Federal Court clears way for Maxcon liquidator examinations over $42 million in transfers

The Federal Court has refused leave to appeal a decision allowing the liquidator of former property developer Maxcon Developments Pty Ltd to examine members of the Elzain family and other related parties over more than $42 million in payments alleged to have been made before the company’s collapse.

Justice Beach held that the proposed appeal lacked sufficient merit and that the applicants had not shown they would suffer substantial injustice if the examination summonses remained in place. The Court also questioned whether the appeal was barred by legislation preventing appeals from decisions refusing to adjourn a hearing.

Andrew Yeo of Pitcher Partners was appointed liquidator of the company formerly known as Maxcon Developments after the company was wound up on an application by the Deputy Commissioner of Taxation. The DCT has lodged a proof of debt for approximately $24.18 million, which Mr Yeo admitted for voting purposes.

The dispute concerns examination and document-production summonses issued under section 596B of the Corporations Act to former directors, members of the Elzain family and related entities. The proposed examinees include Dimitrios Diakou, Anthony, Raymond, Edward, Joanne and Carol Elzain, Elzain Pty Ltd and Maxcon Constructions Pty Ltd.

The summonses form part of Mr Yeo’s investigation into payments connected with the development of property at 420-434 Spencer Street in West Melbourne.

Maxcon agreed in 2015 to provide management, facilitation and funding services for the development in exchange for half of the project’s profit. It later entered a subcontract with Singapore-incorporated Seraphim Group Pte Ltd, under which Seraphim was to receive an $8.5 million upfront fee and 90% of Maxcon’s share of the development profit.

According to the judgment, Seraphim did not provide services under the subcontract. Maxcon nevertheless paid Seraphim approximately $30.6 million between 2015 and 2019 and claimed the payments as tax deductions.

The Australian Taxation Office later disallowed deductions of $8.5 million for the 2015 income year and approximately $22.1 million for the 2018 income year.

Maxcon also paid dividends totalling approximately $11.9 million to Elzain Pty Ltd in 2020 and 2021. The liquidator alleges that the company was insolvent, or became insolvent, when the first dividend was paid.

Seraphim subsequently paid approximately $31.99 million to members of the Elzain family during 2022. Those payments included approximately $9 million to Raymond Elzain, $5 million each to Joanne, Carol, Anthony and Edward Elzain, and a further approximately $2.99 million to Anthony Elzain.

Mr Yeo and Maxcon have commenced separate recovery proceedings seeking to recover the payments to Seraphim and the family members. The claims include alleged breaches of directors’ duties, unreasonable director-related transactions, uncommercial and insolvent transactions, and transactions intended to defeat or interfere with creditors’ rights.

The examinees sought to set aside the summonses, arguing that the examinations would overlap with unresolved objections to personal tax assessments issued against several family members.

They also argued that the ATO was funding the liquidator, that the examination process could operate as a parallel evidentiary process for the tax disputes, and that producing documents already supplied during the ATO audits and objections would be duplicative and oppressive.

Justice Button dismissed their application in April after refusing a last-minute request to adjourn the hearing. The applicants had not filed further evidence or written submissions in accordance with programming orders and did not retain alternative counsel after learning that their preferred senior counsel was unavailable.

Justice Beach said the applicants had been given a reasonable opportunity to present their case but had failed to prepare for or prosecute their own application, saying that “[p]rocedural fairness does not require open-ended opportunities to be heard, or an automatic right to adjourn a hearing when a party’s preferred counsel is unavailable”.

The Court found that the applicants waited until shortly before the hearing to seek an adjournment, despite knowing for more than a month that their preferred counsel could not appear. Their supporting affidavit was served on the morning of the hearing. Justice Beach also rejected the substantive grounds advanced for setting aside the summonses.

The liquidator had received only limited and incomplete company records, and requests to Mr Diakou and Anthony Elzain for further information had not produced the documents required. The examinations were intended to investigate the causes of the company’s failure, identify assets and possible voidable transactions, assess the existing recovery claims and identify other potential causes of action.

The fact that the DCT was funding the examinations did not establish an improper purpose, the Court held. It is common for a major creditor to fund a liquidator’s investigations, particularly where that creditor stands to receive the greatest benefit from recoveries.

Justice Beach said the applicants had incorrectly conflated the liquidator’s role with that of the DCT.

The liquidator was not involved in determining the personal tax objections and had an independent statutory duty to investigate the company’s affairs. Any overlap between the examinations and the factual issues raised in the tax disputes did not make the summonses abusive.

The Court also rejected the contention that the examinations would provide a “dry run” for potential tax litigation. The tax review proceedings had not been commenced and might never be commenced, while the Court retained power to control the examinations and restrict questions or the use of information where necessary.

Justice Beach said setting aside an examination summons for abuse of process should ordinarily be a measure of last resort, particularly where any risk of unfairness could be addressed through directions controlling the examination.

The applicants had also failed to identify any specific reputational or procedural harm that would outweigh the potential benefits of the examinations to the liquidation.

Justice Beach dismissed the leave application and ordered the applicants to pay the liquidator’s costs. A related application seeking review of a Judicial Registrar’s decision was also dismissed with costs.

Read the decision here.

K&L Gates and C.T. Möller SC of Lonsdale Chambers acted for the liquidator. Diakou Faigen, Daryl Williams AM KC and M.A.J. McKillop acted for the examinees.