Federal Court of Australia

Blakeley v Ausmart Services Pty Ltd (in liq), in the matter of Ausmart Services Pty Ltd (in liq) [2021] FCA 1470

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to section 579E(1) of the Corporations Act 2001 (Cth) (Act), each of the First to Seventeenth Defendants inclusive (the Group) is a pooled group for the purposes of section 579E of the Act.

2.    Pursuant to sections 90-15 and 65-45 of Schedule 2 - Insolvency Practice Schedule (Corporations) to the Act (IPSC) and pursuant to section 579G of the Act, that each of the Second to Seventeenth Defendants inclusive (Non-Treasury Entities) transfer the amounts in their bank accounts to the following account for the purposes of the liquidation of each of the Defendants (Group Entities):

3.    Pursuant to section 579G(1)(d) of the Act and section 90-15(1) of the IPSC, the plaintiffs are not required to lodge an annual return in relation to the external administration of the Group Entities individually (as otherwise required by Subdivision B of Division 70 of the IPSC) and may lodge a single consolidated return to be lodged for the Group Entities.

4.    Pursuant to section 588FF(3)(b) of the Act, the time for the First to Eighth Plaintiffs to make any application or applications for orders under section 588FF of the Act against any party is extended for a period of 12 months from the date of this order.

THE COURT DIRECTS THAT:

5.    Pursuant to section 65-45 of the IPSC that section 65-25 of the IPSC is to operate in relation to the Non-Treasury Entities such that the Plaintiffs must not pay any money out of the Treasury Account otherwise than:

(a)    for purposes related to the external administration of any one or more of the Non-Treasury Entities;

(b)    for purposes related to the operation of the Group Entities; or

(c)    in accordance with the Act.

THE COURT ORDERS THAT:

6.    The Plaintiffs’ costs of this application be costs in the winding up of each of the Defendants.

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

REASONS FOR JUDGMENT

O’CALLAGHAN J:

Introduction

1    On 22 November 2021, after hearing from Mr MAJ McKillop, counsel for the plaintiffs, I made the orders and directions set out above. These are my reasons.

2    The plaintiffs are liquidators of the 17 defendant companies. The companies are members of a larger group of companies controlled by Zu Neng Shi (also known as Scott Shi) (Mr Shi), and his associates (the Group). The Group has provided contract labour hire to the abattoir industry over a period of approximately 10 years.

3    As part of a government task force led by the Australian Taxation Office (ATO) created for the purpose of investigating tax avoidance, tax evasion, and money laundering (facilitated by the misuse of trusts and the concealment of ownership), and avoidance of creditor claims (facilitated by the improper use of offshore entities, sham transactions, nominee arrangements, and company structures), the Group and its associates were the subject of an audit by the ATO.

4    That audit revealed a pattern of conduct which involved, over a lengthy period of time, the employment of common methods of tax evasion and avoidance, including phoenix activity, asset diversion, and money laundering. It also revealed the appalling treatment of employees.

5    As I shall explain, the scheme was carried out on a grand scale.

6    In this application, the plaintiffs sought the following relief:

(a)    a pooling order under s 579E of the Corporations Act 2001 (Cth) (Act) regarding the 17 defendant Group companies;

(b)    orders giving relief under the Insolvency Practice Schedule (Corporations) (IPSC) (Schedule 2 to the Act) from requirements to establish and operate bank accounts for each company; and

(c)    a shelf order under s 588FF(3) of the Act in relation to the first to eighth defendants.

7    The materials relied on in the application were:

(a)    affidavit of Ross Blakeley affirmed 12 October 2021;

(b)    affidavit of Ross Blakeley affirmed 19 November 2021, regarding service of the application and the response of creditors to it, as well as an updated position regarding certain voidable transaction claims; and

(c)    the Originating Process filed 15 October 2021.

Pooling

8    The plaintiff liquidators applied for an order determining that the 17 defendant companies constitute a “pooled group” for the purposes of s 579E of the Act. That provision relevantly provides:

579E    Pooling orders

Making of pooling order

(1)    If it appears to the Court that the following conditions are satisfied in relation to a group of 2 or more companies:

(a)    each company in the group is being wound up;

(b)    any of the following subparagraphs applies:

(i)    each company in the group is a related body corporate of each other company in the group;

(ii)    apart from this section, the companies in the group are jointly liable for one or more debts or claims;

(iii)    the companies in the group jointly own or operate particular property that is or was used, or for use, in connection with a business, a scheme, or an undertaking, carried on jointly by the companies in the group;

(iv)    one or more companies in the group own particular property that is or was used, or for use, by any or all of the companies in the group in connection with a business, a scheme, or an undertaking, carried on jointly by the companies in the group;

the Court may, if the Court is satisfied that it is just and equitable to do so, by order, determine that the group is a pooled group for the purposes of this section.

Note 1:    Section 9 provides that pooling order means an order under subsection (1) of this section.

  Note 2:    See also subsection (12) (just and equitable criteria).

Consequences of pooling order

(2)    If a pooling order comes into force in relation to a group of 2 or more companies:

(a)    each company in the group is taken to be jointly and severally liable for each debt payable by, and each claim against, each other company in the group; and

(b)    each debt payable by a company or companies in the group to any other company or companies in the group is extinguished; and

(c)    each claim that a company or companies in the group has against any other company or companies in the group is extinguished.

Note:    For exemptions, see paragraph 579G(1)(a).

(3)    Subsection (2) applies to a debt or claim:

(a)    whether present or future; and

(b)    whether certain or contingent; and

(c)    whether ascertained or sounding only in damages.

(4)    Subsection (2) does not apply to a debt payable by, or a claim against, a company in the group unless the debt or claim is admissible to proof against the company.

…

(10)    The Court must not make a pooling order in relation to a group of 2 or more companies if:

(a)    both:

(i)    the Court is satisfied the order would materially disadvantage an eligible unsecured creditor of a company in the group; and

(ii)    the eligible unsecured creditor has not consented to the making of the order; or

(b)    all of the following conditions are satisfied:

(i)    a company in the group is being wound up under a members’ voluntary winding up;

(ii)    the Court is satisfied that the order would materially disadvantage a member of that company;

(iii)    the member is not a company in the group;

(iv)    the member has not consented to the making of the order.

Note:    For eligible unsecured creditor, see section 579Q.

Standing

(11)    The Court may only make a pooling order on the application of the liquidator or liquidators of the companies in the group.

Just and equitable criteria

(12)    In determining whether it is just and equitable to make a pooling order, the Court must have regard to all of the following matters:

(a)    the extent to which:

(i)    a company in the group; and

(ii)    the officers or employees of a company in the group;

were involved in the management or operations of any of the other companies in the group;

(b)    the conduct of:

(i)    a company in the group; and

(ii)    the officers or employees of a company in the group;

towards the creditors of any of the other companies in the group;

(c)    the extent to which the circumstances that gave rise to the winding up of any of the companies in the group are directly or indirectly attributable to the acts or omissions of:

(i)    any of the other companies in the group; or

(ii)    the officers or employees of any of the other companies in the group;

(d)    the extent to which the activities and business of the companies in the group have been intermingled;

(e)    the extent to which creditors of any of the companies in the group may be advantaged or disadvantaged by the making of the order;

  (f)    any other relevant matters.

…

9    As Vaughan J (as his Honour then was) explained in Re Watch Works Australia Pty Ltd (in liq); ex parte Francis [2020] WASC 6 at [33]-[35]:

Accordingly, there are various formal matters of which the court must be satisfied. First, there must be a group of two or more companies. Second, each company in the group must be being wound up. Third, one of the sub-paragraphs in s 579E(1)(b) must apply. Fourth, as previously mentioned, by s 579E(11) the court may only make a pooling order on the application of the liquidator or liquidators of the companies in the group. Once the pre-conditions are satisfied the court may make a pooling order if the court is satisfied that it is just and equitable to do so. As will be seen, s 579E(12) specifies a number of mandatory considerations in assessing whether it is just and equitable to make a pooling order. Section 579E(10) also specifies two situations in which the court must not make a pooling order.

The consequences of a pooling order determination are provided for by s 579E(2). First, each company in the group is taken to be jointly and severally liable for each debt payable by and claim against each other company in the group. Second, each intra-group debt and claim is extinguished. These two consequences of a pooling order apply to all debts and claims whether present or future, certain or contingent and whether ascertained or sounding only in damages (s 579E(3)). However, the debt or claim must be admissible to proof as against the company (s 579E(4)). The usual order of priority applicable under s 556, s 560 and s 561 is not altered (s 579E(4)).

In this way the available assets in each winding-up become available to satisfy the external debts of all of the companies in the pooled group. So far as external creditors are concerned the separate windings-up are administered as if they were a single winding-up. The available assets from all of the windings-up are applied to the external debts and claims of all companies rateably as if the external creditors were the creditors of a single company.

10    Here, the 17 companies the subject of the pooling order application are each of the defendants.

11    I turn to the statutory criteria.

12    The first criterion is whether there is “a group of 2 or more companies”.

13    The expression “group” means no more than a collection or plurality, so that a group exists merely through identification of several companies. There is no need to find any connection or shared characteristic. See Allen v Feather Products Pty Ltd (2008) 72 NSWLR 597 at 599 [9] (Barrett J); and Re Lombe [2011] NSWSC 1536; (2011) 87 ACSR 84 at 88 [8] (Barrett J).

14    It follows that the 17 companies here constitute a “group of 2 or more companies”.

15    The second criterion is whether each of the companies in the Group is being wound up. That is so in this case. That fact is established in Mr Blakeley’s first affidavit.

16    The third criterion relied on by the liquidators is that contained in s 579E(1)(b)(iv). That is to say, the court must be satisfied that “one or more companies in the group own particular property that is or was used, or for use, by any or all of the companies in the group in connection with a … scheme … carried on jointly by the companies in the group”.

17    “Scheme” is not defined, but the word obviously bears its ordinary meaning, namely “[a] plan of action devised in order to attain some end; a purpose together with a system of measures contrived for its accomplishment; a project, enterprise. Often with unfavourable notion, a self-seeking or an underhand project, a plot …” See Oxford English Dictionary (online edition).

18    As to the requirement that the scheme be “carried on jointly”, it is sufficient that there be identified separate acts of several legal persons sharing a purpose and acting in concert. See Allen v Feather Products Pty Ltd (2008) 72 NSWLR 597 at 600-601 [14]-[19].

19    As Mr Blakeley deposed, the scheme in this case operated along these lines.

20    The Group operated a labour hire business in the abattoir/meat processing industry, and engaged in large scale tax evasion over a significant period via a variety of means.

21    Each of the companies in the Group was directed and/or controlled by Mr Shi, a member of his family, and/or an associate of Mr Shi.

22    Mr Blakeley deposed that the Shi family was comprised as follows:

(a)    Mr Shi, his wife (Yu Qin Zhang), and their children (Michael Shi and Yun Jiao Shi, who is also known as Amy Shi);

(b)    Mr Shi’s older brother (Zu You Shi, who is also known as David Shi), his wife (Wan Fang Wen), their daughter (Yan Qin Shi), and her husband (Hong Fei Yu); and

(c)    Mr Shi’s younger brother (Quan Fa Shi, who is also known as Roger Shi), and his wife (Mei Ming Zheng).

23    The liquidators estimated that the Group contracted with some 42 abattoirs between 2008 and 2017, engaging some 1,100 workers per year.

24    Many of the entities within the Group engaged workers as “contractors” rather than “employees”, despite being treated as employees, which affected the entities’ taxation liabilities.

25    Most workers were Chinese, Taiwanese, and/or Korean nationals with limited rights to work in Australia. Workers were housed in residential properties owned by the Group (or entities/individuals associated with the Group) and/or situated close to the principal place of business of a Group entity. These properties were often grossly overcrowded with other workers, with rent paid via wage deductions before payment.

26    The liquidators say that, over a period of more than 10 years, Group members deliberately failed to pay federal and state tax obligations on revenues of some $349 million. The evasion of the obligation to meet those obligations included the following practices:

(a)    underreporting or failing to report tax liabilities;

(b)    failing to lodge income tax returns;

(c)    lodging tax returns that grossly underreported income tax liabilities;

(d)    lodging tax returns that overstated entitlement to claim tax deductions;

(e)    failing to lodge Business Activity Statements (BAS);

(f)    lodging BAS that underreported GST liabilities;

(g)    lodging BAS that overstated entitlement to GST input credits; and

(h)    collecting “pay as you go” withholding amounts from employees and/or workers, but failing to remit the same to the ATO.

27    Tax obligations were also evaded through frequent illegal “phoenix” activity.

28    Different companies in the Group provided different functions:

(a)    some contracted directly with abattoirs to supply labour (head companies);

(b)    some contracted workers to provide to the abattoirs and paid them (payer companies);

(c)    some were used to collect revenue from the head companies and distribute it to payer companies and divert it outside the Group; and

(d)    others did not use a divided structure, and instead operated to hold contracts with abattoirs and retain workers directly.

29    The scheme also involved diversion of large sums of money overseas, and into land assets in Australia. The liquidators identified payments or transfers from Group companies of:

(a)    $7,055,891 in overseas payments or transfers;

(b)    more than $96 million in intragroup payments made between different Group entities; and

(c)    approximately $1.25 million that was applied towards the purchase, maintenance and/or improvement of various properties, mostly owned by members of the Shi family and their associates.

30    I am accordingly satisfied that the defendant companies, by devoting their assets to the common pursuit of the scheme in different ways, amount to a group of companies whose property has been used in connection with a business, scheme or undertaking which they carried on jointly within the meaning of s 579E(1)(b)(iv).

31    The fourth criterion is whether it is just and equitable to make a pooling order.

32    Section 579E(12) says that the court must have regard to all the following matters:

(a)    the extent to which:

(i)    a company in the group; and

(ii)    the officers or employees of a company in the group;

were involved in the management or operations of any of the other companies in the group;

(b)    the conduct of:

(i)    a company in the group; and

(ii)    the officers or employees of a company in the group;

towards the creditors of any of the other companies in the group;

(c)    the extent to which the circumstances that gave rise to the winding up of any of the companies in the group are directly or indirectly attributable to the acts or omissions of:

(i)    any of the other companies in the group; or

(ii)    the officers or employees of any of the other companies in the group;

(d)    the extent to which the activities and business of the companies in the group have been intermingled;

(e)    the extent to which creditors of any of the companies in the group may be advantaged or disadvantaged by the making of the order;

 (f)    any other relevant matters.

33    This is an overwhelming case for the exercise of the discretion to make the pooling order, for reasons which, if I may say so with respect, were put succinctly and persuasively by counsel in his written submissions.

34    As was submitted, the following matters are compelling in favour of the exercise of the discretion:

(a)    many companies in the Group worked with each other, for example as payer companies and as operational or head companies;

(b)    intermingling of the business for that reason, exacerbated by serial “phoenix” activity between successive companies;

(c)    the collapse of the Group as a whole had been caused by the intercompany indebtedness and interoperation of the Group companies;

(d)    Mr Shi, his family, and his associates were involved in the control and operation of all the Group companies;

(e)    the apparent overall purpose of the scheme was to defraud the federal and state revenue authorities, and contractor creditors;

(f)    pooling will permit coordination and funding of recoveries across the Group for the benefit of creditors; and

(g)    pooling will permit coordination and funding of investigations across the Group, which will involve common issues across many companies, including tracing of funds remitted overseas and offences involving tax fraud and modern slavery, many of which would be hampered without pooling.

35    On the other side of the ledger, there is no disadvantage or prejudice to unsecured creditors. Again, if I may borrow from counsel’s submissions, the key points, which emerged from the evidence adduced by Mr Blakeley, are these:

(a)    The liquidators do not presently expect that there is likely to be a return to ordinary unsecured creditors, so questions of financial detriment do not arise.

(b)    The liquidators issued a joint report to creditors on 29 October 2021, which was sent to all known eligible unsecured creditors by email and post, and uploaded to the FTI Consulting Creditors’ Portal (accessible on its website). It identified that the liquidators would be seeking a pooling order, included a copy of the Originating Process, and stated that any creditor wishing to object was required to do so by serving a notice of objection stating the grounds for objection within 14 days of the date of the report. As at 19 November 2021, the liquidators had not received any correspondence from or on behalf of any creditor of the defendants objecting to the application.

(c)    The cost of the liquidation of the defendants will be significantly higher if no pooling order is made, because the liquidators will need to reconstruct the accounts of each company to ascertain and account for intragroup claims.

(d)    Unfunded companies in the Group which have claims of potential value will not be able to investigate or pursue them without litigation funding, or third-party funding.

(e)    The largest unsecured creditor, the ATO (which is also the largest priority creditor, owing to superannuation guarantee charge liabilities), consented to the pooling order.

(f)    The liquidators cannot currently form a view as to whether other priority creditors may emerge when proofs are called, but based on current expectations, no material priority claims apart from statutory claimants are likely.

(g)    There is likely to be some question as to which company is entitled to assets in the Group, particularly real property, when tracing and fiduciary claims are considered, and a pooling order will make such questions less significant.

(h)    Although the second, fifth, seventh, and eighth defendants have either made material recoveries, have material assets, or have pending unfair preference claims, it is not yet possible to determine if there will be sufficient funds for any priority creditor distribution after the costs of liquidation and payment out of traceable funds to other Group entities. In respect of the unfair preference claims, it is presently uncertain that a recovery will be made since the proceedings have not yet been issued and the defence to be put to the claims has not been articulated.

36    For those reasons, I made the pooling order in the form sought by the liquidators,

Shelf order

37    The liquidators sought a “shelf order” under s 588FF(3) of the Act in relation to the first to eighth defendants.

38    Section 588FF(3) provides:

588FF    Courts may make orders about voidable transactions

(1)    Where, on the application of a company’s liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:

(a)    an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;

(b)    an order directing a person to transfer to the company property that the company has transferred under the transaction;

(c)    an order requiring a person to pay to the company an amount that, in the court’s opinion, fairly represents some or all of the benefits that the person has received because of the transaction;

(d)    an order requiring a person to transfer to the company property that, in the court’s opinion, fairly represents the application of either or both of the following:

(i)    money that the company has paid under the transaction;

(ii)    proceeds of property that the company has transferred under the transaction;

(e)    an order releasing or discharging, wholly or partly, a debt incurred, or a security or guarantee given, by the company under or in connection with the transaction;

(f)    if the transaction is an unfair loan and such a debt, security or guarantee has been assigned—an order directing a person to indemnify the company in respect of some or all of its liability to the assignee;

(g)    an order providing for the extent to which, and the terms on which, a debt that arose under, or was released or discharged to any extent by or under, the transaction may be proved in a winding up of the company;

(h)    an order declaring an agreement constituting, forming part of, or relating to, the transaction, or specified provisions of such an agreement, to have been void at and after the time when the agreement was made, or at and after a specified later time;

(i)    an order varying such an agreement as specified in the order and, if the Court thinks fit, declaring the agreement to have had effect, as so varied, at and after the time when the agreement was made, or at and after a specified later time;

(j)    an order declaring such an agreement, or specified provisions of such an agreement, to be unenforceable.

(2)    Nothing in subsection (1) limits the generality of anything else in it.

(3)    An application under subsection (1) may only be made:

(a)    during the period beginning on the relation‑back day and ending:

(i)    3 years after the relation‑back day; or

(ii)    12 months after the first appointment of a liquidator in relation to the winding up of the company;

whichever is the later; or

(b)    within such longer period as the Court orders on an application under this paragraph made by the liquidator during the paragraph (a) period.

(4)    If the transaction is a voidable transaction solely because it is an unreasonable director‑related transaction, the court may make orders under subsection (1) only for the purpose of recovering for the benefit of the creditors of the company the difference between:

(a)    the total value of the benefits provided by the company under the transaction; and

(b)    the value (if any) that it may be expected that a reasonable person in the company’s circumstances would have provided having regard to the matters referred to in paragraph 588FDA(1)(c).

39    A “shelf order” is a term that seems to have originated in a judgment of Austin J in Brown v DML Resources Pty Ltd (No 5) (in liq) [2001] NSWSC 973; (2001) 166 FLR 1 at 8 [31]. See Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher (2015) 254 CLR 489 at 495 [1]. As the High Court held in that case, the power under s 588FF(3)(b) to extend the time within which a company’s liquidator may apply for orders in relation to voidable transactions entered into by the company extends to transactions not able to be identified at the time of the order.

40    As Mr Blakeley said in his affidavit, this is a case where the liquidators have not been able to determine whether they have a claim on the merits against any putative defendant in respect of the potential uncommercial transactions or certain “international transfers” to which he deposed. Accordingly, there is no natural justice requirement to serve any putative defendant since none has been identified and further investigation is required to determine if there is any such defendant subject to a claim with merit.

41    The power to make a shelf order is a discretionary one. In exercising the discretion, the court should consider the following factors:

(a)    the adequacy of the liquidator’s explanation for the delay in commencing proceedings;

(b)    a preliminary view of the merits of the proposed proceedings; and

(c)    a balancing of the case for granting the extension against any actual prejudice to the respondents that is likely to arise from granting the extension. (See Re Cohalan & Mitchell Roofing (in liq) [2020] VSC 222 at [30]-[33] (Sifris J)).

42    As Mr Blakeley explained, and I agree, the following reasons overwhelmingly favour the making of a shelf order:

(a)    investigations to date have not been able to determine whether there are voidable transactions that are of merit to pursue in respect of potential uncommercial transactions and the international transfers;

(b)    the potential claims involve substantial payments or international transfers which, in view of the scheme, are potentially voidable, and accordingly have potential merit;

(c)    further investigation is required to identify the purpose of the transactions and (in some cases) the recipients of the transfers, among other things; and

(d)    it is not possible to evaluate prejudice to potential defendants, other than presumptive prejudice, since specific claims have not been identified.

43    Counsel also submitted that the following matters provide further justification for the making of the order, and I agree:

(a)    the liquidation of the Group is large and complex, by sheer scale;

(b)    the complexity is heightened by the inadequacy of the books and records, and the lack of cooperation of the Group directors, officers, and employees;

(c)    since the scheme pursued by the Group was a massive fraud against the revenue, involving elements of extensive phoenix activity, exploitation of immigrant workers, and theft of company funds, the public interest is served by extending time to allow the careful and deliberative investigation of the Group’s affairs; and

(d)    it is likely that future claims brought during the extension period will be brought by recipients of company money paid away for improper purposes, rather than creditors or other commercial arm’s length parties. The likely claims do not amount to unfair preferences, for example. Considerations of delay prejudice are accordingly not as important as they might be in shelf orders that preserve voidable transactions arising from legitimate commercial activity.

44    For all those reasons, in my opinion, it was appropriate to make a shelf order of the type sought by the liquidators.

IPSC bank account relief and consolidated return relief

45    Because I made a pooling order, it was necessary only to consider [3(d)] and [3(e)] of the Originating Process.

46    As counsel submitted, the making of the directions may not strictly be necessary but, lest there be any doubt about which account the liquidators are to pay monies out from, or whether they are entitled to lodge a single consolidated annual return, a direction of the type sought was made.

Associate:

Dated:    23 November 2021

SCHEDULE OF PARTIES