Federal Court of Australia

Alfonso, in the matter of Pinnacle Fire Protection Pty Ltd (in liq) v Woods [2021] FCA 1402

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 477(2B) of the Corporations Act 2001 (Cth), the entry by the plaintiffs into an agreement on the terms contained in the Heads of Agreement which is Exhibit ERA-1 to the affidavit of Erwin Rommel Alfonso affirmed 27 October 2021 is approved.

2.    Pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth), the contents of the Exhibit ERA-2 to the affidavit of Erwin Rommel Alfonso affirmed 27 October 2021 not be available for inspection by any person except with the leave of the Court.

3.    The plaintiffs’ costs be costs in the liquidation of the second plaintiff.

4.    Leave is granted to the plaintiffs to file an amended Concise Statement forthwith.

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

REASONS FOR JUDGMENT

CHEESEMAN J:

introduction

1    The first plaintiffs are the liquidators of the second plaintiff, Pinnacle Fire Protection Pty Ltd (the Company), having replaced the previous liquidators on 29 September 2020. These proceedings were commenced seeking relief against the defendant, Darren Woods, for alleged breaches of his duties as a director of the Company. The parties attended a court-annexed mediation before a Registrar in September 2021 and ultimately resolved to enter into a settlement agreement to dispose of the proceedings. The liquidators move on an amended interlocutory application dated 5 November 2021 seeking approval under s 477(2B) of the Corporations Act 2001 (Cth) to cause the Company to proceed with the proposed settlement.

2    The liquidators rely on an affidavit of Erwin Rommel Alfonso affirmed 27 October 2021 and the exhibits to that affidavit. Confidentiality orders are also sought in respect of exhibit ERA-2 to Mr Alfonso’s affidavit on the basis that the material is the subject of legal professional privilege.

3    The defendant is not named as a party to the amended interlocutory application and does not seek to be heard on the present application.

4    For the reasons that follow, approval is granted to the liquidators under s 477(2B) of the Act to enter into the settlement agreement noting that such approval is required because the term of the agreement is likely to exceed 3 months.

background

5    The Company was in the business of performing fire safety inspections and providing other fire safety services. In providing such services, the Company received payments into its bank account and also accrued GST liability in connection with the amounts it charged for its services.

6    The Company is in liquidation pursuant to a winding up order of this Court made on 25 September 2019. The Company was in default of its tax obligations for some time prior to liquidation and from at least 1 January 2012. As at the date of liquidation, the Company owed at least $138,868.74 in GST obligations (the tax debt). The winding up of the Company was at the application of the Deputy Commissioner of Taxation in reliance upon the tax debt.

7    In addition to the tax debt, the Company owes other liabilities which include $16,400 claimed by CBUS Superannuation Fund in respect of unpaid superannuation owed to the defendant and an unquantified liability arising from the Company’s apparent failure to make PAYG withholding payments in respect of the salary purportedly paid to the defendant. In any event, there is a real question as to whether the debt owed to the defendant’s super fund is provable given the application of s 553AB of the Act.

8    These proceedings were commenced to recover funds drawn by the defendant from the Company’s accounts which the liquidators say were withdrawn in breach of his duties as a director of the Company and were otherwise voidable transactions under s 588FDA and s 588FE of the Act. The funds withdrawn by the defendant were directed to the payment of his personal expenses. The effect of the defendant’s personal drawings was to leave the Company without funds required to pay its tax liabilities which were substantially unserviced. The liquidators seek to recover $310,336.54 from defendant, being the amount of personal drawings made within 4 years of the relation back day.

9    As noted at the outset, at mediation the parties agreed on the terms of a proposed settlement of these proceedings. The settlement is recorded in a "Binding Heads of Agreement" that is in evidence and is conditional upon the Court’s approval being obtained under s 477(2B) of the Act.

10    Pursuant to the settlement, the defendant is to pay $175,000 in compromise of the claims made in these proceedings. The evidence indicates that the defendant’s material assets consist of:

(1)    $116,438 that is held in his solicitor's trust account as security for the Company's claims in these proceedings pursuant to orders made by this Court on 26 August 2021 (the Security Amount);

(2)    a claim to part of the sale proceeds of his former matrimonial home (totalling $513,704.39), which are currently held in a solicitor's trust account pending the resolution of a dispute that is the subject of family law proceedings in the Federal Circuit and Family Court of Australia; and

(3)    approximately $30,000 in cash (from which he must pay the legal costs of both these proceedings and the family law proceedings).

11    In essence, the defendant does not have the requisite funds immediately available to him to complete the settlement. While most of the settlement sum is to be paid upfront from the Security Amount, payment of the last $58,562 is deferred until the defendant can obtain access to funds the subject of the family law proceedings.

12    As those funds may not be released until more than 3 months in the future, the liquidators lack the power to proceed with the settlement without approval under s 477(2B) of the Act.

legal principles

13    Section 477(2B) provides:

(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 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.

14    The principles relevant to an application for approval under s 477 are set out in In the matter of One.Tel Limited [2014] NSWSC 457; (2014) 99 ACSR 247 at [26] – [30] (Brereton J), being a case in which approval of a settlement was sought under subsections (2A) and (2B). Owing to the direct relevance to this application, it is convenient to set out that passage in full:

26     The principles applied to applications for approval under s 477(2B) have been helpfully summarised by Gordon J in Stewart, Re; Newtronics Pty Ltd [2007] FCA 1375 at [26] and by Hasluck J in Re The Bell Group Ltd (in liq) [2009] WASC 235 at [57]-[58] (Bell Group), in terms that are equally applicable to applications under s 477(2A). The role of the court is to grant or deny approval to the liquidator's proposal, not to reconsider every issue considered by the liquidator, nor to develop some alternative proposal which might seem preferable. In reviewing the liquidator's proposal, the court pays due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, but satisfies itself that there is no error of law or ground for suspecting bad faith or impropriety, and evaluates whether the proposal is consistent with the expeditious and beneficial administration of the winding up. Importantly, the Court's approval is not an endorsement of the proposed agreement, but merely permission for the liquidator to exercise his or her own commercial judgment in the matter. Thus the approval confers, or completes, the liquidator's power to enter into the transaction, but does not amount to the court approving the transaction itself. The distinction is material, because it means that - unlike a direction under s 479(3) or s 511 - an approval under s 477(2A) or (2B) alone does not exonerate the liquidator from personal liability.

27     However, while it has been said that the approach under each provision is "much the same" (Re United Medical Protection Ltd (2003) 46 ACSR 98; [2003] NSWSC 237; Re HIH Insurance Ltd at [15]; S&D International at [83]), the two provisions deal with different aspects of a liquidator's powers (HIH Insurance at [15]), and this means that the relevant considerations under each provision differ.

28    Section 477(2A) is concerned with the compromise of debts due to the company, which would otherwise be assets in the administration, and has the effect that the liquidator cannot compromise substantial debts without the approval of the committee of inspection, the creditors, or of the Court. Essentially, its purpose is to ensure that the interests and wishes of those affected by a compromise, chiefly the creditors, are a major consideration in making such a compromise. As Giles J said in Re Spedley Securities Ltd (1992) 9 ACSR 83 (Spedley Securities):

The court pays regard to the commercial judgment of the liquidator. 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 a 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.

29    Thus while the court does not exhaustively or closely consider the commercial merits or otherwise of the transaction (Re CIC Insurance Ltd (2001) 38 ACSR 181; [2001] NSWSC 438 (CIC Insurance)), which it largely entrusts to the liquidator, some examination of the merits of the compromise cannot be avoided (In the Matter of 246 Arabella Investments Pty Ltd (In Liq) [2012] NSWSC 1212 (246 Arabella Investments)). However, if the liquidator expresses the opinion that it is an appropriate commercial compromise, and there does not appear to be any such lack of good faith, error in law or principle, or real or substantial ground for doubting the reasonableness of the liquidator's view (as referred to in Re Mineral Securities Australia Ltd (in liq) [1973] 2 NSWLR 207), the court will generally give its approval (In the Matter of Adscaff Pty Ltd [2013] NSWSC 1081 at [5]).

30     Section 477(2B), on the other hand, is concerned with long-term agreements which might protract the liquidation, and has the effect that the liquidator cannot enter such agreements without the approval of the committee of inspection, the creditors, or of the Court. Its rationale is that that the interests and wishes of those affected, particularly creditors, should be highly influential in determining whether the liquidator should assume a contractual obligation that could interfere with the expeditious completion of the winding up: Re G A Listing & Maintenance Pty Ltd (1994) 15 ACSR 308; CIC Insurance; HIH Insurance Ltd at [15]]. Thus in considering giving approval under s 477(2B), the main consideration is the impact of the agreement on the duration of the liquidation, and whether that is, in all the circumstances, reasonable in the interests of the administration:Re Opel Networks Pty Ltd [2013] NSWSC 1245.

15    It follows that in considering whether to grant approval under either ss 477(2A) or (2B):

(1)    the Court is not to second guess the liquidator’s judgment but rather to satisfy itself that there is no error of law, bad faith or impropriety, and ensure that the proposal is consistent with the expeditious and beneficial administration of the winding up.

(2)    it must be borne in mind that (unlike in an application for judicial advice), the Court’s approval does nothing more than empower the liquidator to proceed as he or she proposes – the Court is not approving the underlying transaction itself, such that the approval does not exonerate the liquidator from any liability he or she may have in respect of the transaction.

(3)    where only approval under s 477(2B) is sought, the consideration is whether it is reasonable and in the interests of the liquidation to permit the liquidator to enter into an agreement that will not be completed within 3 months (though it is still necessary for the Court to be satisfied that the transaction is a proper realisation of the assets of the company or otherwise assists its winding up): Re Stewart (in his capacity as official liquidator of Newtronics Pty Ltd (recs and mgrs apptd) (in liq)) [2007] FCA 1375 at [26(6)] (Gordon J).

consideration

16    I am satisfied that approval ought to be granted to the liquidators to proceed with the settlement for the following reasons.

17    It is apparent from the evidence of the defendant’s financial circumstances that the settlement is unlikely to be completed within 3 months and approval under s 477(2B) is required. The Binding Heads of Agreement contemplate that the majority of the settlement sum is to be paid immediately, with payment of the balance (approximately $58,000) (Further Sum) being deferred until such time that the defendant obtains access to funds following the resolution of disputed family law proceedings.

18    The liquidators have obtained legal advice regarding the settlement and, based on that legal advice, have formed the view that proceeding with the settlement would be in the best interests of the Company.

19    Mr Alfonso has deposed to his view that partially deferring the defendant’s obligation to pay the settlement sum will provide the Company significantly more funds than what the defendant would otherwise have available to him.

20    The liquidators have addressed two matters that may be raised against approval of entry into the settlement.

21    First, Mr Alfonso’s evidence candidly states that the liquidators have not sought the views or approval of the Company’s creditors as to the settlement, but rather have simply sought approval of the Court. The Company’s primary creditor is the Australian Taxation Office (ATO). The ATO has not had any involvement in the proceedings. Mr Alfonso deposes to his view that approaching the ATO would likely take substantial time. Mr Alfonso also states that the liquidators’ remuneration combined with the Company’s legal expenses will likely exhaust the majority of the amount payable by the defendant by way of the settlement. The primary reason for this was the lack of company books and records which required the liquidators to undertake a large amount of manual work to investigate any possible claims available to the Company.

22    Secondly, the impact of the proposed agreement on the duration of the liquidation and whether the impact is reasonable are considerations that bear on the exercise of the power to grant approval under s 477(2B): Re Mudgee Dolomite & Lime Pty Ltd [2021] NSWSC 984 at [21] (Ward CJ in Eq). Approval should not be withheld unless there is an error of law or reason to suspect lack of good faith on the part of the liquidator of a company. I am satisfied, having considered Mr Alfonso’s evidence, that in proceeding with the settlement, the liquidators are not acting on the basis of an error of law, or in bad faith, or engaging in any impropriety. In my view the liquidators have been prudent in their approach to the settlement, including by commissioning legal advice.

23    I note that deferral of the Further Sum will have the effect of prolonging the liquidation until such time that the defendant’s family law proceedings are resolved. However, I am satisfied the benefit of the Further Sum to the liquidation outweighs any detriment that may be caused by extending the liquidation.

24    I am satisfied that the liquidators’ explanation for not seeking the ATO’s approval is reasonable having regard to matters of efficiency and reduction of costs, noting in particular the lack of involvement of the ATO in these proceedings and the likely application of the settlement amount. In any event, an order under s 477(2B) operates only as an approval to exercise power and not approval of the settlement itself or as an exoneration from liability should a creditor later seek to challenge its propriety: One.Tel Limited at [26] (Brereton J). As such, the rights of any creditors will not be materially prejudiced by a grant of approval.

25    While I am mindful of the likelihood that the bulk of the settlement amount will be consumed by the costs of the Company’s liquidation, I accept the liquidators’ submission that this is not a matter that goes to the merit of the agreement. The authorities are clear that the role of the Court does not involve exhaustively or closely considering the commercial merits or otherwise of the transaction: CIC Insurance at [8] (Barrett J). Further, the liquidators have not sought approval of their remuneration as a part of the application before me and Mr Alfonso in his evidence accepts that the liquidators’ remuneration will be a matter that will need to be approved by creditors or by the Court by way of a separate application.

26    The liquidators have not sought approval under s 477(2A), which, together with reg 5.4.02 of the Corporations Regulations 2001 (Cth), provides that a liquidator must not compromise a debt of a company that exceeds $100,000 without approval of the creditors, committee of inspection or the Court. The liquidators submit that s 477(2A) only applies to the compromise of debts and does not extend to the kinds of claims brought in these proceedings, being claims for breach of duty and voidable transaction claims: see Re Tietyens Investments Pty Ltd [1999] FCA 206; (1999) 31 ACSR 1 at [93] (Weinberg J) citing Farrow Finance Co Ltd (in liquidation) v ANZ Executors and Trustees Co Ltd [1998] VR 50 at 74; (1996) 23 ACSR 488; Elderslie Finance Corporation Limited v Newpage Pty Ltd (No 6) [2007] FCA 1030; (2007) 160 FCR 423 at 428 – 429 [24] – [25] (Lindgren J). I accept that submission.

27    Accordingly, I made orders substantially in the form sought by the liquidators approving entry into the agreement.

28    The liquidators have also requested that an order be made preventing disclosure of the privileged legal advice tendered on this application, such order to be made pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth) on the basis that it is necessary to prevent prejudice to the proper administration of justice. Being satisfied that it is appropriate and necessary to make the confidentiality order sought, I made an order under s 37AF of the Federal Court of Australia Act.

Associate:

Dated:    11 November 2021