[2024] SASC 120

Applicant: ANDREJS JANIS STRAZDINS AS LIQUIDATOR OF ROXBY DOWNS CLUB INCORPORATED (IN LIQUIDATION) Counsel: MR M DOUGLAS - Solicitor: BELPERIO CONNELL Hearing Date/s: 16/07/2024 File No/s: CIV-22-012061 & CIV-22-012194 B SUPREME COURT OF SOUTH AUSTRALIA (Civil) DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment. The onus remains on any person using material in the judgment to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court in which it was generated. IN THE MATTER OF ROXBY DOWNS CLUB INCORPORATED (IN LIQUIDATION); CLUB MANAGEMENT SERVICES (SA) PTY LTD v ROXBY DOWNS CLUB INCORPORATED (IN LIQUIDATION) [2024] SASC 120 Decision of the Honourable Associate Justice Bochner 14 October 2024 CORPORATIONS - WINDING UP - CONDUCT AND INCIDENTS OF WINDING UP - APPLICATIONS TO COURT FOR DIRECTIONS OR ADVICE CORPORATIONS - WINDING UP - CONDUCT AND INCIDENTS OF WINDING UP - PROOF OF DEBTS - PROCEDURE Application for advice and directions. Held: The Court declines to give the advice and directions sought. Associations Incorporation Act 1985 (SA); Corporations Act 2001 (Cth), referred to. Re Magic Australia Pty Ltd (in liq) (1992) 7 ACSR 742; Re Willmott Forests Ltd (No 2) [2012] VSC 125; Re Octaviar Limited (in liq) [2019] QSC 235; Re GMG Victoria Holdings Pty Ltd (In liq) [2021] FCA 86; Woodhouse, Re Forex Capital Trading Pty Ltd (in liq) [2022] FCA 600; In the matter of Polat Enterprises Pty Ltd (in liq) [2020] VSC 485; Re Morgan, Traditional Values Management (in liq) [2024] FCA 74, considered. -- 1 of 10 -- -- 2 of 10 -- IN THE MATTER OF ROXBY DOWNS CLUB INCORPORATED (IN LIQUIDATION); CLUB MANAGEMENT SERVICES (SA) PTY LTD v ROXBY DOWNS CLUB INCORPORATED (IN LIQUIDATION) [2024] SASC 120 1 The Roxby Downs Club Incorporated (“the Club”) was incorporated under the Associations Incorporation Act 1985 in the late 1970’s or early 1980’s and owns one of the few pieces of freehold land in Roxby Downs. It is a not-for-profit organisation run by its members for the benefit of the Roxby Downs community. 2 In 2008, the Club entered into an agreement with Club Management Services (SA) Pty Ltd (“CMS”) pursuant to which CMS was to provide management services to the Club, and lend the Club funds to redevelop the Club’s buildings and to fit out the Club’s premises. Two separate loan agreements were entered into, the first in the sum of $3,700,000, for the redevelopment of the Club’s buildings and the second in the sum of $550,000 for its fit out. The interest rate on each loan was 9% per annum. Once the redevelopment was completed, CMS provided management services to the Club. 3 On 12 April 2018, the Club terminated the management services agreement. On 12 October 2020, CMS served a creditor’s statutory demand, seeking payment of $5,517,059.68, which it said it was owed pursuant to the two loans. On 21 May 2021, CMS commenced an action in the District Court for payment of the sum of $5,800,331.69. 4 On 1 February 2022, Mr Strazdins was appointed the administrator of the Club, and on 17 May 2022, the creditors resolved to wind up the Club and Mr Strazdins was appointed its liquidator. Following the Club’s entering into liquidation, CMS presented a proof of debt to Mr Strazdins in the sum of $6,190,033.05. 5 CMS’s position is that it advanced a total amount of $4,062,404.04 to the Club pursuant to the two loans, and over time, the Club made repayments of $544,499.45. In addition, CMS forgave $1,400,000. It contended that the Club acknowledged in its audited financial statements for the year ended 30 June 2015, that it owed CMS $5,279,238 with respect to both loans. 6 On examining CMS’s proof of debt, Mr Strazdins formed the view that there was a basis to doubt the amounts claimed. In particular, he considered that the agreements allowed CMS to claim simple interest, but the accounts suggested that interest had been calculated on a periodic capitalised basis and that there was insufficient evidence to allow him to be satisfied of the amount actually lent to the Club, how interest had been calculated, whether amounts paid by the Club had been properly accounted for, and whether the moneys loaned were used for their intended purpose. 7 Mr Strazdins was concerned that, in support of the debt, he was unable to find the amount of documentation that he would expect, including a detailed ledger -- 3 of 10 -- [2024] SASC 120 Associate Justice Bochner 2 setting out how and when funds were repaid and how interest was calculated, a complete audit trail with respect to the delivery and use of materials for the redevelopment and fit out of the Club, and a record relating to the increased costs to complete the redevelopment and fit out. This was in spite of the Club’s retaining experienced external bookkeepers, accountants and auditors. To satisfy his concerns, Mr Strazdins embarked on a series of public examinations. Examinees included employees of the Club’s auditors, and bookkeepers and CMS’s sole director, Mr Matthews and CMS’s accountants. 8 Following the examinations, Mr Strazdins formed the view that CMS had wrongly calculated interest on a periodic capitalised basis, when the loan agreements only permitted simple interest to be charged. As a result, he has determined that it would be proper for him to reject CMS’s claim. 9 On reaching the determination that he could not accept CMS’s claim in full, Mr Strazdins formed the view that he could either reject its proof of debt in its entirety or try to reconstruct the loan facilities and account for the amounts that had been paid or forgiven and the interest that had accrued. He decided to do the latter, given that there is no doubt that the redevelopment and fit out occurred. On undertaking this exercise, he determined that the debt fell within a range of $446,290 to $1,892,754, with the mean being $1,169,522 (“the mean figure”). He considered that the proof of debt should be admitted for this amount. Given the difficulties he encountered in determining the debt owed to CMS, Mr Strazdins has formed the view that this was the fairest figure at which the debt should be adjudicated. 10 CMS disputes Mr Strazdins’ assessment of the debt and contends that he has failed to consider properly a number of issues, including the basis on which interest could be calculated under the loan agreements, documents provided by architects in support of the amounts advanced to the Club, and whether payments made by the Club were applied first to interest or principal. There is a real dispute between CMS and the liquidator on these issues, particularly on the correct construction of the loan contracts as to the calculation of interest. Why has Mr Strazdins sought advice from the Court? 11 Mr Strazdins wishes to sell the land and other assets owned by the Club. He has engaged in a process of sale by expressions of interest of the land, gaming machine entitlements and plant, equipment and stock. On 18 May 2023, Mr Strazdins entered into a heads of agreement with Mr Steven Dewick, with respect to the sale of these assets and sought various orders from the Court to enable him to finalise a sale. CMS objected to the orders sought on a range of grounds, including the basis on which it was intended to transfer the gaming machine entitlements and in relation to the allocation of the purchase price between the land, the plant, equipment and stock and the gaming machine entitlements. As CMS’s debt is secured against the land only, the amount allocated to the land was -- 4 of 10 -- [2024] SASC 120 Associate Justice Bochner 3 of central importance to CMS in ensuring that its debt was satisfied. One can only assume that it would also be of critical importance to unsecured creditors. 12 As a result of these objections, Mr Strazdins sought to enter into two new contracts with Mr Dewick, the first in the sum of [redacted] for the land and [redacted] for the plant, equipment and stock, and the second in the sum of [redacted] for the gaming machine entitlements. The first contract was unconditional, the second not so. 13 Mr Strazdins is aware that, if CMS’s debt is adjudicated at the mean figure, CMS will object to the sale of the land and seek to review the adjudication. If it adjudicated at the higher amount, CMS is likely to allow the sale to occur. Finally, there is likely to be a contest between CMS and Mr Strazdins as to the payment of a number of the costs of the liquidation, including the examinations that occurred. 14 The amount at which CMS’s proof of debt is adjudicated will have significant consequences for the progress of the liquidation and its attendant costs. If CMS’s proof is adjudicated at an amount that is acceptable to CMS, then the costs of a review of that adjudication, as well as other costs associated with the sale of the property (for which the liquidator also intends to seek court approval) may be avoided. The hearing of this application 15 This application was dealt with on an ex parte basis, save for the fact that CMS was given the opportunity to file written submissions dealing with its attitude to the advice sought by Mr Strazdins. CMS did not appear at the hearing. 16 In its written submissions, supported by a significant body of affidavit material which it was given leave to file, CMS urged me find that its proof of debt should be admitted in a sum significantly in excess of the mean figure. CMS challenged many of the matters deposed to by Mr Strazdins in his filed material. CMS was not heard in the traditional sense. In particular, there was no joining of issues in any real sense with respect to the construction of the loan documents or the calculations of the amounts advanced to the Club or paid by it. Consideration 17 I do not consider that this an appropriate matter in respect of which the Court should give advice and directions. In reaching this conclusion, I rely on a range of authorities. 18 The case of Re Magic Australia Pty Ltd (in liq)1 is a useful starting point. In this case, McLelland J said: However no such binding determination can arise from a direction given in a liquidator's application for directions, and such an application is not an appropriate vehicle for the 1 (1992) 7 ACSR 742. -- 5 of 10 -- [2024] SASC 120 Associate Justice Bochner 4 determination of substantive issues: see generally Re G B Nathan & Co Pty Ltd (in liq) (1991) 5 ACSR 673; 9 ACLC 1291 as to the nature, scope and incidents of an application for directions. A direction to the effect that a liquidator would be justified in admitting, or alternatively would be justified in rejecting, a particular proof of debt, would not be determinative of the validity or otherwise of the claim the subject of the proof, and would not preclude a subsequent appeal to the court from the liquidator's decision in compliance with the direction. It would normally therefore be inappropriate for such a direction to be sought or given.2 19 Davies J discussed the scope of power provided in s 511(1) of the Corporations Act 2001 (Cth) in the case of Re Willmott Forests Ltd (No 2).3 She determined that the Court had the power to make orders affecting the substantive rights of third parties, and whether it chose to do so was a matter of discretion, not power. She went on to say: Finally, for the sake of completeness, it is noted that the power under s 511(1) is not exercisable when effectively the Court is being asked only to give its approval to a commercial decision about which the liquidator wants reassurance.4 20 The Courts in Re Magic Australia and Re Willmott Forests were considering the predecessor legislation to that applicable in this case. The current provisions have been considered by a number of recent cases. 21 In Re Octaviar Limited (in liq)5 Bradley J said the following: In form, s 90-15(1) may authorise a broader range of orders than its predecessors. Of course, broader orders may require the court to afford potentially affected parties an opportunity to be heard. The present application does not seek any broader relief. In any event, the directly affected parties were served and those most interested appeared and were heard. The court’s power to give judicial advice is confined only by the subject matter, scope and purpose of the statutory provision conferring the power. It is not appropriate to read the provision down or imply any limitation on the power or the discretionary factors relevant to its exercise. Section 90-15(1) contains no express words of limitation. It is intended to facilitate the performance of a liquidator’s functions. It should be interpreted widely to give effect to that intention; so, the court may give advice where it is in the interests of the liquidation to do so. An application for advice can be a simple and economical procedure. Its utility arises from the fact that “if the court gave a direction to an official administrator who had made a full and fair disclosure to the court of the material facts, the official administrator might act in accordance with the direction without thereby incurring personal liability”. In this way the statutory provision authorises the court to give advice to an applicant that is private, in the 2 Ibid, 745. 3 [2012] VSC 125. 4 Ibid, [58]. 5 [2019] QSC 235. -- 6 of 10 -- [2024] SASC 120 Associate Justice Bochner 5 sense that it is for the protection of the applicant, and the potentially affected parties are not parties to the proceeding in the usual way. 6 (footnotes omitted) 22 He went on to say: The existence of a legal controversy, even of contested proceedings, about the subject matter for advice is not an automatic bar to the court giving advice. Nor is it a factor of such weight that it would generally cause the court to decline to do so. Indeed, in adversarial situations an external administrator may well be assisted by judicial advice. The extent to which judicial advice may determine substantive rights in contested proceedings is relevant to the exercise of the discretion, because that is not its purpose. The court’s advice should not be directed to deciding disputes between interested parties. It ought to be directed to whether the external administrator is justified in conducting a winding up in a particular way. The court deals with an application in the same way as an application by a trustee for advice. This requires the court to consider an applicant’s reasons and the process by which the foreshadowed decision has been reached.7 (footnotes omitted) 23 In Re GMG Victoria Holdings Pty Ltd (In liq),8 Greenwood J said: … In the exercise of the power conferred upon the Court by clause 90-15(1), it is not the function of the Court to give directions as to the making and implementation of a business or commercial decision falling to be made by the liquidators. Nor is it the role of the Court to substitute its own view about whether a proof of debt ought to be admitted in the liquidation. However, where a particular legal question arises in relation to the propriety or reasonableness of a decision to admit or reject a proof of debt, the Court’s role is properly engaged in deciding the resolution of that question which, in turn, properly leads to the giving of directions in relation to the relevant subject matter. The legal question which engages the Court’s power to make a particular direction may be a legal issue of “substance or procedure [or], it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised”: Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409, Goldberg J at [65]. This proposition has been cited many times in subsequent authorities.9 24 In Woodhouse, Re Forex Capital Trading Pty Ltd (in liq),10 Banks-Smith J said: Whilst a court generally refrains from making directions relating to a liquidator's or administrator's business or commercial decisions, it may give directions relating to issues such as a legal issue of substance or procedure, or an issue of power, propriety or reasonableness: In the matter of Ansett Australia Limited and Korda [2002] FCA 90; (2002) 115 FCR 409 at [44]-[46] (Goldberg J).11 6 Ibid, [9] – [11]. 7 Ibid, [22] – [34]. 8 [2021] FCA 86. 9 Ibid, [24]. 10 [2022] FCA 600. 11 Ibid, [53]. -- 7 of 10 -- [2024] SASC 120 Associate Justice Bochner 6 25 In In the matter of Polat Enterprises Pty Ltd (in liq)12 the Court observed that s 90-15 is 'broad in its scope and contemplates not only the exercise of judicial discretion but also the determination of substantive rights'13 26 Finally, I note the case of Re Morgan, Traditional Values Management (in liq).14 In that case, Button J said: The plaintiffs also drew attention to authority to the effect that it is not an appropriate use of the power to make directions for the court to approve or reject a particular proof of debt, it being the duty of the liquidator to adjudicate on proofs of debt in respect of which creditors have rights of appeal: Re Magic Aust Pty Ltd (in liq) (1992) 7 ACSR 742 at 745 (McLelland J); Re Glowbind Pty Ltd (in liq) (2003) 48 ACSR 456; [2003] NSWSC 1190 (Burchett AJ); Selim v McGrath (2003) 177 FLR 85; [2003] NSWSC 927 at [140]–[141] (Barrett J); Re Horne (as joint and several liquidator of Australian Property Custodian Holdings Ltd (in liq)) (2021) 150 ACSR 565; [2021] VSC 51 (Re Horne) at [31] (Sloss J); In the matter of Broens Pty Limited (in liq) [2018] NSWSC 1747 at [52] (Gleeson J); White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) (No 7) [2019] FCA 113 at [7] (Perram J); Re Bell Group Ltd (in liq) [2020] WASC 259 (Re Bell Group) at [47] (Hill J). That is not, however, to preclude the possibility of directions being given that bear on the proof of debt process. As the plaintiffs submitted, Black J observed in Re Plutus Payroll Australia Pty Ltd (in liq) [2019] NSWSC 1171 at [5], that directions may nonetheless be given concerning issues arising in the determination of proofs of debt. Further, Hill J has observed that s 90-15 may be used to provide advice that a liquidator is justified in accepting a proof of debt: Re Bell Group at [47] citing Barnden (Liquidator), in the matter of Masonry Works Pty Limited (in liquidation) [2020] FCA 575 at [22] (Gleeson J) and In the Matter of Daily Planet Pty Ltd (in Liq) [2019] VSC 265 (Sifris J). It appears, from the searches of counsel, that similar proposals have been approved by this Court in two previous cases: Re Forex, and ION Limited, in the matter of ION Limited (Subject to Deed of Company Arrangement) [2010] FCA 1119 (Re ION), a decision of Dodds-Streeton J. It is, as those cases illustrate, an appropriate exercise of the power conferred by s 90-15 to approve an abridged process where that abridged process involves considerable savings and avoids the exhaustion of the funds remaining in the winding up. In both of those cases, detailed investigations had been undertaken into the affairs of the company in relation to claims, following which the liquidators (in Re Forex) and the deed administrators (in Re ION) had concluded that there were valid claims against the company and proposed to admit the claims of the relevant group with the discount reflecting the “quid pro quo” by which the value of claims was to be discounted as the price of saving the relevant claimants the need to collate detailed evidence and formally prove their individual claims.15 27 These authorities serve to demonstrate that, while the Court can, in an application for advice and directions, determine substantive rights, it should only do so in limited circumstances. The cases where the Court has given advice as to the acceptance or otherwise of a proof of debt have arisen in circumstances where there has been a conflict of interest on the part of the liquidator (for example, where 12 [2020] VSC 485. 13 Ibid, [31]. 14 [2024] FCA 74. 15 Ibid, [30] – [32]. -- 8 of 10 -- [2024] SASC 120 Associate Justice Bochner 7 the liquidator both prepared the proof of debt as the liquidator of a creditor company, and is required to adjudicate on it as liquidator of the debtor company) or where there is some question of law that requires determination. Otherwise, the Court is reluctant to become involved in the commercial or business decisions that a liquidator must make in the course of winding up a company. 28 I consider that the question that Mr Strazdins has asked the Court to consider in this application is a commercial one. He has determined the amount at which he believes CMS’s proof of debt should be allowed; he is conscious of the fact that this will, in all likelihood, cause CMS to take action which will both prolong and increase the cost of the liquidation process. Nonetheless, I consider that this is a decision that he must make, in accordance with his obligations and his experience as a liquidator. 29 There can be no doubt that there is a significant issue in contention between the parties: the construction of the loan agreements between the Club and CMS. In addition, there are significant factual issues in dispute. An application which has been dealt with largely ex parte is not the appropriate forum in which to resolve these disputes. In any event, both Mr Strazdins and CMS are agreed that any advice that I give will be binding on him, but not on CMS. Thus, any determination that I make will not be determinative of the rights of the parties, but will result in my giving an opinion based on less information that I would have if this had proceeded as a review of a liquidator’s determination. This seems to me to be an inefficient and arguably unfair way to deal with the dispute between the parties. 30 While I was the presiding judicial officer with respect to the lengthy public examinations that occurred, I do not consider that this equipped me with the factual basis on which to make a determination as to the appropriate amount at which CMS’s proof of debt should be allowed. Public examinations occur in a unique setting, which is always one sided. The only evidence adduced is that relied on by the liquidator, and parties who might otherwise be on the other side in adversarial litigation are not afforded the opportunity to proffer evidence that supports their case, nor to examine or cross-examine witnesses to adduce oral evidence that might otherwise not be forthcoming. As a result, the examination process, while it offers benefits to the liquidator in determining issues leading to or arising out of the liquidation of a company, does not offer a useful forum for determining disputed questions of fact or law. It is an investigative tool, not an adjudicative one. 31 I accept that Mr Strazdins seeks to protect himself in the event that he chooses a path that may lead to further expense in the liquidation, including further litigation. Nonetheless, that is one of the burdens taken on by a liquidator when he or she assumes that role. In the circumstances of this case, it is a burden that he must carry alone. 32 The Court declines to give the advice and directions sought. -- 9 of 10 -- [2024] SASC 120 Associate Justice Bochner 8 33 I will hear the parties on the question of the conduct of this matter. -- 10 of 10 --