FEDERAL COURT OF AUSTRALIA

Chan v Four C Realty Pty Ltd (in liq), in the matter of Four C Realty Pty Ltd (in liq) (No 2) [2013] FCA 959

IN THE MATTER OF FOUR C REALTY PTY LTD (IN LIQ) (ACN 130 269 909)

THE COURT ORDERS THAT:

1.    Pursuant to s 471B of the Corporations Act 2001 (Cth) (the Act), the Applicant have leave, nunc pro tunc, to proceed with this proceeding against the First Respondent.

2.    Ross Andrew Blakeley and Andrew Peter Schwarz (together, the Liquidators) be joined as the Second and Third Respondents to this proceeding and the title of the proceedings be amended accordingly.

3.    Wenlyan Pty Ltd be joined as the Fourth Respondent to this proceeding and the title of the proceedings be amended accordingly.

4.    If and to the extent that it is required, pursuant to s 1322(4)(d) of the Act, the period for the making by the Applicant and the Liquidators of an application for the Court’s approval under s 477(2B) of the Act for the Liquidators to enter into the contract the terms of which are recorded in the letter from the Liquidators to the Applicant dated 13 August 2013 (a copy of which is Annexure “MC-8” to the affidavit of Matthew Critchley sworn 9 September 2013) (the Contract) be extended to 17 September 2013.

5.    Pursuant to s 477(2B) of the Act, the entry by the Liquidators into the Contract is approved nunc pro tunc.

6.    The First Respondent pay the Applicant’s costs:

   6.1    of the preparation and filing of the interlocutory process issued on 9 September 2013, and the affidavits filed in support of that process; and

   6.2    of and incidental to the hearing on 11 September 2013,

on a party/party basis, being costs in the liquidation of the First Respondent.

7.    The First Respondent pay the Applicant’s costs of and incidental to the hearing on 17 September 2013 on a party/party basis, being costs in the liquidation of the First Respondent.

8.    The costs of the First, Second and Third Respondents of and incidental to the hearing on 11 September 2013 and the hearing on 17 September 2013 be costs in the liquidation of the First Respondent.

9.    The Fourth Respondent bear its own costs of and incidental to the hearing on 11 September 2013 and the hearing on 17 September 2013.

10.    Liberty to apply.

AND THE COURT DECLARES THAT:

11.    Pursuant to s 1322(4)(a) of the Act, the Liquidators’ entry into the Contract is not invalid by reason of the Liquidators having entered into it without the Court’s prior approval under s 477(2B) of the Act.

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

IN THE MATTER OF FOUR C REALTY PTY LTD (IN LIQ) (ACN 130 269 909)

REASONS FOR JUDGMENT

INTRODUCTION

1    The background to these proceedings is set out in a previous judgment: Chan v Four C Realty Pty Ltd (in liq), in the matter of Four C Realty Pty Ltd (in liq) [2013] FCA 928 (the Reasons).

2    The current question is whether, pursuant to s 477(2B) of the Corporations Act 2001 (Cth) (the Act), the Court should approve, nunc pro tunc, the entry by Mr Ross Blakeley and Mr Andrew Schwarz (together the Liquidators) of Four C Realty Pty Ltd (in liquidation) (Four C Realty) into a contract with the applicant, Ms Chan, to sell the business assets of Four C Realty to her on certain terms and conditions. In the Reasons, the Court concluded there was a binding and enforceable agreement between the Liquidators and Ms Chan (the Contract).

3    On the hearing of the application for approval, Ms Chan and the Liquidators were each represented by counsel and solicitors. In addition, counsel and solicitors representing Wenlyan Pty Ltd, Mr Ian Chen and Ms Isabelle Huang (collectively the Huang interests) appeared at the hearing and made submissions. Ms Chan submitted that the approval should be granted. Counsel for the Liquidators submitted that the approval should be granted yet, at the same time, also submitted that the creditors’ and members’ interests would be better served by opening up the sales process to better offers. The Huang interests submitted that approval should not be granted. It will be necessary to return to consider those positions in greater detail.

4    These reasons for judgment will deal with the facts, the applicable principles and then consider the parties’ submissions and the current application.

FACTS

5    The background facts were set out in the Reasons at [5]-[16]. The relevant facts are repeated below and, where necessary, additional facts are included where they were relied upon by an interested party.

6    Four C Realty was incorporated on 25 March 2008 and carried on business as an estate agent from premises located at Suites 1316 and 1317, 401 Docklands Drive, Docklands. Four C Realty conducted a rent roll and acted as agent in the sale of residential properties, mainly in the Melbourne CBD and Docklands. Four C Realty also acted as the selling agent for a number of multi-story apartment developers whereby they facilitated off-the-plan sales to predominantly Chinese purchasers sourced through contacts of the shareholders of Four C Realty.

7    On 25 July 2013, the Liquidators were appointed as joint and several liquidators of Four C Realty. The Liquidators reviewed the asset and liability position of Four C Realty. A key asset was commission income due to Four C Realty from development contracts which had yet to settle. The Liquidators sought to determine the number of contracts and quantum of commissions due. As at 11 September 2013, the Liquidators expressed the view that there appeared to be approximately 58 contracts which were yet to settle. Those investigations are not complete. Four C Realty was typically paid half of the sales commission upon a purchaser entering into a contract of sale, with the balance payable when the contract was completed at settlement. There were corresponding obligations on Four C Realty to pay commissions to sales agents upon execution and settlement of those contracts of sale. Where a contract of sale does not settle, Four C Realty is liable to repay to the developers the commission previously received. Accordingly, with some contracts due to settle between now and 2016, there is a possibility that Four C Realty will have to refund commissions up to 2016 in respect of any contracts which fail to complete.

8    By a letter dated 7 August 2013, the Liquidators announced an Expression of Interest (EOI) campaign for the sale of the business of Four C Realty. The letter stated, in part:

The role of the Liquidator is to collect, protect and realise [Four C Realty’s] assets. In realising the assets it is incumbent upon the Liquidator to obtain the best price in the circumstances.

Having regard to the circumstances it is my preliminary view … [that] the business in its current form would not be attractive to a third party independent purchaser. As such it is my intention to sell the business to one or more of the existing shareholders, should they be interested.

Accordingly, in order to provide each party with the opportunity to submit an offer I propose conducting an Expression of Interest (“EOI”) campaign.

In this regard, please find attached an EOI form for completion.

The timetable for the EOI campaign is as follows

•    7 August 2013 – Commencement of EOI.

•    8 August 2013, 5:00 pm – EOI period closes.

•    9 August 2013 – Offers reviewed by Liquidator.

•    12 August 2013 or earlier if possible – Notification of offers accepted or rejected.

Following communication to the successful party, it is my intention to complete a transaction as soon as possible.

It should be noted that pursuant to section 477(2A) of the [Act], the Liquidator may need to obtain creditor or court approval of any proposal that results in debts owed to [Four C Realty] being compromised.

(Emphasis added.)

A copy of that letter was sent to Ms Chan and Mr Ian Chen (a director of Four C Realty and – with Ms Lydia Boya Li – owner and controller of Wenlyan).

9    The EOI form, headed, “Expression of Interest to Acquire Assets and/or Business of the Company” was attached. It required a prospective purchaser to provide their name and contact details. It then invited the prospective purchaser to address the following matters:

Please detail your offer by providing the information requested below:

Assets I am interested in acquiring:

My offer for the above items is $____________________________

Liabilities I am willing to adopt as part of my offer:

Terms

Please detail below any other specific terms of your office [sic] including payment terms, finance requirements and other general terms of your offer:

…

The EOI form then required a signature and for the date to be inserted. The deadline for submitting offers was by 5:00 pm on 8 August 2013.

10    At 4:48 pm on 8 August 2013, the Huang interests sent the following to the Liquidators:

Please find attached an Expression of Interest by Yin (Ian) Chen and Isabelle Huang for [Four C Realty].

This offer is formulated as follows:

•    $350,000 cash payment, less any adjustment for employee entitlements. This payment is inclusive of GST, however because this sale is a transmission of a business as a going concern, we do not think it attracts GST.

•    Assumption by the purchaser of a contingent liability of approximately $555,000 for any clawback by developers in the future for failed settlements.

•     The assumption by the purchaser of future commissions (estimated at up to potentially $320,000) payable to sales agents upon settlement of future development sales.

Therefore, the EOI offer provides value in respect of the business of [Four C Realty] of between $770,000 and $900,000 (depending on the debtor recovery outcome).

….

This offer is open for acceptance until noon on Monday, 12 August 2013.

…

(Emphasis in original.)

11    As the letter stated, the EOI lodged by the Huang interests offered to purchase the assets listed in the EOI for $350,000 less employee entitlements (inclusive of GST if any) as well as taking on a number of liabilities. The last liability taken on by the Huang interests was the “Contingent clawback from developers for potential failed future settlements estimated at approximately $505,000 (we will be responsible for this)”.

12    At 7:01 pm on 8 August 2013, the Liquidators’ solicitor wrote to the solicitors for Ms Chan and the solicitors for the Huang interests in the following terms:

We are instructed that: -

1.    there are presently no funds in the Liquidation;

2.    our clients have not been provided with any of [Four C Realty’s] books and records; and

3.    the business is operating at an estimated shortfall of $16,000 per month.

Our clients have provided the parties with a schedule of sales commissions, requesting that the parties confirm the figures in the schedule are accurate. Our clients have not had a reply. In the circumstances, our clients are not able to verify or evaluate the assets of [Four C Realty], in particular the existence and recoverability of expected debtors receipts.

Our clients have requested a Report as to Affairs (RATA). The RATA is due today, but is expected to be received from Mr Chen tomorrow.

Our clients have informed your clients of an expression of interest (EOI) campaign which was to close today.

Our clients received an offer from King & Wood Mallesons acting for Mr Chen prior to the EOI campaign. Mr Chen has been requested to resubmit his offer under the EOI campaign.

We are informed by Corrs Chambers Westgarth acting for Ms Chan that she wishes to submit an offer to purchase the business. However, Mrs Chan advises that her ability to participate in the EOI campaign will be compromised by the limited information available to her in relation to material matters, such as the development commissions payable to third parties (estimated to be amount to $320,000). We are advised that Ms Chan’s concerns for her ability to participate in the EOI campaign are compounded by the fact that a RATA has yet to be provided by Mr Chen. Ms Chan considers that she should not be asked to make an offer in the EOI campaign until Mr Chen has completed the RATA, and has offered our clients an indemnity to meet the additional fees incurred as a result of an extended EOI campaign.

It is clearly important that the RATA be provided by Mr Chen as soon as possible.

In the circumstances, our clients are prepared to extend the EOI offer period to 4:00pm, Friday 9 August 2013.

Our clients have genuine concerns about carrying on the business operations beyond the end of this week. Further, our clients are concerned that a delay in the sale of the rent roll could adversely affect its value due to the likelihood that other agents may in the short term canvass the landowners with a view to procuring their business.

It is our clients’ present intention to consider any offers which may be open for acceptance at 4:00pm tomorrow and, if only one offer, to consider and accept that offer, if appropriate. Otherwise, our clients will cease business operations and stand down staff.

….

This letter is important. It records, as was the fact, the dilemma faced at that time by the Liquidators. The business was operating at a shortfall of $16,000 a month. Mr Chen had not lodged a RATA. There was doubt about the value of at least one asset and, finally, a delay in the sale could adversely affect the value of the rent roll.

13    The relations between the Huang interests and Ms Chan were and remain acrimonious. The solicitor for the Huang interests (Mr Troiani of King & Wood Mallesons) was unhappy that the EOI deadline had been extended to 9 August 2013. He wrote to the Liquidators’ solicitor at 8:06 pm, on the same evening (8 August 2013), in the following terms:

For the record, our clients submitted their conforming EOI to the liquidators, by email from our office, at around 6.50pm this afternoon. We received your email at 7.00pm. Significantly, this means that our clients’ offer, which remains confidential, was made before we knew that Ms Chan has elected not to make any offer.

Ms Chan’s stated reasons for electing not to submit a conforming offer are patently misconceived. She is a director of the company and, herself, is required to produce a RATA. The directors have been in acrimonious dispute for over 6 months with the consequence that records of the company appear to be “split” between the directors. Mr Chen, my client director, is therefore hamstrung in exactly the same way. He is bidding into the unknown.

In light of your email, I expect that I will receive instructions in the morning to place a short deadline on my client’s offer. ….

…

Finally, in light of the urgency of matters, including the matters outlined in your email, we don’t think it appropriate for the liquidators to extend the EOI period. The liquidators have had my clients’ offer for a couple of days. They now have it in a form which conforms to the EOI campaign. My clients have made it very clear to the liquidators that they are gravely concerned about the impact of the liquidation on good will. This was raised with Ms Chan’s legal advisers even prior to the commencement of the liquidation.

Please advise the liquidators’ response to my clients offer as a matter of urgency. Failing agreement, please confirm that the liquidators will effectively close the business, such that the parties will be free, as respectively advised, to seek to otherwise operate.

…

(Emphasis added.)

14    Ms Chan submitted her EOI on 9 August 2013. She offered to purchase all of the listed assets (except the domain name) and assume all of the listed liabilities for $510,000. Her offer included the following payment terms:

1.    50% of the purchase price payable anytime on request.

2.    The next 25% of the purchase price payable two weeks after the first payment.

3.    The last 25% of the purchase price payable two weeks after the second payment.

A careful reader of the two EOI forms will notice that in comparison to the offer made by the Huang interests, the cash component of the Chan offer was considerably greater but did not include the assumption of the clawback of commissions recorded at the foot of the liabilities section of the EOI lodged by the Huang interests: see [11] above.

15    The same day (9 August 2013), the Liquidators’ solicitor wrote to Ms Chan’s solicitor stating that the Liquidators were considering her offer and asked her the following question:

We note that your client has offered a total sum of $510,000 to be paid over 4 weeks. Can you advise whether your client is prepared to provide security for the payment of that sum, and if so the nature of that security.

We also note that your client requires the production of Introducing Sales Agents agreements. Our client does not have possession of any such agreements and so cannot warrant that they will be provided. Please let us know whether your client would agree to a term that the Liquidators use their reasonable endeavours to provide them.

16    Ms Chan’s solicitor relevantly responded later that day:

1.    Our client’s offer was intended to include the purchase of the Domain Name (she neglected to tick the box). Please treat our client’s offer as inclusive of the Domain Name.

   2.    Our client otherwise varies the terms of her offer as follows:

a.    The sum of $300,000 is payable upon request.

b.    The balance of $210,000.00 is payable 2 weeks thereafter.

c.    Our client provides security over her property situated at 477 Waverley Road, Malvern East in respect of her payment obligations.

d.    ….

I am seeking instructions in relation to the other matter you raised and will revert to you as soon as possible.

17    Approximately half an hour later, Ms Chan’s solicitor wrote again to the Liquidators’ solicitor stating:

I have now received further instructions in relation to the question of the refund of commissions that have already been paid to [Four C Realty].

I am instructed that my client is willing to further vary her offer to provide that she will indemnify [Four C Realty] in respect of commissions that [Four C Realty] is required to refund in respect of the development contracts that are yet to settle.

18    During the morning of Monday, 12 August 2013, Mr Troiani provided the Liquidators with a draft RATA prepared by Mr Chen with the assistance of his accountant. Mr Troiani stated that it was inappropriate for the RATA to be provided to Ms Chan. The email also contained the following statement:

I noticed that the RATA includes, in the schedule of unsecured creditors, a debt due from [Four C Realty] to Signature Investments of approximately $141k. In light of the fact that my clients’ offer for the assets of [Four C Realty] included the shares in Signature Investments, I have been instructed to confirm that, if my clients’ offer is accepted, my clients will agree that no proof of debt will be lodged in the winding up of [Four C Realty] by, or on behalf of, Signature Investments.

That email prompted the Liquidators’ solicitor to send a series of questions to Mr Troiani at 4:24 pm on the same day. Mr Troiani did not respond until 5:22 pm on the following day, Tuesday, 13 August 2013.

19    At 5:32 pm on Monday 12 August 2013, Mr Schwarz, one of the Liquidators, wrote to both Ms Chan and the Huang interests and told both of them that he was unable to reach a determination with respect to the offers as a matter had come to light which required further investigation prior to him reaching a determination. Fifteen minutes later, at 5:45 pm, Mr Troiani wrote to Mr Schwarz. The email included the statement that “[f]ormally there was a deadline on my clients’ offer, as the delay has a value impact”.

20    The Liquidators responded. They had made a decision. On 13 August 2013, they wrote to Ms Chan (the 13 August letter) as follows:

I refer to your Expression of Interest received on 9 August 2013, with emails from Corrs Chambers Westgarth dated 9 August 2013, to acquire [Four C Realty’s] business assets.

I confirm that your Expression of Interest submission and emails constitute an offer to purchase [Four C Realty’s] business assets.

I advise that the Liquidators accept your offer of $510,000 (Purchase Price) for [Four C Realty’s] business assets on the following terms:

You have agreed to purchase the following assets:

1.    Outstanding debtors (representing unpaid invoices at the date of the Liquidators’ appointment);

2.    Future commission income from development contacts [sic] which are yet to settle;

   3.    Rent roll (consisting of approximately 80 properties);

   4.    All [Four C Realty] owned plant and equipment; and

   5.    Company name and domain name.

You have agreed to assume and pay the following liabilities:

   1.    Employee entitlements of Ms Joyce Ying Zhao;

2.    Development commissions payable to introducing sales agents and/or any referral fees following the settlement of development contracts;

3.    Any outstanding lease costs of the two premises situated at 1316 and 1317, 401 Docklands Drive, Docklands (Premises).

You also wish to enter into a lease of the Premises and obtain a transfer of the existing telephone numbers operated by [Four C Realty].

You agree to pay the Purchase Price by two instalments, as follows:-

   (a)    $300,000 immediately; and

(b)    $210,000 payable within a further two weeks, namely no later than 28 August 2013.

Please make payment of the sum of $300,000 to the following account:

Account Name:     Four C Realty Pty Ltd (In Liquidation)

BSB:             […]

Account Number:     […]

You have agreed to provide security over your property at 477 Waverley Road, Malvern East in respect of your payment obligations.

Further, you have agreed to indemnify [Four C Realty] in respect of any commission which [Four C Realty] is required to refund in respect of development contracts that are yet to settle.

The Liquidators acceptance of your offer constitutes a binding and enforceable agreement. However, it is intended that these terms be more fully engrossed in a formal sale agreement.

The Liquidators will now advise Mr Yin Chen that his offer for the business has not been successful and will request that he deliver up all [Four C Realty] assets and books and records in his possession.

The Liquidators agree they will use their reasonable endeavours to provide you with the Introducing Sales Agents agreements.

Would you please contact this office as soon as possible to make an arrangement to meet with the Liquidators to discuss the possible transfer of the business.

In the meantime, the Liquidators will instruct their lawyers to draft a License Agreement to be entered into with you, in order that you may trade the business until settlement of the sale of [Four C Realty’s] business to you.

As indicated in my letter to you dated 7 August 2013, it may be necessary for the Liquidator to obtain creditor or court approval of the sale agreement.

(Emphasis added.)

21    On the same day, 13 August 2013, Mr Schwarz wrote to the Huang interests and informed them that their offer had not been accepted. Mr Schwarz went on to state that the Liquidators had determined to accept an offer made by Ms Chan which they considered would result in a better return to creditors and members. At that time, that was the fact. The cash component of the Chan offer was greater and the security for the cash component was identified. The other terms were not substantially dissimilar.

22    The next day, 14 August 2013, Mr Troiani wrote to the Liquidators’ solicitor stating “there [had] been a genuine misunderstanding” whereby the Huang interests were under the impression that, if there were two bidders for the assets of Four C Realty, the Liquidators would conduct an auction of the Four C Realty’s assets. The letter went on to state:

We are instructed that, in reliance on the representations made by the liquidator … about facilitating an auction, our client hereby makes a further offer for the relevant assets for the total sum of $600,000. This EOI is for the assets and liabilities set out in our client’s first EOI, except it does not include the shares in Signature Investment (Australia) Pty Ltd if those shares are not included in any competing offer. Consistent with the representations made by the liquidator, this is an open letter that the liquidator can take to Ms Chan as part of a continuing transparent process designed to elicit the best offer, to verify whether she will make any further offer.

Please confirm by 10am tomorrow, 15 August 2013, that the liquidator is prepared to re-open these discussions and provide an undertaking to our client to not sell the assets of [Four C Realty] to Ms Chan until the completion of the auction process (if she is the successful bidder). If the liquidator now maintains the position that he is somehow bound to complete the transaction with Ms Chan, notwithstanding all the above, we are instructed that our client would appeal that decision and seek urgent interlocutory relief that the auction process be undertaken.

(Emphasis added in italics, bold in original.)

This letter is important for two reasons. First, it contains a purported “offer” by the Huang interests. It will be necessary to return to consider this “offer”. The second reason the letter is important is that, despite its contents, the Huang interests did not appeal the decision made by the Liquidators on 13 August 2013 or seek urgent interlocutory relief.

23    Instead, on 15 August 2013, Mr Troiani sent a further letter to the Liquidators:

We refer to our letter to you dated 14 August 2013, which set out our client’s grievances with the liquidators if there is not an auction for the assets of [Four C Realty]. We note that the liquidators may be concerned that they are now bound to proceed with a sale to Ms Chan, and so are unable to consider the offer made in our earlier letter or to engage in an auction of the assets. We are currently advising our client as to its legal rights if the liquidators now proceed with a sale of assets of [Four C Realty] to Ms Chan, including any steps that may be taken in court.

To enable us to properly advise our client, please provide to us, as soon as possible, a copy of the EOI application submitted by Ms Chan for assets of [Four C Realty], any further correspondence that records the negotiations thereafter between the liquidators and Ms Chan, and any document which might be said to comprise an acceptance by the liquidators (on their own behalf or on behalf of [Four C Realty]) of any offer made by Ms Chan. Our client is entitled to see these documents as a shareholder of [Four C Realty]. Alternatively, our client seeks those documents by way of preliminary discovery, under order 7.23 of the Federal Court Rules, because the documents are directly relevant to the question as to whether our client has a right to obtain relief from your clients (by way of appeal, or otherwise) and a review of the documents is likely to assist our client in making that decision.

…

Again, none of the steps foreshadowed in that letter were taken by the Huang interests.

24    On 15 August 2013, Ms Chan’s solicitor wrote to the Liquidators’ solicitor stating that their client remained ready, willing and able to comply with the terms of the Contract and that she had taken steps to pay the sum of $300,000 to the Liquidators that day. Indeed, on that same day, Ms Chan paid $300,000 to the Liquidators. On 28 and 30 August 2013, Ms Chan deposited further sums totalling $210,000. This represented the full purchase price.

25    On 16 August 2013, Mr Troiani wrote to the Liquidators’ solicitor stating:

Our client, Wenlyan, is a 45% shareholder of [Four C Realty]. Our other client, Ms Huang, is a 5% shareholder. As you know, we also represent Mr Ian Chen who is:

   (a)    a director of [Four C Realty];

   (b)    the director of Wenlyan, the major shareholder of [Four C Realty];

   (c)     a creditor of [Four C Realty]; and

(d)     in conjunction with Ms Huang, one of the bidders for the assets which were offered for sale by the [L]iquidators of [Four C Realty’s].

We are writing to you on behalf of each of our clients, in each of their various capacities.

Our clients maintain that:

(i)    no enforceable contract exists between [Four C Realty] and Ms Chan;

(ii)    the [L]iquidators are obliged to consider the further offer made by Mr Chan and Ms Huang, for the acquisition of the relevant assets, set out in our letter to you of 14 August 2013;

(iii)     if we are incorrect in relation to the above 2 propositions, then the liquidators will have failed in their duty to obtain the best price possible upon disposition of the relevant assets.

…

In our submission, the sale process so far undertaken by the [L]iquidators has failed to result in a binding agreement and has failed to obtain the best price possible for the relevant assets. Accordingly, we are instructed to request, again, that [the Liquidators] immediately provide the undertaking requested in our letter dated 14 August 2013.

…

26    The undertaking was not provided by the Liquidators. Instead, on 20 August 2013, the Liquidators’ solicitor wrote to Mr Troiani and to Ms Chan’s solicitor:

As you know, on 7 August 2013 the [L]iquidators released an expression of interest (EOI) campaign.

Mr Schwarz purported to advise Ms Chan on 13 August 2013 that he had accepted her offer to purchase [Four C Realty’s] business assets, subject to court approval.

On 14 August 2013, King & Wood Mallesons advised of their client’s understanding that in the event of there being two bidders for the assets of [Four C Realty], the [L]iquidators would conduct an auction of those assets. As a corollary, since Mr Chen was not aware of another offer being submitted, we are advised that Mr Chen believed that he was the only interested party and was not required to make a further offer.

Mr Chen has now made a further offer for the business assets in the total sum of $600,000 in anticipation of there being an auction of those assets, or ongoing sale discussions. The offer is expressed to be part of a continuing process designed to elicit the best offer. The value of Mr Chen’s offer is superior to Ms Chan’s offer of $510,000.

King & Wood Mallesons contend that no enforceable contract exists between [Four C Realty] and Ms Chan and that the liquidators are obliged to consider the further offer made by Mr Chen for the acquisition of the relevant assets. Accordingly, the liquidators have been requested to reopen sale discussions and provide an undertaking not to sell the business assets of [Four C Realty] until the completion of the suggested auction process.

King & Wood Mallesons contend that:-

(a)     the EOI form did not describe the assets which were offered for sale with sufficient precision such that the EOI form, once completed, could give rise to an offer capable of acceptance;

(b)     being an EOI, the completed forms cannot objectively have been intended to, without more, give rise to offers capable of legally enforceable acceptance;

(c)     the uncertainty of the alleged agreement is made plain by reference in Mr Schwarz’s letter to the sale of the business, yet the EOI form comprising Ms Chan’s offer sets out the specific assets to which the offer related, which did not include a business;

(d)     Mr Schwarz’s letter refers to the need for the [L]iquidators to obtain court approval of the “sale agreement”. In light of the fact that the purported agreement with Ms Chan requires indemnification of [Four C Realty] in respect of contingent liabilities which will extend for more than 3 months after the agreement (in fact, it will be over three years), court approval is clearly required under section 477(2B) of the [Act]. As a matter of objective construction, the parties must have intended that there would be no binding agreement until such time as a sale agreement was entered which would have to itself be subject to court approval; and

(e)     Mr Schwartz’s conclusion that the [L]iquidators’ acceptance gives rise to a “binding and final agreement” must, in the circumstances, be read as merely setting out the [L]iquidators’ opinion or hope at the time.

We consider that there is sufficient ambiguity arising by reason of the objections made by King & Wood Mallesons as to the existence of an unconditional, final and binding agreement. In the circumstances, the [L]iquidators are reluctant to complete the sale agreement without Court direction.

If there is no binding agreement, the [L]iquidators are of the view that it would be appropriate for the sale process to be re-opened. It is apparent that there is further interest in the business assets which will result in a better return to creditors and members.

However, the liquidators will not re-open the sale process unless they are of the opinion that it is in the interests of the creditors and members as a whole, or the parties otherwise wish to do so. In the event that the parties wish to re-open the sale process (as to whole or in part), the [L]iquidators would propose to conduct it forthwith with a view to the successful party entering a proforma binding formal sale agreement immediately following the conclusion of the sale process (subject to creditor or court approval pursuant to section 477(2B)).

Otherwise, the [L]iquidators will consider their options which may include an application to the Court for directions pursuant to section 479(3) of the Act on the issues of whether to complete a sale agreement with Ms Chan or continue sale discussions.

Please let us know by 4:00pm tomorrow whether your clients wish to re-open the sale process as to all or part.

In the interim, [Four C Realty] will continue to operate the business subject to the [L]iquidators’ control.

We note that Ms Chan has deposited $300,000 into the liquidation account. The [L]iquidators intend to return this sum to Ms Chan without prejudice to the rights of any party.

…

Ms Chan refuted the allegation that the Contract was not binding and enforceable. As a result, these proceedings were filed and, after a hearing, the Reasons were published. The sum of $300,000 was not returned. In fact, none of the purchase price of $510,000 paid by Ms Chan has been returned. It remains with the Liquidators.

ISSUE NOW FOR DETERMINATION

27    The proceeding returned to court for further hearing on 17 September 2013. The terms of the Contract entered into by the Liquidators and Ms Chan included an obligation for Ms Chan to indemnify Four C Realty for commissions that Four C Realty may be required to refund in relation to the development contracts that are yet to settle and which fail to settle. Ms Chan’s obligation to indemnify Four C Realty will continue until the last contract has settled: see [30] of the Reasons. That obligation extends to contracts due to settle in 2016: see [29] of the Reasons. Accordingly, it was necessary for the Court to consider s 477(2B) of the Act.

28    The Liquidators submitted that approval under s 477(2B) of the Act should be given subject to the qualification earlier identified: see [3] above. The question for the Court is whether that approval should be granted.

STANDING TO MAKE APPLICATION FOR APPROVAL

29    The circumstances in which the present application was brought before the Court are unusual. In part, that is because an application for approval under s 477(2B) of the Act is ordinarily made by a liquidator. The application in these proceedings was made not by the Liquidators, but by Ms Chan as a party to the Contract. At the hearing for approval, counsel for the Liquidators submitted that approval should be granted and that they themselves sought the approval. Given that support, it is appropriate for the Court to determine the application: see In the matter of AT Air Group Pty Limited (in liq) [2012] NSWSC 1508 at [22]-[23]; cf Venetian Nominees Pty Ltd & Anor v Conlan (1999) 17 ACLC 301 at 304.

APPLICABLE PRINCIPLES

30    Section 477(2B) of the Act, commonly described as the “long-term agreements” provision, provides that:

Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company’s behalf (for example, but without limitation, a lease or an agreement under which a security interest arises or is created) if:

(a)    without limiting paragraph (b), the term of the agreement may end; or

(b)    obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance;

more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months.

31    As the express words of s 477(2B) make clear and consistent with the policy underlying the section, a liquidator should seek the Court’s approval before entering into a long term agreement: Empire (Aust) Nominees Pty Ltd v Vince (2000) 18 ACLC 738 at 741. In certain circumstances, retrospective approval may be given by the court: Re HIH Insurance Group & Ors (2001) 19 ACLC 1,102 and Empire (Aust) Nominees at 741 and the authorities cited therein.

32    What then are the principles the Courts apply in considering whether to exercise its discretion to grant approval under s 477 of the Act? In Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375 at [26], the relevant principles were summarised as follows:

(1)    the court does not simply “rubber stamp” whatever is put forward by a liquidator. As Giles J said in Re Spedley Securities Ltd (In liq) (1992) 10 ACLC 1,742 at 1,745 in relation to the powers of a liquidator to compromise claims:

[T]he 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. The same restraint must apply when the question is whether the liquidator should be authorised to enter into a particular transaction the benefits and burdens of which require assessment on a commercial basis. Of course, the compromise of claims will involve assessment on a legal basis, and a liquidator will be expected (as was made plain in Re Chase Corporation (Australia) Equities Ltd) to obtain advice and, as a prudent person would in the conduct of his own affairs, advice from practitioners appropriate to the nature and value of the claims. But in all but the simplest case, and demonstrably in the present case, commercial considerations play a significant part in whether a compromise will be for the benefit of creditors.

(2)    a court will not approve an agreement if its terms are unclear: Re United Medical Protection (No 4) (2002) 20 ACLC 1,647;

(3)    the role of the Court is to grant or deny approval to the liquidator’s proposal. Its role is not to develop some alternative proposal which might seem preferable: Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 16 ACLC 1,642;

(4)    in reviewing the liquidator’s proposal, the task of the Court is:

[not] to reconsider all of the issues which have been weighed up by the liquidator in developing the proposal, and to substitute its determination for his in ... a hearing de novo [but] ... simply to review the liquidator’s proposal, paying due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, satisfying itself there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene in terms of the “expeditious and beneficial administration” of the winding up.

…

(6)    generally, the Court grants approval under s 477(2B) of the [Corporations] Act only where the transaction is the proper realisation of the assets of the company or otherwise assists in the winding up of the company: GDK Financial Solutions at [58] and the cases cited therein.

(Emphasis added.)

33    Therefore, the present task is to “to review the liquidator’s proposal, paying due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, satisfying itself there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene in terms of the “expeditious and beneficial administration”” of the winding up. In undertaking that task, a key consideration is whether what is proposed is in the interests of those concerned in the winding up: Re Spedley Securities Ltd (In liq) (1992) 10 ACLC 1,742 at 1,744.

PARTIES’ POSITIONS

The Liquidators’ position

34    Ms Chan sought approval under s 477(2B) for the Liquidators’ entry into the Contract. That application was supported at the hearing by the Liquidators. However, the Liquidators also said that the creditors’ and members’ interests would be better served by re-opening the sales process to better offers.

35    Ordinarily, where an application for approval under s 477(2B) is made, the liquidator’s commercial judgment is in favour of entering into the proposed agreement. It was not in dispute that, at the time of entering into the Contract, the Liquidators were of the opinion that accepting Ms Chan’s offer was in the interests of Four C Realty’s creditors and members. The Liquidators made the commercial decision to sell the assets of Four C Realty via a particular process. As a result of that process, the Liquidators accepted Ms Chan’s offer and entered into the Contract. The Liquidators accepted Ms Chan’s offer because they considered, at the time, that Ms Chan’s offer would result in a better return to creditors and members of Four C Realty compared to the offer then made by the Huang interests: see [21] above.

36    However, the Liquidators no longer consider that the Contract represents the best outcome for creditors and members. Following the execution of the Contract, and in light of the complaints and further representations made by the Huang interests (see [22]-[23] and [25] above), the Liquidators have now reached the view that, were a different process adopted, a better bargain may be reached.

37    The Liquidators’ current position was addressed in an affidavit sworn by Mr Schwarz, one of the Liquidators, on 11 September 2013. That affidavit relevantly records the following:

The offer now made by Ian Chen and Ms Huang is in terms which are essentially the same as the offer made by Alice Chan, save that Ian Chen and Ms Huang have offered to pay more for the [Four C Realty] assets, and also provide security in relation to [Four C Realty’s] contingent liabilities and they have offered employment for three of [Four C Realty’s] four employees. … [A]n offer to provide security for the indemnity will more likely result in a distribution to creditors much earlier than 2016 when the final contract is due to settle.

From my recent discussions with the parties … it has become apparent that there is a competitive tension for [Four C Realty’s] business assets. In the circumstances, it is likely that if the sale process was re-opened, a price in excess of that currently offered by Ian Chen and Ms Huang would be achieved. Accordingly, I consider that the interests of the creditors and members will be best served if the liquidators re-open the sale process and take steps to achieve the highest sale price.

(Emphasis added.)

At this point it is important to recognise that the Liquidators do not assert, because they cannot do so, that a better bargain will be achieved.

38    Finally, it should be noted that the Liquidators submitted (and I accept) that:

1.    there is no suggestion of a lack of good faith on the part of the Liquidators entering into the Contract;

2.    there is no suggestion of an error in law or principle in the Liquidators accepting the offer from Ms Chan and then entering into the Contract;

3.    there are no real or substantial grounds for doubting the prudence of the Liquidators accepting the offer from Ms Chan and then entering into the Contract; and

4.    there is no suggestion that any party is encouraging the Court to develop a new or alternative proposal to the Contract.

Submissions of the Huang interests

39    The Huang interests submitted that the Court should not grant approval under s 477(2B) of the Act. The Huang interests had two principal complaints.

40    First, the Huang interests submitted that the Liquidators’ current assessment of what was in the best interests of creditors and members was a matter tending against the approval of the Contract. They submitted that the terms of the Contract are less advantageous to the creditors and members of Four C Realty than those offered on behalf of the Huang interests on 14 August 2013 (see [22] above). The Huang interests submitted that their “offer” is more advantageous because it involves payment of $600,000 and provides security for the indemnity of Four C Realty’s contingent liability in respect of the commissions payments. The Huang interests submitted that, in assessing whether the approval of the Contract is in the best interests of creditors and members, the Court is obliged to take that offer into account. However, that submission faced a fundamental difficulty. The “offer” made on 14 August 2013 did not address the issue of security. In fact, there was no evidence which identified with precision the terms of the offer which the Court was asked to compare against the Contract.

41    At the hearing of the application for approval, counsel for the Huang interests sought to adduce hearsay evidence from his instructing solicitor regarding the terms of the security said to have been offered. Counsel for Ms Chan objected to that proposal on the basis that such evidence would be irrelevant, going to a “misconceived notion” that the Liquidators had an obligation to achieve the best price reasonably obtainable. The Huang interests were asked to produce a document which identified what was said to be offered, subject to a ruling on its admissibility. The solicitors for the Huang interests supplied the Court with a single-page document outlining the offer said to be made by Mr Chen and Ms Huang on 14 August 2013, which had been “subsequently explored” with the Liquidators. That document was not in the form of sworn evidence. However, even taken on face value, that document does not provide certainty. The document described the offer that had been made and “subsequently explored with the Liquidators” as follows:

(a)    The nominee purchaser company of Mr Chen and Ms Huang (Proposed Purchaser) will immediately pay $600,000 to the [L]iquidators for the assets of [Four C Realty] … described below. The Proposed Purchaser has transferred cleared funds totalling $600,000 to King & Wood Mallesons’ trust account, in anticipation of the [L]iquidators accepting this offer.

   (b)    The assets that will be purchased are:

(i)    Outstanding debtors (representing unpaid invoices as at the date of the [L]iquidators’ appointment);

(ii)    Future commission income from development contracts which are yet to settle;

(iii)    Rent roll (consisting of approximately 80 properties);

(iv)    All [Four C Realty] owned plant and equipment; and

(v)    The [Four C Realty] company name and domain name.

(c)    The Proposed Purchaser will assume and pay the following liabilities:

(i)    Outstanding employee entitlements of Isabelle Huang, Boris Srbinoski and Emily Chen (current employees of [Four C Realty]);

(ii)    Development commissions payable to introducing sales agents and/or any referral fees following the settlement of development contracts;

(iii)    Transfer of telephone numbers (land line and mobile) operated by [Four C Realty];

(iv)    Any commission which [Four C Realty] is required to refund in respect of development contracts that are yet to settle. Mr Chen and Ms Huang offer the following as security for this indemnity:

(A)    A charge (i.e. full PPSR registrable security interest) over the whole of the assets and undertaking of the Proposed Purchaser (note: Proposed Purchaser’s assets are otherwise unencumbered); and

(B)    A personal guarantee by Ian Chen.

(d)    Alternatively to all of the above, the Proposed Purchaser stands ready, willing and able to bid, transparently, for the assets listed in 1(b) above.

As is apparent, there are a number of difficulties with this evidence. The name of the proposed purchaser is not disclosed. The value of the security proffered cannot be ascertained. What has been “subsequently explored” with the Liquidators was not disclosed. That list is by no means conclusive. Indeed, during the course of argument, counsel for the Huang interests described the offer simply by reference to the letter of 14 August (see [22] above) and conceded that the actual security had not been the subject of agreement.

42    Secondly, the Huang interests submitted that approval should not be granted because the sale process conducted by the Liquidators was “grossly unfair”. They submitted that they were not afforded the same opportunity (as had been given to Ms Chan) to improve their offer made in response to the EOI. The Huang interests asserted that they were disadvantaged by a mistaken belief that there would be an “auction process” which would continue if there were two EOIs received by the Liquidators. They submitted that, in those circumstances, it could be inferred that if both offerors had received an opportunity to increase their EOI offers, a better result for creditors and members would have been obtained.

43    There are a number of answers to that submission. First, the position adopted by the Huang interests in relation to the sales process has waxed and waned depending on whether or not they thought they were likely to be the successful bidder. So, for example, they did not want the deadline for the EOI extended when they thought that their “cheeky” offer might succeed: see [13] above. That was not in the best interests of creditors and members. Then they sought to impose a time and date by which their offer would expire (see [10] and [19] above) again as a mechanism to try and secure the assets at a lower price. That was not in the best interests of creditors and members. It was therefore unsurprising that they were outbid. Despite then complaining about the process adopted by the Liquidators, they failed to take any of the steps foreshadowed in their correspondence: see [22]-[23] above. In the circumstances (and given the limited nature of the assets and information available to the Liquidators), it cannot be said that there are real and substantial grounds for doubting the prudence of the Liquidators’ conduct in entering into the Contract.

44    The recent decision of Griffiths J in Wentworth Metals Group Pty Ltd v Leigh and Owen (as liquidators of Bonython Metals Group Pty Ltd): In the matter of Bonython Metals Group Pty Ltd (In liq) [2013] FCA 349 is instructive. That case concerned a sale process conducted by liquidators to sell the insolvent company’s joint venture interest in a mining tenement. The plaintiffs in that case sought to “appeal” the liquidators’ decision to accept a competing offer under s 1321 of the Act and applied for an interlocutory injunction to restrain the liquidators from proceeding with that competing offer. Following the commencement of the sale process, the liquidators received a number of offers, including the plaintiffs’. The liquidators subsequently engaged in discussions with the various bidders in an effort to improve their offers. Towards the end of the process, the liquidators decided not to accept the plaintiffs’ offer but did not communicate that decision to the plaintiffs at that time. Instead, the liquidators asked the remaining bidders for their highest and best offers, one of which was accepted: see Wentworth Metals Group at [13].

45    In dismissing the application, Griffiths J held, inter alia, that there was no serious issue to be tried to the effect that the Liquidators were under an obligation to consult with the plaintiffs and provide it with multiple opportunities to address shortcomings in its bid. His Honour made that finding having regard to (1) the fact that all bidders were notified of the steps to be taken during the bidding process and the liquidators had reserved their rights to deal with any bidder in any manner they saw fit; (2) his Honour’s opinion that the liquidators’ decision to proceed with tight time frames was appropriate having regard to their business judgment and the overall context of fluid and rapid commercial negotiations; (3) there was no obligation on the liquidators to obtain a valuation of the joint venture interest and they were entitled to proceed by way of a competitive sale process; and (4) the plaintiffs could point to no legal source for any obligation by the liquidators to engage in a continuing dialogue with the plaintiffs regarding their concerns with the adequacy of its bid: see Wentworth Metals Group at [45]. Griffiths J also held that the plaintiffs had not established a prima facie case that the liquidators’ conduct was unreasonable or otherwise defective. When proper allowance was made for the business judgment rule, his Honour concluded that the plaintiffs had not established that it was unreasonable of the liquidators to prefer the winning offer over that of the plaintiffs. To the contrary, his Honour found that it was plainly open to the liquidators to hold that preference in circumstances where the winning offer provided a higher and certain amount of cash immediately, provided indemnities, was based on credible offers of security and did not rely on non-cash consideration of uncertain value: see Wentworth Metals Group at [36]. Similar considerations are equally applicable here.

Submissions of Ms Chan

46    Ms Chan submitted that approval should be granted. Three points were made in response to the submissions made by the Huang interests.

47    First, in relation to the fairness of the sale process, Ms Chan submitted that, contrary to the premise on which the Huang interests’ submission was based, after they lodged their initial EOI they privately dealt with the Liquidators and altered the terms of their offer: see [18] above. The short answer was that their offer at that time was too low. Further, Ms Chan submitted that the process adopted by the Liquidators was in fact the process they said they would adopt as set out in their letter of 7 August: see [8] above. In those circumstances, it could not be said that one party was treated differently from the other.

48    Secondly, Ms Chan refuted the Huang interests’ submission that re-opening the sale process would achieve a better price. Ms Chan submitted that there was no certainty that the Huang interests could make good on their enhanced offer. For the reasons stated at [41] above, I agree.

49    Finally, Ms Chan submitted, correctly, that there is no obligation on the Liquidators to achieve the best price reasonably obtainable (cf the obligation imposed on receivers by s 420A of the Act): see Wentworth Metals Group at [35] and [42]. The Liquidators have an obligation to exercise commercial judgment and act in the best interests of creditors and members. That is what they did.

CONCLUSION

50    In reality, what the Huang interests would have the Court do would be to require the Liquidators to renege on the Contract with Ms Chan in the hope that re-opening the sales process would enliven the “competitive tension” between Ms Chan and the Huang interests which might result in a better bargain. That rises no higher than speculation.

51    For the reasons set out above, I consider that approval should be granted under s 477(2B) of the Act. I do not consider that it is in the best interests of the creditors and members to reopen the sales process. In the circumstances of this case, certainty is to be preferred over merely speculative possibilities especially where it is inevitable that considerable time and expense would be incurred in reopening the sales process. And, as is common ground, further delay is not in the interests of the creditors and members and will likely diminish the value of the assets of Four C Realty. Other not insignificant factors that support that conclusion are that (1) despite the run-off caused by the development contracts that are yet to settle, the Liquidators informed the Court that the majority of the contracts will settle this year and there is a real possibility of a distribution to unsecured creditors this year; (2) the terms of the offer from the Huang interests are difficult to assess given the lack of detail and certainty about certain aspects of that offer and (3) the financial position of Four C Realty (including the size and nature of its assets).

52    For those reasons, the Liquidators are granted approval, nunc pro tunc, to enter into the Contract.

Associate:

Dated:    23 September 2013