FEDERAL COURT OF AUSTRALIA

Algeri, in the matter of Gem Management Group Pty Ltd (in liq) (No 2) [2024] FCA 940

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) (IPS), being Schedule 2 to the Corporations Act 2001 (Cth), that the applicants (together, the Liquidators) are justified in distributing the assets of the VKK Investments Unit Trust, being the net proceeds of sale of the property located at 64 Hutton Road, Keysborough in the State of Victoria 3173, less remuneration and legal costs (the Liquidation Fund) and finalising the liquidation of GEM Management Group Pty Ltd (in liquidation) (the Company) and winding up the Trust without commencing and, or alternatively, pursuing possible claims against the directors for any breaches of duty for losses suffered by investors arising from their investments in an unregistered managed investment scheme (the Possible Claims).

2.    Pursuant to s 1318 of the Corporations Act and, or alternatively, s 67 of the Trustee Act 1958 (Vic), the Liquidators be relieved from any liability for distributing the Liquidation Fund and finalising the liquidation of the Company and winding up the Trust without commencing and, or alternatively, pursuing the Possible Claims.

3.    There be liberty to apply.

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

REASONS FOR JUDGMENT

MCEVOY J:

1    Before the court is an interlocutory process filed on 26 April 2024 and made pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) (IPS), being Schedule 2 to the Corporations Act 2001 (Cth) and s 1318 of the Corporations Act as to the distribution of the assets of the VKK Investments Unit Trust, being the net proceeds of sale of the property located at 64 Hutton Road, Keysborough in the State of Victoria 3173, less remuneration and legal costs (the Liquidation Fund).

2    At all relevant times, Gem Management Group Pty Ltd (A.C.N. 143 095 774) (the Company) was the trustee of the Trust. As trustee of the Trust, the Company owned the property and operated an unregistered managed investment scheme (the Scheme). On 20 April 2018, the applicants (together, the Liquidators) were appointed joint and several liquidators of the Company and the Scheme, and trustees of the Trust (on the application of the Australian Securities and Investment Commission).

3    In support of their application, the Liquidators rely on the confidential affidavit of Mr Robert Scott Woods sworn on 8 March 2024 (the Confidential Affidavit), the open affidavits of Mr Woods sworn on 20 May 2022 (the First Woods Affidavit) and 8 March 2024 (the Second Woods Affidavit), two affidavits of service of Ms Isabella Cardaci sworn on 30 May 2024 and 14 June 2024, and an affidavit of Mr Thomas Clark affirmed on 27 June 2024 (the Clark affidavit). They rely also on written submissions signed by senior and junior counsel dated 14 June 2024.

4    Since their appointment, the Liquidators appear to have completed extensive investigations into the operations of the Company, the Trust and the Scheme. The sale of the property realised a substantial amount to be returned to investors, but the records of the Company were, it seems, in disarray and inaccurate. In addition, the investors in the Scheme were unsophisticated and, on the whole, did not speak English. As a result, the process of determining their entitlements to the proceeds from the sale of the property was complex and lengthy. The evidence of the Liquidators is that that task is now complete and that they have substantially completed the liquidation.

5    Subject to the present application and two other matters (which are dealt with at [21]-[22] below), the Liquidators are in a position to distribute the Liquidation Fund to the investors and finalise the liquidation.

6    The present application concerns the availability of possible claims against the directors of the Company. The Liquidators submit that throughout the course of the liquidation they have considered whether they should pursue the directors for breaches of duty for the losses suffered by investors arising from their investments in the Scheme (the Possible Claims) before they distribute the Liquidation Fund to investors. For the reasons set out in the Confidential Affidavit, however, they have decided not to do so.

7    It is against this background, and by their interlocutory process filed on 26 April 2024, that the Liquidators seek orders approving the distribution of the Liquidation Fund and the finalisation of the liquidation of the Company/winding up of the Trust without them pursuing the Possible Claims. It is the Liquidator’s position that, in the circumstances set out in the affidavit material and written submissions, such orders would facilitate the just and beneficial conduct of the liquidation, and provide the Liquidators with appropriate protection.

8    For the reasons that follow the Liquidators will have the orders sought in paragraphs 1, 2 and 5 of their interlocutory process dated 26 April 2024. For completeness I note that the court’s orders dated 30 May 2024 refer paragraph 3 of the interlocutory process, which relates to the Liquidators’ remuneration pursuant to s 90-15 of the IPS, to a Registrar. Those orders also require that the Confidential Affidavit not be provided for inspection to any person or party without an order of the court pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth).

BACKGROUND

9    A detailed timeline of the relevant history of the Trust is set out in the First Woods Affidavit. However, the relevant background facts for the purposes of the present application are as follows.

10    The Trust was established on 9 January 2007 with Mr Eang Kang as trustee for the purposes of completing a property development, which was to be funded by investors. On 22 March 2007, Mr Kang (as trustee of the Trust) entered into a contract to purchase the property for $21.4m, payable over three years.

11    Apparently sometime in the period May to June 2010 (Mr Woods is unable to say precisely when) the Company was appointed as trustee of the Trust. As insufficient funds had been raised by that time to complete the purchase of the property, the Company issued an information memorandum inviting prospective investors to participate in the scheme to fund the purchase and rezoning of the property as investors in the Trust.

12    Relevantly, the information memorandum provided that if $21m could not be raised by the completion of the purchase of the property, then the money that had been invested to that point would be returned to the investors, plus the interest earned (the Repayment Obligation).

13    The Company failed to raise the amount required to purchase the property by the time of settlement. Notwithstanding the Repayment Obligation and the Company’s failure to raise adequate funds to complete the purchase, however, the Company did not return the money that had been contributed by investors to them.

14    Instead, the settlement date was extended, and to fund the shortfall:

(a)    on 30 March 2011, the Company took out a loan from Woodlane Pty Ltd (A.C.N. 149 373 357 (Woodlane) in the sum of $5.522m (the Woodlane Loan); and

(b)    Mr Kang and another director lent the Company the sum of $3,522,619.75.

15    On 31 March 2011, the purchase of the property settled, with the Company having raised $27,063,944.80. However, only $18,019,325 of that sum was raised from investors. The balance came from Woodlane and the directors.

16    Between December 2014 and November 2016, various other loans were entered into by the Company in relation to repaying the Woodlane Loan and otherwise.

17    As has been mentioned, on 20 April 2018, the Liquidators were appointed to the Company and to the Trust. Shortly thereafter, on 5 June 2018, the property was sold by Principled Mortgage Investments Pty Ltd, as mortgagee, for a sale price of $30,000,000.

18    After their appointment the Liquidators commenced work on the task of determining the interests of the investors who contributed to the purchase of the property. That task was complex, as the records maintained by the directors of the Company were apparently substantially incomplete and unreliable, and the Liquidators faced challenges in communicating with the investors. To attempt to work out the sums that investors had contributed to the purchase of the property the Liquidators had to reconstruct the records that they received and take steps to corroborate the information contained within them from other sources.

19    Having done the best they could in the circumstances to prepare an estimate of the investors’ interests in the Trust, but not being certain that their conclusions were correct, the Liquidators sought orders concerning the distribution of the assets of the Trust, those assets being the net proceeds of sale of the property less the Liquidation Fund. Specifically, the Liquidators sought orders:

(a)    pursuant to s 90-15 of the IPS, that they were justified in adopting a course that would see them conduct a “proof of claim” process (and were entitled to their remuneration, costs and expenses);

(b)    pursuant to s 63 and, or alternatively, or s 63A of the Trustee Act 1958 (Vic), or s 23 of the Federal Court Act, granting them the necessary power to adopt the course they proposed; and

(c)    pursuant to s 1318 of the Corporations Act and, or alternatively, s 67 of the Trustee Act, relieving them from liability for adopting that proposed course.

20    On 17 October 2022, the court made orders in these terms: Algeri, in the matter of Gem Management Group Pty Ltd (in liq) [2022] FCA 1229.

21    Thereafter, the Liquidators conducted their proof of claim process. That process was completed in about February 2023. Two related parties appealed the Liquidators’ rejection of their proofs of claim, and those appeals resolved on 16 August 2023. After that, the proof of claim process appeared to be finalised, but on 30 May 2024 one of the directors of the Company, Mr Hakly Lao, informed the Court that he wished to appeal against the rejection of various proofs he had submitted. On 25 June 2024 Mr Lao filed an interlocutory application to this effect.

22    On 23 July 2024 a Registrar granted leave for Mr Lao or other claimants to file an appeal by 22 August 2024 (pursuant to sub-regulation 5.6.54(3) of the Corporations Regulations 2001 (Cth)) against notices of rejection provided by the Liquidators to Mr Lao in respect of two claims made by Keysborough Diamond Pty Ltd and one claim made by DSC4-3 Pty Ltd. The Registrar otherwise dismissed Mr Lao’s interlocutory application. The extant parts of that application thus remain to be dealt with after 22 August 2024, as does the Liquidators’ final remuneration application. It is the Liquidators’ position, confirmed to the court in writing on 27 June 2024 and 29 July 2024, that Mr Lao’s application should not impact or effect the progress or determination of the present application.

23    Subject to those two matters (and the present application), the Liquidators submit that they are now ready to distribute the Liquidation Fund and finalise the liquidation.

24    The Liquidators wish to finalise the liquidation without commencing the Possible Claims and, given the possibility that some investors may be dissatisfied with that decision, they seek the Court’s approval of that proposed course.

THE STATUTORY REGIME AND RELEVANT PRINCIPLES

25    Section 90-15(1) of the IPS provides that the court may make such orders as it thinks fit in relation to the external administration of a company which may include an order determining any question arising in the external administration of the company: see s 90-15(3)(a).

26    In Kelly (as joint and several liquidators of Halifax Investments Services Pty Ltd (in liq)) v Loo (No 8) (2020) 144 ACSR 292 at [50]–[59], Gleeson J set out the principles applicable to the exercise of the power in s 90-15 of the IPS (and its predecessor s 479(3) of the Corporations Act) and observed that:

(a)    the court’s supervisory powers under s 90-15 of the IPS are arguably as broad, or broader, than its powers under the former s 479(3) of the Corporations Act: Ample Source International Limited v Bonython Metals Group Pty Limited (in liquidation), in the matter of Bonython Metals Group Pty Limited (in liquidation) (No 8) [2018] FCA 1614 at [88]-[92];

(b)    in Re Ansett Australia Ltd (all admin apptd) and Korda (as admin) (2002) 115 FCR 409; 40 ACSR 433, Goldberg J explained at [44]:

When liquidators and administrators seek directions from the Court in relation to any decision they have made, or propose to make, or in relation to any conduct they have undertaken, or propose to undertake, they are not seeking to determine rights and liabilities arising out of particular transactions, but are rather seeking protection against claims that they have acted unreasonably or inappropriately or in breach of their duty in making the decision or undertaking the conduct. They can obtain that protection if they make full and fair disclosure of all relevant facts and circumstances to the Court. In Re G B Nathan & Co Pty Ltd (1991) 24 NSWLR 674; 5 ACSR 673, McLelland J said at NSWLR 679–80; ACSR 678:

The historical antecedents of s 479(3) …, the terms of that subsection and the provisions of s 479 as a whole combine to lead to the conclusion that the only proper subject of a liquidator’s application for directions is the manner in which the liquidator should act in carrying out his functions as such, and that the only binding effect of, or arising from, a direction given in pursuance of such an application (other than rendering the liquidator liable to appropriate sanctions if a direction in mandatory or prohibitory form is disobeyed) is that the liquidator, if he has made full and fair disclosure to the court of the material facts, will be protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company in respect of anything done by him in accordance with the direction.

…

Modern Australian authority confirms the view that s 479(3) ‘does not enable the court to make binding orders in the nature of judgments’ and that the function of a liquidator’s application for directions ‘is to give him advice as to his proper course of action in the liquidation; it is not to determine the rights and liabilities arising from the company’s transactions before the liquidation’: [citations omitted];

(c)    Justice Goldberg concluded in Re Ansett Australia at [65]:

[T]he prevailing principle adopted by the courts, when asked by liquidators and administrators to give directions, is to refrain from doing so where the direction sought relates to the making and implementation of a business or commercial decision, either committed specifically to the liquidator or administrator or well within his or her discretion, in circumstances where there is no particular legal issue raised for consideration or attack on the propriety or reasonableness of the decision in respect of which the directions are sought. There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, the decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised. It is insufficient to attract an order giving directions that the liquidator or administrator has a feeling of apprehension or unease about the business decision made and wants reassurance. There must be some issue which arises in relation to the decision. A court should not give its imprimatur to a business decision simply to alleviate a liquidator’s or administrator’s unease. There must be an issue calling for the exercise of legal judgment.

(d)    in Handberg (in his capacity as liquidator of S & D International Pty Ltd (in liq)) v MIG Property Services Pty Ltd (2010) 79 ACSR 373, Warren CJ approved the liquidator’s compromise of legal proceedings involving competing claims over a property held on trust, exercising the power then conferred by s 511 of the Corporations Act. Her Honour, at [17], described the case as one that “dealt with the risk attendant upon a conscientious liquidator in an acrimonious liquidation environment” and considered that s 511 orders may have utility to protect liquidators “where such protection would be just and beneficial to advancing the liquidation process as a whole”;

(e)    in Re One.Tel Ltd (2014) 99 ACSR 247 at [35] Brereton J noted the need for caution in making a direction, saying:

But the fact that a direction under s 511 — unlike an approval under s 477(2A) or (2B) — exonerates the liquidator from personal liability, means that a closer examination of the liquidator’s decision is required than under s 477. In short, the court should not make a direction the effect of which is to exonerate the liquidator from personal liability in respect of a commercial judgment that the liquidator is concerned may prove contentious, unless satisfied that the liquidator’s decision is, in all the circumstances, a proper one.

(f)    in Re KSK Holdings (Australia) Pty Ltd (in liq) [2019] NSWSC 1463 at [18], Rees J explained:

The Court may give directions where it will be “of advantage in the liquidation”: Dean-Wilcox v Soluble Solution Hydroponics Pty Limited (1997) 42 NSWLR 209 at 212; (1997) 24 ACSR 79 at 81. The Court will not generally give a direction where the matter relates to the making or implementation of a business or commercial decision or when no legal issue is raised, or where there is no attack on the propriety or reasonableness of the liquidator’s decision, but it may do so where there is the prospect of such an attack: In the matter of 7 Steel Distribution Pty Limited (in liquidation) (receivers and managers appointed) [2013] NSWSC 669 at [20] per Black J; In the matter of Dungowan Manly Pty Limited (in liq) [2018] NSWSC 1083 at [17].

27    I accept that these principles are of application in the present circumstances.

THE POTENTIAL CLAIMS AGAINST THE DIRECTORS

28    As has been mentioned, by their interlocutory process the Liquidators have sought a direction pursuant to s 90-15 of the IPS that they are justified in distributing the Liquidation Fund and finalising the liquidation without commencing and, or alternatively, pursuing the Possible Claims, and an order under s 1318 of the Corporations Act and, or alternatively, s 67 of the Trustee Act, relieving them from any liability for having taken that course.

29    The Liquidators have explained in the Confidential Affidavit the reasons they have decided not to pursue the Possible Claims, and they have exhibited an opinion they received from senior counsel in that respect. I accept that in the circumstances set out in that affidavit and in the opinion from senior counsel, the Liquidators’ decision is reasonable.

30    The Liquidators’ application for these directions is made in circumstances where the investors are largely unsophisticated and vulnerable. They may regard themselves as victims of the Company’s misconduct and feel aggrieved by their losses, and they may not appreciate the reasoning behind the Liquidators’ decision. In all the circumstances I accept that it would be just and beneficial to the liquidation process to afford the Liquidators protection against any allegations that might be made that they have acted unreasonably or inappropriately or in breach of their duties in taking their proposed course.

DISPOSITION

31    As has been mentioned, on 30 May 2024 a Registrar of the court made orders in this proceeding, including that, by 14 June 2024, the Liquidators:

(a)    file submissions in support of the present application;

(b)    publish a statement directed to the investors in the Trust via their electronic portal asking if any of them wish to be heard in relation to this application (which statement was to require investors to notify the Liquidators of any desire to be heard by 21 June 2024); and

(c)    file an affidavit deposing to their provision of all filed court documents to the investors, and the posting of the statement to the investors, by use of the portal.

32    The Clark affidavit sets out the response from investors in relation to the invitation to be heard. Mr Clark deposes that on 17 June 2024 the Liquidators received an email from Mr Sayyad Mohiddin indicating that he wished to be heard in relation to this application. The Liquidators and Mr Mohaddin exchanged several emails between 19 June 2024 and 26 June 2024. On 27 June 2024 the Liquidators requested that the court make a direction that Mr Mohiddin confirm his position. Accordingly, on 28 June 2024, the court ordered that he do so by 2 July 2023, failing which the Liquidators’ application would be determined on the papers.

33    On 2 July 2024 Mr Mohiddin informed the Court by email that he no longer sought to be heard in relation to this application.

34    The Clark affidavit deposes that no other investor has contacted the Liquidators giving notification that they wish to be heard in respect of this application.

35    In all the circumstances I am satisfied that it is appropriate to grant the relief sought by the Liquidators in paragraphs 1, 2 and 5 of their interlocutory process, broadly in the terms that they seek.

Associate:

Dated:    20 August 2024