Federal Court of Australia

Jahani (liquidator) v Alfabs Mining Equipment Pty Ltd, in the matter of Delta Coal Mining Pty Ltd (in liq) (No 2) [2021] FCA 927

ORDERS

THE COURT ORDERS THAT:

1.    By 27 August 2021, the parties file and serve on all other parties the evidence and submissions (of no more than eight pages) that they wish to rely on at a hearing for the adoption, variation or rejection of the report of the referee dated 9 March 2021.

2.    By 10 September 2021, the parties file and serve on all other parties any evidence and submissions (of no more than five pages) strictly in answer to any evidence and submissions filed and served under Order 1.

3.    The proceeding be listed for interlocutory hearing on the question of the adoption, variation or rejection of the report of the referee dated 9 March 2021 on 16 September 2021 at 10:15 am.

4.    The costs of the hearing on 6 August 2021, including the costs of preparing submissions, be reserved for determination at the adoption hearing referred to in Order 3.

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

ORDERS

THE COURT ORDERS THAT:

1.    The cross-defendants file and serve any defence to the cross-claim by 27 August 2021.

2.    The plaintiffs file and serve any reply to the defence by 27 August 2021.

3.    The cross-claimants (i.e., the defendants) file and serve any reply to any defence to the cross-claim by 10 September 2021.

4.    The proceeding be listed for case management on 16 September 2021.

5.    The costs of the hearing on 6 August 2021, including the costs of preparing submissions, be reserved for determination at the hearing referred to in Order 4.

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

REASONS FOR JUDGMENT

STEWART J:

1    These reasons concern two proceedings where there is a common issue of when a group of companies became insolvent. The question that arises for decision is whether the issue of solvency should be heard together and decided in common between them. There are other complexities to the question but that is its essence. It arises in the following way.

2    On 31 May 2017, four companies in the Delta SBD group of companies were put into liquidation and liquidators were appointed. The companies are:

(1)    Delta SBD Ltd;

(2)    Delta Mining Pty Ltd and SBD Services Pty Ltd, the shares in each of which were wholly owned by Delta SBD; and

(3)    Delta Coal Mining Pty Ltd, the shares of which were wholly owned by Delta Mining.

3    In November 2018, the liquidators commenced a proceeding against the Commissioner of Taxation (NSD 2208/2018). The liquidators claim that a number of payments that had been made to the Commissioner by some of the companies were made in circumstances that made them unfair preferences within the meaning of s 588FA of the Corporations Act 2001 (Cth) and hence insolvent transactions under s 588FC and voidable under s 588FE. Those circumstances give rise to relief under s 588FF. This is what is commonly referred to as a preference proceeding.

4    In May 2020, the liquidators commenced a further preference proceeding (NSD 577/2020) against 28 other defendants after I had given the liquidators leave to join all those defendants in the same proceeding: Re Delta Coal Mining Pty Ltd (in liq) [2020] FCA 752. As with proceeding 2208, the liquidators claim that payments were made by one or more of the companies to each of the defendants in circumstances which give rise to those payments being insolvent transactions (s 588FC) and hence voidable transactions (s 588FE) giving rise to remedies (s 588FF).

5    One of the reasons for granting leave for the 28 defendants to be joined in one proceeding was because there was a real prospect that a common issue to all the claims would be when the group of companies became insolvent. That arises because a necessary element of establishing that a transaction is an insolvent transaction is that it was entered into at a time when the company was insolvent (s 588FE(a)). If there were proceedings against each of the defendants separately and the issue of insolvency of the companies was contested, the consideration of that issue alone would require the allocation of significant judicial resources across all the proceedings and it would create the risk of inconsistent findings in the different proceedings in relation to the same issue of fact.

6    On 22 October 2020, I referred the questions of whether each of the companies was insolvent during the period 1 December 2016 to 31 May 2017 and, if so, when during that period each company was insolvent to a referee. That was pursuant to ss 37P(2) and 54A of the Federal Court of Australia Act 1976 (Cth) and Div 28.6 of the Federal Court Rules 2011 (Cth). Ms Robyn McKern of McGrathNicol was the appointed referee and a process was established for her to prepare her report.

7    For much the same reasons as underpinned the grant of leave to bring the one proceeding against 28 defendants, on 12 November 2020 I consolidated the 2208 proceeding and the 577 proceeding. The Commissioner thus became the 29th defendant in the 577 proceeding. See Jahani (liquidator) v Commissioner of Taxation [2020] FCA 1642. The claim against the Commissioner accordingly also became subject to the referral to the referee on the question of insolvency of the companies.

8    It is convenient to refer to the consolidated proceeding (NSD 2208/2018 and 577/2020) as the preference proceeding.

9    Unknown at that time to the Court and the defendants in preference proceeding, the liquidators commenced a further proceeding in December 2020 (NSD 1379/2020). That was during the time in which the referee was preparing her report on insolvency, which included receiving evidence and submissions from the parties.

10    Proceeding NSD 1379/2020 is brought against three former directors of the companies and the executor of the estate of a fourth director. It is alleged that each of the directors contravened s 588G(2) of the Act by being a director of one or more of the companies at a time when the company incurred a debt and was insolvent, or became insolvent by incurring the debt, and at that time there were reasonable grounds for suspecting that the company was insolvent or would so become insolvent and failed to prevent the company from incurring the debt.

11    It is convenient to refer to proceeding NSD 1379/2020 as the insolvent trading proceeding.

12    It is apparent that in the insolvent trading proceeding one of the elements to the claim is that the companies were insolvent at a particular time. That is to say, it will be necessary to establish when the companies became insolvent.

13    It is, to say the very least, unfortunate that the liquidators failed to bring to the attention of the Court and the defendants in the preference proceeding at a much earlier time that they were filing another related proceeding that raised a common issue. That only became apparent to the Court when the defendants in the insolvent trading proceeding sought third party access to the by then finalised referee’s report in the preference proceeding. The consequence of the liquidators failing to bring the insolvent trading proceeding to the attention of the Court in the preference proceeding at an earlier time is that the referee has made findings on insolvency in the one proceeding which is also an issue in the other proceeding, but the defendants in the other proceeding did not have the opportunity to participate in the referral process by which the referee made her findings.

14    The referee concluded that “whilst there were indications of potential insolvency at earlier dates, having regard to the primacy of the cash flow test in assessing solvency, it is my opinion that the Group was solvent until the end of January 2017 and was insolvent thereafter.”

15    The defendants in the insolvent trading proceeding have since filed a cross-claims against three cross-defendants. They are a firm of chartered accountants, insolvency practitioners and official liquidators and its two directors. It is alleged that the cross-defendants gave negligent advice in May 2017 with regard to the solvency of the group of companies with the result that if the cross-claimants are liable to the liquidators then the cross-defendants are liable to indemnify them. It is apparent that the group’s solvency at that time will be an issue in the cross-claim.

16    Turning now directly to the question that arises in the case management of the two proceedings, there are essentially two possible courses to be taken with regard to the question of solvency of the group of companies:

(1)    First, the two proceedings could be kept separate with the preference proceeding moving to a hearing on the adoption of the referee’s report and the insolvent trading proceeding going its own course on the question of solvency, whether that be by way of a referral to a referee or to be determined by the Court at final hearing.

(2)    Secondly, the question of solvency could be determined in common across the two proceedings. Although there are various ways in which that could happen, the most attractive of those would be to reopen the reference to the referee in the preference proceeding for the purpose of the referee taking into account any evidence and submissions by the defendants and cross-defendants in the insolvent trading proceeding and then issuing a new or amended report. There could then be an adoption hearing in common across the two proceedings, whereafter the proceedings would then go their own independent ways.

17    The principal advantage of the second course is that it avoids duplication and the risk of conflicting outcomes. In that regard there is a general and well-recognised legal policy against the fracturing of litigation such as to cause the same issue to be litigated separately in different proceedings which causes wasteful duplication and the risk of conflicting outcomes.

18    Weighing against that course, and in favour of the first course, is the problem of delay. The preference proceeding has been on foot for some time and has already been delayed for several months because of the need to furnish everything that was before the referee to the parties in the insolvent trading proceeding so that they could form a view on how matters should proceed. In the meanwhile, the cross-claim in the insolvent trading proceeding has been pleaded out and the parties have prepared their positions, and consequent submissions, on how to deal with the question of insolvency. If the referee process were to be re-opened it would undoubtedly further delay the preference proceeding for some time.

19    None of the parties to the preference proceeding raises any particular issue with regard to the delay that would be caused, which may be because the position of the defendants in that proceeding on the insolvency of the companies is likely, if anything, to be improved by the contribution that the directors of the companies might make on the insolvency question. That is because it is in the directors’ interests to contend for the date of the onset of insolvency to be as late as possible. The same applies to the cross-defendants in the insolvent trading proceeding.

20    There is, however, another consideration which is raised by Mr Krochmalik on behalf of the defendants in the insolvent trading proceeding who oppose the insolvency question being heard in common across the proceedings. He points out that the way in which the insolvency question arises, or falls to be dealt with, is in certain respects significantly different in preference proceedings in comparison with insolvent trading proceedings.

21    In preference proceedings, what is significant is when the companies were insolvent. That is something that has to be proved by the liquidators as a requirement of s 588FC(a) of the Act. In defence of such a claim, a defendant can plead and prove that in relation to each benefit that they received because of the impugned transaction they received it in good faith and at the time when they received it they had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent and a reasonable person in their circumstances would have had no such grounds for so suspecting (s 588FG). A number, if not all, of the defendants in the preference proceeding have relied on that provision.

22    In contrast, in an insolvent trading proceeding the liquidators must prove that the company was insolvent at the relevant time, or became insolvent by incurring the debt in question or by incurring at that time debts including that debt, and, at that time, there were reasonable grounds for suspecting that the company was insolvent, or would so become insolvent (s 588G). Mr Krochmalik submits that problems are likely to arise if the question of insolvency is determined in common across both proceedings by the referee process. One is that evidence will still have to be led by the liquidators in the insolvent trading proceeding on the question of solvency of the companies in order to discharge their onus to show that there were reasonable grounds for suspecting that the company was insolvent at the relevant time. The other is that that evidence may tend to contradict whatever finding had been made in the referee process.

23    There is another consideration which arises from the cross-claim. That is that a key issue in the cross-claim is going to be what the solvency position was of the companies at the time that the cross-defendants gave advice in May 2017. That evidence may also, conceivably, tend to contradict whatever finding had been made in the referee process.

24    The result is that there will almost certainly be a significant volume of evidence in the insolvent trading proceeding relevant to the question of the solvency of the companies, including when they were insolvent, even if the question of solvency is determined as a preliminary issue in common with the preference proceeding. Thus, for the parties to the insolvent trading proceeding there will not be a saving, but rather a duplication, if that course were followed; they would have to present their evidence and submissions to the referee and otherwise engage in the referee’s process on the question of insolvency and thereafter in any adoption hearing, and then they would have to canvass essentially the same factual and evidentiary matrix the second time in the hearing of the insolvent trading proceeding.

25    With regard to the concern about the potential for different outcomes in different proceedings, Mr Krochmalik refers to the judgment of Black J in Re Force Corp Pty Ltd (recs and mgs apptd) (in liq) [2018] NSWSC 1919. In that case there was an application by defendants to preference proceedings for the question of the solvency of the company to be decided as a separate question in parallel insolvent trading proceedings against the directors of the company.

26    His Honour accepted (at [9]) that there was plainly a substantial overlap, to the point of near identity, of the issues as to solvency raised in the insolvent trading proceeding and the preference proceeding. His Honour also accepted that there would likely be significant overlap in the evidence led in the liquidators’ case in the two proceedings, since it is reasonable to expect that evidence of substantially the same matters would be led to establish insolvency over the particular period.

27    However, his Honour did not accept the submission in that case that it would be “absurd” for two judges of the Court to determine questions of solvency over overlapping periods in two separate cases. His Honour did not accept the proposition that it can never be a proper use of the Court’s resources to determine an overlapping issue in two separate cases involving separate parties. His Honour reasoned that it will often be the case, in complex commercial proceedings, that different cases may be brought, including by a single plaintiff, against different defendants with substantial overlap in issues of fact or law. It will not always be the case that that overlap is best avoided by joining the two proceedings together. (At [11].)

28    His Honour also noted (at [12]) that s 588E of the Act recognises the possibility that there will be more than one recovery proceeding brought by a liquidator in an insolvency. That section deals with that matter, not by contemplating that those proceedings will necessarily be brought together, but instead by creating a limited presumption in specified circumstances, which can be rebutted by evidence in the subsequent proceedings.

29    I have not found it easy to resolve the issue before me. It weighs with me that if the question of solvency is not decided in common across the two proceedings two consequences may follow. One is that different dates for the onset of insolvency may be decided in the two proceedings. The other is that the directors, who were integrally involved in the affairs of the companies, have not contributed to the finding by the referee on the date of the onset of insolvency in the preference proceeding; the referee has had to rely on the evidence of the liquidators and the defendants to that proceeding, none of whom was involved in the affairs of the companies.

30    Nevertheless, taking into account the pertinent observations of Black J in Force Corp referred to above and the significant difficulties that I consider might arise in the insolvent trading proceeding if the question of solvency is decided as a preliminary issue, I consider that the most prudent course is the first one identified at [16(1)] above, i.e., to keep the proceedings separate. The difficulties I have in mind are those that I foresee arising as a result of the “reasonable grounds for suspecting” requirement in s 588G(1)(c) of the Act and the issues on the cross-claim, as identified above.

31    I also observe that the defendants in the preference proceeding had available to them the powers of subpoena and like processes to compel the provision of documents from the liquidators and the directors, so it may be that participation by the directors in the reference process would not add much value to the defendants in the preference proceeding.

32    Mr Rose, who appears for the liquidators, reminded me of my decision in Weston in his capacity as liquidator of Starcom Group Pty Ltd (in liq) v Rajan [2019] FCA 1455 in which the report of a referee was adopted on the question of solvency in an insolvent trading proceeding. Another judge of the Court had referred that question to a referee which does not appear to have been opposed as there are no published reasons for the referral. Mr Rose referred to that case merely as an example to support the submission that deciding the question of solvency in an insolvent trading proceeding as a preliminary issue by referral to a referee does not necessarily create difficulties.

33    That may be so, but the circumstances in that case are not known. It is also not known whether, indeed, difficulties did arise. My decision in the present case is not one of principle with regard to all insolvent trading proceedings, but is rather directed to the particular circumstances of the proceedings before me. I am nevertheless mindful that a notable distinction between preference proceedings and insolvent trading proceedings which is relevant to the question whether the question of solvency can or should be decided as a preliminary issue is that in a preference proceeding (whether by way of referee or otherwise) the defendants would generally be strangers to the company so the evidence that they would be expected to rely on in proof of their “good faith” defences (s 588FG) is not likely to overlap, at least not significantly, with the evidence on actual insolvency. In contrast, the directors’ “reasonable grounds” defences (s 588G) are likely to rely on evidence internal to the company which is likely to overlap very considerably with the evidence on actual insolvency.

34    In the circumstances, I will make separate programming orders in the two proceedings that have them continue apart. I will continue to manage both proceedings, although there does not appear to be any need for them to be managed together. If at some point it becomes prudent, or necessary, for the two proceedings to be managed or heard by different judges, I expect that one or other of the parties will raise that.

Associate:

Dated:    9 August 2021

SCHEDULE OF PARTIES