CATCHWORDS
WINDING UP - application by judgment creditor to wind up company on grounds of insolvency and inactivity - appeal lodged against judgment giving rise to the debt - application for adjournment of winding up proceedings until after resolution of appeal - relevance of improper motive of petitioning creditor, given the lack of utility of a winding up order as no prospect of a dividend from liquidation of the company.
Corporations Law - ss 459A, 461(c)
Cases Considered
Adamopoulos v Olympic Airways SA (1990) 95 ALR 525
Re Amalgamated Properties of Rhodesia (1913) Ltd [1917] 2 Ch 115
Ataxtin Pty Ltd v Gordon Pacific Developments Pty Ltd (1991) 29 FCR 564
L & D Audio Acoustics Pty Limited v Pioneer Electronic Australia Pty Ltd (1982) 7 ACLR 180
JEKOS HOLDINGS PTY LTD v AUSTRALIAN HORTICULTURAL FINANCE PTY LTD
QG 3006 OF 1996
AUSTRALIAN HORTICULTURAL FINANCE PTY LTD v JEKOS HOLDINGS PTY LTD & ORS
QG 3008 of 1996
DRUMMOND J
BRISBANE
10 JULY 1996
FEDERAL COURT OF AUSTRALIA ) No. QG 3006 of 1996
QUEENSLAND DISTRICT REGISTRY )
GENERAL DIVISION )
BETWEEN: JEKOS HOLDINGS PTY LTD
ACN 009 940 738
Applicant
AND: AUSTRALIAN HORTICULTURAL FINANCE PTY LTD
ACN 003 892 027
Respondent
MINUTES OF ORDERS
JUDGE MAKING ORDER: Drummond J
DATE OF ORDER: 10 July 1996
WHERE MADE: Brisbane
THE COURT ORDERS THAT:
1. The hearing of the application for winding up be adjourned sine die.
2. Both parties have liberty to apply to bring their respective applications back before the Court.
3. The costs of and incidental to the hearing of the applications be reserved.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
FEDERAL COURT OF AUSTRALIA ) No. QG 3008 of 1996
QUEENSLAND DISTRICT REGISTRY )
GENERAL DIVISION )
BETWEEN: AUSTRALIAN HORTICULTURAL FINANCE PTY LTD
ACN 003 892 027
Applicant
AND: JEKOS HOLDINGS PTY LTD ACN 009 940 738
CJZ INVESTMENTS PTY LTD ACN 009 951 062
HGT INVESTMENTS PTY LTD ACN 009 951 080
PETER ZINN
JMB INVESTMENTS PTY LTD ACN 009 951 071
SHETTLESTON PTY LTD ACN 009 905 891
DABARY INVESTMENTS PTY LTD ACN 009 951 384
THEME (NO. 3) PTY LTD ACN 009 783 297
ERAND PTY LTD ACN 010 536 400
KFA INVESTMENTS PTY LTD ACN 009 951 053 and
ITA INVESTMENTS PTY LTD ACN 009 979 819
Respondents
MINUTES OF ORDERS
JUDGE MAKING ORDER: Drummond J
DATE OF ORDER: 10 July 1996
WHERE MADE: Brisbane
THE COURT ORDERS THAT:
4. The application to set aside the various statutory demands be adjourned sine die.
5. All parties have liberty to apply to bring their applications back before the Court.
6. The costs of and incidental to the hearing of the applications be reserved.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
FEDERAL COURT OF AUSTRALIA ) No. QG 3006 of 1996
QUEENSLAND DISTRICT REGISTRY )
GENERAL DIVISION )
BETWEEN: JEKOS HOLDINGS PTY LTD
ACN 009 940 738
Applicant
AND: AUSTRALIAN HORTICULTURAL FINANCE PTY LTD
ACN 003 892 027
Respondent
FEDERAL COURT OF AUSTRALIA ) No. QG 3008 of 1996
QUEENSLAND DISTRICT REGISTRY )
GENERAL DIVISION )
BETWEEN: AUSTRALIAN HORTICULTURAL FINANCE PTY LTD
ACN 003 892 027
Applicant
AND: JEKOS HOLDINGS PTY LTD ACN 009 940 738
CJZ INVESTMENTS PTY LTD ACN 009 951 062
HGT INVESTMENTS PTY LTD ACN 009 951 080
PETER ZINN
JMB INVESTMENTS PTY LTD ACN 009 951 071
SHETTLESTON PTY LTD ACN 009 905 891
DABARY INVESTMENTS PTY LTD ACN 009 951 384
THEME (NO. 3) PTY LTD ACN 009 783 297
ERAND PTY LTD ACN 010 536 400
KFA INVESTMENTS PTY LTD ACN 009 951 053 and
ITA INVESTMENTS PTY LTD ACN 009 979 819
Respondents
Coram: Drummond J
Date: 10 July 1996
Place: Brisbane
REASONS FOR JUDGMENT
Jekos Holdings Pty Ltd (Jekos) applies to wind up Australian Horticultural Finance Pty Ltd (AHF). AHF seeks an injunction restraining Jekos from further prosecuting its winding up application until the outcome of an appeal, presently before the Queensland Court of Appeal in proceedings between Jekos and other creditors of AHF, on the one side, and AHF, on the other. AHF also applies to set aside statutory demands issued by Jekos and those other creditors. Notwithstanding the relief claimed by AHF, I accept that the decisive question is whether I should stay, or more appropriately, adjourn Jekos' winding up application until the appeal proceedings are completed.
Jekos seeks to wind up AHF, not on the basis of non-compliance with its statutory demand, which was served after it filed its winding up petition, but rather on two other bases: firstly, that AHF has not traded for a whole year (see s 461(c) the Corporations Law) and, secondly, that it is insolvent (see s 459A).
The
relationship between AHF and Jekos (and the other 10 persons who are
respondents to AHF’s application to set aside the statutory demands) arose in
the context of a tax avoidance scheme based on a macadamia plantation
operation. AHF’s role was to provide
finance to persons like Jekos, who were participants, as investors, in the
scheme, on terms intended to produce tax and other benefits to those
investors. The loans to be made by AHF
to Jekos and others were to take the form of advances of the relevant loan
amounts to the scheme
representative for disbursement to the other organisations who were to be
responsible for implementing the scheme.
The scheme failed, apparently because of the lack of investor interests. The litigation in the Supreme Court took the
form of an action by Jekos and the other 10 persons to recover from AHF
pre-payments of interest made by each, to AHF, in respect of its participation
in the scheme, as money paid on a consideration that wholly failed. AHF counter-claimed for the amounts it
allegedly lent to each, for investment in the scheme. Dowsett J, in a reserved judgment, gave
judgment for Jekos and the other applicants for a total of about $615,000 and
dismissed AHF’s counter-claim.
Central to this litigation in the Supreme Court was AHF’s contention that it had discharged its obligation to Jekos and each of the other plaintiffs to advance to the scheme representative the loan funds agreed to be made available by AHF on behalf of each. Dowsett J said:
“Much of this case depends upon the significance of the defendant’s participation in the ‘round-robin’ transactions. If there was an agreement between each of the plaintiffs and the defendant, it obliged the defendant to lend to the plaintiff in question the sum specified in the Deed of Loan signed by that plaintiff, by paying that sum to the Representative. The defendant claims that it discharged these obligations by engaging in the ‘round-robin’ transactions, but I do not agree. There is no sensible way in which it can be said that the ‘round-robin’ transactions amounted to payment of the principle sums to the Representative. Mr Normand made it clear that the transactions were designed to ensure that the amount of each cheque drawn upon an account was matched by a deposit to the same account. The various cheques were not intended or able to facilitate transfers of funds to the Representative. Neither the Representative nor any of the other companies which participated in the ‘round-robin’ acquired control over any funds.
¼ That the
Representative chose to release the ‘funds’ does not mean
that the effect of the cheques drawn on the defendant's account in favour of
the Representative was any different.
The cheques were not intended to effect the transfer of funds. They were never more than props in an
elaborate facade.
It is true that at the end of the day, Okari Plantations and Okari Management were owed money by the defendant and that none of the cheques had been dishonoured, but these results were also merely elements of the facade. Although the defendant had a significant sum derived from prepayment of interest, it had no prospect of repaying those debts. As to the fact that none of the cheques had been dishonoured, this was because none of the payees had sought to present them other than in a way which would not lead to payment. In the circumstances, it is impossible to say that the defendant performed its obligation to pay the principal sum to the Representative.
In those circumstances, if there were enforceable agreements for loan, whether pursuant to the Deeds of Loan or otherwise, the defendant failed to advance the funds as required by those agreements. The plaintiffs were therefore entitled to terminate the agreements as they have done.”
His Honour also said:
“As a matter of common understanding, what each plaintiff had contracted for was the advance of funds to the Representative. No funds were advanced, and in those circumstances, it is clear to me that the defendant did not discharge its obligations pursuant to the various agreements, nor does the defendant now offer to do so.”
It appears
that his Honour did not regard the “round robin” as a sham, as between AHF and
the other parties to the round robin transaction, because he inferred that each
participant in the “round robin” accepted what was done as discharging their
various obligations inter se (see p 26 of his Honour's reasons). However, his Honour concluded that, as
between AHF and the applicants, AHF’s
role in the “round robin” could not be regarded as the performance by AHF of
its obligation to each applicant to advance moneys to the representative for
disbursement to the other scheme organisations.
Contrary to my initial impression, at the moment the appeal does, I
think, involve only a fairly narrow question of law as to whether AHF's role in
the “round robin” was sufficient to amount to the performance of its
obligations under the loan agreements with Jekos and the other plaintiffs to
make the promised loan advances.
It is
common ground that AHF was set up as a single venture company, ie, solely for
the purpose of acting as financier to persons who, like Jekos, decided to
become involved in this tax avoidance scheme.
While AHF has, in the past five years, once been deregistered for its
failure to file returns, its inactivity needs to be balanced against the fact
that it has sought to recoup from Jekos and others moneys allegedly due in
respect of loans made by it for their benefit in connection with the scheme,
that it has actively participated in the Supreme Court litigation, which
involved fairly extensive interlocutory litigation, and that it is actively
pursuing its appeal in those proceedings.
Even if it could be said that AHF has not carried on business over the
past five years, so that the Court's discretion to wind it up on the ground
provided for by s 461(c) is enlivened, having regard to the fact that it was incorporated for this single venture and to
its litigation activities that have arise out of that venture to which I have
referred, there would still be a good discretionary argument that it should not
be wound up pursuant to s 461(c).
If that were the only ground upon which the petition were based, it
would, in my opinion, be appropriate
to grant an adjournment of the petition until conclusion of the appeal
proceedings.
It is also
common ground that AHF is presently insolvent.
However, if it wins its appeal, it appears that it may well become
solvent. Moreover, success in the appeal
will give it good reason to think that it can recover substantial moneys from
other investors in the tax avoidance scheme, apart from Jekos and the other
plaintiffs in the Supreme Court proceedings, or at least so it was
submitted. AHF claims to have advanced
what now amounts to in excess of $9M (with interest) to about 200
investors. It appears that, apart from
the judgment debts the subject of the appeal proceedings, the only other
significant indebtedness of AHF is, firstly, to the scheme manager and scheme
plantation owner, companies associated with AHF: both have written off the debts owed by AHF
and, consistently with that, appear not to have sought to pursue AHF for
repayment, although the debts may not yet be statute barred; and, secondly, in
the sum of about $1M in respect of a guarantee AHF gave to a person who appears
to have sold to one of the scheme organisations some of the properties around
which the scheme was structured.
However, the evidence shows that while about three years ago, ie, at the
time Jekos and the other plaintiffs commenced the proceedings in the Supreme
Court, this person took some steps to recover from AHF the unpaid purchase
price of $1M, there is nothing in the evidence before me to suggest that that
person is now, or has for some years past, taken any action to pursue his claim
for payment. It is arguable that, apart
from the judgment debt the subject of the pending appeal, AHF may not be insolvent in a commercial sense, in view of the
apparent lack of interest of its only
other creditors in recovering the payments due to them.
AHF’s contention is that, if it were to be wound up now, that would result in its appeal, if well-founded, being rendered nugatory. Jekos' primary contention is that AHF is really seeking a stay from this Court of proceedings before the Court of Appeal to which it is not entitled: as a successful plaintiff, there is no justification for keeping Jekos out of its moneys.
AHF's response is to concede that it would be difficult for it to obtain a stay of the Supreme Court judgment notwithstanding the pendency of the appeal. AHF relies on cases in bankruptcy and refers to what is suggested to be the practical improbability of a liquidator pursuing the appeal if winding up is now ordered. It relies on Adamopoulos v Olympic Airways SA (1990) 95 ALR 525. There, a sequestration order was made, although an appeal was pending against the judgment the subject of the bankruptcy notice on which the petition was based. The Full Court said:
“¼ the governing principle is that a court in bankruptcy should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment founding the bankruptcy notice provided the appeal is based on genuine and arguable grounds.”
At 531,
after referring to a comment by the trial judge to the effect that if a
sequestration order was made, it would be a matter for the trustee in
bankruptcy to determine whether to pursue the appeal and that one could be
confident, if there
was any substantial merit in the appeal, that it would be pursued, the Full
Court said:
“With respect, we do not think this view of the matter is consistent with authority. An appeal against the very judgment which founds the bankruptcy notice is a matter of significance requiring advertence to the possibility that the appeal may be justified. Nor is it realistic to entertain any confidence, in other than a special case, that a trustee in bankruptcy will decide to pursue an appeal with merit. The extremely experienced counsel who appeared for the respondents was unable to recall any instance where such a thing had happened. A much more likely consequence of a sequestration order is the abandonment of the appeal, whatever its merits, and its dismissal for non-prosecution.”
The Full Court therefore set aside the sequestration order and adjourned the hearing of the petition to allow the appeal to be determined.
While there
is an analogy, I do not think there is a complete analogy between the position
of a natural person facing bankruptcy for non-payment of a judgment debt that
he is appealing and a company facing winding up on the ground of insolvency
brought about by its liability established by a judgment which it is
appealing. The likely fate of a
bankrupt's appeal will not necessarily befall a company's appeal, even if it is
wound up before the appeal is heard, if those behind the company consider that
it is worthwhile to put the liquidator in funds to prosecute the appeal that,
in a case like the present, will turn the company from insolvency to
solvency. A bankrupt, however, will
often not be able to procure third party assistance to put his trustee in funds
to continue an appeal instituted by the bankrupt as readily as a company in
liquidation may be able to achieve that.
There is reason to think that those behind this insolvent company, who
have been able to
ensure that AHF has run its case in the Supreme Court proceedings to date and
who also have been able to arrange funds to offer as security for Jekos' costs
of AHF's appeal, may be able to ensure that the appeal will not die if AHF is
wound up.
I do not, however, accept the applicant's submission that the position is equivalent to an unsuccessful defendant seeking to keep a successful plaintiff out of his moneys by a stay until appeal proceedings are over. AHF is, at the moment, plainly insolvent. Jekos acknowledges that. Jekos is not seeking to enforce its right to the payment determined by the judgment. It wishes to wind up this insolvent company in circumstances in which it cannot expect to receive any significant dividend. This is a case in which there is neither a prospect of a dividend from the liquidation of the debtor company nor uncertainty as to whether a liquidator’s administration might turn up assets capable of producing a dividend: winding up would be appropriate in either situation. Jekos’ true objective is, I think, to terminate the appeal proceedings.
While there is no reason to doubt AHF's intention to prosecute its appeal expeditiously, Jekos and the other respondents to the appeal consider that it is necessary to go back to the trial judge, on his return from leave next month, to seek further findings of fact before the appeal is heard. The appeal for them is therefore a rather complicated and expensive exercise. They cannot expect to recover all the costs they will incur, if they defeat the appeal.
In Ataxtin Pty Ltd v Gordon Pacific
Developments Pty Ltd (1991) 29
FCR 564, Heerey J refused to adjourn a winding up petition based on a statutory
demand for payment of a judgment debt, although there was an appeal pending
against the judgments. But that was a
case in which a winding up was likely to produce a real dividend to creditors,
including the petitioner (see pp 574-575).
So was the decision relied on by Heerey J, Re Amalgamated Properties of Rhodesia (1913) Ltd [1917] 2 Ch
115: the petition there was brought to
prevent the appellant company continuing to dissipate its assets in order to
ensure that the judgment creditor would be able to recoup in the winding up
something of what was owed to it: see p
117. If a winding up application is
brought for an improper purpose, it is clear that it will be an abuse of
process: see L & D Audio Acoustics Pty Limited v Pioneer Electronic Australia
Pty Ltd (1982) 7 ACLR 180 at 183. It
was because the creditor brought its winding up petition in the Re Amalgamated Properties of Rhodesia
case to recoup as much as possible of the moneys owed to it by means of an
administration of the debtor company in insolvency that Sargant J rejected the
appellant company's argument that the winding up petition should be dismissed
as an abuse of process as having been brought not for the purpose of obtaining
payment of moneys due by the company under the judgment the subject of the appeal
but for the ulterior motive of stifling the company's appeal (see p 121).
The petitioning creditors in Ataxtin, supra, and Re Amalgamated Properties of Rhodesia, supra, were both within the general rule that a creditor who cannot obtain payment is entitled to a winding up order as a right. For the reasons given, I do not think Jekos is entitled to rely on that rule.
Initially, AHF showed no interest in pursing Jekos or the other investors for the large sums it claims is due to it, a point which will be established if the appeal succeeds. The transactions on which Jekos (and the other plaintiffs) sued and out of which AHF's alleged right to the payment by them of substantial sums arise, occurred in mid 1990. For a time, AHF took no action to enforce the claims its appeal is now intended to vindicate. AHF waited until Jekos and the others sued it in April 1992. It only brought its claims by way of counter-claim in those proceedings. Its conduct prior to Jekos and the other plaintiffs suing does not suggest a company keen to enforce its rights to recoupment of substantial assets in the form of the debts allegedly owing to it. But since then, AHF has actively pursued its claims in the Supreme Court proceedings, which have, as I have said, involved considerable interlocutory litigation.
I note that
Dowsett J was critical of the conduct of those controlling AHF and that his
Honour referred the papers to the ASC, obviously with a view to that
organisation considering whether proceedings against those controlling AHF were
warranted. I am not at all sure that the
explanation for the determination of those controlling AHF to stave off winding
up and prosecute their appeal may not stem from a motive collateral to the
interests of the company, viz, the hope that by succeeding in an appeal, those
persons may achieve an advantage if they are, or if they become, the subject of
an ASC investigation. But there is
nothing else to suggest that AHF's appeal is not bona fide. It raises a ground that is at least arguable. Jekos' standing to apply for the winding up
of AHF depends on it
successfully resisting that appeal. It
does not appear that any significant delay is likely to be involved in the
determination of the appeal, for which AHF could be held responsible. AHF is insolvent but has, in response to
demands by Jekos and the other respondents, offered a not insubstantial sum as
security for their costs of the appeal.
This offer has been rejected, but negotiations are continuing. The only prejudice that I can see which Jekos
may suffer if the hearing of its winding up application is postponed until the
determination of the appeal is that it may incur costs in going back to the
trial judge, which may not be recovered from AHF if the appeal fails. But that prejudice will be the result of
Jekos' own election.
There are substantial arguments in favour of both AHF and Jekos. However, I think that in view, firstly, of AHF's diligence since 1992 in pursuing its claims, once Jekos and the other plaintiffs commenced the Supreme Court proceedings; secondly, that the appeal is probably brought bona fide to try to recoup substantial sums AHF alleges to be due to it; thirdly, that the appeal is not inarguably hopeless; fourthly, that AHF appears to be prosecuting it with reasonable expedition; fifthly, the lack of utility of a winding up now as a means of recouping to Jekos what has been adjudged due to it; and, finally, Jekos' probable objective in seeking winding up, to which I have referred, I will order that the hearing of the Jekos application for winding up be adjourned sine die to the intent that it will not be heard until after the Supreme Court appeal is determined. Both parties will have liberty to apply to bring their respective applications back before the Court if they are so advised.
That deals with the winding-up application and AHF’s application for an injunction. There is still AHF’s application to set aside the statutory demands to be considered. As I understand the position, that is also to be adjourned sine die, following on from the conclusion I have reached in the other matters.
Therefore I will adjourn the application by AHF to set aside the various statutory demands sine die, on the same basis, with liberty to apply.
As to costs, the order will be that the costs of and incidental to the hearing of the applications will be reserved.
I certify that this and the preceding 12
pages are a true copy of the reasons
for judgment of the Honourable
Justice Drummond.
Associate:
Date: 10 July 1996
QG 3006 of 1996
Counsel for the applicant: Mr D Cooper
Solicitor for the applicant: Lees Marshall & Warnick
Counsel for the respondent: Mr PR Dutney QC and
Mr MJ Griffin
Solicitor for the respondent: Nicol Robinson & Kidd
QG 3008 of 1996
Counsel for the applicant: Mr PR Dutney QC and
Mr MJ Griffin
Solicitor for the applicant: Nicol Robinson & Kidd
Counsel for the respondents: Mr D Cooper
Solicitor for the respondents: Lees Marshall & Warnick
Date of Hearing: 5 July 1996
