A recent decision of the NSW Supreme Court stands as a reminder of the Court's power to intervene in close-knit arrangements and dealings aimed at 'vote stacking'.
In Grocon Constructors Pty Ltd v Kimberley Securities Ltd [2009] NSWSC 541 the plaintiff Grocon sought to overturn a deed of company arrangement (DOCA) dated 21 April 2009, executed by the first defendant, Kimberley, by relying on sections 600A, 445D and 447A of the Corporations Act 2001 (Cth) (Act). Grocon sought to attack the resolution of the creditors by which execution of the DOCA was approved.
Kimberley, a property development company, had three directors - Scown, Lorentz and Stoliar, all of whom were also directors of Selwan Property Holdings Ltd (Selwan), a creditor of Kimberley. Mr Burke was a secretary of Selwan and both a secretary and creditor of Kimberley.
The DOCA
Pursuant to a resolution of its directors, administrators were appointed to Kimberley on 19 December 2008. At a reconvened meeting of creditors held on 30 March 2009, a resolution was passed in favour of the execution of a DOCA.
The terms of the DOCA established a 'deed fund' which allowed for the related entities and directors of Kimberley to share in the remains of the fund after payment of the administrators' costs, disbursements and remuneration. The DOCA provided that the debts of the remaining creditors were to be extinguished, and that there was no right of participation in the deed fund.
Of the 22 creditors who voted on a poll, 17 (equating to approximately $13.5M) voted in favour of the resolution and five (accounting for approximately $5.5M) voted against. It was conceded that 11 of the creditors were related creditors within the meaning of section 600A(3) by reason of the fact that a director of each entity was also a director of Kimberley.
The remaining six creditors who voted in favour of the resolution - Burke, Brett McKechnie Consulting (BKC), Green Grill Pty Ltd (Green Grill), Leavers Constructions Pty Ltd (Leavers Constructions), Mushroom Catering Pty Ltd (Mushroom Catering) and Paccito Holdings Pty Ltd (Paccito), accounted for $25,239, and each appointed either Lorentz or Burke as its proxy.
The buying of debts
The circumstances by which BKC, Green Grill, Leavers Constructions, Mushroom Catering and Paccito became creditors of Kimberley was the subject of evidence. In the case of Mushroom Catering, it was found that it accepted the assignment of a debt of $1,210 paid by Selwan (on behalf of Kimberley) to Taren Constructions Pty Ltd. It was accepted that Mushroom Catering was only a creditor by virtue of the assignment of Kimberley's debt, and it was apparent that there was no commercial reason why Mushroom Catering accepted the assignment.
With respect to the remaining assignees, it was found that Green Grill, Mushroom Catering and Paccito were companies by which Mr Paccito was a director, Mr McKechnie of BKC was the principal of a consulting firm used by Kimberley, and Mr Leavers of Leavers Constructions was a former project manager of Kimberley.
Barrett J accepted that there was evidence that Burke arranged the assignments, from which his Honour inferred that he had relevant dealings with Paccito. As to Kimberley director, Lorentz, Barrett J stated that '...there can be no real doubt that Mr Lorentz was an active participant in the events involving the assignment of debts' [44].
His Honour concluded:
The directors and secretary of Kimberley, in their capacity as directors and secretary of Selwan, deployed the financial resources of Selwan to ensure that certain debts owed by Kimberley became vested in entities controlled by persons on whom they could rely, with each entity making no financial outlay and incurring no financial risk and being willing to give a proxy to Mr Lorentz or Mr Burke [53].
Undertakings
During the proceedings it became apparent that in each of several recent financial years, Opportune Pty Ltd (Opportune), a company owned and controlled by Stoliar and Lorentz, had provided letters assuring financial support to Kimberley's auditors. In considering the letters, Barrett J considered whether each styled 'undertaking' could be sued on by Kimberley so as to produce funds available to creditors in a winding up, and whether the directors of Kimberley (two of whom were mutual directors of Opportune) acted in accordance with the duties owed by them to Kimberley in relying on the Opportune letter. His Honour concluded that 'these were potentially very fertile lines of inquiry that will be available to a liquidator...' [96].
The manipulation of voting control
In considering that every vote in favour could be categorised as a vote of a 'related creditor', the vote of a Selwan procured creditor, or the vote of an individual who devised the procuring of voting power by Selwan, Barrett J stated that had all those votes been ignored, the outcome would have been that there would have been no votes in favour of the adoption of the DOCA.
Lorentz failed to provide any real explanation as to why Selwan, in having paid the external creditors, did not become the assignee of the debts. The real reason was obvious. Barrett J concluded that Selwan did not become an assignee for firstly, in being a 'related entity' of Kimberley, any votes it cast as a creditor could immediately have invoked the application of section 600A(1)(b) and secondly, if all external debts had been assigned to Selwan it would have produced one new creditor, not five.
In this regard, Barrett J surmised that the directors and secretary of Kimberley, acting in association with Selwan, implemented a strategy deliberately aimed at enhancing their prospect of controlling creditor voting in number which they had already controlled in value.
Prejudice to remaining creditors
Barrett J stated that the passing of the resolution for the adoption of the DOCA brought about clear prejudice to the five creditors opposed to the resolution.
His Honour stated that the denial of a right to participate in the deed fund and the extinguishment of their debts was a further prejudice to the five creditors who had voted against the resolution.
Conclusion
In considering that an order under s 600A(2)(a) setting aside the DOCA would not, of itself, put an end to the DOCA (see s 600E), and therefore would not obviate the relevant prejudice, Barrett J stated that a winding up order should be made pursuant to section 600A(2) or alternatively s 447A.
In light of the administrators' opinion that as Kimberley was insolvent and the administration should end, Barrett J was of the view that the winding up order was the 'only sensible and satisfactory outcome' [109].
Accordingly, his Honour ordered that the resolution of creditors be set aside, the DOCA terminated, and that Kimberley be wound up.
For further information please contact Dean Hely on 9288 6772 or Amy Salapak on 9288 6833.
