Friday, 24 October 2014

Liquidation's outcome 'profoundly disturbing" says On Q Group judge

Matthew Gess
Photo: Worrells 
LIQUIDATORS' remuneration and deeds of company arrangement (DoCAs) are again in the spotlight following the publication of a judgement relating to the failed ASX-listed IT outfit, On Q Group Limited (In Liquidation)(Subject to Deed of Company Arrangement)

The judgement - handed down last Friday by NSW Supreme Court Justice Paul Brereton - ruled on the application of Danny Vrkic, a Wollongong-based insolvency practitioner seeking to terminate the winding up of On Q Group so as to facilitate the effectuation of a DoCA. 

Paul Burness
Photo: Worrells.
But while outlining his reasons for ultimately granting Vrkic's application, the judge expressed multiple reservations about how On Q Group's insolvency has played out.

One concern related to the remuneration of On Q Group's liquidators, Worrells' Matthew Jess and Paul Burness, who were appointed liquidators via a creditors voluntary winding up on December 23, 2008. Justice Brereton questioned the liquidation's purpose.

"Thus the practical effect of the liquidation has been to
recover in excess of $725,000 of assets and transfer it to the liquidators, their agents and advisers, with no benefit at all to those for whose benefit the liquidation is supposed to be conducted. I find this profoundly disturbing," he said.

Prior to the judgement Jess and Burness presented evidence to justify their remuneration, with Jess filing an affidavit on October 1 2014 which laid out the complexities of the liquidation and the work done. The judge however seemed unconvinced.

"But even assuming that every dollar of remuneration can be supported on the basis of time spent at their usual rates, it is difficult to see how it can be justified having regard to considerations of proportionality," he said, referring to his recent decision in the matter of AAA Financial Intelligence Ltd (in liquidation) ACN 093 616 445 (No 2) [2014] NSWSC 1270 (17 September 2014).

In a statement provided to SiN, Worrells shed more light on the background to On Q Group's complicated clean up.

"Prior to us accepting this appointment, we are aware that at least one other major insolvency firm had refused to consent to act due to the significant risk and uncertainty associated with the appointment," the firm said. 

"The Voluntary Administration and subsequent Liquidation of the Company was burdened with a number of complexities, including several separate legal proceedings, and significant costs that we were required to personally fund (at our expense and risk) as there were no recoveries until more than 12 months following our appointment.

"Worrells supports proper scrutiny of liquidators remuneration and we welcome open discussions on insolvency matters."

Justice Brereton's judgement, following hard on the heels of the AAA Financial decision, also drew a quick response from the Australian Restructuring, Insolvency & Turnaround Association (ARITA)

"Whenever the issue of remuneration in insolvency administrations is being considered, we think it is important to recognise that liquidators are highly qualified professionals that bear significant personal financial risk in fulfilling their statutory obligations," ARITA technical director Kim Arnold said. 

"Whilst insolvency by definition means that there are insufficient funds to pay creditors in full, and the money paid to the practitioner for providing their professional services necessarily reduces the available pool of funds even further; without those insolvency practitioners providing their services, there may be limited to no recovery of assets, limited investigation of the company’s and directors’ conduct, and no meaningful reporting to creditors and ASIC about the company's affairs. 

"Insolvency practitioners are also conducting businesses and if they are unable to be appropriately remunerated for their skill and the risks borne, many may leave the industry." But fees and costs weren't the only aspects of On Q's insolvency to arouse his honour's ire. 

Vrkic was appointed voluntary administrator of On Q Group on January 23, 2014 under section 436B (1), which allows liquidators to appoint voluntary administrators (VA) to the same company to which they've been appointed. The judge had no problem with the appointment but the section 439A report was a different matter. Justice Brereton said he doubted he could make the termination order based on the report. 

".... while I am satisfied that notice of the creditors' meeting was duly given to all known creditors (except a now-deregistered company), my reservations about the s 439A report, and the somewhat farcical nature of the creditors meeting (at least insofar as is evidenced by the minutes), do not enable me to accept that as sufficient notice of the application."

The judge's reservations centre on the report's recommendation that creditors endorse the DoCA proposal. Following his appointment as VA, Vrkic subsequently became deed administrator of a DoCA funded by Bennelong Capital Partners and executed on March 12, 2014.

But Justice Brereton queried how the terms of the DoCA - which included the formation of a share trust in which creditors would have at best a 2 per cent stake - were presented.

"In the context of total creditors of in the order of $75 million, the idea that there is benefit for creditors in the share trust seems quite illusory, but that is not conveyed by the administrator's report which, to the contrary, by referring only to a distribution of 3.5 million shares, gives an appearance that it involves a real tangible benefit. 

"Accordingly, I am concerned that the explanation to creditors of the effect of the DoCA was inadequate, and does not convey the illusory nature of the apparent benefit to ordinary, unsecured creditors."

And in referencing creditors, the judge singled out one-time On Q Group sibling Bill Express, which is currently in the hands of  PPB partners Craig Crosbie and Ian Carson.

"While the liquidators of Bill Express Limited,­ a creditor for $21,526,787, which represents almost one ­third by value of the creditors­ have subsequently, by letter to the administrator of 29 September 2014 confirmed that they support the DoCA on the basis that it appears that there will be no return for creditors under a liquidation scenario, and the DoCA provides the only current basis on which there will be any return for them, it is not clear that they appreciate just how fanciful is the prospect of any benefit under the DoCA," the judge said.

Crosbie told SiN that endorsing the DoCA was a no brainer. "We knew it was a long shot but the alternative was that in liquidation, we were guaranteed of getting nothing whereas with the DoCA, whilst it's a slim chance of a modest amount coming back it's at least better than nothing," he said.

For Vrkic, who applied to have On Q Group's winding up terminated on September 9, 2014, Justice Brereton's remarks have come as a surprise.

"Yes he has misgivings and I can't dispute that but I never mean to mislead anyone. Maybe I took too broad a snapshot of the whole history of it," Vrkic said.

"Report after report said creditors would get nothing. The creditors didn't want to fund the liquidator. Creditors approved the fees. ASIC would've looked at the fees because they would've been disclosed on the s533 reports," he said.

"I just had it in my mind that creditors knew that there was nothing for them in a liquidation scenario and the company was not going to go back to the old directors."

He said the job had come as a surprise. "Steve Nicols just rang me. I can't answer why they approached me to be honest but it just came out of the blue."

Sydney liquidator Steve Nicols is a director of Bennelong and his affidavit, referred to in the judgement, contained details of how the shares were to be apportioned and how funds for stage one of the DoCA sat in his trust account, waiting for the winding up to be terminated.

Despite his reservations, Justice Brereton concluded his judgement by revealing that after extracting an additional $71,000 for the deed fund from Bennelong, a sum sufficient to repay On Q Group's priority creditors, he was satisfied he could order that the winding up be terminated, sparing Jess and Burness a remuneration review.

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