Connelly and Harris as liquidators of Eureka Co-Operative Housing Society No. 2 Limited (in liquidation) v McGrath [2022] QSC 128

SUPREME COURT OF QUEENSLAND CITATION: Connelly and Harris as liquidators of Eureka Co-Operative Housing Society No. 2 Limited (in liquidation) v McGrath [2022] QSC 128 PARTIES: ANTHONY CONNELLY AND WILLIAM HARRIS AS LIQUIDATORS OF EUREKA CO-OPERATIVE HOUSING SOCIETY NO. 2 LIMITED (IN LIQUIDATION) (first applicant) and EUREKA CO-OPERATIVE HOUSING SOCIETY NO. 2 LIMITED (IN LIQUIDATION) (second applicant) v DAVID PETER MCGRATH (first respondent) and MCGRATH FINANCIAL SERVICES AUSTRALIA PTY LTD ACN 084 000 840 (second respondent) FILE NO/S: BS 3495 of 2022 DIVISION: Trial Division PROCEEDING: Application ORIGINATING COURT: Supreme Court at Brisbane DELIVERED ON: Date of Order: 30 March 2022 Date of Further Orders: 22 June 2022 Date of Publication of Reasons: 22 June 2022 DELIVERED AT: Brisbane HEARING DATE: 30 March 2022 Written submissions received 8 April 2022 JUDGE: Martin SJA ORDER: Date of Order: 30 March 2022 1. Pursuant to section 8 of the Supreme Court of Queensland Act 1991 (Qld) or otherwise in the inherent jurisdiction of the Court, the fourth affidavit of Anthony Norman Connelly filed on 24 March 2022 be placed in a sealed envelope on the court file which is marked: “Not to be opened except on the order of a Judge of this Court”. 2. Pursuant to section 477(2A) of the Corporations Act 2001 (Cth), the applicants have the approval of the -- 1 of 12 -- 2 Court to compromise debts owing to the second applicant, upon the terms contained in the Deed of Settlement and Release dated 18 October 2021. 3. Pursuant to rule 90-15 of Schedule 2 Insolvency Practice Schedule (Corporations) of the Corporations Act 2001 (Cth) (Insolvency Schedule), the first applicants are justified in entering into, and in causing the second applicant to enter into, the Deed. 4. Pursuant to rule 90-15 of the Insolvency Schedule, the first applicants are justified in making payments to the creditors of the second applicant in accordance with the proposed method of distribution set out in paragraphs 125 and 126 of the second affidavit of Anthony Norman Connelly, filed on 24 March 2022. Date of Further Orders: 22 June 2022 1. Pursuant to rule 60-10 of the Insolvency Schedule, the remuneration of the first applicants for the period from 4 July 2020 to 19 November 2021 be fixed and determined in the amount of $224,069.01 including GST. 2. Pursuant to rule 60-10 of the Insolvency Schedule, the remuneration of the first applicants for the period from 20 November 2021 to the finalisation of the liquidation of the second applicant be fixed and determined in the amount of $99,000 including GST. 3. The costs of this application are to be treated as costs in the winding up of the second applicant, and are payable out of the assets of the second applicant. CATCHWORDS: CORPORATIONS – WINDING UP – LIQUIDATORS – RIGHTS AND POWERS – IN WINDING UP BY COURT – GENERALLY – where the liquidators sought directions that they were justified in entering into a settlement of the litigation – whether there was an error of law or ground for suspecting bad faith or impropriety of the liquidators in settling the litigation – whether the Court should sanction the settlement CORPORATIONS – WINDING UP – LIQUIDATORS – RIGHTS AND POWERS – IN WINDING UP BY COURT – POWER TO COMPROMISE CLAIMS – where the liquidators sought the Court’s approval to compromise debts owing to the second applicant – whether there was an error of law or ground for suspecting bad faith or impropriety of the liquidators in compromising the debt – whether the Court should sanction the compromise -- 2 of 12 -- 3 CORPORATIONS – WINDING UP – LIQUIDATORS – RIGHTS AND POWERS – IN WINDING UP BY COURT – GENERALLY – where the liquidators sought orders that they were justified in making payments to the creditors in accordance with the proposed method of distribution – whether it is proper to exonerate the liquidators from liability for implementing the proposal – whether there is any good reason why the liquidator should not proceed as proposed – whether the Court should approve the proposed method of distribution CORPORATIONS – WINDING UP – LIQUIDATORS – REMUNERATION – IN WINDING UP BY COURT – GENERALLY – where the liquidators seek orders fixing their remuneration – where Queensland Treasury Corporation, as registrar of co-operative housing societies, fixed the remuneration of the liquidators in an amount equal to that which is sought by the liquidators – whether the Court should make orders fixing the liquidators’ remuneration in the amount sought by the liquidators Corporations Act 2001 (Cth), s 477(2A), sch 2 r 60-10, sch 2 r 60-12, sch 2 r 90-15 Financial Intermediaries Act 1996, s 117, s 118, s 183, s 187 ASIC v Tasman Investment Management Ltd & Ors (2006) 59 ACSR 113 Barnes v Addy (1874) LR 9 Ch App 244 Conlan v Adams (2008) 65 ACSR 521 Re One.Tel Ltd & Ors (2014) 99 ACSR 247 Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 Sanderson v Sakr (2017) 93 NSWLR 459 COUNSEL: P Ahern for the applicants No appearance for the respondents SOLICITORS: McCullough Robertson for the applicants No appearance for the respondents [1] On 30 March 2022, I made the following orders: (a) Pursuant to section 8 of the Supreme Court of Queensland Act 1991 (Qld) or otherwise in the inherent jurisdiction of the Court, the fourth affidavit of -- 3 of 12 -- 4 Anthony Norman Connelly, filed on 24 March 2022 (court document 6) be placed in a sealed envelope on the Court file which is marked: “Not to be opened except on the order of a Judge of this Court”. (b) Pursuant to section 477(2A) of the Corporations Act 2001 (Cth) (Corporations Act), the applicants have the approval of the Court to compromise debts owing to the second applicant, upon the terms contained in the Deed of Settlement and Release dated 18 October 2021. (c) Pursuant to rule 90-15 of Schedule 2 Insolvency Practice Schedule (Corporations) of the Corporations Act (Insolvency Schedule), the first applicants are justified in entering into, and in causing the second applicant to enter into, the Deed. (d) Pursuant to rule 90-15 of the Insolvency Schedule, the first applicants are justified in making payments to the Creditors of Eureka in accordance with the proposed Method of Distribution set out in paragraphs 125 and 126 of the second affidavit of Anthony Norman Connelly, filed on 24 March 2022. [2] These are my reasons for making those orders. Background [3] The first applicants are liquidators appointed to the second applicant (Eureka). [4] Eureka is a co-operative housing society that was established for the purpose of providing financial accommodation to its members to purchase, or refinance, residential property. Eureka entered into loan agreements with its members to assist them to purchase residential properties, and was granted a mortgage over each property as security. Eureka obtained wholesale funding from National Australia Bank Limited, in order to finance the loans that it made to its members (the Source Loan). [5] The first respondent has been a director of Eureka since 2014, and is also the sole director, sole shareholder and company secretary of the second respondent. [6] Immediately before 6 March 2018, Eureka: -- 4 of 12 -- 5 (a) had 14 members, with an aggregate liability to Eureka pursuant to their loan agreements in the amount of $999,308.72; (b) was indebted to National Australia Bank Limited under its Source Loan in the amount of $187,099.61; and (c) had net assets of $827,438.03. [7] On or about 6 March 2018, Eureka completed a transaction which resulted in: (a) members’ loan agreements and mortgages being transferred from Eureka to the second respondent; in return for (b) the payment by the second respondent to Eureka of $187,099.61. (the Transaction) [8] Eureka used the $187,099.61 it received from the second respondent as part of the Transaction to discharge the Source Loan. As a result of the Transaction, Eureka suffered a loss of $812,209.11 (being the amount by which members’ loans exceeded the Source Loan) and Eureka’s net assets were reduced to about $15,288.92. [9] On 1 November 2018, Queensland Treasury Corporation (QTC), as Registrar of Co- Operative Housing Societies, issued a certificate under s 183(1A) of the Financial Intermediaries Act 1996 (FI Act) to wind up Eureka. The first applicants were appointed liquidators of Eureka by QTC on the same day. On 29 June 2021, QTC agreed to indemnify Eureka and its liquidators in the amount of $749,140. The Proceeding [10] On 7 May 2019, the applicants commenced proceedings against the respondents. In those proceedings, the applicants claim, against the first respondent, a debt of $812,209.11 owing under s 118 of the FI Act, plus a further amount reflecting the profit made by the first respondent by reason of the Transaction. They also make a Barnes v Addy1 knowing receipt claim against the second respondent. [11] On 18 October 2021, the parties participated in a mediation which culminated in the execution of a Deed of Settlement and Release (the Deed). The settlement will result 1 (1874) LR 9 Ch App 244. -- 5 of 12 -- 6 in Eureka receiving loans and cash to a total value of $995,000. As part of the settlement, QTC also agreed to defer repayment of amounts owing under its indemnity until after members’ claims are repaid. The Deed contains a number of conditions to the continuing performance of the Deed. Before the hearing of this application, they had all been performed save for the condition that the liquidators apply for and obtain approval of the terms of the Deed in accordance with the provisions of s 477(2A) of the Corporations Act 2001. Entering into the Deed [12] The liquidators sought directions that they were justified in entering into a settlement of the litigation. [13] The principles relevant to the Court’s jurisdiction to make such directions were discussed by Giles J in Re Spedley Securities Ltd (in liq):2 “…the court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator’s conduct.”3 [14] In their written submissions, the liquidators have explained the reasons for their support of the proposed settlement, including that: (a) the settlement is very favourable to the plaintiffs, granting them the overwhelming majority of relief they sought in the proceeding; (b) the total amount to be paid by the defendants exceeds the plaintiffs’ principal claims in the proceeding by some margin; (c) the settlement ensures that Eureka recovers the member loans and the member mortgages; (d) the settlement obviates any risk of litigation; (e) the settlement avoids the need for further expenditure on legal costs by the plaintiffs if the proceeding were to run to trial; 2 (1992) 9 ACSR 83. 3 At 85-86. -- 6 of 12 -- 7 (f) the settlement followed detailed and extensive negotiations between the parties; (g) the settlement is consistent with the advice obtained from the liquidators’ lawyers; and (h) the settlement involved QTC’s agreement to defer payment of amounts owed under its indemnity until the members’ claims are paid. This means that members are projected to receive a return of 89 cents in the dollar on their claim. [15] The evidence supports these submissions and I am satisfied that the settlement agreement reached is a reasonable commercial compromise, and that it is appropriate to sanction the proposed settlement. Compromising the debt [16] The liquidators have also sought the Court’s approval to compromise debts owing to the second applicant. [17] Section 477(2A) of the Corporations Act 2001 provides: Except with the approval of the Court, of the committee of inspection or of a resolution of the creditors, a liquidator of a company must not compromise a debt to the company if the amount claimed by the company is more than: (a) if an amount greater than $20,000 is prescribed – the prescribed amount; or (b) otherwise – $20,000. [18] The prescribed amount for the purpose of this section is $100,000.4 [19] Part of the proceedings involves a claim against the first respondent for a debt of $812,209.11 owing under s 118 of the FI Act, because of the first respondent’s contravention of his duties under s 117 of the FI Act. Section 118(3) provides: “(3) If a person contravenes section 117, the society may, whether or not the person has been convicted of an offence against the section for the 4 Corporations Regulation 2001 (Cth), reg 5.4.02. -- 7 of 12 -- 8 contravention, recover from the person as a debt due to the society by action in a court having jurisdiction for the recovery of debts up to the amount involved— (a) if that person or any other person has made a profit because of the contravention—an amount equal to that profit; and (b) if the society has suffered loss or damage because of the contravention—an amount equal to that loss or damage.” The claim is for a debt within the meaning of that word as used in s 477(2A) of the Corporations Act (set out above). [20] The Court’s role in relation to a s 477(2A) application is (like its role in sanctioning a settlement) not to reconsider every issue considered by the liquidator or to develop an alternative preferable proposal, but merely to satisfy itself that there is no error of law or ground for suspecting bad faith or impropriety.5 [21] For the reasons set out in paragraph 14 above, I am satisfied that the compromise is favourable to the plaintiffs and involves no error of law or bad faith on behalf of the liquidators. Accordingly, it should receive the Court’s sanction. Proposed method of distribution [22] The liquidators sought orders that they were justified in making payments to the creditors of Eureka in accordance with the proposed method of distribution. [23] Extensive affidavits were filed on behalf of the applicants outlining the proposed method of distribution. In short, the proposed method can be summarised in this way: (a) Each person who was a member of Eureka as at the date of the Transaction is a creditor. (b) Each Member’s claim arose because the transfer of the loans from Eureka to the second respondent diminished the loan surplus available to members. (c) Because the transfer of the loans to the second respondent diminished the loan surplus that was available to members, the members’ claims total the loan surplus ($812,209.11). 5 Re One.Tel Ltd & Ors (2014) 99 ACSR 247 at [26]. -- 8 of 12 -- 9 (d) There are no other creditors of Eureka apart from the members. (e) Each member’s claim should be calculated by: (i) calculating each member’s loan balance as at 6 March 2018, as a fraction of the total members’ loans as at 6 March 2018 ($999,308.72); and (ii) multiplying that fraction by the amount by which members’ loans exceeded the Source Loan ($812,209.11). (f) As some members had repaid their loans in full after the loans were transferred from Eureka to the second respondent, the proposed method of distribution will combine loan reductions and cash payments, depending on each member’s circumstances: (i) if the member still owes an amount pursuant to their member loan, that loan will be reduced by the extent of their distribution; (ii) if the member’s claim distribution exceeds the balance of their remaining member loan, the loan will be reduced to nil and they will be paid the balance of their distribution in cash; and (iii) if the member has repaid their member loan in full, they will receive a cash distribution for the amount of their claim. [24] Similar principles apply to those involved in relation to the settlement of litigation. In ASIC v Tasman Investment Management Ltd & Ors,6 Austin J, in considering a particular distribution to creditors, noted: “…The answer to this question does not depend upon the court determining the rights of the investors to the scheme assets. It depends upon whether there is a reasonable basis for [the liquidator’s] proposal, sufficient to persuade the court that it is proper to exonerate him from liability for implementing the proposal; or conversely, whether there is any good reason why the liquidator should not proceed as proposed.”7 6 (2006) 59 ACSR 113. 7 At [32]. -- 9 of 12 -- 10 [25] I am satisfied that there is a reasonable basis for the proposal, and that it is proper to exonerate the liquidator for liability for implementing the proposal. It was flagged by the liquidators that, after making the proposed distribution to members, the remaining balance of members’ loans will total approximately $46,700 (comprising loans to five members). These five members will not be paid any cash, and will receive their dividend entirely in the form of a loan reduction. Essentially, the liquidator will ‘write off’ these remaining loans. I do not see this as being a ‘good reason’ for the liquidator not proceeding as proposed. Such an approach is not uncommon in a liquidation, and this liquidator has established that it will not be commercially viable to realise the balance of the loans of those five members. Remuneration [26] The applicants sought orders that the remuneration of the liquidators be fixed at: (a) for the period from 4 July 2020 to 19 November 2021 – $224,069.01 including GST; and (b) for the period from 20 November 2021 to the conclusion of the liquidation – $99,000 including GST. [27] I did not make these orders at the hearing, and sought further submissions from the applicants. [28] Rule 60-12 of the Insolvency Schedule sets out the matters to which a court must have regard in making a remuneration determination. Relevant matters include: (a) whether the work was necessary and properly performed; (b) the period during which the work was performed; (c) the quality of the work; (d) the complexity of the work; (e) the value and nature of any property dealt with; (f) the number, attributes and conduct of the creditors; (g) if the remuneration is worked out on a time-cost basis – the time properly taken in performing the work; and -- 10 of 12 -- 11 (h) any other relevant matters. [29] Liquidators are entitled to remuneration that is fair and reasonable.8 The onus is on the applicant to establish that the remuneration claimed is reasonable. The function of the Court is to determine the remuneration by considering the material provided and bringing an independent mind to bear on the relevant issues.9 There must be evidence relating to the work done by particular persons, how long it took to do the work, their hourly rate and the reasonableness of the rate.10 [30] At the hearing, an issue arose indirectly with respect to the liquidators’ remuneration. The respondents did not appear, but a letter was tendered from the respondents’ solicitors which contained an assertion that the liquidators’ fees should not be coming from the monies available within Eureka, and that the fees should be the responsibility of the Registrar. [31] I was not directed to any provision of the FI Act which required that to occur. In the absence of argument from the respondents I will not pursue the matter. [32] My attention was also drawn to s 183(4) of the FI Act, which provides that: “A liquidator is entitled to receive an amount of remuneration the registrar considers appropriate, having regard to the rate of payment that would normally apply for such appointment” [33] I was also referred to s 187 of the FI Act, which provides: “Despite anything in the Corporations Act or a law applied under part 6, division 5, the remuneration paid to the liquidator of a society wound-up voluntarily must not be more than the amount fixed by the registrar.” [34] An issue might arise as to whether there is an inconsistency between s 187 and rule 60-12 of the Insolvency Schedule to the Corporations Act. But it does not arise in this case. The registrar has “fixed” the liquidators’ remuneration in an amount equal to that which is sought by the liquidators. The material provided by the liquidators sets out in considerable detail the work which was done, the manner in which it was done, 8 Sanderson v Sakr (2017) 93 NSWLR 459 at [49], [51] and [54]. 9 Sanderson v Sakr (2017) 93 NSWLR 459 at [54]. 10 Conlan v Adams (2008) 65 ACSR 521 at [28]. -- 11 of 12 -- 12 the relevance of the work which was done, the complexity of the work and the categories of persons who undertook the work. I’m satisfied that the first applicants have established that the remuneration sought is appropriate in all the circumstances. In the absence of a contradictor, it is inappropriate to consider any inconsistency when, on the facts, the result is the same. Orders [35] Pursuant to rule 60-10 of the Insolvency Schedule, the remuneration of the first applicants for the period from 4 July 2020 to 19 November 2021 be fixed and determined in the amount of $224,069.01 including GST. [36] Pursuant to rule 60-10 of the Insolvency Schedule, the remuneration of the first applicants for the period from 20 November 2021 to the finalisation of the liquidation of the second applicant be fixed and determined in the amount of $99,000 including GST. [37] The costs of this application are to be treated as costs in the winding up of the second applicant, and are payable out of the assets of the second applicant. -- 12 of 12 --