Chan v Four C Realty Pty Ltd (in liq), in the matter of Four C Realty Pty Ltd (in liq) [2013] FCA 928 (13 September 2013) & Chan v Four C Realty Pty Ltd (in liq), in the matter of Four C Realty Pty Ltd (in liq) (No 2) [2013] FCA 959 (23 September 2013): section 477(2B) of the Corporations Act 2001 (Cth) for retrospective approval of contract for sale of business, obligation to indemnify insolvent company in respect of contingent liabilities, factors relevant to exercise of Court’s discretion

September 26, 2013 |

Gordon J in Chan v Four C Realty Pty Ltd (in liq), in the matter of Four C Realty Pty Ltd (in liq) [2013] FCA 928 and then in Chan v Four C Realty Pty Ltd (in liq), in the matter of Four C Realty Pty Ltd (in liq) (No 2) [2013] FCA 959 made orders regarding the enforcement of a contract and then approval for the Liquidator to enter into that contract.  The facts are common to both hearings

Chan v Four C Realty Pty Ltd (in liq), in the matter of Four C Realty Pty Ltd (in liq) [2013] FCA 928

FACTS

The Applicant, (“Chan”)  applied under sections  471B,  477(2B) and 477(6) of the Corporations Act 2001 (Cth) (the Act) for a series of orders including a declaration that, on 13 August 2013, she and the First Respondent (“Four C Realty”)  entered into a binding and enforceable contract for her to purchase its  business assets of Four C Realty. The Respondents submitted that no binding contract existed on 13 August 2013 and, alternatively, if a binding contract did exist, then Chan was required to provide security for what has been described as “the indemnity” [2].

Four C Realty carries on business as an estate agent, conducting a rent roll and acting as agent in the sale of residential properties and as the selling agent for a number of multi-story apartment developers whereby they facilitate off-the-plan sales to predominantly Chinese purchasers who are sourced through contacts of the shareholders of Four C Realty. On 25 July 2013, the Second and Third Respondents, Mr Ross Blakeley and Mr Andrew Schwarz (together “the Liquidators”), were appointed joint and several liquidators of Four C Realty [6]. A key asset was commission income due to Four C Realty from development contracts which had yet to settle. There appeared to be approximately 58 contracts which are yet to settle. Four C Realty is typically paid half of the sales commission upon a purchaser entering into a contract of sale, with the balance payable when the contract is completed at settlement. There are corresponding obligations on Four C Realty to pay commissions to sales agents upon execution and settlement of those contracts of sale. Where a contract of sale does not settle, Four C Realty is liable to repay to developers the commission previously received. By a letter dated 7 August 2013, the Liquidators announced an Expression of Interest (“EOI”)  campaign for the sale of the business of Four C Realty [8].  Ms Chan submitted her EOI on 9 August 2013. She offered to purchase all of the listed assets (except the domain name) and assume all of the listed liabilities for $510,000 [11].  There was an exchange of correspondence regarding how the offer was structured and the security [12][14].  On 13 August 2013 the Liquidators wrote to  Chan in the following terms:

I refer to your Expression of Interest received on 9 August 2013, with emails from Corrs Chambers Westgarth dated 9 August 2013, to acquire [Four C Realty’s] business assets.

 I confirm that your Expression of Interest submission and emails constitute an offer to purchase [Four C Realty’s] business assets.

 I advise that the Liquidators accept your offer of $510,000 (Purchase Price) for [Four C Realty’s] business assets on the following terms:

 You have agreed to purchase the following assets:

1. Outstanding debtors (representing unpaid invoices at the date of the Liquidators’ appointment);
2. Future commission income from development contacts [sic] which are yet to settle;
3. Rent roll (consisting of approximately 80 properties);

 4. All [Four C Realty] owned plant and equipment: and

 5. Company name and domain name.

 You have agreed to assume and pay the following liabilities:

 1. Employee entitlements of Ms Joyce Ying Zhao;

 2. Development commissions payable to introducing sales agents and/or any referral fees following the settlement of development contracts;

3. Any outstanding lease costs of the two premises situated at 1316 and 1317, 401 Docklands Drive, Docklands (Premises).

You also wish to enter into a lease of the Premises and obtain a transfer of the existing telephone numbers operated by [Four C Realty].

 You agree to pay the Purchase Price by two instalments, as follows:-

 (a) $300,000 immediately; and

 (b) $210,000 payable within a further two weeks, namely no later than 28 August 2013.

 Please make payment of the sum of $300,000 to the following account:

 Account Name: Four C Realty Pty Ltd (In Liquidation)
BSB: […]
Account Number: […]

 You have agreed to provide security over your property at 477 Waverley Road, Malvern East in respect of your payment obligations.

 Further, you have agreed to indemnify [Four C Realty] in respect of any commission which [Four C Realty] is required to refund in respect of development contracts that are yet to settle.

 The Liquidators acceptance of your offer constitutes a binding and enforceable agreement. However, it is intended that these terms be more fully engrossed in a formal sale agreement.

 The Liquidators will now advise Mr Yin Chen that his offer for the business has not been successful and will request that he deliver up all [Four C Realty] assets and books and records in his possession.

 The Liquidators agree they will use their reasonable endeavours to provide you with the Introducing Sales Agents agreements.

 Would you please contact this office as soon as possible to make an arrangement to meet with the Liquidators to discuss the possible transfer of the business.

 In the meantime, the Liquidators will instruct their lawyers to draft a License Agreement to be entered into with you, in order that you may trade the business until settlement of the sale of [Four C Realty’s] business to you.

 As indicated in my letter to you dated 7 August 2013, it may be necessary for the Liquidator to obtain creditor or court approval of the sale agreement.

 (Emphasis added.)

Chan paid $300,000 on 15 August 2013 and the balance on 28 and 30 August 2013, [16] .

DECISION

In considering whether there was an agreement reached on 13 August 2013, [18], her Honour noted the following in the 13 August letter:

  • the Liquidators were responding to the EOI lodged by Ms Chan and “emails from Corrs Chambers Westgarth dated 9 August 2013” [19].
  • the Liquidators confirm that(Ms Chan’s EOI and the Corrs’ emails “constitute an offer to purchase [Four C Realty’s] business assets”. The matters addressed in those letters constitute an offer capable.  The Liquidators stated that acceptance of the offer constituted a “binding and enforceable agreement” but that the terms would be “more fully engrossed in a formal sale agreement[20].
  • The Liquidators accepted the price offered of $510,000 on certain terms and conditions which included, at [21]:
  1. The payment terms including identifying the account name and number into which the immediate payment of $300,000 was to be paid;
  2. A list of the assets to be acquired;
  3. A list of the liabilities to be assumed and paid;
  4. To provide security over an identified property “in respect of [the] payment obligations”; and
  5. To indemnify Four C Realty “in respect of any commission which [Four C Realty] is required to refund in respect of development contracts that are yet to settle.”

Her Honour found that there was no lack of any essential term [21].  In determining whether there was a concluded agreement her Honour cited the principles set out in Masters v Cameron:

Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three classes. It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.

In each of the first two cases there is a binding contract: in the first case a contract binding the parties at once to perform the agreed terms whether the contemplated formal document comes into existence or not, and to join (if they have so agreed) in settling and executing the formal document; and in the second case a contract binding the parties to join in bringing the formal contract into existence and then to carry it into execution. Of these two cases the first is the more common.

Her Honour found, at [23], that in determining which of the three classes a particular agreement:

(a) will fall into “depends upon the intention disclosed by the language the parties have employed”: Masters v Cameron at 362.

(b) That intention must be objectively ascertained from the terms of the relevant document or documents when read in light of the surrounding circumstances: Godecke v Kirwan at 638-639.

Her Honour found that viewed objectively  this case fell squarely within the first class identified in Masters v Cameron stating:

The parties intended to be immediately bound to the performance of the terms of their bargain but, at the same time, proposed to have the terms restated in a form which would be fuller or more precise but not different in effect.

Regarding the the Liqudators’ submissions that:

  1. the 13 August letter was a counter-offer and therefore no binding agreement was reached at all her Honour found that the existence, timing and content of the Corrs’ emails and the Liquidators’ response constituted an “offer” which which the Liquidators accepted [24].
  2. the correspondence between the parties after 13 August 2013 demonstrated that the parties “continued to explore the breadth of the offer” her Honour found that that correspondence did no more than indicate that Chanremained ready, willing and able to comply with the terms of the “Contract”[25]
  3. that term of the contract also extended to Ms Chan being required to provide security for the indemnity [27] Her Honour found that is contrary to the express words of the 13 August letter and that, viewed objectively, the term of the contractto provide security was separate, and independent, of the term of the contract to provide the indemnity. The correspondence records a meeting of the minds and there was no misunderstanding [28]

Chan v Four C Realty Pty Ltd (in liq), in the matter of Four C Realty Pty Ltd (in liq) (No 2) [2013] FCA 959

The issue for her Honour’s determination was whether, pursuant to section 477(2B) of the Act, the Court should approve, nunc pro tunc, the entry by the Liquidators into a contract with Chan to sell the business assets of Four C Realty .

FACTS

The position of the parties were:

  1. Wenlyan Pty Ltd, Mr Ian Chen and Ms Isabelle Huang ( the Huang interests) submitted that approval should not be granted.
  2. Chan submitted that the approval should be granted.
  3. the Liquidators submitted that the approval should be granted yet, at the same time, also submitted that the creditors’ and members’ interests would be better served by opening up the sales process to better offers.

In response to the EOI at 4:48 pm on 8 August 2013, the Huang interests sent the following to the Liquidators, extracted at [11], as :

Please find attached an Expression of Interest by Yin (Ian) Chen and Isabelle Huang for [Four C Realty].

 This offer is formulated as follows:

  • $350,000 cash payment, less any adjustment for employee entitlements. This payment is inclusive of GST, however because this sale is a transmission of a business as a going concern, we do not think it attracts GST.
  • Assumption by the purchaser of a contingent liability of approximately $555,000 for any clawback by developers in the future for failed settlements.
  • The assumption by the purchaser of future commissions (estimated at up to potentially $320,000) payable to sales agents upon settlement of future development sales.

Therefore, the EOI offer provides value in respect of the business of [Four C Realty] of between $770,000 and $900,000 (depending on the debtor recovery outcome).

….

This offer is open for acceptance until noon on Monday, 12 August 2013.

That evening the Liquidators solicitor responded to the offer (which is extracted in virtually its entirety at [13]) of which to her Honour stated

  It records, as was the fact, the dilemma faced at that time by the Liquidators. The business was operating at a shortfall of $16,000 a month. Mr Chen had not lodged a RATA. There was doubt about the value of at least one asset and, finally, a delay in the sale could adversely affect the value of the rent roll

Chan and the Huang interests made offers and the Liquidators wrote to both (see [13] – [19]) with the Liquidators making a decision on 13 August accepting the Chan offer (see decision above and [20]) and not accepting the Huang Interests offer, [21].  The Huang interests solicitor wrote to the Liquidators on 14 August making a further offer and forshadowing an appeal and interlocutory relief if the liquidators maintain they are bound by the Chan offer ( [23]  & wrote again on 15 August [24]).  On 16 August the Huang Interests solicitor sought undertakings of the type sought on 14 August ([25]) which were not provided by the Liquidator ([26]) who instead notified both Chan and the Huang Interests on 20 August that there was no binding agreement and they would re open the sale process [26]. This prompted the action taken by Chan in   Chan v Four C Realty Pty Ltd (in liq), in the matter of Four C Realty Pty Ltd (in liq) [2013] FCA 928 (and considered above) .

By the  return to court on 17 September the terms of the Contract entered into by the Liquidators and Chan included an obligation for Chan to indemnify Four C Realty for commissions that Four C Realty may be required to refund in relation to the development contracts that are yet to settle and which fail to settle and which will  until the last contract has settled [27]

It was necessary for the Court to consider s 477(2B) of the Act.  The Liquidators submitted that approval under s 477(2B) should be given subject to qualification [28].

DECISION

Her Homour noted that the circumstances of the application are unusual, in part, because an application for approval under s 477(2B) of the Act is made by Chan as a party to the Contract rather than the liquidator which is ordinarily the case.  At the hearing for approval, counsel for the Liquidators submitted that approval should be granted and that they themselves sought the approval. In those circumstances her Honour found it was appropriate for the Court to determine the application [29].

With respect to section 477(2B) applications her Honour stated and also extracted the principles set out in Stewart, in the matter of Newtronics Pty Ltd that, at [31]:

  •  a liquidator should seek the Court’s approval before entering into a long term agreement
  • in certain circumstances, retrospective approval may be given by the court

and, at [32] that the Court

  • does not simply “rubber stamp” whatever is put forward by a liquidator. It  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.
  • will not approve an agreement if its terms are unclear;:
  • will grant or deny approval to the liquidator’s proposal but not develop some alternative proposal which might seem preferable;
  • the court in reviewing the liquidator’s proposal will review the liquidator’s proposal, paying due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, satisfying itself there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene in terms of the “expeditious and beneficial administration” of the winding up.
  • grants approval under s 477(2B) only where the transaction is the proper realisation of the assets of the company or otherwise assists in the winding up of the company

In that context her Honour framed her task as, at [33]:

to review the liquidator’s proposal, paying due regard to his or her commercial judgment and knowledge of all of the circumstances of the liquidation, satisfying itself there is no error of law or ground for suspecting bad faith or impropriety, and weighing up whether there is any good reason to intervene in terms of the “expeditious and beneficial administration”” of the winding up. In undertaking that task, a key consideration is whether what is proposed is in the interests of those concerned in the winding up:

The liquidators submitted:

  • while the Liquidators supported the Chan application for approval under s 477(2B) for the Liquidators’ entry into the Contract they also argued that the creditors’ and members’ interests would be better served by re-opening the sales process to better offers [34].
  • the Liquidators accepted Chan’s offer because they considered, at the time, that it would result in a better return to creditors and members of Four C Realty compared to the offer then made by the Huang interests however they no longer consider that the Contract represents the best outcome for creditors and members and that, were a different process adopted, a better bargain may be reached [35][36] which would involve re opening the sale process [37];.
  • there is no suggestion of a lack of good faith or an error in law or principle on the part of the Liquidators entering into the Contract,  no real or substantial grounds for doubting the prudence of the Liquidators accepting the offerand then entering into the Contract and  no suggestion that any party is encouraging the Court to develop a new or alternative proposal to the Contract [38].

The Huang interests submitted:

  • that the Liquidators’ current assessment of what was in the best interests of creditors and members was a matter against the approval of the Contract and that the terms of the Contract are less advantageous to the creditors and members of Four C Realty than those offered on behalf of the Huang interests  and that in assessing whether the approval of the Contract is in the best interests of creditors and members, the Court is obliged to take that offer into account. Her Honour noted the submission faced a fundamental difficulty that the “offer” did not address the issue of security amd there was no evidence which identified with precision the terms of the offer which the Court was asked to compare against the Contract [40].
  • approval should not be granted because the sale process conducted by the Liquidators was “grossly unfair” as they were not afforded the same opportunity to improve their offer made in response to the EOI [43]. Her Honour noted  that the Huang  interests position in relation to the sales process had waxed and waned depending on whether or not they thought they were likely to be the successful bidder, which at times was not in the best interests of creditors and members .

Her Honour cited, at [45], Griffiths J in Wentworth Metals Group Pty Ltd v Leigh and Owen (as liquidators of Bonython Metals Group Pty Ltd): In the matter of Bonython Metals Group Pty Ltd (In liq) [2013] FCA 349 where his Honour held, inter alia,

  • that there was no serious issue to be tried to the effect that the Liquidators were under an obligation to consult with the plaintiffs and provide it with multiple opportunities to address shortcomings in its bid; and
  • that the plaintiffs had not established a prima facie case that the liquidators’ conduct was unreasonable or otherwise defective.

and stated that

Similar considerations are equally applicable here.

Chan submitted:

  • that approval should be granted [46]. 
  • in relation to the fairness of the sale process  the Huang interests’ initial EOI was too low and taht the process adopted by the Liquidators was in fact the process they said they would adopt as set out in their letter of 7 August. In those circumstances, it could not be said that one party was treated differently from the other [47].
  • there was no certainty that the Huang interests could make good on their enhanced offe  if the sale process was re opened [48];
  • there is no obligation on the Liquidators to achieve the best price reasonably obtainable only  an obligation to exercise commercial judgment and act in the best interests of creditors and members [49].

Her Honour granted the application, [51], noting:

  • what the Huang interests would have the Court do would be to require the Liquidators to renege on the Contract with Ms Chan in the hope that re-opening the sales process would enliven the “competitive tension” between Ms Chan and the Huang interests which might result in a better bargain which she said “..rises no higher than speculation” [50]
  • it is not in the best interests of the creditors and members to reopen the sales process [51].
  • despite the run-off caused by the development contracts that are yet to settle the majority of the contracts will settle this year and there is a real possibility of a distribution to unsecured creditors this year [51];
  • the terms of the offer from the Huang interests are difficult to assess given the lack of detail and certainty about certain aspects of that offer [51].

ISSUE

The circumstances in this proceeding are unusual however the dynamics of the case is quite common.  Two competing parties seek to purchase the asseets of the company in liquidation.  Both parties and the liquidators enter into voluminous and complicated communications within a very short time.  One party is unhappy with the liquidators determination.  In this case Chan was initially unhappy because the liquidators sought not to complete the contract she said they had entered into.  Gordon J found for Chan at first instance on core contractual principles. The Second hearing was unusual in that Chan sought approval under section 477(2B) although with the Liquidators conditionally supporting the application her Honour was comfortable hearing the application.  Her Honour considered the application in light of the well settled principles which she set out.  That decision highlighted the need for an interested party to take care in formulating its offer.  In this case the solicitors for the Huang Interests threatened action, including interlocutory relief, which they did not follow through on. The contents of the offer was vague and inadequate.  At a hearing, given the strong presumption to adopt the proposed course of the Liqudiators, such weaknesses can be fatal.

 

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