Earlier this week, on 30 November 2011, four of Nick Bolton’s Australian Style companies faced winding up application hearings in the Supreme Court of Victoria. As posted a few weeks ago, interestingly, the applicant was not the Deputy Commissioner of Taxation or any of the other parties those companies are reputed to have had disputes with recently. The applicant was As Staff Pty Ltd and the four companies the subject of the winding up applications were Bottle Domains Pty Ltd, Australian Style Group Pty Ltd, Australian Style IP Pty Ltd and ACN 102 378 316 Pty Ltd.

The winding up orders were not made. It is not yet known if the applications were dismissed or withdrawn or, more likely, adjourned for a hearing perhaps in a few weeks time. However what is clear from ASIC’s records is that the winding up orders were note made at the hearing.

For those of you who cannot recall where they have heard the name before, Nick Bolton is the young Melbourne entrepreneur who raked in a tidy $4.5m in 2009 by investing in BrisConnections, trying to have the company wound up, and then selling his voting rights.

Perhaps Mr Bolton is managing to pull another unorthodox manouver, and wriggle out of a tight spot profitably somehow. Watch this space.

The decision of Ferguson J in the Victorian Supreme Court handed down last week of Stolar Joinery (Aust) Pty Ltd v Charterarm Investments Pty Ltd (in liq) [2011] VSC 577 provides a good opportunity for review of the legal principles as to when a Court will terminate a winding up, and to consider what evidence an applicant should come armed with to succeed.

Section 482(1) of the Corporations Act 2001 (Cth) provides as follows –

(1) At any time during the winding up of a company, the Court may, on application, make an order staying the winding up either indefinitely or for a limited time or terminating the winding up on a day specified in the order.

(1A) An application may be made by:

(a) in any case – the liquidator, or a creditor or contributory, of the company; or

(b) in the case of a company registered under the Life Insurance Act 1995 – APRA; or

(c) in the case of a company subject to a deed of company arrangement – the administrator of the deed.

In this case, the application was made by a corporate shareholder of the company in question, 7 months after the winding up order had been made.

Her Honour at [17] cited the principles set out by Barrett J in Metledge v Bambakit Pty Ltd (in liq) [2005] NSWSC 160 –

“The jurisdiction to terminate a winding up under s 482 is discretionary. The court may have regard to a range of factors. While not to be rigidly applied, the list of criteria set out in the judgment of Master Lee QC in  Re Warbler Pty Ltd (1982) 6 ACLR 526 provides useful guidance:

1. The granting of a stay is a discretionary matter, and there is a clear onus on the applicant to make out a positive case for a stay.

2. There must be service of notice of the application for a stay on all creditors and contributories, and proof of this.

3. The nature and extent of the creditors must be shown, and whether or not all debts have been or will be discharged.

4. The attitude of creditors, contributories and the liquidator is a relevant consideration.

5. The current trading position and general solvency of the company should be demonstrated. Solvency is of significance when a stay of proceedings in the winding-up is sought.

6. If there has been non-compliance by directors with their statutory duties as to the giving of information or furnishing a statement of affairs, a full explanation of the reasons and circumstances should be given.

7. The general background and circumstances which led to the winding up order should be explained.

8. The nature of the business carried on by the company should be demonstrated, and whether or not the conduct of the company was in any way contrary to ‘commercial morality’ or the ‘public interest’.

Her Honour, perhaps by way of emphasis, repeated that “in addition to these factors”, the court is required to take into account the interests of the public and whether the termination will be detrimental to commercial morality. Here, she noted that the principal factors for consideration were those relating to solvency and commercial morality. I will mainly focus below on the evidentiary issues as to solvency, save to note in passing that the commercial morality issues in this case arose from the director having resisted many requests from the liquidator that he provide the Company’s books, records and full details of the Company’s assets and there whereabouts. So much so that the liquidator filed a report with ASIC about the director’s conduct. The director had also continued litigation in the company’s name in VCAT, post-liquidation, including getting 19 days into the trial, before it was stayed.

I will not rehash the facts of this case, as aside from a useful reminder of the relevant legal principles to be applied, its significance is largely illustrative. However it is worth noting that while her Honour found that the Company was “technically solvent”, she was not willing to find this was sufficient to justify a termination of the winding up having regard to this factor. The Company had been insolvent in the past and there was insufficient evidence to establish that it would be anything more than barely solvent were it to recommence trading. The liquidator’s evidence was that the Company had been insolvent from June 2007, there was evidence of a significant number of dishonoured cheques from May 2008, and prior to the litigation which the director claimed caused all the trouble, the Company was trading beyond the  limit of its bank account.

I pause to note her Honour’s next observations, at [49]. Ferguson J remarks that given the historical (borderline) performance of the Company, evidence was required about how the business would run both operationally and financially were the liquidation terminated. Her Honour usefully indicated that what was required by way of evidence was –

• a business plan,
• cash flow forecasts, and
• more detailed information about support from third parties (as to their identity, level of support and ability to provide that support).

Her Honour remarked that where effectively the Court’s imprimatur is sought to permit a company to begin trading again, she did not think it acceptable to brush aside considerations such as the likely position of future creditors and persistent failure by the director of the company to comply with statutory obligations.

In many of these cases. evidence adduced to make out a case for a stay or termination of a winding up does not go so far as her Honour has outlined. Applicants would be well-advised to take heed of her Honour’s express indications in this judgment as to how they can go about marshalling the evidence to support a termination application, and how far that evidence will need to go to provide sufficient comfort to the Court as to the likely well-being of creditors and of the public moving forward, were it to permit the Company to come out of a winding up and recommence trading.

It was being reported in the Age yesterday that settlement discussions were afoot in the multi-case litigation on foot in the Victorian Supreme Court concerning the failed margin lending house Primebroker Securites, some of its principals and interested parties, and the ANZ Bank. Prior to its collapse in 2008, Primebroker and ANZ had been counterparties in securities lending arrangements.

On the back of its expensive settlement with Opes Prime’s liquidators in early 2009, ANZ was facing another unenviable and expensive legal battle, fighting on several fronts. The Chimaera parties were claiming hundreds of millions of dollars in damages against ANZ on several grounds, including alleging that ANZ had wrongfully reneged on a deal of financial support back in 2008, and that ANZ had acted wrongfully in appointing receivers to Primebroker. The liquidators of Primebroker were also seeking recovery from ANZ of some $200 million in payments it had received from the failing company in the months before its collapse. It was reported by the Age that taken together, ANZ faced total claims in the vicinity of $350 million. (See the full Age article here).

Today, the Age has reported that ANZ has agreed to pay $20.5 million cash to the liquidator of Primebroker Securities. It is reported that as part of the deal, ANZ will release numerous properties owned by the principals of Primebroker, Mr Catalano and Mr Pattison, but which the bank had claimed as security. It is also reported that ANZ will not prove in the liquidation for the estimated $150 million it claims still to have been owed when Primebroker collapsed in July 2008. It is alleged that ANZ will also allow its receivers Paul Kirk and Stephen Longley of PricewaterhouseCoopers to hand the liquidator of Primebroker Laurie Fitzgerald of BDO, their book of Primebroker receivables, which it is said could generate a further $20 million. (See the full Age article here.)

Two weeks ago, on 7 November 2011, Davies J of the Victorian Supreme Court handed down an interesting decision in SC Capital Pty Ltd & Anor v Primebrokers Securities Ltd (in liq) [2011] VSC 565. Effectively, it answers the question raised in the title of this post in the affirmative.

An appeal had been lodged from the judgment and orders of an Associate Judge given on 31 August 2009. The receivers for Primebrokers (appointed by the ANZ Banking Group Ltd (ANZ)) had served statutory demands upon the plaintiffs. The plaintiffs (SC Capital Pty Ltd and Cablerand Pty Ltd) had successfully applied to the Associate Judge under s 459G of the Corporations Act 2001 (Cth) (the Act) for orders setting aside the statutory demands. The grounds for their application to set aside included – (1) that the receivers had not been validly appointed and therefore had no legal right to serve the demands on behalf of Primebrokers, and (2) that the plaintiffs had an offsetting claim against the ANZ, the appointor of the receivers for wrongful conduct. His Honour held that the claim was not offsetting within the meaning of s 459H as it was not against Primebrokers. However his Honour did find on the evidence before him that the receivers were not validly appointed. The statutory demands were set aside on that ground.

The receivers appealed that decision. Interestingly, the ANZ also appealed that decision, even though the ANZ was not a party to. and did not appear, in the applications before the Associate Justice. ANZ sought to rely on r 77.06 of the Supreme Court Rules which provides at (1) that “any person affected” by a judgement or orders may appeal decisions of an Associate Justice to a judge of the Court.

The plaintiffs also applied to have various consent orders made on 16 July 2010 set aside, including orders granting special leave to Primebrokers and ANZ to rely on additional evidence. Her Honour explained that those orders had been made in the context of the broader litigation on foot between the parties. In general terms, the receivers seek a declaration as to their valid appointment, a broader group of which the plaintiffs are part, referred to as the “Chimaera parties” had sued ANZ, the receivers, and two other mortgagees in possession appointed by ANZ of certain of Primebrokers properties. The Chimaera parties seek damages for alleged wrongful conduct, including the invalid appointment of the receivers. The trial of all of these proceedings commenced on 24 October 2011. Interestingly, as I am about to announce in a separate post, it has been reported today that those principal proceedings were the subject of a settlement reached yesterday.

This case was a discrete hearing before Davies J of an application the plaintiffs filed to set aside the consent orders previously made, and for the dismissal of ANZ’s notices of appeal. This application raised four principal issues for determination –

(1) Whether ANZ had standing under r 77.06(1) of the SCR to bring the appeals as a “person affect” by the “judgment and orders” of the Associate Justice;

(2) Whether leave to ANZ to intervene in the appeals should be set aside because ANZ does not satisfy the test for intervention;

(3) Whether the orders granting special leave to rely on additional evidence should be maintained, and

(4) Whether the Court should entertain the application to set aside the orders of 16 July 2010.

(1) “Person affected” – Senior counsel for the plaintiffs argued inter alia that the order setting aside the statutory demands had no relevant legal effect on ANZ because the application did not finally determine any rights of the parties, and that therefore ANZ was not a “person affected” by the judgment and orders. However Davies J took the view that the relevant question was whether ANZ had a direct interest in the matters in controversy in the s 459G application, as distinct from an interest that is indirect or consequential (see [7]). Her Honour held it was manifest that ANZ had a direct interest as the matters in controversy are ANZ’s rights and liabilities. The Associate Justice had considered ANZ’s alleged “wrongful conduct. He had determined that ANZ had not validly appointed the receivers to Primebrokers’ property. This was to be re-agitated upon the receivers’ appeal, which would again involve the determination of ANZ’s rights and liabilities as the foundation for the orders. Moreover, the orders setting aside the statutory demands directly impacted ANZ’s rights as appointor of the receivers and as chargee (see [8]).

(2) Leave to intervene – The plaintiffs sought revocation of leave to ANZ to intervene, relying on Levy v The State of Victoria [1997] HCA 31; (1996-1997) 189 CLR 579. Her Honour was not sympathetic to their arguments (see [10-12]).

On the remaining two issues, her Honour upheld the order granting special leave to lead additional evidence, and did entertain the application.

News has broken today of a settlement reached in the broader litigation between the parties, outline above. That will be the subject of a separate post to which I will now turn.

In less than 2 weeks, on 30 November 2011, four of Nick Bolton’s Australian Style companies face winding up application hearings in the Supreme Court of Victoria. Interestingly, the applicant is not the Deputy Commissioner of Taxation or any of the other parties those companies are reputed to have had disputes with recently. The applicant is As Staff Pty Ltd and the four companies the subject of the winding up applications are Bottle Domains Pty Ltd, Australian Style Group Pty Ltd, Australian Style IP Pty Ltd and ACN 102 378 316 Pty Ltd.

For those of you who cannot recall where they have heard the name before, Nick Bolton is the young Melbourne entrepreneur who raked in a tidy $4.5m in 2009 by investing in BrisConnections, trying to have the company wound up, and then selling his voting rights.

It will be interesting to see if winding up orders are made on the first return date. Perhaps Mr Bolton will manage to pull another unorthodox manouver, and wriggle out of a tight spot profitably somehow. Watch this space.

As I posted 2 weeks ago, Friday 4 November 2011 was the first return date of ASIC’s application to wind up 32 of the companies associated with Mark Letten, the subject of many court hearings before her Honour Justice Gordon, since February 2010. You can read my other posts about some of the previous litigation here here and here.

At the first return date, her Honour made orders pursuant to s 461(1)(k) of the Corporations Act 2001 (Cth) – the just and equitable ground – to wind up the 32 companies. Mr Damian Templeton and Mr Phillip Hennessy of KPMG were appointed liquidators of all 32 of the companies – they had been the receivers and managers of certain property of those (and other) companies, and the receivers and managers of identified property of the relevant (unregistered) managed investment schemes.

One of the companies, LGH Finance Pty Ltd, was in a different position. The other companies had operated managed investment schemes that were unregistered, in contravention of s 601ED(5) of the Act, which gives rise to an offence under s 1311 of the Act. LGH Finance was in a different position. Its role was limited to holding units in the Reef House Unit Trust on behalf of investors in the Reef House Resort. Its solvency depended upon whether investors in the resort had any direct claims against it and, if so, the outcome of the realisation of assets of the resort after payment of the outstanding bank debt. In the event, the proceeds of sale of the resort were insufficient to meet the outstanding bank debt, let alone any claims by investors.

Her Honour’s judgment contains a characteristically useful distillation of principles, in this case those relevant to an application under s 461(1)(k) by a public authority – see [13-14] of the judgment.

ASIC’s application was unopposed. Her Honour ordered that the companies be wound up pursuant to s 461(1)(k) for 7 reasons –

1. The companies operated an unregistered managed investment scheme or schemes that was or were required to be registered under the Act, in contravention of s 601ED(1).

2. The companies owe investors large sums of money in principal and capital gains, the investors have good contractual claims to these moneys and the companies are either no longer trading or there is little prospect of them continuing to do so.

3. The companies formed part of a web of companies which raised large sums of money from investors for the purpose of investing in commercial and/or retail property joint venture projects, which should have been registered.

4. The lack of disclosure to investors in the raising of funds lead to many being misled as to the true nature of the manner in which their funds were to be used, and the risks inherent in the investments.

5. The companies misapplied investors’ funds without their knowledge or consent.

6. The properties acquired by the companies have been sold.

7. There is no good reason to maintain registration of these companies.

You can read Gordon J’s fairly brief judgment in full here.

A final word on the October 2011 developments in relation to the Reef House Resort and other unregistered managed investment schemes of Mr Mark Ronald Letten and his companies, which collapsed in early 2010.

ASIC has now filed applications to wind up a large number of the companies involved in these schemes. They are listed for a first return date of 4 November 2011 – later this week.

Following judgment in ASIC v Letten (No 13) (see my post reporting on that judgment here), Gordon J handed down her decision on costs on 18 October 2011 – ASIC v Letten (No 14) FCA 1174.

It makes for interesting reading. In short, Gordon J ordered Mirvac to pay the indemnity costs of the Receivers and the secured creditor Westpac. Notably, even though ASIC had not asked for it, her Honour even ordered Mirvac to pay ASIC’s costs on an indemnity basis.

Mirvac had submitted that its costs should be paid by the Receivers out of the fund held by them, or alternatively that there should be no order for costs against Mirvac. Again her Honour’s distillation of the principles is a useful reference (see [3-8]). In relation to the claim for indemnity costs, the Receivers produced a letter dated 18 February 2011 they had sent to Mirvac stating that its claim was misconceived and inviting them to withdraw it. Westpac had no such letter to rely upon, in its application for indemnity costs, but pointed to the lateness with which Mirvac raised some of its arguments, and that Mirvac’s arguments had failed in their entirety.

Gordon J held that there were “special or unusual features” justifying the Court exercising its discretion to award indemnity costs. Essentially, Mirvac failed to accept the Receivers’ adjudication of its claim for the termination fee. Moreoever, its claim failed “legally and factually”. For these reasons, her Honour awarded indemnity costs against Mirvac in favour of the Receivers, Westpac and, even though ASIC did not seek them, in favour also of ASIC [at 11].

This month has seen some interesting developments in relation to the Reef House Resort and other unregistered managed investment schemes of Mr Mark Ronald Letten and his companies, which collapsed in early 2010.

First and foremost, on 7 October 2011, Justice Gordon handed down judgment in ASIC v Letten (No 13) FCA 1151. This was an application by the receivers of the Reef House Resort Scheme for directions, primarily as to whether the receivers were justified in refusing to pay Mirvac Hotels Pty Ltd (Mirvac) a termination fee of over $0.5m, to which Mirvac claimed to be entitled under a hotel management agreement, as an expense of the receivership of the company. (The company in question being Firbank Arch Pty Ltd.) Her Honour’s answer was yes, the receivers were justified in refusing to pay the termination fee as an expense of the receivership. In effect, the receivers were held entitled to terminate the contract pursuant to its termination clause, without incurring personal liability to pay the termination fee. However it should be noted that some particular aspects of this case are likely to limit its broader application (see below).

In June 2010, orders had been made by Gordon J empowering the receivers to sell the Reef House Properties (see ASIC v Letten (No 4)). The orders included directions to apply the proceeds of realisation in a specified manner, including first to pay all fees and reasonable expenses associated with the sale, and to also deduct from proceeds the receivers’ reasonable fees and expenses of getting in, preserving and realising the Reef House Properties, before payment of the proceeds to any secured lender, the balance to be paid into a bank account.

On 11 November 2010, pooling orders were made, which included further directions that the receivers were justified in paying the following amounts out of the proceeds of sale of each asset in a set order of priority, the first of which was “priority receivership costs”, defined to include the receivers’ fees, costs and expenses of getting in, preserving or realising a relevant asset.

On 17 December 2010, further orders were made by Gordon J directing that the receivers were justified in settling contracts of sale that had been entered into with respect to the Reef House Properties (see ASIC v Letten (No 8 ) ).

At the time when the receivers were appointed in February 2010, Mirvac held a hotel management agreement (HMA) with the trustee company which owned the Reef House Resort. Under the HMA, the trustee company could terminate the agreement at any time without cause on three months notice, but a termination would trigger a termination fee under clause 15.4. [10]

After the receivers were appointed, Mirvac wrote to them requiring payment of outstanding amounts due in respect of the Reef House Resort for salaries and wages, Mirvac management fees and Mirvac services [14]. The receivers wrote back on 6 April 2010. They trod a careful line. They write that they acknowledged the existence of the HMA, but that as it was executed prior to their appointment, it had not been adopted by them and personal liability was excluded to the extent possible by law. They wrote that while they had not formally adopted the HMA, they did “acknowledge its existence” and would provide payment with respect to fees Mirvac would ordinarily be entitled under it, relating to the period from their appointment to the date of termination. They also stated that under no circumstances would they the receivers be responsible for any termination fees should Mirvac elect to cancel the HMA [15]. Her Honour held that the contents of this letter did not amount to an “adoption” by the receivers of the HMA, which was a point of some significance in this case. Note that her Honour also held that a termination fee was not a fee to which Mirvac would “ordinarily be entitled” [16-17].

Following the court order permitting the sale of Reef House Properties in June 2010, the receivers put the Reef House Resort on the market. Mirvac continued to manage the resort up to the time of sale. The Resort was marketed with the HMA in place and Mirvac’s position as manager was highlighted prominently as a feature. The information memorandum referred to Mirvac’s position as manager in greater detail [19-20]. In October 2010, the ultimate buyer of the Reef House Properties advised the receivers that a condition of its purchase was vacant possession. In the end, as this was a precondition of the best offer available, the receivers determined that termination of the HMA was desirable. On 16 November 2010 they entered into a contract of sale and caused Firbank Arch to serve a notice of termination on Mirvac under cl15.8 of the HMA. Mirvac claimed entitlement to its termination fee, but the receivers refused.

One point to note here is that the receivers in this case were not appointed by the secured creditor nor were they appointed for the purpose of enforcing a charge. Rather, they were appointed by the Court and for a broader purpose – to wind up the unregistered management investments scheme and realise the assets for the benefit of the stakeholders [29]. As can be seen from the discussion below, this became a point of fact of relevance to her Honour’s decision on a number of the arguments mounted by Mirvac.

Before embarking upon an analysis of the issues, Gordon J highlighted the following aspects of the case before her, citing the key authorities –

First – the Receivers were Court-appointed. They took possession of the Reef House Properties on identified bases. Their appointment was made subject to the rights of prior interests including that of the Secured Lender [32].

Second – property does not vest in the receiver [33].

Third – a receiver does not become liable on contracts made by the company prior to their appointment, unless they act to assume liability. Unless they do so, receivers are free to complete a contract entered into by the company before the appointment without becoming personally liable on the contract [34].

Her honour then considered Mirvac’s six bases for entitlement to payment of the termination fee in priority to payment to the secured lender [from 35].

Mirvac failed on all of them, some as they were not supported by the proven facts, some failed on matters of law, some on both. As noted above, the fact that the receivers had been appointed by the Court, not by the secured lender Westpac, undermined a number of the arguments Mirvac sought to mount [see, for example, her Honour’s analysis at 35-46].

One argument Mirvac ventured, based upon the Toshoku principle, was that the termination fee should be regarded as an expense of the receivership even though it arises out of a pre-receivership contract (the hotel management agreement) because it “would be just and equitable in the circumstances to treat the [fee] as if it were an expense of the [receivership]:  In re Toshoku Finance UK plc [2002] UKHL 6; [2002] 1 WLR 671 at [25-29]. Gordon J considered the House of Lords’ decision, and its treatment by Finkelstein J in 2009 in one of the Timbercorp  decisions, and reflected upon the scope of this principle [from 47]. Her Honour concluded that at its core, the principle in Toshoku is one which governs the interpretation of “expenses” under the Insolvency Rules 1986 (UK), and is of limited (if any) assistance in this case [53]. Her Honour observed that it was unnecessary to decide if it could be of broader application, to receiverships in Australia, because there was no underlying equitable reason why the termination fee should be regarded as an expense of the receivership in any event, because –

1. At no point did the Receivers personally adopt the hotel management agreement, indeed they expressly disclaimed such adoption; and

2. The bases upon which the secured lender was to be responsible for, or subject to, the obligations under that agreement were limited. Westpac neither appointed a receiver over the company’s assets, nor did it take action for default under the mortgage [55].

In relation to some of Mirvac’s other arguments, her Honour held that  s 419 of the Corporations Act 2001 (Cth) did not apply as the Receivers were not appointed nor did they take control of property for the purpose of enforcing a charge [from 57]. There was no new contract between Mirvac and the Receivers [70] nor was there any adoption of the contract by the Receivers [71].

Finally, Mirvac argued that the Moodemere and GDK Financial Solutions principles supported a finding by the Court that the termination fee ought be paid in priority to the secured lender. Gordon J rejected that argument also [73-79]. Her Honour crucially observed that while the catalyst for termination of the hotel management agreement was the contract of sale of the property, any liability to pay the termination fee derived from a pre-appointment contract, not from caring for, preserving and realising the Reef House Properties.  The fact that the secured creditor was not a party to the proceedings in which the Receivers were appointed was another factor pointing against application of those principles here. There was also nothing to suggest unconscientious conduct on the part of the secured creditor. The rule in Ford, also discussed in GDK Financial Solutions, did not assist Mirvac here as it had not taken any action, or incurred any cost, of benefit to the fund as a whole.

Gordon J’s judgment contains an excellent distillation of a number of key legal principles, and is highly recommended reading. I would caution, however, against assuming her Honour’s decision is of broad application to all cases where receivers terminate pre-receivership contracts, given the particular facts of this case.

There have been further developments following this decision, which will be updated in subsequent posts.