Federal Court of Australia

Boardman (liquidator) v Australian Boutique Spirits Pty Ltd, in the matter of Europa International Pty Ltd (in liq) [2021] FCA 1520

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 477(2A) of the Corporations Act 2001 (Cth), the plaintiff on behalf of Europa International Pty Ltd (in liquidation) (ACN 137 519 307) (Company) be authorised nunc pro tunc to enter into the Deed of Settlement and Release being Confidential Exhibit “JRB-2” referred to in the affidavit of John Richard Boardman sworn 25 November 2021.

2.    Pursuant to s 477(2B) of the Corporations Act 2001 (Cth), the plaintiff be authorised nunc pro tunc and to the extent that approval may be required to enter into the Deed of Settlement and Release being Confidential Exhibit “JRB-2” referred to in the affidavit of John Richard Boardman sworn 25 November 2021.

3.    Pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth), Confidential Exhibit “JRB-2” referred to in the affidavit of John Richard Boardman sworn 25 November 2021, until such time as any litigation (including any appeal) arising out of the winding up and affairs of the Company is concluded or until otherwise ordered, shall be kept confidential and not be capable of inspection pursuant to to r 2.32 of the Federal Court Rules 2011 (Cth) by a person who is not a party to this proceeding.

THE COURT DECLARES THAT:

4.    Pursuant to s 1322(4)(a) of the Corporations Act 2001 (Cth), the Deed of Settlement and Release being Confidential Exhibit “JRB-2” referred to in the affidavit of John Richard Boardman sworn 25 November 2021, is not invalid by reason of it having been entered into without the Court’s prior approval.

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

REASONS FOR JUDGMENT

HALLEY J:

Introduction

1    By an interlocutory application filed on 25 November 2021, the first plaintiff, Mr John Boardman, in his capacity as the liquidator (Liquidator) of Europa International Pty Ltd (in liquidation) (Company), applied under ss 477(2A) and 477(2B) of the Corporations Act 2001 (Cth) (Act) for orders that he be authorised to enter into a deed of settlement between the plaintiff and the defendants, on his own behalf and on behalf of the Company.

2    The application is supported by affidavits of the Liquidator sworn on 14 October 2021 and 25 November 2021. The Deed of Settlement and Release (Deed) is found at Confidential Exhibit “JRB-2”. The Liquidator also seeks a suppression order pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth) (FCA Act) in relation to the Deed, such that it not be capable of inspection pursuant to r 2.32 of the Federal Court Rules 2011 (Cth) (FCR) by a person who is not a party to these proceedings.

3    The principal creditor of the Company, Mr Ian Kingham, had been joined as a party to the proceedings pursuant to an order made by Cheeseman J on 26 November 2020. Mr Martin of counsel, who appeared for Mr Kingham, informed the Court that Mr Kingham neither consented nor opposed the proposed orders sought by the Liquidator.

4    For the reasons that follow I am satisfied that it is appropriate to make orders pursuant to ss 477(2A) and 477(2B) of the Act authorising the Liquidator to enter into the Deed on behalf of the Company and for a suppression order to be made in relation to the Deed.

Background

5    This factual background emerges from the affidavits of the Liquidator.

6    On 5 June 2009, the Company was incorporated in New South Wales, Australia.

7    On 26 September 2018, the Liquidator was appointed by a special resolution of the members of the Company. The winding up is proceeding as a creditor’s voluntary winding up.

8    Members of the Beri family controlled the Company throughout its life. The relevant family members are Anil and Meena Beri (the fifth and sixth defendants, respectively), who are husband and wife, and Amit Raj Beri and Sahil Beri (the fourth and seventh defendants, respectively), who are the sons of the fifth and sixth defendants.

9    The Company operated from premises situated at 29 Anvil Road, Seven Hills NSW 2147. It manufactured and sold aromatic bitters which bore the brand “Australian Bitters Company”, and other alcoholic products.

10    On 20 June 2014, the Company entered into a Distributorship Agreement with Coca-Cola Amatil (Aust) Pty Ltd (CCA).

11    In 2015, the Company commenced proceedings numbered 2015/153024 in the Supreme Court of New South Wales (IP Proceedings) against various parties, including Mr Kingham.

12    On 8 July 2016 the IP Proceedings were dismissed and the Company was ordered to pay the costs of the defendants. The Court later ordered on 12 September 2016 that the defendants’ costs incurred from 1 December 2015 were to be assessed on an indemnity basis.

13    On 22 December 2016, the Company entered into two further agreements with CCA.

14    The determination of the quantum of the costs payable by the Company was protracted and had not been completed by 20 April 2018 when a new company, Australian Boutique Spirits Pty Ltd (ABS), the first defendant, was incorporated.

15    On 1 June 2018, the Company issued a letter to the suppliers of the Company which indicated that the business of the Company had been sold to ABS. The Liquidator’s investigations revealed that, as at that date, no contract for the sale of the business had been entered into.

16    In July 2018, National Australia Bank Limited, from which the Company had established a business overdraft facility of $800,000 in August 2011 (Facility), assigned the Facility to the second defendant, Alemnesch Pty Ltd (Alemnesch). The effect of this assignment was to release the second defendant, fourth to sixth defendants and Sona International Pty Ltd (Sona) from their guarantees relating to the Facility.

17    On 31 July 2018, the Company entered into a Deed of Novation with ABS and CCA, novating an entitlement to an agreement between the Company and CCA to ABS. A recital to that deed refers to an intention of the Company to “sell and transfer its business and assets as a going concern” to ABS. It was a condition precedent under that deed that the completion of the sale of business between the Company and ABS complete.

18    The Company’s business was sold to ABS under a document which bears a handwritten date of 1 August 2018, with the purchase price of $626,000. Despite making enquiries, the Liquidator was unable to discover how the purchase price was determined. The Liquidator has formed the view that the sale of business transaction may have been voidable or there may have been contractual remedies available under the sale of business agreement.

19    The electronic accounting records of the Company showed various amounts owed to the Company by certain related parties (Related Parties):

20    On 10 May 2019, the Liquidator issued demands on each of the Related Parties and was met by responses that challenged the accuracy of the books and records that had been kept by the directors of the Company.

21    In June 2021, the Liquidator took steps to publicly examine a list of persons in relation to the affairs of the Company including the fourth to seventh defendants, and lawyers and accountants who had acted for the Company. He also sought production of documents from a number of sources. One of the objects of the examinations that were listed to take place on 24, 25 and 26 November 2021 was to investigate further what may be the correct position in relation to those entries.

22    The Liquidator encountered difficulties serving the examinees and, with the approach of the three year limit on certain actions, brought an application for an extension of that limit pursuant to s 588FF(3) of the Act. That application was opposed.

23    The liquidation is without funds. The Liquidator explored various avenues to obtain funding to pursue investigation and recovery, including a lengthy process with ASIC, which ultimately proved fruitless. The Liquidator also unsuccessfully sought funding from creditors.

24    On 4 November 2021, the Liquidator and the fourth to seventh defendants engaged in a mediation. Although no settlement was reached at that time, the parties were ultimately able to arrive at a settlement on 19 November 2011, the terms of which were recorded in the Deed.

25    Clause 7 of the Deed provides that the provisions of the Deed are subject to and conditional upon court approval. The Liquidator deposes to his understanding that ABS is in the initial stages of preparing for a public offering and the terms of the Deed may impact upon that offering.

26    The terms of the Deed provide for a material payment to be made in the very near future. The Liquidator gives evidence that he took into account the following considerations in concluding that agreeing to the arrangements reflected in the terms of the Deed is in the best interests of the creditors:

(a)    the administration is without funds;

(b)    despite continuing efforts, he has been unable to secure funding on appropriate terms for further investigations and/or litigation;

(c)    the Beri family and their related entities have presented stout resistance to every enquiry he has sought to make regarding their stewardship of the Company and the sale of the business of the Company, and they appear to be sufficiently well resourced to continue that resistance;

(d)    at least Amit Raj Beri, the fourth defendant, apparently resides in the United States of America, and he has not been able to arrive at any reliable view as to the worth of the assets which Amit Raj Beri appears to own; and

(e)    the monies payable under the Deed will permit a certain return to creditors of approximately fifteen to twenty five cents in the dollar which he expects to be in a position to pay promptly subject to the usual procedures of dealing with proofs and effecting the payment of the dividend.

27    In addition to these factors, Mr Spencer of counsel, who appeared for the Liquidator, submits that one may add the balance between the certainty of an outcome for creditors if the settlement sum is received and the need to otherwise incur further expense in examinations and investigation as well as for the cost of any proceedings which may be indicated from those examinations and investigations.

28    Mr Spencer submits that in those circumstances, the Liquidator has made a decision to accept the certainty of an immediate payment. He submits that there is no reason to think that the decision is not made prudently, in good faith and for sound commercial reasons.

29    The terms of the Deed contemplate as the most likely outcome that the principal obligations of the parties will be performed within the next month. In the event that the settlement monies are not paid, the Deed contemplates that the Liquidator may sue on the Deed, in which case certain of the obligations would continue pending the resolution of that suit.

30    Given that the alternative to the settlement of the Deed is for the conduct of examinations and investigations and then the prosecution by litigation of those claims, Mr Spencer submits that the Deed will most likely serve to shorten the administration rather than prolong it.

RELEVANT Legal Principles

31    Pursuant to s 506(1A) of the Act, ss 477(2A) and 477(2B) apply in relation to the Liquidator as if he had been appointed by the Court.

32    Section 477(2A) of the Act, combined with reg 5.4.02 of the Corporations Regulations 2001 (Cth) provides that, except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not compromise a debt to the company if the amount claimed by the company is more than $100,000.

33    Section 477(2B) of the Act provides that except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not enter into an agreement on the company’s behalf if the term of the agreement may end, or obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance more than three months after the agreement was entered into.

34    The approval of the Court is required here because the Deed anticipates a settlement sum in excess of $100,000.

35    It is well established that the Court does not concern itself with the commercial desirability of the transaction in an application for approval pursuant to ss 477(2A) and 477(2B) of the Act. As Giles J stated in the much quoted passage in Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83; 10 ACLC 1742 (Re Spedley) at 85-6:

… the court pays regard to the commercial judgment of the liquidator (re Chase Corporation (Australia) Equities Ltd (1990) 8 ACLC 1118). That is not say that it rubber stamps whatever is put forward by the liquidator but, as is made clear in Re Minerals 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.

36    Further, the observations of Bathurst CJ in Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher and Barnet (2015) 89 NSWLR 110; [2015] NSWCA 85 at [125] are apposite:

Further, it is not generally the function of the court, in granting approval under s 477(2B) of the Act, to review a liquidator’s commercial judgment or to second guess its decision. The court will generally not interfere unless there seems to be some lack of good faith, some error of law or principle, or a real or substantial ground for doubting the prudence of the liquidator’s conduct. However, as was pointed out in each of the cases cited, the court does not act as a mere rubber stamp and will confer the power only when it is satisfied that a case for its exercise, in the particular circumstances, has been shown.

(Footnotes omitted.)

37    The court’s assessment must be made in light of the purposes for which liquidators’ powers exist. One overriding purpose is to serve “the interests of those concerned in the winding up – here the creditors”: Re Spedley at 85 (Giles J); see also McGrath & Anor re HIH Insurance & Ors [2010] NSWSC 404 (McGrath) at [13] (Barrett J); Pascoe in the matter of Brentwood Village Ltd (in liquidation) [2014] FCA 1295 at [44] (Gleeson J). The other purpose is to do whatever needs to be done for the proper realisation of the assets of the company or to assist its winding up: Re GA Listing & Maintenance Pty Ltd (1994) 15 ACSR 308 at 311 (Young J).

38    The release of all claims necessarily involves a release of any debts: Re One Tel Ltd (2014) 99 ACSR 247; [2014] NSWSC 457. If there is room for argument about whether a claim is a debt to the company, the Court should err on the side of treating the claim as a debt rather than declining to grant approval under s 477(2A) on the grounds of lack of jurisdiction: McGrath at [12]; QBE Workers Compensation (NSW) Ltd v GJ Formwork Pty Ltd (2006) 56 ACSR 687; [2006] NSWSC 98 at [4]-[5].

39    In a doubtful case, the Court can grant approval under s 477(2A) of the Act to the extent that approval may be required: Elderslie Finance Corporation Ltd v Newpage Pty Ltd (No 6) (2007) 160 FCR 423; [2007] FCA 1030 (Elderslie Finance) at [34]. I see no reason why this principle would not apply equally to an application for approval under s 477(2B) of the Act.

40    Further, the main consideration in determining whether to give approval under s 477(2B) is the impact of an agreement on the duration of the liquidation and whether it is, in all the circumstances, reasonable in the interests of the administration: In the matter of Opel Networks Pty Limited [2013] NSWSC 1245 at [6]-[7] (Brereton J).

41    A further potential issue arises by reason of the fact that the Deed has already been entered into, albeit that it is subject to the approval of the Court. While approval should normally be obtained in advance of the exercise of the power in question, there appears to be no doubt that the Court has the power to give approval that operates from an earlier time: Re Bell Group Ltd (in liq) (ACN 008 666 993); Ex parte Woodings (as liquidator of the Bell Group Ltd (in liq)) (2013) 97 ACSR 117; [2013] WASC 409 at [34] (Allanson J); Chamberlain v RG&H Investments Pty Ltd and Another (2009) 76 ACSR 415; [2009] FCA 1531 at [22]-[24] (Lindgren J); Re Bell Group Ltd (in liq); ex parte Woodings [2020] WASC 121 at [61]-[62] (Hill J).

42    As noted in those authorities, there is some divergence of opinion as to the precise basis as to how retrospective approval ought to be effected. The divergence of opinion, however, would appear to make clear that, for an abundance of caution, it may be prudent for the Court to order that the approval be granted nunc pro tunc and potentially also make a declaration under s 1322(4)(a) that the settlement agreement is not invalid by reason of it having been entered into without the Court’s prior approval. In addition, consideration has been given in those authorities to the making of directions under s 479(3) of the Act that each plaintiff may rely on the settlement agreement as if it had been entered into with the prior approval of the Court, and that in appropriate circumstances, an extension of time might be required for a plaintiff to bring an application for approval under s 477(2A) or s 277(2B), and in those circumstances, an order may be made that time be extended. Section 479(3) of the Act has since been repealed, but I note that such a direction could now be made pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations), being Sch 2 of the Act.

Consideration

43    In the circumstances outlined above, in particular at [26]-[30], I am satisfied that it is appropriate for an order to be made, nunc pro tunc, largely in the form sought by the plaintiff pursuant to ss 477(2A) of the Act authorising the Liquidator to enter into the Deed on behalf of the Company. The Deed provides an immediate and certain financial return. The absence of any funding to pursue litigation that is likely to be contested and give rise to significant legal expenses, the uncertainty of success and ultimate recovery, and the lack of any opposition to the entry by the principal creditor to entry into the Deed all weigh heavily in favour of granting approval for the Liquidator to enter into the Deed on behalf of the Company.

44    It is possible, albeit unlikely, that the obligations of the parties to the Deed will not be discharged within three months of the Deed being entered into. I am therefore satisfied that it would be prudent to also make an order, nunc pro tunc, pursuant to s 477(2B) of the Act authorising the Liquidator to enter into the Deed on behalf of the Company.

Confidentiality

45    The Liquidator also seeks a confidentiality order in relation to the Deed, being Confidential Exhibit “JRB-2”.

46    Rule 2.32 of the FCR permits a person who is not a party to proceedings to apply to the Court for leave to inspect a document that the person is not otherwise entitled to inspect. Rule 2.32(3) prevents a person who is not a party from inspecting a document if the Court has ordered the document be “confidential”.

47    Section 37AF of the FCA Act allows the Court to make a suppression order in appropriate circumstances to prohibit the disclosure of evidence in a proceeding. Section 37AG permits the Court to make such an order where the order is necessary to prevent prejudice to the proper administration of justice.

48    There is a clear public interest in the due and beneficial administration of the estates of insolvent companies and individuals, which are both in issue in these proceedings: Mansfield v Thousand Angeles Island Pty Ltd (in liq), in the matter of Thousand Angeles Island Pty Ltd (in liq) (No 2) [2021] FCA 283 at [25] (Farrell J). That interest is served by facilitating the entry by liquidators into settlement arrangements with parties that have concerns that in documenting those arrangements they might suffer commercially in ways unconnected with the settlement.

49    The Liquidator gives evidence that ABS is in the initial stages of planning a public offering in 2022 and that the Beri family are concerned that the disclosure of the terms of the settlement that has been reached might adversely affect that public offering.

50    The terms of the Deed provide for the parties to maintain confidentiality in relation to the terms and substance of the Deed. That clause is subject to a carve out so as not to interfere with the statutory obligations that the Liquidator has to this Court and the creditors.

51    Making a suppression order is consistent with the proposition that the Court will aid the proper efforts of liquidators to negotiate settlements of claims in the interests of creditors. By maintaining the confidentiality of the specific terms of the Deed, but otherwise through the provision of these reasons for making the orders sought by the Liquidator, I am satisfied that the Court has acted consistently with the principles of open justice and otherwise permitted the Liquidator to limit the disclosure of its terms to what is necessary to properly inform the creditors of the conduct of the liquidation.

52    It is submitted by the Liquidator, and I accept, that in the circumstances of this case, the public interest in open justice will not be significantly compromised if the precise terms upon which these litigants have resolved proceedings are not publicised. I also note that as a party to these proceedings, Mr Kingham has been provided with a copy of the submissions of the Liquidator and has not opposed the Court approving the entry by the Liquidator into the Deed on behalf of the Company.

53    I am therefore satisfied that it is appropriate to make the suppression order sought under s 37AF of the FCA Act as a necessary measure to prevent prejudice to the proper administration of justice pursuant to s 37AG(1)(a).

Associate:    

Dated:    2 December 2021

SCHEDULE OF PARTIES