that Ms Dunn is not in a position to investigate these transactions because of the suggestion, and it is only a suggestion, that she may have had some involvement in them. I must again emphasise that she has denied being involved. Nevertheless, at the end of the day the question which arises when a Court is asked to consider appointing a special purpose liquidator is whether it would be just in the administration of the company and beneficial to the outcome of the liquidation for the appointment to be made.

Consideration

27    An immediate concern with the appointment of a special purpose liquidator must always be the burdening on the company of the added costs. Here, however, the Commonwealth has entered into an agreement with the proposed special purpose liquidator, so as to minimise any burden on the company, and at least for present purposes, ensuring that a special purpose liquidator is properly funded.

28    In this case it is just and beneficial to order the appointment of the special purpose liquidator particularly because it avoids the difficulty the general purpose liquidator would otherwise have of investigating transactions in which she has allegedly been involved. On the information before the Court there would be an apparent conflict of interest were Ms Dunn to investigate the veracity of the asset sale agreements. This is a powerful consideration in the exercise of the Court’s discretion.

29    It is also relevant that, in a general sense, any investigations and action by the special purpose liquidator will enure for the benefit of the Commonwealth, which, having that special interest, has indicated its intention to support a special purpose liquidator. In this sense the scope of the special purpose liquidator’s role is necessarily narrowly defined.

30    It is to be kept in mind that, at present, the Commonwealth has not been accepted by Ms Dunn as a creditor of Intelara other than by reason of the fact that it discharged the employee entitlements of the Intelara employees for which it has been reimbursed. However, it is reasonably clear that it is a “contingent creditor” in relation to the payments made to the other 22 former Intelara employees because events which might occur may well result in it being a substantial creditor of the company. If the asset sale agreements are set aside the Commonwealth will have discharged the employee entitlement obligations of Intelara in an amount of approximately $677,000. On that basis it would be entitled to recover a similar amount from the company.

31    As the Commonwealth has satisfied the Court that it is a contingent creditor, it has standing to make the application for the appointment of a special purpose liquidator.

32    It is also relevant that the general purpose liquidator and company appeared by Counsel in the proceedings and did not oppose the appointment. That was a very proper attitude for the general purpose liquidator to take and Counsel on her behalf, Mr Copley, helpfully referred me to a couple of matters in the proposed orders to which I might now turn.

33    One question which arises is the extent to which the special purpose liquidator might investigate the conduct of the general purpose liquidator? Whilst that issue may have necessitated some detailed consideration of the various authorities, that need not be pursued because there was agreement that the interest of the special purpose liquidator in relation to Ms Dunn only concerned her conduct prior to being appointed as administrator. That being so the orders made will limit any public examination of her or any of her staff to issues which are outside of their conduct in the winding up of Intelara.

34    The orders proposed by the Commonwealth also provide that Ms Dunn, as the liquidator for the company, uses her reasonable endeavours to assist the special purpose liquidator to exercise special purpose liquidator’s powers, and that includes by providing documents or information previously prepared or obtained by her in investigating or pursuing any claim in relation to the matters set out in the schedule to the order. In that respect there is no need in the orders of the Court, at this stage, to require either her or her staff to make statements pursuant to s 475(2) of the Corporations Act. Were, of course, the special purpose liquidator to become dissatisfied with the assistance from either the liquidator or her staff, the special purpose liquidator may approach the Court for a variation of the orders.

35    It follows that the appointment of the special purpose liquidator should be made and the proposed orders fashioned accordingly.

Costs

36    The remaining question concerns the Commonwealth’s costs of the proceedings. Mr Copley submitted that its costs of the application for the appointment of a special purpose liquidator should not be costs in the general liquidation of the company. He submitted, with some force, that the costs of the proceedings should be the plaintiff’s costs in the special liquidation of the company. By that I understand he means that, to the extent to which the plaintiff is successful through the special purpose liquidator in securing the recovery of funds, its costs of these proceedings will be payable out of those proceeds. There is substantial force in those submissions.

37    On the other hand, it was submitted by Ms Conway for the Commonwealth, that where a need for a special purpose liquidator arises it is appropriate for a creditor, including a contingent creditor, to take action to have the special purpose liquidator appointed. That too is a powerful argument.

38    Ultimately, I am of the opinion the weight falls in favour of the submissions advanced by Ms Conway. The Commonwealth could not sit back and allow the limitation periods for taking action against the directors and others to expire. In this respect the application was prudent and, even if it were unsuccessful, in the circumstances which have arisen it was a necessary step to take. In those circumstances the costs of the proceedings of the plaintiff and of the second defendant should be costs in the liquidation of the company.

Associate:

Dated:    4 December 2018