Federal Court of Australia

Higgins v JSS Logistics Pty Ltd (in liq) (No 2) [2023] FCA 92

ORDERS

THE COURT ORDERS THAT:

1.    Gregory Bruce Dudley and Jerome Hall Mohen as joint and several liquidators of the first defendant be joined as third defendants.

2.    Pursuant to s 477(2A) and s 477(2B) of the Corporations Act 2001 (Cth), the third defendants on behalf of the first defendant be authorised nunc pro tunc to enter into the deed of settlement dated 10 November 2022 with Simm Group Assets Pty Ltd and Simmcal Pty Ltd.

3.    Paragraph 4 of the orders made 20 December 2021 be vacated, and the surplus proceeds of sale from the agreement of sale between Simm Group Assets Pty Ltd and the first defendant dated on or about 15 November 2021, as amended by a deed of amendment dated 15 November 2021, currently held in the trust account of the plaintiff's solicitors (Mendelawitz Morton), be released to the third defendants.

4.    The third defendants' costs of this application are proper costs of the liquidation.

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

REASONS FOR JUDGMENT

BANKS-SMITH J:

1    The liquidators of JSS Logistics Pty Ltd (in liq) (Gregory Dudley and Jerome Mohen of RSM Australia Partners) applied for orders under s 477(2A) and s 477(2B) of the Corporations Act 2001 (Cth) relevantly that they be permitted to enter into and give effect to a Deed of Settlement dated 10 November 2022.

2    I heard the application on 9 February 2023 and made orders on that date, effectively in the terms sought by the liquidators. These are my reasons for doing so.

Background

3    The parties to the Deed are JSS Logistics, Simm Group Assets Pty Ltd, Simmcal Pty Ltd and the liquidators. By the Deed the parties seek to settle disputes between them, including those arising out of a sale of business between JSS Logistics as vendor and one or both of Simm Group and Simmcal as purchaser.

4    The background to the appointment of the liquidators is included in the reasons of Jackson J in Higgins v JSS Logistics Pty Ltd (in liq) [2022] FCA 1320. For convenience I extract the relevant paragraphs:

[3]    JSS Logistics operated a transport and logistics business in WA from two depots, located in Perth and in Karratha. Its two directors and two shareholders in equal shares were a married couple: Sarah Higgins and James Stewart.

[4]    In about August 2020, following the breakdown of their marriage, Ms Higgins and Mr Stewart agreed to sell JSS Logistics' business and assets with a view to ceasing trading. In November 2021 this culminated in an agreement for the sale of the company's business to Simm Group Assets Pty Ltd. Completion of the sale occurred on 15 December 2021.

[5]    On 30 November 2021, Ms Higgins commenced proceedings in this Court seeking orders for the winding up of JSS Logistics. An interlocutory application was also filed on 30 November 2021 seeking the appointment of provisional liquidators until the making of a winding up order.

[6]    On 2 February 2022, Mr Dudley and Mr Mohen were appointed as joint and several provisional liquidators pursuant to s 472(2) of the Corporations Act 2001 (Cth). According to a report that the provisional liquidators lodged with the Court at the beginning of March 2022, as at the date of their appointment there were several outstanding matters regarding the sale to Simm Group that needed to be resolved. These included the transfer of registration of the company's numerous vehicles to Simm Group and the assignment of the lease for the Perth depot and transfer of service contracts from the company to Simm Group. Net sale proceeds held in a solicitors' trust account pursuant to an order the Court made in December 2021 also needed to be distributed, and there was a potential claim by Simm Group for damages relating to non-delivery of assets and resulting loss of turnover.

5    His Honour's reference at [6] to proceeds held in a solicitors' trust account is relevant to this application and is expanded upon below.

6    The facts relevant to this application are otherwise set out in an affidavit of Mr Dudley affirmed 6 December 2022 and an affidavit of his solicitor, Alister Norwood, sworn 3 February 2023.

7    Under the sale agreement, JSS Logistics agreed to sell its business and all assets, except for certain excluded fleet assets, to Simmcal for the sum of $4,382,938. Whilst the evidence is not entirely conclusive, it appears that Simm Group was later purportedly substituted as purchaser.

Disputes arising out of sale agreement

8    Upon settlement, it was discovered that various assets of JSS Logistics that were to be transferred under the sale, being various vehicles and trailers and JSS Logistics' stock and consumables at its Perth depot, were missing. The completion of the sale proceeded to the extent then possible, but on 20 December 2021 orders were made by Jackson J by consent obliging the second defendant, as director of JSS Logistics, to pay the proceeds of sale into a solicitors' trust account for distribution to certain secured and unsecured creditors, with the balance to remain on trust pending further orders. Neither Simmcal nor Simm Group were a party to the Court proceedings.

9    Pursuant to those orders, the balance purchase proceeds in the amount of $1,577,887.01 were deposited into the solicitors' trust account in the name of JSS Logistics on or about 22 December 2021. The amount held on trust was subsequently reduced after a payment made by consent and at the date of Mr Dudley's affidavit stood at $1,294,987.15.

10    Following settlement, Simm Group asserted various claims in the sum of $1,688,375.52 against JSS Logistics for breach of the sale agreement, made up as follows:

(a)    missing plant and equipment in the amount of $332,000;

(b)    missing stock in the amount of at least $500,000; and

(c)    damages in the amount of $856,375.52 for lost profits it claimed to have suffered as a result of not receiving those items.

11    Simm Group has asserted a right to the funds held on trust for the above claims. Mr Dudley explained that Michael Simm, a director of both Simm Group and Simmcal, contended that before they agreed to proceed with the sale they 'insisted on being protected by having the purchase funds put into a trust account until all the conditions of sale were satisfied as per the sale agreement'.

12    The liquidators challenged this assertion of an interest in the trust fund, contending that the sale proceeds were paid into trust pursuant to the court orders and over concerns by disputing directors that the funds might not be used by JSS Logistics 'for proper purposes'.

13    Simm Group later increased its claims against JSS Logistics to the sum $1,802,737 and also claimed a lien over two items of fleet that had been excluded from the sale, but were left in Simm Group's possession post-completion.

14    The liquidators continued to challenge Simm Group over both the lien and the quantum claimed, particularly noting the walk-in walk-out nature of the sale and the manner in which profits had been calculated for the damages claim. The liquidators also maintained concerns that valuations of vehicles and equipment relied upon in the claim were not appropriately discounted.

15    Subsequently the liquidators received a without prejudice offer from Simm Group by its lawyer. Although the quantum claimed had been adjusted, the claim to the moneys on trust was maintained, as was the lien. The liquidators rejected the without prejudice offer, and told Simm Group that they would bring proceedings to seek release of the trust funds to them.

16    The liquidators also received correspondence from lawyers acting for Simmcal, threatening legal proceedings relating to the sale.

17    Importantly, the liquidators also ascertained that there was a debt in the sum of $146,751.19 owed by Simmcal to JSS Logistics recorded in the books of JSS Logistics (Simmcal debt).

18    The parties then participated in various without prejudice meetings. During the course of the negotiations, the liquidators were provided with information for the first time from which they ascertained that the value of the missing stock might be far more than they had previously understood. They were also given copies of correspondence that they had not previously seen that supported Mr Simm's claim that there had been pre-settlement communications between Mr Simm and Nigel Gill of Ascend Capital (who appears to be a business broker who was involved in the sale process) about the proceeds of sale being paid into trust pending the resolution of disputes about allegedly missing plant, equipment and stock.

19    Following various meetings and after obtaining legal advice, the parties negotiated a settlement that would resolve all disputes apart from the damages claim asserted by Simm Group, including any dispute as to the Simmcal debt, and recorded those terms in the Deed.

Terms of the Deed

20    The Deed provides as a condition precedent that the Liquidators are to obtain Court approval to enter into and effect the matters in the Deed, and otherwise provides that:

(a)    Simm Group is to receive $500,000.00 from the funds held on trust;

(b)    the balance of the trust fund is to be released to the liquidators;

(c)    Simmcal and Simm Group (the Simm parties) release JSS Logistics and the liquidators (the JSS parties) from all claims the Simm parties may have against the JSS parties in relation to JSS Logistics, the sale agreement, an option included in the sale agreement and the trust fund;

(d)    the JSS parties release the Simm parties from all claims the JSS parties may have against the Simm parties (including the Simmcal debt) in relation to JSS Logistics, the Sale Agreement, the option and the trust fund but excluding the damages claim;

(e)    the JSS parties are free to deal with and realise the excluded fleet items in the ordinary course of the liquidation of JSS;

(f)    the Simm parties are entitled to prove in the winding up of JSS logistics for the damages claim in accordance with Division 6 of Part 5.6 of the Corporations Act; and

(g)    the Simm parties will use their best endeavours to assist the liquidators with their investigations into the damages claim including by providing any information reasonably requested by the liquidators.

Why this application was brought

21    The outcome of the negotiated settlement with its mutual releases results in the compromise of the Simmcal debt due to JSS Logistics, and so approval is required under s 477(2A) of the Corporations Act.

22    The liquidators consider that the obligations under the Deed may also take longer than three months to be discharged, so formed the view that approval is likely and should be sought under s 477(2B) of the Corporations Act in order to implement the Deed.

Consideration of the merits by liquidators

23    Mr Dudley explains in his affidavit why he considers that entry into the Deed is reasonable, proper and beneficial for the creditors of JSS Logistics. He set out six reasons, which I paraphrase.

24    First, he notes that JSS Logistics will be released from debts that total some $832,000, having regard to the missing plant and equipment of $332,000, and missing stock claimed at $500,000, according to the amounts claimed by Simm Group. It will also be released from claims relating to the alleged excluded fleet.

25    Second, and in return, the Simm parties are to be paid $500,000 from the trust account plus have the benefit of the release of the Simmcal debt. The liquidators consider the real value of that debt may be only $64,651.51, so that the benefit to the Simm parties can reasonably be assessed at $564,651.51, an amount considerably less than the $832,000 claimed from JSS Logistics.

26    Third, JSS Logistics will obtain the benefit of immediate access to the balance funds in the trust account without further dispute and, in particular, without awaiting the outcome of the disputed damages claim.

27    Fourth, the damages claim, being the largest claim by the Simm parties, does not need to be resolved immediately and will be subjected to the usual proof of debt process, with the added contractual obligation of the Simm parties to assist the liquidators in providing relevant information for that process.

28    Fifth, any opposition to the sale of the excluded fleet items by the liquidators is avoided and they may now proceed to realise those assets in the usual course.

29    Sixth, the uncertainty and costs of litigation that might otherwise have been incurred by the liquidators in resolving the various claims involving the Simm parties and JSS Logistics is avoided, including claims relating to the funds held on trust.

Principles - power under s 477(2A) and s 477(2B)

30    The principles that apply to the exercise of power under s 477(2A) and s 477(2B) of the Corporations Act are well known and were usefully collected by Halley J in Vardy v Linz, in the matter of Bondi Pizza Pty Ltd (in liq) [2021] FCA 530. I respectfully adopted those reasons in Rathner v Fopar Nominees Pty Ltd, in the matter of Reliance Franchise Partners Pty Ltd (in liq) [2022] FCA 1313 at [14], and again adopt the following from his Honour's reasons:

[13]    Section 477(2A) of the Corporations 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.

[14]    Section 477(2B) of the Corporations 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.

[15]    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 Corporations Act. As Giles J stated in the much quoted passage in Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83; 10 ACLC 1742 at 85-86:

… the court pays regard to the commercial judgment of the liquidator (re Chase Corporation (Australia) Equities Ltd (1990) 8 ACLC 1118). That is not 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.

[16]    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]

…

[22]    A further potential issue arises by reason of the fact that the Deed of Settlement and Release 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); ex parte Woodings (2013) 97 ACSR 117; [2013] WASC 409 at [34]; Chamberlain v RG & H Investments Pty Limited, in the matter of Hardy Bros (Earthmoving) Pty Limited (in liq) (No 2) (2009) 76 ACSR 415; [2009] FCA 1531 at [22]-[24]; and Re Bell Group Ltd (in liq); ex parte Woodings [2020] WASC 121 at [61]-[62].

[23]    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 Corporations 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 Corporations 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 Corporations Act.

31    It is also established that the role of the court is to grant or deny approval of the liquidator's proposal, not to develop some alternative proposal: Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 16 ACLC 1642 at 1649 (Austin J).

32    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: Re Opel Networks Pty Ltd [2013] NSWSC 1245 at [7] (Brereton J); Lindholm (liquidator), in the matter of Aviation 3030 Pty Ltd (in liq) [2021] FCA 1244 at [44] (Anderson J); and Ball, in the matter of ACN 605 650 182 Pty Ltd (in liq) [2022] FCA 2 at [24] (Cheeseman J).

Notice to creditors and position of other parties

33    There is no contradictor to this application. Mr Simm informed the liquidators that 'we' (presumably the Simm parties) consent to the orders being sought. That position is unsurprising, in light of the execution of the Deed.

34    However, other interested parties received notice of the application but none has chosen to be heard, and none has indicated any opposition to the orders sought. In particular, the plaintiff has notified the Court that she consents to the application. The second defendant neither consents to nor opposes the application.

35    On 4 January 2023 the liquidators' second report to creditors was distributed to the creditors of JSS Logistics. It notified creditors of the terms of the Deed and this application including the date of the hearing. As at the date of the hearing the liquidators had received no response from any creditor relating to the application. None sought to be heard at the hearing.

Disposition

36    It might be said that the liquidators have taken a conservative approach in bringing this application, given that it is unclear that a debt exceeding the statutory amount is the subject of compromise, and it is unclear that the relevant three month time period will be exceeded. However, given the uncertainties confronting them, it was not inappropriate to follow this course and I have decided that entry into the Deed is commercially reasonable and in the best interests of creditors.

37    This is so for the reasons relied upon by the liquidators and referred to at [23]-[29] above. Further, it seems to me that the claim to the trust funds was in effect a claim by the Simm parties (or one of them) to priority payment from those funds, placing their claim in a different category to an ordinary unsecured claim by a creditor. I accept that resolution of that claim may have required litigation and at considerable cost. That the compromise of the Simmcal debt has been secured in conjunction with the resolution of such contested claims to my mind reduces the likely length of the liquidation as a whole and the concomitant cost to creditors.

38    I am also persuaded in this view by the evidence that I have referred to that suggests that the liquidators decided to enter into the Deed only after investigations and negotiations, including a range of questions directed to the Simm parties and challenges to their calculations of the various claims.

39    The operation of the Deed is conditional upon Court approval. Should it be necessary having regard to the date of execution of the Deed, I will provide that the order shall operate retrospectively.

40    I am also satisfied that the costs of the application should be costs in the liquidation.

41    For completeness, I note that although the interlocutory application referred to relief under s 90-15(1) of Schedule 2 of the Corporations Act (the Insolvency Practice Schedule), the application was pursued seeking relief under only s 447(2A) and s 447(2B) of the Corporations Act.

Associate:

Dated:    14 February 2023