Papers referred 3

I’ve written before under this title about cases where judges get a whiff of something irregular. The driest judges just decide the controversy according the strict but minimum of law and don’t concern themselves about iniquities disclosed on either side. On other occasions, as I have explained before, judges can refer the papers to appropriate authorities for further investigation.

Whether they do seems (to me) to depend on how moralistic they are, though it can also be affected by how pompous, quick to jump to conclusions and vindictive they are once their prejudices are confirmed. (And yes, I’m thinking of one judicial officer in particular but no, even writing pseudonymously I won’t identify him.)

I would describe Justice Palmer as a judicial moralist. This is a difficult thing to pin down, and in some ways more a matter of flavour than anything more specific, but you can see it sometimes in arguments he is receptive to or not. I put it down to his Catholicism, but hell, Tony Abbott’s a Catholic of sorts and we don’t suspect the same of him. It must really just be who Justice Palmer is.

In Modena Imports Pty Ltd (in liq), In the matter of: Leveraged Capital Pty Ltd (R&M app) (in liq) v Modena Imports Pty Ltd (in liq) [2010] NSWSC 739 (what a lengthy title!) his Honour was faced with an application to bring the liquidation of a company to an end and to put it into administration under a deed of company arrangement (DOCA).

Described as simply as possible, what this means is that instead of leaving a company to be wound up by the liquidator, an administrator is appointed and (usually) somebody tips in a fund to be shared out amongst all the creditors of the company or certain classes of creditors (often related party creditors are treated differently from true external creditors). The creditors vote on the scheme and you are bound by that as a creditor even if you opposed it. That means that your only chance to be paid is according to the terms of the DOCA. You don’t get paid a proportionate share of whatever assets the company has divided out amongst all creditors after the liquidator’s expenses have been paid, as you would in a liquidation, and once the company limps to its feet you can’t come back and claim repayment of your old debt.

This is a strategy favoured by directors of companies which they want to keep alive and immune from the investigation that a liquidator might make about the company’s affairs. It usually happens because creditors can be persuaded to take a bird in the hand (the fund offered under the deed) rather than the bird in the bush of their prospects of recovery after a long and drawn-out liquidation, especially in cases where the company otherwise looks so hopeless or its affairs are so obscure that the prospect of any return from a dividend in the winding up seems remote. Although the liquidator doesn’t vote on the proposal, the attitude of the liquidator is also relevant because the liquidator must provide a report to the court and the liquidator will, as a practical matter, need to be paid something for his or her fees and expenses. Sometimes there can be something in the DOCA for the liquidator as well and hell, something is often better than nothing. Whilst an ethical liquidator should not lie to the court, it can be easy to persuade a liquidator whose costs are being met but might not be met otherwise to consent to the application or at least not oppose it. Where things get more tricky are what relatively brief assessment the liquidator gives of the affairs of the company and what has happened during the liquidation.

It is also a strategy open to abuse, since the directors (rather like Alan Bond when he was bankrupt) can make things difficult for the creditors and the liquidator, and then offer to cut a deal which is attractive precisely because of the directors’ success in concealing or covering things up or otherwise making the liquidation an unattractive prospect. And any situation which depends on votes of creditors is always vulnerable to rigging of voting in favour of creditors (genuine or not, arms length or friendly) who may well be insiders to the whole deal.

Probably because of that, it is a strategy which requires approval by the court. It was an application of this sort that came before Justice Palmer in this case. As he says at the beginning of his judgment:

1 This is an application under s 482 Corporations Act 2001 (Cth) for the termination of the liquidation of Modena Imports Pty Ltd (in liq), conditional upon the implementation of a Deed of Company Arrangement (DOCA) which has been approved by creditors. The DOCA is funded by a company called Australian Corporate Restructuring Services Pty Ltd (ACRS).

2 ACRS is, in truth, a front for Mr James Warren Byrnes. Mr Byrnes has a notorious reputation as a stand-over man and associate of major criminals. In an inquest in 2008 into the murder of one Max Gibson, the coroner described Mr Byrnes, a named “person of interest” in the inquest, as “untruthful” and “manipulative”, who had been “caught lying to the Court on more than one occasion”.

3 This is not a trial of Mr Byrnes. I do not have to determine whether or not Mr Byrnes’ reputation is deserved. I merely state the fact that Mr Byrnes has a reputation of which no judge in this State could be unaware.

4 Awareness of that reputation led me to enquire more closely into this application. It was, at first, presented to the Court as a bland, run of the mill application, not opposed by the liquidator or ASIC and having nothing remarkable about it so that it should be granted almost as a matter of course. As soon as I detected the involvement of Mr Byrnes, I determined that I could not treat the application in that way.

Jim Byrnes’s greatest moment of fame was probably when he was engaged as Alan Bond’s “bankruptcy advisor” in the early 1990s. But he had a reputation even then. Suffice to say that the association was not one which did Alan Bond any credit, to the extent that he still had any by then. As Palmer J goes on to relate, Byrnes is presently disqualified from acting as a director and has been disqualified before. He has been named by the coroner (admittedly, it was the slightly ott J Milledge) as a person of interest in an inquest in relation to the death of a person accused of the arson of a house which he was purchasing (he subsequently beat down
price).

A director of the company, Peter Trad, was cross-examined by counsel appearing for ASIC (the generally rather toothless corporate watchdog). Numerous questionable aspects of the conduct of the company’s affairs and the involvement of Mr Byrnes came to light.

The court did not approve the application. The proposed scheme involved Mr Byrnes’s company putting up a fund of $50,000 to pay out the liquidator and the creditors receiving nothing, but it emerged that he was funding this by selling two Maseratis which had been given to him with backdated and apparently undervalued invoices which had the effect of concealing their disposal from the liquidator and cast some doubt over the genuineness of the transactions at all.

It’s a ripper of a read, though I think it might have been better for his Honour to have toned down his opening character assassination of Byrnes and just got on with the concrete reasons which were unearthed once his suspicions were aroused. Still, as Byrnes isn’t a party, it will be difficult for him to appeal it, and the more so because the judicial discretion is broad and there was ample evidence to support his Honour’s attitude.

Here are the last few paras:

52 In short, Mr Trad has failed to persuade me that the true nature and extent of Modena’s creditors have been fully disclosed. He has failed to show how the company can trade solvently. He has failed to provide any adequate explanation for the failure by the company’s directors to ensure that the company’s financial records were properly maintained. He has failed to explain how Modena could lawfully and properly assume liability for debts which had nothing to do with its own trading activities. He has failed to explain why those debts should now be extinguished by the DOCA, for no consideration or dividend.
53 Finally, I am satisfied that it would be contrary to the interests of creditors and an affront to commercial morality for Modena’s liquidation to be terminated and a DOCA given effect in accordance with a scheme devised by Mr Byrnes whereby he is to receive the benefit of assets of Modena to the value of $500,000, if not more, while Mr Hall [the liquidator] is out of pocket for his remuneration and expenses, and the creditors of Modena receive nothing. If Modena has assets worth $500,000, they should be realised for the benefit of the company’s creditors and to enable Mr Hall to investigate fully the company’s affairs. I place no weight on the fact that those creditors who attended the creditors’ meeting on 23 March 2010 voted in favour of the DOCA. Those creditors comprised Mr Byrnes himself and four others for whom he was proxy, including ACRS.
54 I conclude that it would be contrary to the public interest to enable Modena to be released into the marketplace to conduct its affairs under the control of Mr Trad and, probably, under the control of his brother Carl, both of whom are prepared to engage in dishonest practices such as the transaction with Mr Papas and the falsifying of evidence of sale of Modena’s assets to Mr Byrnes.
55 The application is dismissed. I will hear the parties as to any costs order which may be sought by ASIC and Mr Hall.

I like the bit about “affront to commercial morality” because funnily enough that is the one kind of morality which is sacred to all equity judges, even though, if you think about it, the risks of judges dabbling aren’t so different from the risks of their dabbling in other morality (in the sense of non-legal or extra-legal values). His Honour didn’t actually refer the papers. Given that ASIC and the liquidator were there and they are probably the people who should take any next step he probably didn’t need to. All the same, I won’t be holding my breath waiting for any ill-consequences to catch up with Mr Byrnes.

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One Response to “Papers referred 3”

  1. Blog somnolence « Stumbling on melons Says:

    […] Stumbling on melons « Papers referred 3 […]

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