SUPREME COURT OF NORFOLK ISLAND

Prechelt, in the matter of Hillcrest Pty Ltd v Hillcrest Pty Ltd (No 2)

[2017] NFSC 3

ORDERS

THE COURT ORDERS THAT:

1.    The parties be heard as to the form of the orders in light of these reasons and as to costs.

THE COURT DIRECTS THAT:

2.    To the extent necessary, the publication of the notice in the “Norfolk Islander” on 23 July 2016 met the requirements of r 5.6 of the Court Procedure Rules 2006 (ACT), Schedule 6 Corporations Rules.

REASONS FOR JUDGMENT

BESANKO CJ:

Introduction

1    This is an application for an order that Hillcrest Pty Ltd (Hillcrest) be wound up under s 467 of the Companies Act 1985 (Norfolk Island) (the Act). Mr Gregg Prechelt is the applicant and he is a creditor and shareholder of Hillcrest. Mr Kerry Douran and his sister, Ms Gordina Douran, are the directors of Hillcrest and they are also shareholders. Mr Kerry Douran is the controlling director and major shareholder. The company opposes the application for an order that it be wound up. Mr Douran said in cross-examination that the only reason he opposed the application was because of the potential exposure he may have to contribute to the costs of a liquidator. He agreed that if he had no such exposure, then he would not oppose the application.

2    The evidence in the case consisted of two affidavits of Mr Prechelt, two affidavits of Mr Douran and a number of exhibits. Mr Prechelt and Mr Douran were each cross-examined.

3    Mr Prechelt relies on five grounds in support of his application for an order winding up Hillcrest.

4    First, he alleges that Hillcrest has suspended its business for 12 consecutive months or more (s 468(1)(c) of the Act). The company admits that allegation, but submits that the Court should exercise its discretion against making a winding up order. For the reasons I will give, I reject this submission. The factors which are relevant to the exercise of the discretion strongly favour the making of a winding up order.

5    Secondly, Mr Prechelt alleges that Hillcrest is unable to pay its debts (s 468(1)(e) of the Act). Hillcrest denies this allegation. He submits that the two debts of the company are not due and payable. The company’s liability to Mr Prechelt is in the amount of $1,368 and that amount is not due or payable because Mr Prechelt has not made a demand for its repayment. Even if Mr Prechelt made a demand for repayment, Mr Douran states, and I accept, that he is willing and able to repay the loan. The liability of Hillcrest to Mr Prechelt does not establish that Hillcrest is unable to pay its debts. The second loan stands in a different position. Mr Douran himself is a creditor of the company in the amount of $1,034,930. He states that he has not demanded repayment of the loan and that he has no intention of doing so. While there is no reason to doubt that evidence, it does not mean that the company is able to pay its debt in the particular circumstances of this case. The company sold all of its assets in November 2012 and has not traded since that date. There is no suggestion that it will resume trading in the future or that it will receive monies from any source. In fact, it seems to be accepted on all sides that the company will not resume trading. I find that, in those circumstances, the company is unable to pays its debts. As I have said, the factors which are relevant to the exercise of the discretion strongly favour the making of a winding up order.

6    Mr Prechelt relies on three further grounds in support of his application for the winding up of the company. They are as follows: the directors of Hillcrest have acted in the affairs of Hillcrest in their own interests rather than in the interests of the members as a whole or in some other manner that appears to be unfair and unjust to some or all of the members (s 468(1)(f) of the Act); an act or omission by or on behalf of Hillcrest was oppressive or unfairly prejudicial to, or unfairly discriminatory against, a member or members or was contrary to the interests of the members as a whole (s 468(1)(h) of the Act); and it is just that the company be wound up (s 468(1)(j) of the Act). The acts, matters and transactions which form the factual basis for these grounds relate to the sale of the company’s assets to Heritage Hill Pty Ltd (Heritage Hill) in November 2012. Mr Prechelt alleges that the sale was at a substantial undervalue and for the benefit of Mr Douran and a third party. Mr Prechelt points to various aspects of the transaction, such as the following: Mr Douran did not obtain a valuation of the land, business and other assets before entering into the transaction; the land, business and other assets were sold at an undervalue; and Mr Douran was and is a director and shareholder of Heritage Hill and has or will benefit from the transaction. In the reasons which follow, I set out my findings on the evidence before me. There appears to be a prima facie case of breach of duty by Mr Douran. That conclusion is relevant to the exercise of the discretion and supports the making of a winding up order.

Procedural Issues

7    After the hearing, Mr Prechelt advanced evidence in support of his case that two procedural requirements attending his application had been satisfied. Hillcrest did not oppose that course and nor did it wish to make any submissions in relation to the procedural requirements.

8    Mr Prechelt was required by the Act to give notice of the filing of the application and the date on which it was filed to the Registrar of Companies (s 474(1)(a)). Mr John Brown’s affidavit sworn on 1 August 2016 establishes that such notice was given. I will admit Mr Brown’s affidavit and it will be marked “Exhibit P6”.

9    Mr Prechelt was required to publish a notice of his application at least three days after the originating process is served on the company and at least seven days before the date set for hearing of the application (r 5.6 of the Court Procedure Rules 2006 (ACT), Schedule 6 Corporations Rules). These Rules (which I will refer to as the ACT Corporations Rules) apply to this proceeding by reason of s 19(4) of the Supreme Court Act 1960 (Norfolk Island). The ACT Corporations Rules contain a form for the notice (Form 9).

10    Prior to 1 January 2013, r 2.11 of the ACT Corporations Rules specified the manner in which notice was to be given and that was by publication once in a daily newspaper circulating generally in the State or Territory where the body has its principal, or last-known, place of business. Rule 2.11 was omitted from the Rules with effect from 1 January 2013. A new manner of publication was specified – publication on Australian Securities and Investments Commission’s (ASIC) website (s 1367A Corporations Act 2001 (Cth) and reg 5.6.75 Corporations Regulations 2001 (Cth)).

11    In this case, a second affidavit sworn by Mr Brown on 1 August 2016 establishes that Mr Prechelt caused the required notice to be published in the Norfolk Islander on 23 July 2016. The Norfolk Islander is a newspaper circulating in Norfolk Island. I will admit that affidavit and it will be marked “Exhibit P7”.

12    Hillcrest is registered in the Norfolk Island and not with ASIC and it has had its principal place of business in Norfolk Island. In my opinion, publication of the notice in the Norfolk Islander satisfied the requirements of r 5.6 of the ACT Corporations Rules, but should there be any doubt about the matter, I will give a direction under r 1.8(b) of the ACT Corporations Rules that the publication which has taken place in this matter met the requirements of r 5.6 of the ACT Corporations Rules.

13    Mr Prechelt has asked me to receive the consent of the liquidators as an exhibit and that is a convenient course. I admit the consent and it will be marked “Exhibit P8”.

14    Hillcrest has, in effect, no assets. Mr Prechelt wishes to have the transaction in 2012 whereby the company’s assets which were sold investigated by a liquidator. He has offered funding to enable that to be done. That offer has now been formalised in a written undertaking from Mr Prechelt and that undertaking should be noted in the order.

The Facts

15    During the interlocutory stages of this proceeding, there was a dispute between the parties concerning non-party production under the Court Procedure Rules. I ruled on that dispute and gave reasons for doing so (Prechelt, in the matter of Hillcrest Pty Ltd v Hillcrest Pty Ltd [2017] NFSC 1). In the course of my reasons, I set out the main aspects of Mr Prechelt’s case and his evidence as contained in the affidavits filed to that point. Mr Prechelt’s case and evidence remains the same and he was only briefly cross-examined at trial about other “offers” made for the land, business and other assets. In the circumstances, I can repeat the summary of Mr Prechelt’s case and evidence which I set out in my earlier reasons and adopt it for the purposes of my findings in these reasons (at [3]):

(1)    Hillcrest was registered as a proprietary company on 22 January 1996. The company’s authorised share capital is 1,000,000 one dollar shares and the issued share capital is 2,500 one dollar ordinary shares.

(2)    The shareholders of the company and their respective holdings are Mr Kerry Douran (2,199 ordinary shares), Mr Prechelt (300 ordinary shares) and Ms Gordina Douran (1 ordinary share). Mr Prechelt claims that he has an entitlement to a further 400 shares from Mr Douran and reserves his rights in respect of that claim.

(3)    Hillcrest filed an Annual Return for the 2014 year signed (it seems) by Mr Douran on 19 January 2015. In that document the directors of the company are said to be Mr Douran and Ms Gordina Douran, and Mr Douran is said to be the company secretary. The Directors’ Statement which is part of the Annual Return contains the following statements:

1.    The Profit and Loss Account of the company is drawn up so as to give a true and fair view of the results of the company for the year ended 30 June 2014.

2.    The balance sheet of the company is drawn up so as to give a true and fair view of the state of affairs of the company as at 30 June 2014.

3.    The accounts have been set out in accordance with approved accounting standards.

And note that:-

a)    the company ceased trading effective 21 November 2012 and has reached accommodation with creditors outstanding at the date of cessation. These arrangements are reflected in the balance sheet.

b)    the company is insolvent with no outstanding creditors except directors and shareholders loans.

c)    there are no written agreements to support their loans to the company and that given the financial state of the company there are no prospects for repayment of the loans.

The Directors’ Report states that the company was, until 21 November 2012, operating as a tourist accommodation and hospitality business. The company ceased trading on that date and has not traded since. The Directors’ Report states that the company has no plans to resume trading of any type and that the company “continues to work towards winding up its affairs”.

The Annual Return includes a balance sheet for the company for the financial year ended 30 June 2014 which records (among other matters) the long term liabilities of the company as shareholder loans by Mr Douran ($1,034,930) and Mr Prechelt ($1,368). The net assets of the company are recorded as a deficit of $1,036,157.

The Notes to the Financial Statements for the period ended 30 June 2014 state that all outstanding creditors have been settled on negotiated terms and with further assistance from Mr Douran.

(4)    A company called Heritage Hill Investments Pty Ltd (“Heritage Hill”) was registered under the Act on 29 October 2012. The authorised share capital of Heritage Hill is 10,000 one dollar shares and the issued share capital is 100 ordinary shares. The shareholders of the company and their respective holdings as recorded on the certificate of incorporation are Mr Douran (50 ordinary shares) and a Mr Michael King (50 ordinary shares). Mr Douran and Mr King are shown as the directors of the company and Mr King is shown as the company secretary.

(5)    The Annual Return for Heritage Hill for the 2014 year records Mr King as holding 94 ordinary shares in the company and Mr Douran as holding 50 ordinary shares.

(6)    On 20 November 2012, Hillcrest and Heritage Hill entered into a written Assets Sale Agreement for the sale by Hillcrest to Heritage Hill for a total consideration of $500,000 of land, a business and plant and equipment (“Assets Sale Agreement”). The assets and the amounts allocated to each of them by the Agreement are as follows:

1.    The Business, being a licensed hotel business known as “Hillcrest Hotel” or “Hillcrest Bed & Breakfast” carried on by Hillcrest on the land prior to completion ($20,000);

2.    The Land, being the land specified in Schedule 1 to the Agreement (Lots 28, 29, 30 and 32) and includes all improvements and fixtures located on the land ($460,000); and

3.    The Plant and Equipment, being the plant and equipment specified in Schedule 3 to the Agreement ($20,000).

The Assets Sale Agreement was signed by Mr Douran as director and secretary of the vendor, Hillcrest, and by Ms G Douran as director of Hillcrest, and by Mr Douran as a director of the purchaser, Heritage Hill, and by Mr King as a director and the secretary of Heritage Hill.

(7)    Mr Prechelt claims that the directors of Hillcrest did not inform him of the proposed assets sale by Hillcrest and that he did not become aware of the sale until about December 2012.

(8)    Hillcrest gave notice of an Annual General Meeting of the company to be held on 24 June 2014. One of the items of business was to receive the company’s financial statements for the years ending 30 June 2011, 30 June 2012 and 30 June 2013. The profit and loss statement for Hillcrest for the financial year ended 30 June 2013 records the sale of the company’s assets “at directors’ valn” (i.e., valuation).

(9)    The land transfer lodged under the Land Titles Act 1996 (Norfolk Island) for the transfer of Lot 32 from Hillcrest to Heritage Hill includes a notation that the value of the Land Transfers was reassessed at $800,000.

(10)    In his affidavit, Mr Prechelt expresses his concern that on the above state of affairs, not only have the directors of Hillcrest sold the company’s assets to a related entity without his knowledge, but it appears (he contends) that Hillcrest have done so at a significant under-value. He proposes to offer funding to a liquidator of Hillcrest to investigate the transaction should the company be wound up.

16    It may be helpful if I also set out the shorter summary of Hillcrest’s case and Mr Douran’s evidence in my earlier reasons (at [5]-[6]):

5.    Mr Kerry Douran has filed a lengthy affidavit in response to Mr Prechelt’s affidavit and a second affidavit in support of Hillcrest’s application to set aside the notices to produce. In his first affidavit, Mr Kerry Douran deposes to a number of matters, but this is not the occasion to examine each of those matters. On behalf of Hillcrest, he admits that the company has suspended its business for 12 consecutive months. He denies that the company is unable to pay its debts. He claims that the company has no outstanding debts. He has paid debts resulting from the company’s trading losses for the five years ending 30 June 2013, amounts owed to Westpac Banking Corporation Limited and all other liabilities of the company. The company has no other liabilities other than the shareholders’ loans and, in the case of his loan, he has not demanded repayment and has no intention of doing so and, in the case of Mr Prechelt’s loan, there has been no demand on the company for repayment and, in any event, he stands ready, willing and able to repay the loan.

6.    With respect to the Assets Sale Agreement, Mr Kerry Douran states that as at October 2012, the company had no option but to consider selling the property and the directors resolved to sell the assets of the company to a new company funded by Mr King, Heritage Hill, which was incorporated for the purpose. The consideration under the agreement was paid to Westpac for a discharge of Westpac’s mortgage and charge over the property. Mr Kerry Douran states that he made no contribution to the capital of Heritage Hill and that he received no personal financial benefit from the transaction which is the subject of the Assets Sales Agreement. He states that he derived no director’s fees or dividends from Heritage Hill. He states that Heritage Hill is trading at a loss. Mr Kerry Douran further states that Heritage Hill was required by the Registrar of Titles to obtain a valuation of the property and a valuation report of Eastpoint Valuations dated 6 June 2013 was obtained. On 6 August 2013, an entity other than Hillcrest paid ad valorem duty of $32,000 to the Registrar of Titles.

17    Mr Douran’s affidavit evidence and the documentary evidence establishes the following matters.

18    Mr Prechelt held a lease of the hotel and a licence to conduct the business between March 2002 and March 2008. Mr Prechelt resigned from the day-to-day management of the hotel in March 2008 and he left Norfolk Island in approximately April 2008. Thereafter, Mr Douran took over the responsibility for the management of the hotel and business. There was a dispute between Mr Prechelt and Mr Douran concerning the location of the books and records of the company.

19    Hillcrest was losing money and, in 2009 and 2010, the land, business and other assets were listed for sale. The property was not sold until November 2012. Between 2008 and 2012, Hillcrest incurred trading losses which were met by Mr Douran. He also met Hillcrest’s liabilities to Westpac and other creditors.

20    By October 2012, Mr Douran had exhausted his personal funds and he could no longer support the company. He states that no money to assist Hillcrest had been provided by Mr Prechelt. The books were allegedly missing, attempts to sell the property had failed and the economy on Norfolk Island was depressed. It was in those circumstances that Mr Douran approached Mr King “to see if he could assist”. The Assets Sale Agreement was executed. Since that time, Mr Douran has paid the creditors of Hillcrest, other than Mr Prechelt and himself. Mr Prechelt was given a copy of the Assets Sale Agreement by Mr Douran in December 2012.

21    Hillcrest held an annual general meeting on 24 June 2014 and a further general meeting on 18 January 2015. Mr Prechelt, Mr Douran and a proxy for Ms Douran were present at the meeting on 24 June 2014. Mr Douran and Ms Douran were present at the further general meeting on 18 January 2015. There is a dispute between the parties as to whether Mr Prechelt was given notice of the meeting on 18 January 2015.

22    The minutes of the annual general meeting held on 24 June 2014 contain the following:

Chairman moved “in accordance with the motion on the agenda I move that steps be taken as soon as practicable to wind up the affairs of the company. Discussion ensued recognising the need for formal and appropriate procedures to be followed. Agreed unanimously.

23    The minutes of the general meeting held on 18 January 2015 contain the following:

Kerry Douran advised the meeting that he had taken advice in relation to the winding up of the company and will follow the recommended procedure in the next few months.

24    Five days before the meeting, Mr Prechelt wrote to Mr Douran, Ms Douran and Mr King in the following terms:

Could you please provide me with all documents relating to the sale of the company’s assets to Heritage Hill Pty Ltd.

I have enclosed a draft letter that I intent [sic] to deliver to the appropriate Minister and the Companies Registrar on Monday.

I would like, if possible to have all relevant documents presented with this letter.

Please feel free to contact me to discuss any of my concerns.

25    The draft letter referred to in this letter contained a request for an investigation of the sale of the company’s assets in November 2012.

26    On or about 18 January 2015, Mr Douran attempted to deregister Hillcrest and, as part of that attempt, he made a statutory declaration in which he stated (by ticking the appropriate box) that the members of the company had lost all interest in its affairs and would not attend a meeting for the purpose of winding up.

27    The following additional matters emerged from the evidence given at the trial and, in particular, the evidence given by Mr Douran in cross-examination:

(1)    Between mid-2007 and March 2008, Mr Prechelt had discussions with Mr Phil Hooper about the sale of Hillcrest’s assets at a figure of between $2.5 million and $2.8 million.

(2)    Mr Douran agreed that Hillcrest has no intention of trading again.

(3)    Mr Douran agreed at a meeting on 24 June 2014, that the company be wound up.

(4)    Prior to 29 October 2012, Mr Douran approached Mr King about the sale of Hillcrest’s assets. Mr Douran had had previous dealings with Mr King.

(5)    Mr Douran considered that $500,000 was a fair figure for Hillcrest’s assets. That was the amount which Hillcrest owed its banker. Mr Douran did not obtain an independent valuation of the assets prior to the Assets Sale Agreement. He approached Mr Prechelt about Hillcrest’s financial difficulties, but he did not mention a sale of its assets for $500,000.

(6)    In June 2011, Mr Douran listed Hillcrest’s assets for sale at $1.9 million and he received an oral offer of $1.3 million which was subsequently withdrawn.

(7)    When he was asked why he did not obtain an independent valuation of Hillcrest’s assets, Mr Douran said that he wanted to get out of the business because he had exhausted his funds and he was in a “bad place” at the time.

(8)    Mr Douran said that there was no chance of him every recovering the money which the company owed him and he agreed that, as a director of the company, he had certified in the 2014 annual return for the company that it was insolvent.

(9)    Mr Douran agreed that Mr King contributed all of the capital to Heritage Hill and that he did not contribute any capital. He brought his knowledge of the tourism industry to Heritage Hill. The Shareholders Agreement between Heritage Hill, Mr King and Mr Douran was executed on 22 November 2012. Mr King lent the company $600,000. The loan did not carry interest. Of the loan amount, $500,000 was to be used to discharge Heritage Hill’s obligations to Hillcrest under the Assets Sale Agreement and the balance of $100,000 was to be used by Heritage Hill for working capital. The loan was to be repaid on one month’s notice. Mr King expressed the intention in the Shareholder’s Agreement to forgive an amount of $500,000 after two years.

(10)    It seems that the legal firm, Willis Bowring, acted for both Mr Douran and Mr King in the transaction. It appears that the firm may have recommended a sale of assets rather than shares because “it avoids the Prechelt complications which would arise if the company was sold, rather than its assets”.

(11)    Despite being aware that Mr Prechelt wished to have the affairs of the company investigated, Mr Douran sought to have the company deregistered in February 2015.

Should the Company be wound up?

28    As I have said, Hillcrest has not carried on business for at least 12 consecutive months. In fact, it has not carried on business since November 2012 and there is no reasonable prospect of it ever carrying on business again. Mr Douran described himself as a “retired pensioner” and, as I have said, Mr Douran said that he did not oppose the winding up of Hillcrest, providing he is not liable for any of the costs. Ms Douran did not give evidence. The other shareholder, Mr Prechelt, wants the company wound up. In the circumstances of this company, there are limited options. They are that Hillcrest is wound up as sought by Mr Prechelt or it is deregistered, or Hillcrest continues and Mr Prechelt is left to bring an oppression claim under s 405 of the Act, if so advised.

29    The winding up of Hillcrest will bring to an end an entity which has not traded for over three and-a-half years calculated to the time of the winding up application, and over four years calculated to the time of trial. It will enable a liquidator to investigate the circumstances surrounding the Assets Sale Agreement and, subject to funding or other appropriate arrangements, bring proceedings in relation to that transaction. As I have said, on the evidence before me, there is a prima facie case of breach of duty by Mr Douran.

30    Hillcrest advanced an argument that it ought not be wound up on Mr Prechelt’s application because he will gain little by any successful action by the company against Mr Douran. The main beneficiary of any successful action in terms of an increase in Hillcrest’s assets will be Mr Douran and he does not want Hillcrest wound up. It is certainly true that Mr Douran is by far and away the major creditor and he is the majority shareholder. Nevertheless, I reject this argument. Mr Douran will need to prove his debt in the liquidation and whether he does so will be a matter for the liquidator. In addition, s 471(5) of the Act provides that the Court shall not refuse an order for winding up on the application of a shareholder on the ground that, if an order is made, there will be no property available for distribution among the shareholders. Perhaps most importantly, there is a public interest in determining whether a company should be wound up (SC Projects Australia Pty Ltd v Field Deployment Solutions Pty Ltd [2016] FCA 1025 at [19] per Gilmour J). There is a public interest in winding up a company which is no longer trading and has no prospect of trading in the future.

31    I do not think that to leave the company to be deregistered is an appropriate course, even if that did not preclude the company from later being liquidated as Hillcrest pointed out in its submissions (s 561(5)(b) of the Act). Hillcrest has an arguable cause of action against one of its officers and liquidation is an appropriate means of investigating and, if appropriate, pursuing that cause of action.

32    Nor, in the circumstances of this case, is a refusal to make a winding up order leaving Mr Prechelt to pursue an oppression claim under s 405 of the Act (if so advised) an appropriate course. That might be an appropriate course where a company is trading successfully or there was a reasonable prospect of it trading successfully in the future. However, neither of those circumstances exist in this case.

33    There was a suggestion by Hillcrest that a winding up order should be refused because of delay on the part of Mr Prechelt, although this was not pursued with any enthusiasm in closing submissions. The facts, so far as they were the subject of evidence, are set out earlier. Delay can be an important consideration, but I do not think it is in this case because Hillcrest has not traded since November 2012.

34    These conclusions are sufficient to lead to the conclusion that an order that the company be wound up should be made. I would add that I consider that Mr Prechelt has also established that the company is unable to pay its debts.

35    The relevant ground in s 468(1) provides that a company may be wound up if it is unable to pay its debts. In the well-known case of Sandell v Porter and Another (1966) 115 CLR 666, the High Court considered s 95 of the Bankruptcy Act 1924-1960 (Cth) which referred to an inability to pay debts as they fell due out of the debtor’s own moneys. The Court said that solvency or insolvency is not proved simply by an examination of a company’s balance sheet. Section 95A of the Corporations Act 2001 (Cth) (for which there is no equivalent in the Act) provides that a person is solvent if and only if the person is able to pay all of the person’s debts, as and when they become due and payable.

36    Hillcrest’s balance sheet as at 30 June 2014 (and it has not traded since that time) shows negative assets of over $1 million. However, that of itself does not prove an inability to pay its debts. Hillcrest advanced an argument that Mr Douran’s statement that his present intention is not to seek repayment of his loan means that it is not unable to pay its debts. It relied on authorities where a director is owed money, but has no intention of seeking repayment in the reasonably foreseeable future and the Court has held that the company is not insolvent (see, for example, Coates Hire Operations Pty Limited v D-Link Homes Pty Limited [2011] NSWSC 1279 at [76]-[82] per White J). It seems to me that this case is different. The company’s only asset is $141 cash in the bank and the company has no reasonable prospect of trading again. I am satisfied on the balance of probabilities that the company is not now and never will be in a position to repay Mr Douran’s debt. His present intention is not to forgive the debt and, in fact, as has been seen, he relies on it to argue that there will be no commercial benefit to Mr Prechelt in the winding up of the company. It was Mr Douran’s own evidence that there was no chance of him ever recovering the money which Hillcrest owed him. In those circumstances, I find that the company is unable to pay its debts.

Conclusion

37    The company should be wound up. I will hear the parties as to the form of the orders and costs.

Associate:    

Dated:    31 May 2017