Hammoud Investments - Case Update

A pair of liquidators have found themselves in a peculiar predicament, having to choose between distributing a surplus sufficient to discharge all creditors or pursuing claims against a company’s director which may erode that surplus if unsuccessful.

Hammoud Investments Pty Ltd operated as an investment vehicle generating income from three commercial warehouses which it owned. In January 2022, Ji Sue Hammoud (“Ms Kim”), a shareholder of Hammoud Investments, brought proceedings in the Federal Court of Australia seeking the winding up of the company. Shortly thereafter, Ali Hammoud (“Ali”), the sole director of the company, resolved to place the company into voluntary administration and to have the liquidators (Rajiv Ghedia and Shumit Banerjee of Westburn Advisory) appointed as voluntary administrators. A DOCA was executed but not proceeded with and the company went into liquidation. For the duration of their appointment as administrators, the liquidators continued trading and duly sold the properties (which were mortgaged to Westpac bank) for net sales proceeds of approximately $3.1 million. This amount was sufficient to pay all creditors, including Ali, and there would be surplus cash leftover. The only person with a direct economic interest in the surplus was Ms Kim due to a clause in the shareholders’ agreement giving her priority over other shareholders on a winding up.

However, the liquidators also identified a number of transactions involving Ali and members of his family which were alleged to have unlawfully deprived the company. These included the company advancing over $1.5 million to Ali or family members, allowing two entities related to Ali to occupy company premises for no rent and without a lease, and the company transferring a vehicle to Ali and agreeing to pay financing costs.

Against this unusual backdrop, the liquidators applied under s 90-15 of the Insolvency Practice Schedule (Corporations) for a series of orders in the nature of judicial advice — namely whether it would be reasonable to investigate and pursue possible claims against Ali and a capital gains tax concession that may be available to the company. The liquidators stated that they were “on the horns of a dilemma” brought about by the conflicting interests of unpaid creditors, especially Ali, and those of Ms Kim, the contributory and only direct economic beneficiary of any recovery. The creditors would be paid in full if there was a distribution now, but if the liquidators proceeded, payment to creditors would be delayed and there was potential that the erosion of the surplus may have the ultimate effect that creditors might not be paid in full, or in an extreme case at all, if the company loses or wins and there is no recovery. The liquidators also pointed out that Ali was the major target of the claims, and that his opposition should be seen in this light.

The Supreme Court of New South Wales ruled that the liquidators were not justified in investigating or pursuing the foreshadowed claims at this time. The Court has inherent jurisdiction on the application of a contributory to grant leave to bring proceedings on behalf of the company in liquidation. That step has not been taken. There was no indemnity from Ms Kim in respect of the costs for which the company might be liable if it fails in the litigation, which will no doubt be significant. Were Ms Kim to have leave to bring a derivative action on behalf of the company she would, almost inevitably, have to indemnify the company against any such loss.

In the Court’s view, the liquidators could not investigate the claims and prosecute the proceedings to finality for an amount even vaguely as modest as the current surplus without the capital gains tax concession, and if the company were to lose the proceedings, its own costs and that of the successful defendants would largely, if not entirely, erode any surplus even with that concession. There was no evidence about Ali’s ability or inability to meet any verdict.

Accordingly, the Court ruled that the liquidators were not justified in investigating or pursuing the claims and will not be justified in doing so, unless, at least, within a reasonable time (by 21 February 2025) Ms Kim moves for leave to bring a derivative action and fails, or another party applies for the termination of the winding up and fails.

Read the decision here.

Professionals involved:

• Counsel for the liquidators: Patrick Reynolds

• Solicitors for the liquidators: Hallcross Legal