It’s a liquidator’s prerogative to change their mind

Hopefully there’s no hard feelings after a judge this week rejected an appeal in respect of a lengthy proof of debt dispute involving two Victorian liquidators.

“In any event, there is nothing in the evidence to suggest the defendant’s later adjudication was made capriciously, in bad faith or without proper regard to the relevant facts and law.” Associate Justice Julian Hetyey.

This stoush goes back to 2016, and the intensity of the battle owes much to the existence of a Deed of Agreement, Guarantee and Indemnity (‘Deed’) entered into in April of that year between the Commissioner of Taxation (‘Commissioner’), the two companies at the heart of the liquidators’ dispute and the sole director the companies’ shared.

As is revealed in the 42 page judgement of Associate Justice Julian Heytey in Re Eliana Construction and Developing Group Pty Ltd [2023] VSC 639 the plaintiff in this appeal was South Yarra practitioner Craig Bolwell in his capacity as liquidator of Rock Development & Investments Pty Ltd (Rock).

Rock was a party to the Deed in the capacity as a guarantor of payments to be made to the Commissioner via the taxpayers, those being Eliana Construction and Developing Group Pty Ltd (Eliana) and the two companies’ common director, Mr Magdy Sowiha.

Rock was able to assume the role of guarantor because it was the registered proprietor of real property in Bond Street, Ringwood which was offered as security for Eliana and Sowiha’s obligations under the Deed.

Bolwell was appointed liquidator of the company in July 2017 via a court ordered winding up but seven months earlier Vincents’ Nick Combis and Louisa Sijabat had been installed as receivers.

Meanwhile, the fortunes of Eliana had taken a similarly regrettable course, with the company going into administration in October 2016 and liquidation a month later.

The practitioners appointed were Romanis Cant’s Tony Cant and John Potts, the latter of which later resigned leaving Cant as sole appointee.

After Combis and Sijabat sold the Bond Street property and remitted the amount owing to the Commissioner, Bolwell commenced proceedings on 30 September 2019 under ss 588FA, 588FB, 588FC, 588FE and 588FF of the Corporations Act in respect of the sale proceeds (‘voidable transaction proceeding’).

Bolwell’s application sought to characterise the payment to the Commissioner of the sale proceeds as an uncommercial transaction and alleged a separate payment of $31,945.81 was an unfair preference.

On May 27, 2020 a court ordered the Commissioner to pay $550,000 in respect of Bolwell’s voidable transaction proceeding, together with interest and legal costs (The S 588FF orders).

As Associate Justice pointed out critically, “The Commissioner made the relevant payment on 23 June 2020. The Court was informed by the plaintiff’s solicitor at the hearing of the present proceeding that no settlement deed or agreement was entered into between Eliana, the plaintiff and the Commissioner as a precursor to the s 588F orders”.

In March 2019 Bolwell brought the fight to Cant, lodging a proof of dent in the liquidation of Eliana comprising the sum of $3,066,681.03, which represented the RBA debt owed by Eliana to the Commissioner, and Rock had guaranteed under the Deed; $1,278,465.83, which represented most of the sale proceeds paid by Combis and Sijabat in satisfaction of amounts owed by Eliana and a further $586,521.85, comprising $82,782.93 advanced to the ATO as part of the sale proceeds representing an unsecured RBA debt balance plus $503,738.92 in relation to an alleged unsecured loan amount.

The following month Cant issued a notice of rejection, but partially accepted the proof in the sum of $4,347,146.86. In his correspondence he told Bolwell that he was disallowing the proof in the sum of $568,521.85, which pertained to the loan account debt for reasons that included an alleged alteration of Eliana’s books after his appointment.

At the same time the ATO was lodging its own claims in the liquidation of Eliana and Cant as liquidator of Eliana was bringing claims against two unidentified individuals.

When he advised creditors of his wish to enter into a deed of settlement in respect of the claims against the individuals Bolwell said he would vote against it.

After adjourning the subsequent meeting and obtaining legal advice Cant told Bolwell in August 2022 that he had “revoked the initial adjudication pursuant to reg 5.6.55 of the Regulations on the basis that the components of the proof of debt that were previously admitted were no longer provable in Eliana’s liquidation”.

Associate Justice Hetyey boiled the issues down to one key question: whether the April 2016 Deed prohibited Rock from proving in the liquidation of Eliana and subrogating to the rights of the Commissioner whilst tax debts remained owing to the Commissioner. And his honour concluded that it did.

“Because Eliana is indebted to the Commissioner in respect of the relevant amounts claimed in the Commissioner’s revised proof of debt, Rock is precluded as a Guarantor from both: (a) subrogating in place of the Commissioner; and (b) proving in the liquidation of Eliana (or otherwise exercising any vote or other rights in respect of any indebtedness of any nature owed to by Eliana) until all amounts payable by Eliana and owing under the Deed have been irrevocably paid in full or the Commissioner otherwise directs.”

Bolwell told iNO he and his legal advisors were considering the judgment so the possibility of a challenge in a higher court can’t be ruled out yet.