FEDERAL COURT OF AUSTRALIA

Boné, in the matter of ACN 002 864 002 Pty Ltd (in liq) formerly known as Petrolink Pty Ltd v Smith [2015] FCA 870

IN THE MATTER OF ACN 002 864 002 PTY LTD (IN LIQUIDATION) FORMERLY KNOWN AS PETROLINK PTY LTD

THE COURT ORDERS THAT:

1.    Pursuant to section 477(2A) of the Corporations Act 2001 (Cth) (the Act), Michael John Morris Smith (the Liquidator), the official liquidator of ACN 002 864 002 Pty Ltd (In Liquidation) (the Company) has the approval of the Court to compromise the judgment debts presently owed to the Company by Mr Boné and Valvelink Pty Ltd on the terms set out in the Heads of Agreement document made between the Liquidator, the Company, Mr Barry Henry Boné and Valvelink Pty Ltd dated 9 June 2015 (the Agreement), being annexure A to these Orders.

2.    Pursuant to section 477(2B) of the Act, the Liquidator has the approval of the Court to enter the Agreement, and to cause the Company to enter the Agreement, notwithstanding that 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 was entered.

3.    Pursuant to section 479(3) of the Act, that the Liquidator is justified in entering into and performing, and in procuring that the Company enter into and perform the Agreement.

4.    The costs of and incidental to the Interlocutory Process filed on 8 July 2015 be costs in the winding up of the Company.

5.    The exhibit MJMS-7 to the affidavit of Michael John Morris Smith sworn 3 July 2015 be confidential and is not to be released to any person, other than upon being returned to Mr Smith with other exhibits in these proceedings, without the order of a judge.

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

IN THE MATTER OF ACN 002 864 002 PTY LTD (IN LIQUIDATION) FORMERLY KNOWN AS PETROLINK PTY LTD

REASONS FOR JUDGMENT

(Delivered ex tempore, revised from transcript)

1    Mr Michael John Morris Smith is the official liquidator of the company formerly known as Petrolink Pty Ltd (Petrolink). In that capacity he has been embroiled in somewhat bitter and protracted litigation with Mr Barry Henry Boné, who was the sole director of Petrolink, and another company associated with Mr Boné, Valvelink Pty Ltd (ACN 053 332 808) (Valvelink). Mr Smith, Mr Boné and Valvelink have agreed to settle two sets of proceedings. That agreement is conditional on the Court approving the settlement. Mr Smith now applies to the Court for approval of the agreement to settle the proceedings under ss 477(2A) and (2B) of the Corporations Act 2001 (Cth) (the Act), and for directions under s 479(3) of the Act.

Background Facts

2    Petrolink was wound up by order of the Court on 7 December 2011. Mr Smith was appointed liquidator of Petrolink. Shortly thereafter, Mr Smith sought and obtained the Court’s leave under s 436B(2) of the Act to appoint himself as voluntary administrator of Petrolink.

3    The administration of Petrolink was short-lived. On 29 March 2012, the creditors of Petrolink resolved that the administration of Petrolink should come to an end. Petrolink was placed back into liquidation and Mr Smith became liquidator again.

4    The short period of administration is relevant to the present application because Mr Smith’s remuneration and conduct as administrator became the subject of litigation between Mr Boné and Mr Smith. At meetings of Petrolink’s creditors on 8 February and 29 March 2012, resolutions were passed, or purportedly passed, approving Mr Smith’s remuneration as administrator in the amount of $74,549.50 (excluding GST) (for the period 22 December 2011 to 7 February 2012) and $57,542.00 (excluding GST) (for the period 9 February 2012 to 29 March 2012).

5    On 27 June 2013, over a year later, Mr Boné filed an interlocutory application seeking declarations that those resolutions were invalid or, in the alternative, an order that Mr Smith’s remuneration as administrator as approved be reviewed and reduced. Mr Boné later amended this application to include an order that there be an inquiry into Mr Smith’s conduct as administrator and an order that he be removed as liquidator.

6    Mr Smith unsuccessfully applied for an order that this interlocutory application be struck out as an abuse of process: see In the matter of Petrolink Pty Ltd; Smith v Boné [2014] FCA 1024.

7    Mr Boné’s application concerning Mr Smith’s remuneration and conduct as administrator was ultimately listed for hearing to commence on 9 June 2015 with an estimate of four days.

8    In the course of the winding up of Petrolink, Mr Smith, in his capacity as liquidator, commenced proceedings against Mr Boné and companies associated with him. On 16 November 2012, Mr Smith commenced proceedings against Valvelink seeking, amongst other things, an order that Valvelink pay Petrolink the sum of $95,065.41 on the basis that it received an unfair preference under s 588FA of the Act. On 13 June 2013, Mr Smith commenced proceedings against Mr Boné seeking, amongst other things, an order that Mr Boné pay Petrolink the sum of $844,491.43 on the basis that he contravened his duty to prevent insolvent trading by Petrolink under s 588G of the Act. The proceedings against Valvelink and Mr Boné were in due course consolidated and heard together.

9    Mr Smith’s actions against Mr Boné and Valvelink were largely successful at first instance. In April 2015, following a contested hearing, Gleeson J ordered Mr Boné to pay Petrolink $669,582.86 plus interest, and ordered Valvelink to pay Petrolink $95,065.41 plus interest in the sum of $17,792.47. Mr Boné was also ordered to pay 80% of Mr Smith’s costs and Valvelink was ordered to pay 20% of Mr Smith’s costs.

10    That was not, however, the end of the matter. Within a few weeks, Mr Boné and Valvelink filed appeals against the judgment and orders of Gleeson J, together with an application to stay the orders pending appeal.

11    On 9 June 2015, on the first day of the hearing of the proceedings relating to Mr Smith’s remuneration as administrator, Mr Smith, Mr Boné and Valvelink reached an agreement in principle in relation to the settlement of the proceedings. The settlement related not only to the remuneration proceedings, but also the unfair preference and insolvent trading proceedings the subject of appeal. The essential terms of the agreement are as follows.

12    First, Mr Boné will discontinue his proceedings relating to Mr Smith’s remuneration and conduct as administrator with no order as to costs. Previous costs orders in those proceedings (including Mr Smith’s unsuccessful attempt to strike out the proceedings) will be vacated.

13    Second, Mr Boné and Valvelink will discontinue the appeal from the judgment and orders of Gleeson J with no order as to costs.

14    Third, the judgment and orders of Gleeson J will not be enforced by Mr Smith pending the payment, by or on behalf of Mr Boné, of the sum of $200,000 by three instalments, the last of which is to be made on or before 9 June 2016.

15    Fourth, upon the payment of those instalments, the judgment against Mr Boné and Valvelink will be regarded as being fully satisfied.

16    Fifth, the parties will provide mutual releases in relation to all claims arising from the administration and liquidation of Petrolink.

17    Sixth, the agreement is conditional on Mr Smith obtaining the Court’s approval of the agreement.

18    Seventh, the agreement is to be treated as void if it is found that there has been any material misstatement in affidavits that have been sworn by Mr Boné and his wife in relation to their respective financial positions. The relevance of these affidavits will be explained later.

Relevant statutory provisions and principles

19    Sections 477(2A) and (2B) of the Act provide as follows:

(2A)    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 compromise a debt to the company if the amount claimed by the company is more than:

(a)    if an amount greater than $20,000 is prescribed—the prescribed amount; or

(b)    otherwise—$20,000.

(2B)    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 a 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.

20    The agreement between Mr Smith, Mr Boné and Valvelink requires approval under s 477(2A) because it involves a compromise of a debt which exceeds $20,000. The relevant debt is the existing judgment debt arising from the unfair preference and insolvent trading proceedings.

21    Approval is required under s 477(2B) because the obligations of Mr Boné or Valvelink under the agreement may be discharged by performance more than three months after the date the agreement was entered into. The relevant performance in this respect is the payment of the instalments, the last of which need not be paid until 9 June 2016.

22    The relevant principles governing applications under ss 477(2A) and (2B) are essentially the same, though s 477(2B) focusses on the need to ensure that contractual provisions as to timing do not cut across the general expectation that winding up will proceed in as expeditious a fashion as circumstances allow: Re McGrath (in their capacity as liquidators of HIH Insurance Ltd) (2010) 266 ALR 642 (Re McGrath) at [14]. The object of both provisions is to give the Court some oversight of agreements that fall within their terms and to afford some protection to the company and its creditors against ill-advised or improper actions of the liquidator: Empire (Aust) Nominees Pty Ltd v Vince (2000) 35 ACSR 167 at [12].

23    The Court’s assessment of whether approval should be given will be informed by the purposes for which a liquidator’s powers exist. Those purposes include, relevantly, to serve the interest of the creditors, to realise the assets of the company and to assist the winding up of the company: Re McGrath at [13]; Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 (Re Spedley Securities) at 85-86; Re GA Listing & Maintenance Pty Ltd (1994) 15 ACSR 308.

24    The Court will not, however, generally concern itself with the commercial desirability of the transaction: Re McGrath at [13]. In Re Spedley Securities, Giles J said (at 85-86):

… the court pays regard to the commercial judgment of the liquidator (Re Chase Corporation (Australia) Equities Ltd (1990) 8 ACLC 1118). That is not to say that it rubber stamps whatever is put forward by the liquidator but, as is made clear in Re Mineral Securities Australia Ltd [1973] 2 NSWLR 207 at 231-2, the court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct.

25    Section 479(3) does not specifically deal with the approval of agreements or transactions. Rather, it provides that the liquidator may apply to the Court for directions in relation to any particular matter arising under the winding up. Different considerations apply to the making of directions under s 479(3) to those that apply in relation to approval under ss 477(2A) and (2B).

26    If a liquidator obtains directions under s 479(3), the liquidator is effectively exonerated from any personal liability arising from the matter the subject of the directions: Re One.Tel Ltd (2014) 99 ACSR 247 (Re One.Tel) at [35]. It follows that a closer examination of the liquidator’s decision is required.

27    The Court is also not bound to give directions simply because the liquidator asks for them. It is ordinarily insufficient to justify the giving of directions that a liquidator merely wants reassurance about a business or commercial decision which is within his or her discretion. Rather, it is usually necessary for the decision to raise some issue concerning a question of law, procedure, power, propriety or perhaps reasonableness: Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409 (Re Ansett); Re One.Tel at [33]. It may be appropriate to give a liquidator directions concerning the commencement, continuation or compromise of legal proceedings where a legal issue or attack on the propriety of the decision is raised or likely to be raised: Re G B Nathan and Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 677-680; Re Ansett at [46], Re Addstone Pty Ltd (in liq) (1997) 25 ACSR 357 at 363; Re Tietyens Investments Pty Ltd (in liq) (rec and mgr apptd) (1999) 31 ACSR 1 at 28-29; Re Lemon Tree Passage & Districts RSL and Citizens Club Co-operative Ltd (1987) 11 ACLR 796 at 799; cf. Shiraz Nominees (in liq) v Collinson (1985) 10 ACLR 7.

28    Because the effect of the giving of such directions is to exonerate the liquidator from personal liability, the Court should not give the directions unless satisfied that the liquidator’s decision is, in all the circumstances, a proper one: Re One.Tel at [35].

Should approval be given under ss 477(2A) and (2B) of the Act?

29    Mr Smith has filed three affidavits in support of the approval application. Those affidavits, and the documentary exhibits thereto, establish the following matters relevant to the question whether the agreement between Mr Smith, Mr Boné and Valvelink should be approved under ss 477(2A) and (2B) of the Act.

30    First, Mr Smith has received legal advice in relation to the prospects of success of his defence of both the remuneration proceedings and the appeal. That advice was provided by senior and junior counsel in the course of the settlement discussions that took place on 9 June 2015. The substance of that advice was subsequently confirmed in writing by counsel.

31    Second, Mr Smith has received estimates of the costs that he and Petrolink would incur in relation to the remuneration proceedings and the appeal if they are not resolved in accordance with the agreement. It is estimated that the cost of the appeal and the related stay application would be in the vicinity of $70,000 to $90,000 and the costs associated with the remuneration proceedings would be in the vicinity of $20,000 to $25,000.

32    Third, Mr Smith has given detailed consideration to information given on oath by Mr Boné and his wife in relation to their financial position. That information was given to Mr Smith for the first time on 9 June 2015 in the context of the settlement discussions. Prior to this, Mr Smith had reason to believe, or at least had no reason to doubt, that Mr Boné would be able to meet any judgment against him in the insolvent trading proceedings. Mr Smith was also provided with an expert report of a senior insolvency practitioner retained by Mr Boné in relation to the costs and possible complications involved in any attempt to recover assets should Mr Boné become bankrupt.

33    Fourth, having given detailed consideration to the information and the advice provided to him, Mr Smith formed the view that, even if he and Petrolink successfully defended both the appeal and the remuneration proceedings, it was unlikely that he and Petrolink would recover any more than $200,000 from Mr Boné and Valvelink. Given that the enforcement of the judgments, including any costs orders, would almost inevitably lead to Mr Boné’s bankruptcy, any recovery of funds would be delayed for a number of years.

34    Fifth, in all the circumstances, Mr Smith formed the view that it was in the best interests of Petrolink to resolve the remuneration and appeal proceedings in accordance with the agreement in principle he had struck with Mr Boné and Valvelink. It should be noted in this regard, however, that Mr Smith does not expect that any creditors will receive any dividend in the winding up of Petrolink even if the proceedings are settled in accordance with the agreement.

35    Having regard to this evidence, it is appropriate to approve the agreement Mr Smith has struck with Mr Boné and Valvelink in accordance with ss 477(2A) and (2B) of the Act. The Court should not second guess Mr Smith’s commercial judgment that the agreement is in the best interests of Petrolink. In entering into the agreement, Mr Smith acted bona fide and on the basis of information and advice provided to him. The agreement is not manifestly unreasonable or improper, and appears to have been entered into for the purpose of assisting in the timely winding up of Petrolink. Whilst the creditors of Petrolink are unlikely to receive any dividend in the winding up following the settlement, it is equally unlikely that they will receive a dividend if the proceedings are not settled. The creditors of Petrolink have been informed of the basic terms of the agreement. There has been no indication of any opposition on the part of any creditor.

Should directions be given under s 479(3) of the Act?

36    The evidence also establishes that this is a proper matter for directions to be sought and given under s 479(3) of the Act. It is not a matter where the liquidator merely wants reassurance in relation to a commercial decision. The agreement to settle the proceedings raises, or at least is likely to raise, an issue concerning the reasonableness and propriety of Mr Smith’s actions. Given the litigious history of Mr Smith’s dealings with Mr Boné, and attacks that have been made on the propriety of Mr Smith’s actions in the past, it is reasonable for Mr Smith to seek directions.

37    In that regard, it is to be noted that in Re Great Southern Managers Australia Ltd (in liq); Ex parte Martin Bruce Jones, Darren Gordon Weaver and James Henry Stewart (in their capacity as liquidators of Great Southern Managers Australia Ltd (in liq)) [2014] WASC 312, Pritchard J in the Supreme Court of Western Australia indicated that one of the circumstances that may warrant the making of directions was where the liquidator had been operating in an acrimonious environment. That would clearly seem to be the case here.

38    There are two particular issues in relation to the settlement that potentially raise questions about the reasonableness and propriety of the settlement. First, the result of the settlement of the unfair preference and insolvent trading proceedings is that the company will recover only $200,000 from Mr Boné and Valvelink, despite having secured judgments for over $750,000 at first instance. More significantly, the result will be that creditors will not receive any dividend in the winding up of Petrolink.

39    Second, the settlement of the remuneration proceedings against Mr Smith raises an issue concerning a potential conflict of interest on the part of Mr Smith. The remuneration proceedings are proceedings against Mr Smith personally. They raise questions about the propriety of his actions as administrator, including the reasonableness of his remuneration and the circumstances in which the remuneration was approved. A potential outcome of the proceedings is that Mr Smith may have to repay some of the remuneration received by him following a review. In the circumstances, the discontinuation of the remuneration proceedings against Mr Smith is of some potential benefit to him.

40    Despite these two issues, when consideration is given to all the relevant facts and circumstances relating to the proceedings, the terms of the settlement agreement and the actions of Mr Smith, it is tolerably clear that the settlement agreement is reasonable and that Mr Smith would be justified in causing and permitting Petrolink to give effect to it.

41    It is of some concern that, despite the success of the preference and insolvent trading actions at first instance, Petrolink’s creditors will receive no dividend in the winding up. Regrettably, however, that appears likely to be the case even if the matter does not settle and Mr Smith successfully defends the appeal. That is because it is unlikely that Mr Smith will be able to recover any more than $200,000 from Mr Boné and Valvelink given the present financial circumstances of Mr Boné, his wife and companies in which he has an interest. Given the likelihood of Mr Boné’s bankruptcy if the judgment is upheld and enforced, any recovery would also be many years down the track.

42    In the circumstances, there is no real upside to continuing to prosecute the appeal. There is, however, a potential downside. The downside is further legal costs and expenses and the possibility, inherent in any litigation, that the appeal will be decided adversely to Petrolink.

43    As for Mr Smith’s potential conflict of interest in including, as part of the settlement, that the remuneration proceedings be discontinued, there could be little doubt that this aspect of the settlement is of some potential benefit to Mr Smith. Not only does he avoid the risk of a judgment that might lead to the review and reduction of his remuneration, but he avoids any scrutiny of the propriety of his actions.

44    Despite this, Mr Smith was and is entitled to proceed on the basis that he was and is justified in causing Petrolink to enter into and give effect to the settlement agreement. That is so for the following reasons.

45    First, Mr Smith has received legal advice in relation to the merits of the remuneration proceedings and his prospects of successfully defending them. That legal advice has been tendered on this application on a confidential basis. It is obviously not appropriate to reveal the content of that advice. Suffice it to say that the Court has had regard to that advice and the prospects of success of the remuneration proceedings in considering whether Mr Smith would be justified in settling the proceedings. It should perhaps be added that there is some merit in Mr Smith’s submission to the effect that the allegations against him in the remuneration proceedings are, at worst, fairly technical.

46    Second, Mr Smith was at all times conscious of the potential conflict of interest and acted appropriately in disclosing it to the Court at the earliest opportunity. Indeed, it was the potential conflict of interest that led Mr Smith to seek directions pursuant to s 479(3) of the Act. Mr Smith has also fully disclosed the nature of the conflict of interest to the creditors in reports to creditors, in particular, in a report to creditors dated 17 July 2015. No creditor has indicated any intention to challenge or contest the proposed settlement in light of Mr Smith’s disclosure.

47    Third, the reality is that there is no potential upside for Petrolink or its creditors in the continuation of the remuneration proceedings. Even if Mr Boné succeeded in his action, it would in any event be unlikely to result in the creditors receiving any dividend in the winding up.

48    Fourth, there is an advantage to Petrolink in resolving the remuneration proceedings. It is unlikely that the unfair preference and insolvent trading proceedings would have settled unless the remuneration proceedings were also settled and vice versa. The advantage to Petrolink from the overall settlement is that it achieves the goal of bringing all litigation involving Petrolink and the winding up to an end. The benefit is that Petrolink, therefore, avoids the need to incur any further legal expenses and Mr Smith is likely to bring the winding up to a conclusion following payment of the final instalment of settlement monies.

49    Fifth, Mr Smith has made it clear that no part of the $200,000 settlement proceeds will be applied to meet his remuneration. It would seem that the settlement proceeds will be eaten-up by legal expenses incurred in the various proceedings in the past.

50    In all the circumstances, Mr Smith is entitled to the directions that he seeks. He is justified in causing and permitting the company to compromise the judgment that he has obtained in the unfair preference and the insolvent trading proceedings, and to enter into the settlement agreement and take all necessary steps to give effect to that agreement.

Associate:

Dated:    18 August 2015