TGIF 5 July 2024 – Provisional liquidators bag prize promotion

In Davis-Jacenko v Roxy’s Bootcamp Pty Limited [2024] NSWSC 702, McGrath J delivered an extempore decision, appointing provisional liquidators in respect of Roxy’s Bootcamp Pty Limited (the Company). His Honour stated that it was “a paradigm case” for the court to intervene to preserve the status quo.

Key Takeaways

• Provisional liquidators may be appointed by the court where there are reasonable prospects that a winding up order will be made in respect of the company, and where necessary to manage the company’s affairs prior to formal winding up proceedings.
  
  
• Winding up of a company on the “just and equitable” ground is likely to be available where there is a justifiable lack of confidence in the conduct and management of the company’s affairs and accordingly, a risk to the public interest.
  
  
• Where a company is in deadlock owing to irreconcilable differences between its directors and/or shareholders, such that it can no longer function for its intended purpose, this will provide a strong basis for the court to exercise its discretion to appoint provisional liquidators.

What happened?

The directors of the Company were Ms Davis-Jacenko (the Plaintiff), Mr Tleis and Mr Alaouie. The court found they were in a rapidly created business relationship, which then rapidly deteriorated over a “highly questionable” promotion scheme publicising an online marketing course to be run by the Plaintiff.

As part of the promotion, participating customers would have their names placed in a draw. First prize was the chance to win a Cronulla property (subject to a further game of chance) or $250,000 cash. The property was held by Mr Tleis and Mr Alaouie, subject to a mortgage. The cash was held in a solicitor’s trust account. Other prizes included a Hermès bag and a Rolex watch, which the Plaintiff claimed to have bought for about $20,000 each. The competition was extensively publicised but, prior to the draw of the prizes, set to occur on 7 June 2024, the relationship between directors broke down and the Plaintiff alleged the Company owed her approximately $295,000 for expenses incurred in organising the competition.

This led to a dispute between directors, resulting in the Plaintiff seeking orders for the appointment of provisional liquidators.

Relevant law

McGrath J considered factors relevant to the court’s discretion to appoint provisional liquidators under section 472(2) of the Corporations Act 2001 (Cth) (Corporations Act), as well as the circumstances in which a company will be wound up on the “just and equitable” ground, as follows:

1. Appointment of provisional liquidators

In relation to the appointment of provisional liquidators, his Honour considered the following factors:

• whether there are reasonable prospects a winding up order will be made in respect of the company;
  
  
• whether the assets or affairs of the company may be at risk and need to be protected by appointing provisional liquidators;
  
  
• whether a provisional liquidator should be appointed to preserve the status quo and minimise harm to all concerned before a final decision can be made on whether to wind up the company;
  
  
• the degree of urgency, the need established by the applicant creditor, and the balance of convenience;
  
  
• the public interest in appointing provisional liquidators, where there is a need for an independent examination of the company’s accounts; and
  
  
• whether the affairs of the company have been carried on casually and without regard to legal requirements, so as to leave the court with no confidence that the company’s affairs are being properly conducted with due regard for the interests of shareholders.

2. Winding up on the “just and equitable” ground

His Honour further considered the circumstances in which companies may be wound up on the “just and equitable” ground, including:

• where there is a justifiable lack of confidence in the conduct and management of the company’s affairs and thus a risk to the public interest that warrants protection;
  
  
• whether the court has confidence in the propensity of company officers to comply with their obligations, including the keeping of books, records and documents, and properly managing the affairs of the company;
  
  
• whether the company has carried on its business candidly and in a straightforward manner with the public;
  
  
• whether the company has repeatedly breached the law, or otherwise engaged in fraud or misconduct; and
  
  
• whether winding up is necessary to protect investors.

Determinations

McGrath J was satisfied that provisional liquidators should be appointed for two main reasons:

• First, it was highly likely that an order would be made to wind up the Company on the “just and equitable” ground.
  
  McGrath J was satisfied that there was a “justifiable lack of confidence” in the conduct and management of the Company based on the following findings:
  
  
  • The irretrievable breakdown in the relationship between the Plaintiff (a 50% shareholder in the Company) and Mr Telis and Mr Alaouie (who comprised the other 50% shareholders), meant the Company was unable to make decisions, and they had been unable to bring their association to an end through negotiation.
    
    
  • As a result, each of the Plaintiff, Mr Tleis and Mr Alaouie had ceased running the competition and promoting the course, such that the Company’s fundamental purpose had been compromised. His Honour also found that the Plaintiff had ceased providing marketing and promotional services to the Company and had unilaterally prevented access to the Company’s bank account.
    
    
  • Further, there was fundamental disagreement between the directors regarding who owned and was entitled to access the various email and social media accounts by which the Company conducted its business, whether the Plaintiff was owed $295,000 by the Company, and whether the Plaintiff or the Company owned the bag and watch.
    
    
  • Allegations of misconduct and mismanagement had also been made against the directors “in equal measure”, and the Plaintiff and Mr Alaouie had each resigned from their position as director. His Honour found that Mr Tleis as sole director had subsequently agreed to halt all sales of the course.
    
    
• Second, it was necessary to place provisional liquidators in control of the Company.
  
  His Honour found that there was an urgent need to protect the public interest in advance of the draw of prizes in the competition, by placing provisional liquidators in control of the Company. This was because members of the public had already purchased the course in reliance on the Company’s statements as to the prizes which could be won. His Honour considered this step necessary on the basis that the directors had each ceased to conduct the affairs of the Company, had ceased to act in the interest of the Company “as opposed to their own interests”, and had stated it was their intention to cease operations in the near future.
  
  His Honour also considered that the Company was likely insolvent, and that none of the persons involved would be able to provide the Company with funding to meet its liabilities. In particular, significant doubts existed as to the Company’s solvency owing to its incomplete books and records, which his Honour found did not reliably report its financial position.

Some provisional final thoughts

Provisional liquidators can be appointed after a winding up application is made, as a way to preserve a company’s assets. As his Honour found, this was a “paradigm” case for making the appointment.

The case is also novel because the provisional liquidators may be expected to do more than just preserve the assets. Based on the orders and undertakings recorded in the judgment, it appears to have been anticipated that the proposed draw would proceed. For example, the trust account was found to be available only for the purpose of the first prize payout. It remains to be seen how this will be managed, particularly given that other prizes were not held by the Company.