In the matter of Australian Tailings Group Pty Limited [2020] NSWSC 1543

Supreme Court New South Wales

Medium Neutral Citation: In the matter of Australian Tailings Group Pty Limited [2020] NSWSC 1543 Hearing dates: 9 April 2020 Date of orders: 9 April 2020 Decision date: 09 April 2020 Jurisdiction: Equity - Corporations List Before: Black J Decision: Company wound up on ground of insolvency. Plaintiffs' costs of the winding up to be costs in the winding up. Catchwords: CORPORATIONS — Winding up — Practice and procedure — Application to adjourn winding up application under Corporations Act 2001 (Cth) s 440A(2) — Where administrator appointed shortly before winding up proceedings — Where winding up application previously opposed on ground of solvency — Short adjournment sought for administrator to investigate information provided by director which administrator cannot presently verify — Where director's evidence does not confirm truth of information provided to administrator — Where administrator previously involved as expert — Whether adjournment in creditors' interest CORPORATIONS — Winding up — Failure to comply with creditor's statutory demand — Presumption of insolvency — Where no solvency evidence led by Company Legislation Cited: - Corporations Act 2001 (Cth), s 440A - Evidence Act 1995 (NSW), s 132 Cases Cited: - Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456 - Deputy Commissioner of Taxation v Bradley Keeling Management Pty Limited [2003] NSWSC 47; (2003) 44 ACSR 377 - Offshore and Ocean Engineering v Greenwich Contractors Pty Limited [2012] NSWCA 371 - Re Offshore and Ocean Engineering Pty Limited [2012] NSWSC 1296 Category: Principal judgment Parties: Phillip Wood (First Plaintiff) Bret Kemp (Second Plaintiff) Australian Tailings Group Pty Ltd (Defendant) Representation: Counsel: Mr J Spinak (Plaintiffs) Mr D Krochmalik (Defendant company in administration and administrator Mr Crouch)

Solicitors: Maddox (as agent for Norman Waterhouse Lawyers) (Plaintiffs) Matthewsfolbigg (Administrator of Defendant Company) File Number(s): 2019/390519

Judgment – ex tempore (revised 9 april 2020) 1. By oral application brought today, by leave, Australian Tailings Group Pty Limited (voluntary administrator appointed) ("ATG") and its administrator, Mr Nicholas Crouch, initially sought an order under s 440A(2) of the Corporations Act 2001 (Cth) adjourning a winding-up application on the basis that ATG was under administration, for a period of 14 days, to allow a first meeting of creditors to occur in that period. I will return to some of the evidence led in support of that application shortly. 2. Mr Krochmalik, who appeared for ATG and Mr Crouch, placed very heavy weight in submissions on the fact that Mr Crouch had only recently been appointed as administrator, but it should be noted that has occurred in the course of a winding-up application that has been on foot for a long period; where ATG has repeatedly asserted that it wished to lead evidence to establish its solvency, and briefed an initial expert to do so, then briefed Mr Crouch to do so, and sought extensions of time from the Court to lead evidence to do so; and now, at the very last moment, has reversed course to accept that it is either insolvent or likely to become insolvent, and appointed Mr Crouch, who was previously to lead evidence of its solvency, as its voluntary administrator. 3. I will refer to evidence below given by ATG's director, Mr Hillam, which seeks to explain these developments on the basis that he has only recently become aware that the test for solvency adopts a cash flow test. I pause to note that it would be a matter of grave concern if a person appointed as a director of a company which appears to have substantial creditors has proceeded throughout an unsuccessful application to set aside a creditor's statutory demand, and a long-running winding-up application, vigorously opposing the winding-up, without a basic understanding of the concept of solvency which is essential to the performance of his functions as a company director and to the proper and responsible conduct of the proceedings in which he was presumably giving instructions to ATG's legal representatives. 4. As matters developed in the course of the hearing, it emerged that there was, at the least, an issue as to whether Mr Crouch would be seen to be sufficiently independent to remain as voluntary administrator to ATG, and Mr Crouch, by his counsel Mr Krochmalik, varied the application so as to seek an adjournment for a shorter period of several days so that inquiries could be made to see whether another insolvency practitioner may be prepared to accept appointment as voluntary administrator to ATG in place of Mr Crouch.

Applicable principles 1. Before turning to the evidence on which Mr Crouch relies for the adjournment application, I should say something as to the applicable principles, which are well-established. Section 440A(2) of the Corporations Act provides that the Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. Whether the Court is satisfied of that matter is to be determined in the relevant circumstances, and the authorities make clear that that requires a sufficient possibility, and not mere speculation, that creditors' interest will advantaged by the adjournment of the winding-up application; Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456 at 456-457. The case law recognises, as Mr Krochmalik emphasises in submissions, that the circumstances in which that question is to be determined may differ between, for example, an application brought at an early point and seeking a shorter adjournment, immediately after an administrator is appointed, or a situation where an administrator has been in office for some time and the Court has to assess whether further to adjourn a winding-up application. The relevance of the circumstances in which the application is brought was emphasised by Campbell J in Deputy Commissioner of Taxation v Bradley Keeling Management Pty Limited [2003] NSWSC 47; (2003) 44 ACSR 377 [19], and I reviewed the relevant issues in Re Denham Constructions Pty Limited [2016] NSWSC 1426 at [6] FS. 2. The parties have recognised, rightly, that the lateness of the appointment of an administrator may be a relevant factor, where that appointment is made shortly before the hearing of a winding-up application: Re Offshore and Ocean Engineering Pty Limited [2012] NSWSC 1296 at [15]; leave to appeal refused in Offshore and Ocean Engineering v Greenwich Contractors Pty Limited [2012] NSWCA 371. That is relevant, first, because as Mr Krochmalik rightly recognises, the Court should treat applications for adjournment of a winding-up, where a voluntary administrator is appointed, as here, on the eve of the hearing, with scepticism, which should be reinforced where that involves a reversal of the company's previous position that it is solvent. Second, that is relevant because, as here, the lateness of the appointment may deprive the administrator of any real understanding of the company's affairs. 3. I should also here recognise that the question of adjournment of a winding-up application is governed by a statutory test, set in s 440A(2) of the Act, that depends upon the Court reaching a state of satisfaction, in the circumstances – which may include the fact that an administrator has recently been appointed – that it is in the interests of the company's creditors to continue under administration. There is, it seems to me, no general predisposition, contrary to a submission which Mr Krochmalik seemed to develop, to adjourn a winding-up application merely because an administrator has only recently been appointed and knows little or nothing of substance as to the company's affairs. The prospects of an application for adjournment are not improved if, rather than the administrator frankly admitting his or her lack of knowledge of the Company, he or she leads evidence of information provided to him or her, which is itself not established by evidence, then disclaims any knowledge whether that information is correct. If an administrator is appointed so late that he or she has no real understanding of the company's affairs, then a winding-up will less readily be adjourned and an administration less readily extended, because the Court will less likely be satisfied that it is in fact in the interests of the company's creditors for the company to continue under voluntary administration. I recognise that, in some cases, there will be value in the continuance of voluntary administration, at least to allow further investigations to be made, but that will turn on there being sufficient evidentiary basis for the Court to conclude that the making of those investigations is itself in creditors' interests.

Evidence in support of the adjournment application 1. The sole director of ATG, Mr Hillam, orally adopted a short affidavit in support of the application. Mr Hillam referred to the engagement of Mr Crouch, who has now been appointed as the voluntary administrator, to provide a solvency report to support ATG's previous opposition to the winding-up application, in circumstances that a previous expert had previously been retained, but, Mr Hillam says, had taken too long to prepare the report. Mr Hillam there refers to having acquired, presumably for the first time, the understanding to which I referred above, that the primary test of solvency was the company's ability to meet its current debts as and when they fell due from its cash flow. Mr Hillam there seeks to explain his earlier view that ATG was solvent by reason of the value of its assets. He indicates that, after he undertook a review of ATG's cash flow, he concluded that its debts that were due and payable could not be paid from existing cash resources or borrowings, and then ascertained whether Mr Crouch would consent to appointment as a voluntary administrator and appointed Mr Crouch as administrator on 6 April 2020. I should note that all of that occurred in circumstances that a winding up application was on foot since late 2019 and ATG was presumed to be insolvent, throughout the whole of the period, by reason of its failure to meet a creditor's statutory demand which it had sought to but failed to set aside. 2. I have set out Mr Hillam's evidence at some length, because it is notable that Mr Hillam does not address matters which involve the core of Mr Crouch's evidence, namely a very large amount of factual information which is said to have been provided by Mr Hillam to Mr Crouch to support Mr Crouch's view that it is in creditors' interests to continue the voluntary administration of ATG. Mr Krochmalik suggests that there has been little time to prepare the affidavit evidence, where Mr Crouch was only recently appointed as administrator. Quite apart from the fact that, as I have noted above, Mr Crouch has been involved as an expert since at least late March 2020, and, as will emerge below, also had a role as an intermediary for Mr Hillam in seeking to negotiate a resolution of the winding-up, it seems to me that the time that was available would at least have been sufficient to Mr Hillam to seek to confirm the truth of the many factual matters of which he has informed Mr Crouch, and on which Mr Crouch has relied in his affidavit evidence. That could at least have been done by a paragraph in his affidavit that identified those many matters and confirmed that each of them was true, even if it did not, as it ideally should have, also identify the basis on which that assertion was made. Mr Hillam makes no attempt to seek to establish the truth of those matters, and it seems to me that I can properly infer that any evidence that he could have, but did not, led in respect of those matters would not have assisted this application. 3. Mr Crouch in turn sets out, in a very detailed statement, which he affirmed in oral evidence, the steps which he has taken since his appointment as administrator, the background to ATG's operations, the nature of its business, and a number of matters of which he has been informed by Mr Hillam, the majority of which he has not been able to verify. Mr Crouch refers, for example, in paragraph 13 of his affidavit to various matters, some of which may be straightforward and some of which may be more controversial, such as his estimate that the company's tenements contain gold worth approximately $44 million to 52 million which are attributed to conversations with Mr Hillam and the company's other officers and agents and to unidentified preliminary investigations. Mr Crouch fairly makes clear that he does not in fact have a view as to the value of ATG's tenements, adopting a structure which is repeated throughout his affidavit, of first noting a position put by Mr Hillam and then indicating that Mr Crouch does not know whether it is correct. Mr Crouch fairly recognises that receivers and managers have been appointed to property owned by ATG, and also to property owned by other companies in a group with which ATG is associated, and I have also been taken to evidence that a controller is in place, albeit in respect of a narrower range of ATG's property. 4. In paragraph 28 of his affidavit, Mr Crouch also notes that he understands the value of gold resources in several of ATG's tenements would be approximately $43 million and the total value of ATG's gold resources would be $48 million. Again, however, that reflects Mr Crouch's making a statement and then disclaiming it, since paragraph 29 recognises that Mr Crouch has not had the opportunity to investigate or confirm those estimates. In fact, the evidence to which I had been taken by Mr Krochmalik in the course of his submissions demonstrates that the value of the tenements there identified is drawn from a report prepared some five and a half years ago, at an early stage of investigation of the tenements, which has been combined by a company officer with the gold price today, without any reference to what may have occurred in the last five and a half years to qualify that information, and the outcome of that calculation is then repeated by Mr Crouch before it is disclaimed by him. 5. Mr Crouch also refers to information provided by Mr Hillam as to possible restrictions on the ability to sell or assign ATG's assets, a matter on which Mr Krochmalik relies to submit that a liquidation would be a worse outcome for ATG's creditors than an administration, but Mr Crouch in turn points out that he has also been unable to verify the existence of those restrictions. I could continue to identify many other examples in Mr Crouch's affidavit where information is referred to as provided by Mr Hillam, although not addressed in Mr Hillam's evidence; Mr Crouch then indicates that he is not aware of whether the information is true; and it is in then relied on, it appears, to provide the basis for Mr Crouch's view that the administration would provide a better result for creditors than a liquidation. 6. Mr Crouch also refers to a proposed deed of company arrangement propounded by Mr Hillam and associated companies, which is in evidence in an exhibit to his affidavit. That deed of arrangement contemplates a small payment to a deed fund, to be made promptly, of only $32,000, although it appears Mr Crouch has made no inquiry as to the capacity of the proponents of the deed to make that payment. It refers to a further payment to be made, but not before six months, and to further contributions to be made out of revenue from projects conducted by associated companies of ATG. It appears that Mr Crouch has also made no inquiry as to the capacity of those companies to make those further payments, which it appears would depend upon the revenue derived from those other projects. I do not say that critically of Mr Crouch, since that may be a matter that reflects the recency of his appointment, notwithstanding his other roles with ATG, but it seems to me that those matters undermine the suggestion that any real weight could be given to the proposed deed of company arrangement in forming a view that the continuance of the voluntary administration would be in the interests of creditors. 7. I have regard to the fact that there is evidence that ATG has substantial creditors, although Mr Hillam has indicated, and Mr Crouch in turn records Mr Hillam's indication, that claims by some of those creditors may be disputed, at least in part, and that ATG has brought, or intends to bring, its own claims against several creditors. The scale of those creditors is significant, in two respects. First, one of those creditors is said to be owed an amount of nearly $10 million, which puts in perspective the suggestion that some $32,000 would initially be contributed to the deed fund. Second, Mr Krochmalik has taken me to evidence that several creditors support the proposed deed of company administration, and put significant weight upon that matter as a reason for an adjournment for the winding-up application. 8. That, however, has at least two difficulties. The first is there is no evidence as to what those creditors have been told about the proposed deed of company administration, by ATG, Mr Hillam or Mr Crouch. Unless they have been adequately informed of content of the proposed deed of company arrangement, and its risks, then little weight could be given to their support for it. Second, it appears that only two of those creditors, one of which is a substantial creditor of ATG, are at arm's length from ATG and Mr Hillam. The other creditors who support the proposed deed of company arrangement are companies controlled by Mr Hillam, and ATG's accountant, and it seems to me that the Court would likely give less weight to their views than to the views of other independent creditors, when properly informed as to any benefit and the risks of the proposed deed of company arrangement. 9. Mr Crouch in turn expresses the view that the proposed deed of company arrangement is capable of generating a positive return to creditors, although it seems to me that that conclusion ultimately depends upon matters of speculation which are not established for the reasons noted above. He expresses the view, which may well be correct, that a liquidation is likely to lead to no return to unsecured creditors. However, it must be borne in mind that a liquidation will at least place an independent liquidator in control of ATG's affairs, and that is a significant benefit of the appointment of an independent liquidator in the circumstances. 10. I should note, although I do so briefly, that a further development occurred in the course of the hearing, which appears to have prompted the change in the scope of the application to which I referred above. One of the plaintiffs, Mr Wood, led evidence that he had been approached, and the wife of the other plaintiff had also been approached, by Mr Crouch in what I will describe, generally and charitably, as an attempt to bring about a settlement of the claims against ATG and an adjournment of the winding-up, on a payment made by ATG or Mr Hillam to those creditors. Mr Crouch was cross-examined as to that matter and, after he was given the appropriate warning under s 132 of the Evidence Act 1995 (Cth), relied on the privilege against self-incrimination in respect of a number of answers to those questions, which I ultimately did not direct him to answer. 11. After that approach by Mr Crouch to the Plaintiffs, Mr Hillam advised Mr Wood, by a text message that "our liquidator, Mr Crouch" had put a proposal to the Plaintiffs, and outlined the disadvantages which, it was suggested, would follow if they did not accept that proposal, including the prospect of voluntary administration. That proposal was put by Mr Crouch to the Plaintiffs before he was appointed as voluntary administrator and Mr Crouch accepted, in cross-examination, that he put that proposal as an intermediary acting on behalf of Mr Hillam and his related companies. In these circumstances, it is perhaps not surprising that Mr Crouch has recognised that a question as to his independence may arise, and that would affect the Court's decision whether it was in the interests of creditors to adjourn the winding up application and leave Mr Crouch in place as voluntary administrator to ATG.

Determination 1. It seems to me that, having regard to the matters to which I have referred above, the Court cannot be satisfied that it is in interests of ATG's creditors for ATG to continue under administration rather than be wound up, even for a short period, in order for Mr Crouch, or Mr Hillam, to seek to identify a further voluntary administrator who might continue in place of Mr Crouch. I reach that view, first, because it seems to me that the evidence to which I have referred is not such that the Court could fairly conclude that it is in the interests of ATG's creditors even to allow further time for investigation by Mr Crouch, rather than promptly placing an independent liquidator in place, if the presumption that ATG is insolvent that arises from the unsatisfied creditor's statutory demand is not displaced. To the extent that Mr Crouch has addressed ATG's position, and the advantages sought to be achieved by voluntary administration, his evidence in that respect ultimately raises no higher than speculation, largely adopting, as I have noted above, a structure of recording what Mr Hillam has said, which is in turn not established by Mr Hillam's evidence, and then recording that Mr Crouch has not been able to satisfy itself of its correctness. That, of course, in turn reflects the lateness of the application. 2. Those matters would likely have been sufficient in themselves to prevent the Court forming any affirmative view that is in the interests of ATG's creditors for it to adjourn the winding-up. Here, however, that difficulty is worse, because the adjournment is now sought on the further speculation that it may be possible, in the relevant circumstances, to appoint a different insolvency administrator who does not have the difficulties with independence that Mr Crouch has, in the period before the matter is returned to the Court. That, again, is wholly speculative in the circumstance. 3. I cannot be satisfied that it is in the interests of ATG's creditors for it to continue under administration, whether for days, or for a longer period, rather than be wound up. In those circumstances I am not satisfied that I should adjourn the winding-up application.

Winding up application 1. By Originating Process filed on 11 December 2019, the Plaintiffs, Messrs Wood and Kemp, applied for an order that ATG be wound up on the grounds of insolvency and that Mark Lieberenz be appointed liquidator of ATG. I have today determined an application to adjourn the winding up under s 440A(2) of the Corporations Act on the basis that a voluntary administrator had been appointed, shortly before the winding up application was to be heard today, and declined to adjourn the winding up application. I now deal with the winding up application. 2. The application is brought on the basis that ATG failed to comply with a creditors statutory demand dated 11 October 2019 for payment of a debt ("Demand") in the amount of $500,000 claimed by Messrs Wood and Kemp. That debt is described as relating to a default by ATG in paying money due under an Asset Sale and Purchase Agreement dated 26 June 2017 as subsequently varied. An application was previously made by ATG, and failed, to set aside that Demand. 3. The Plaintiffs now rely on an affidavit dated 11 December 2019 of Mr Phillip Wood which, relevantly, annexes the Originating Process seeking the winding up of ATG and records that ATG was on 11 October 2018 indebted to the Plaintiffs in the amount of $500,000 by reference to the matters to which the Demand refers. Mr Wood's evidence is that ATG failed to pay that amount within seven days of the date on which the application to set aside the Demand was finally determined by this Court. Mr Wood's evidence is that that amount remains due and payable by ATG to the Plaintiffs. 4. By a further affidavit dated 4 February 2020, Mr Vasilios Marinos, a solicitor employed at the Plaintiffs' solicitors, gives evidence of service of the winding up application upon the solicitors for ATG who then had instructions to accept service. There is, of course, no doubt that the winding up application was served, where ATG has defended the winding up application for an extended period, albeit it ultimately did not lead evidence of its solvency and, by appointing a voluntary administrator, accepts that it is either insolvent or likely to become insolvent. A third affidavit dated 4 February 2020 of Mr Thomas Burke records the giving of notice of the winding up application to the Australian Securities and Investments Commission and the publication of the winding up application on ASIC's Insolvency Notices website. 5. The failure to comply with a creditor's statutory demand, within seven days of the determination of an application to set it aside, which fails, gives rise to a presumption of insolvency. That presumption can, in some circumstances, be rebutted by evidence of solvency. No such evidence has been led by ATG. Where the presumption of insolvency remains unrebutted, the basis for a winding up order is established. 6. For these reasons, I make the following orders: 1. Order that Australian Tailings Group Pty Ltd be wound up on grounds of insolvency. 2. Order that Mark Lieberenz be appointed liquidator of the Defendant. 3. The Plaintiffs' costs of the winding up be costs in the winding up.

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