Federal Court of Australia
Knight as liquidator of Wenshang Developing Pty Ltd (in liq) v Wenshang Developing Pty Ltd (in liq) [2024] FCA 1395
ORDERS
DATE OF ORDER: |
THE COURT ORDERS THAT:
1. Pursuant to s 488(2) of the Corporations Act 2001 (Cth), Tracy Lee Knight in her capacity as liquidator (Liquidator) of Wenshang Developing Pty Ltd (in liquidation) (Company) be granted leave to distribute the surplus in the winding up of the Company.
2. The Liquidator is authorised to distribute any surplus funds available in the liquidation of the Company as follows:
(a) to Mr Minghu Zhou – 40%; and
(b) to Mr Keqing Zhang – 60%.
3. The costs, expenses and remuneration incurred by the Liquidators, including the costs of this application, be paid in priority from the assets of the Company.
AND THE COURT DIRECTS THAT:
4. Pursuant to reg 5.6.71 of the Corporations Regulations 2001 (Cth), the order authorising distribution of the surplus to a person entitled to it need not have annexed to it a schedule in accordance with Form 551.
5. The requirements in r 7.9(2) of the Federal Court (Corporations) Rules 2000 (Cth) that the applicant publish a notice in accordance with Form 15 be dispensed with.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
DERRINGTON J:
1 This is an application brought by Ms Tracy Lee Knight in her capacity as liquidator of Wenshang Developing Pty Ltd (the Company), by which she seeks leave under s 488(2) of the Corporations Act 2001 (Cth) (Corporations Act) to distribute surplus funds in a winding up, and other related relief.
Background
2 The background to this matter is slightly complicated, although the facts are clearly expressed in the affidavit of Ms Knight sworn on 14 November 2024.
3 Since its incorporation in August 2019, the Company had the following relevant persons involved in it. Mr Minghu Zhou, the second respondent, was its sole director, and Jun Yang was its secretary. Its only two shareholders were Mr Zhou and Mr Keqing Zhang, the first respondent, who held 82% and 18% of the shareholding respectively.
4 In September 2019, the Company acquired two lots of land in Hope Island, Queensland for a total of $3.13 million and, thereafter, engaged in the development of the combined parcels. In order to fund the purchase, Mr Zhang contributed $2.1 million. The remaining $1.3 million was funded by a loan from QBI Lending.
5 On 6 May 2020, the Company, Mr Zhou and Mr Zhang entered into a shareholders’ agreement which provided that all decisions or resolutions of the Company must be affirmed by unanimous vote of the shareholders. It also provided for a distribution of liabilities of 40% to Mr Zhou and 60% to Mr Zhang, and that Mr Zhou and Mr Zhang would participate in the dividends in the same proportions. That, of course, was not in accordance with their shareholding, though the reasons for that will become apparent.
6 On 5 April 2023, Mr Zhang filed an application to wind the Company up on just and equitable grounds under s 461(1)(k) of the Corporations Act.
7 On 9 June 2023, the Company was wound up pursuant to s 461(1)(k) and Ms Knight was appointed as the liquidator of the company jointly and severally with Mr Damien Lee Hou Lau, who resigned in August 2024.
8 Since her appointment, Ms Knight has undertaken all the required steps for the purpose of liquidation. Most relevantly, she caused the two lots of land to be sold from which she recovered a total of $5.18 million.
9 Very appropriately, Ms Knight investigated the possibility of there being potential underpayments of transfer duty in respect of the land when it was acquired. That issue arose because of the provisions of the shareholders’ agreement that allowed Mr Zhang to effectively have 60% of the shareholding while only holding 18% of the shares. This arrangement had the effect of avoiding the consequences of certain foreign investment laws in Queensland and, in particular, it avoided or reduced the amount of stamp duties payable under the Duties Act 2001 (Qld) in relation to foreigners acquiring residential property. It also raised other taxation issues relating to land tax surcharges and landholder duties. It appears that those issues were resolved by late October 2023.
10 Ms Knight has since formed the view that there are no known priority or secured creditor claims, that there is sufficient monies to pay all unsecured creditors in full, and that there will be a surplus of funds available to the shareholders.
11 The present application is brought as a result of the expected surplus and the fact that there is a disparity between the entitlements of the shareholders as indicated by the shareholders’ agreement and the actual shareholding.
The application
Legislative provisions
12 By s 488(1) of the Corporations Act, certain powers of the Court in relation to a winding up may be delegated to liquidators for the purposes of the efficient and effective conduct of liquidations with minimal costs. Section 488 provides as follows:
488 Delegation to liquidator of certain powers of Court
(1) Provision may be made by rules or regulations for enabling or requiring all or any of the powers and duties conferred and imposed on the Court by this Part or Schedule 2 in respect of:
(a) the holding and conducting of meetings to ascertain the wishes of creditors and contributories; and
(b) the paying, delivery, conveyance, surrender or transfer of money, property or books to the liquidator; and
(c) the adjusting of the rights of contributories among themselves and the distribution of any surplus among the persons entitled to it; and
(d) the fixing of a time within which debts and claims must be proved;
to be exercised or performed by the liquidator as an officer of the Court and subject to the control of the Court.
(2) Despite anything in rules or regulations made for the purposes of subsection (1), a liquidator may distribute a surplus only with the Court’s special leave.
13 While the Court’s power to distribute any surplus in a winding up has been delegated to liquidators by reason of r 7.10 of the Federal Court (Corporations) Rules 2000 (Cth) (Corporations Rules), the effect of s 488(2) is that a liquidator nonetheless requires the Court’s “special leave” to distribute a surplus: Re Hawden Property Group Pty Ltd (in liq) (2018) 125 ACSR 355, 365 [56] (Re Hawden).
14 In Re Hawden, Gleeson JA observed (at 365 [57]) the following about the purpose of s 488(2):
[57] The phrase “special leave” only requires that an application be made to the Court, rather than the matter being dealt with as part of some other administrative process: Maertin v Klaus Maertin Pty Ltd (in liq) (2009) 232 FLR 239; [2009] NSWSC 618 at [40]–[41] (Austin J) citing Re DS Millard & Son Pty Ltd (1997) 24 ACSR 71 (Young J); Re RH Trevan at [6]. The purpose of the provision is to ensure that there is, in reality, a surplus, in that creditors’ claims have been recognised and met in full, and that the correct relativities among the contributories have been observed: CGU Workers Compensation (NSW) Ltd v Ascom Service Automation (Australia) Pty Ltd [2005] NSWSC 747 at [4] (Barrett J).
15 Quite rightly, the power to grant leave under s 488 is usually exercised such that any surplus can be distributed rateably amongst the proportioned holdings of the identified shareholders, subject to any contrary provisions in the constitution of the relevant company: Re Sullivans Cove IXL Nominees Pty Ltd (in liq) (2011) 82 ACSR 224, 231 [48] (Re Sullivans Cove); Re Kowanyama Cattle Company (in liquidation) [2020] QSC 112; see also Maertin v Klaus Maertin Pty Ltd (2009) 232 FLR 239, 247 [38] (Maertin v Klaus Maertin). The section requires the distribution to be adjusted between any contributories, such that any surplus is distributed amongst “the persons entitled to it”: see Maertin v Klaus Maertin at 247 [37].
16 As Mr Shaw, counsel for Ms Knight, pointed out in his careful written submissions, it may be necessary for the Court to look beyond the share register and consider the entitlements that might be bestowed upon shareholders via agreements or by claims for rectifications of the share register and the like: see Visnic v Sywak (2011) 86 ACSR 569, 576 [22] – [23]; Re Sullivans Cove at 232 [50].
17 Ms Knight also sought relief (in the event that leave is granted under s 488 of the Corporations Act) that the procedural requirements contained in r 7.9(2) of the Corporations Rules and reg 5.6.71(1) of the Corporations Regulations 2001 (Cth) (Corporations Regulations) be dispensed with. Rule 7.9 of the Corporations Rules sets out the requirements in connection with an application for special leave under s 488 of the Corporations Act; relevantly, it requires the liquidator to advertise the application. Regulation 5.6.71 of the Corporations Regulations regulates the distribution of any surplus in the winding up by the Court. It provides:
5.6.71 Distribution of surplus in a winding up by the Court
(1) An order in a winding up by the Court authorising the liquidator to distribute any surplus to a person entitled to it must, unless the Court otherwise directs, have annexed to it a schedule in accordance with Form 551.
(2) The liquidator must send to each person to whom any surplus is distributed a notice in accordance with Form 552.
The proposed distribution
18 In this case, Mr Zhang and Mr Zhou agreed between them that their entitlements would be in accordance with the shareholders’ agreement and not in accordance with their respective shareholding. Ms Knight, after a thorough and complete examination of the circumstances, proposes to distribute the surplus funds in accordance with that agreement, thereby distributing:
(a) 40% of the surplus to Mr Zhou; and
(b) 60% of the surplus to Mr Zhang.
19 Neither Mr Zhang or Mr Zhou have expressed any opposition to that course in response to Ms Knight’s indication of her intention to do so, and there are no other creditors whose interests are affected.
20 The Court can rely upon the extraordinarily high reputation of Ms Knight in this respect. It is apparent that she has very properly pursued a course whereby the appropriate duties payable in respect of the acquisition of the land in question have been met, and it is to her great credit that she has done that.
21 The Court can be satisfied that it has the power to grant leave for Ms Knight to distribute the surplus in the manner proposed. It can also be satisfied that the relief sought falls within the broad ambit of s 90-15 of the Insolvency Practice Schedule (Corporations) (being Sch 2 to the Corporations Act), and that it is consistent with the principle in Cherry v Boultbee (1838) 41 ER 171.
Dispensation of procedural requirements
22 As mentioned, Ms Knight also sought dispensation from certain procedural requirements:
(a) First, the requirement to advertise the application imposed by r 7.9(2) of the Corporations Rules.
(b) Secondly, the requirement in reg 5.61.71(1) of the Corporations Regulations to include a Form 551 on the draft order. Relevantly, that form contains a table entitled “Schedule of contributories or other persons to whom a distribution of surplus is to be paid”.
23 Both of those requirements are commonly dispensed with in circumstances such as the present, particularly where the identities of the contributories are clear (as they are in this case), where the creditors’ debts have been discharged, and where the contributories or members are on notice of the application: see, for example, In the matter of Anne Lewis Pty Ltd (in liquidation) [2018] NSWSC 1727; Walley (Liquidator), in the matter of Icicek Holdings Limited (in liquidation) [2020] FCA 701.
24 Here, there is no controversy concerning the identity of the contributories. They have been served with the application, and all creditors have been paid in full. No party appeared at the hearing to oppose the making of the orders sought and, in light of the relatively small amount remaining to be distributed, the savings of costs involved in those procedural steps justifies the making of the orders.
25 It should be added that Mr Shaw very properly directed the Court’s attention to the issue of certain income tax liabilities arising on the distribution of the surplus. Ms Knight has overcome any concern in that regard, having determined to issue fully franked distributions with the consequence that all relevant income tax will be paid before the funds are received by the taxpayer.
Disposition
26 In the circumstances, it is proper to make the following orders:
(1) Pursuant to s 488(2) of the Corporations Act 2001 (Cth), Tracy Lee Knight in her capacity as liquidator (Liquidator) of Wenshang Developing Pty Ltd (in liquidation) (Company) be granted leave to distribute the surplus in the winding up of the Company.
(2) The Liquidator is authorised to distribute any surplus funds available in the liquidation of the Company as follows:
(a) to Mr Minghu Zhou - 40%; and
(b) to Mr Keqing Zhang - 60%.
(3) The costs, expenses and remuneration incurred by the Liquidators, including the costs of this application, be paid in priority from the assets of the Company.
27 It is also appropriate to direct that:
(4) Pursuant to reg 5.6.71 of the Corporations Regulations 2001 (Cth), the order authorising distribution of the surplus to a person entitled to it need not have annexed to it a schedule in accordance with Form 551.
(5) The requirements in r 7.9(2) of the Federal Court (Corporations) Rules 2000 (Cth) that the applicant publish a notice in accordance with Form 15 be dispensed with.
I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Derrington. |
Associate:
