No Winners Here - Court Appoints Provisional Liquidators To Company To Preserve Status Quo

In the recent case of Davis-Jacenko v Roxy’s Bootcamp Pty Limited,¹ the New South Wales Supreme Court considered an application under section 472 of the Corporations Act 2001 (Cth) (the Act) for the appointment of provisional liquidators to a controversial training and promotions company.

The case revolved around what the Court described as ‘the extraordinary circumstances of the rapid creation and almost equally rapid deterioration’ of the relationship between the directors of Roxy’s Bootcamp Pty Limited (the Company) and a ‘highly questionable’ promotions scheme.²

The decision provides a timely reminder as to the circumstances when a Court will exercise its discretion to order the appointment of provisional liquidators to preserve the status quo.

Background

The Company was registered in February 2024 and ostensibly carried on a business offering bootcamp and other training courses developed by Ms Roxy Davis-Jacenko to the public.  

The Company’s three shareholders were (and are) Ms Davis-Jacenko (50%), Tleis Investments Group Pty Ltd as trustee for the Tleis Trust (25%) and Salameh Investments Pty Ltd as trustee for the Salameh Family Trust (25%).  When the Company was first registered, its three directors were Ms Davis-Jacenko, Mr Youssef Tleis and Mr Kassim Alaouie (who is associated with Salameh Investments).

The Company then launched a promotions scheme with the following features:

• any person who bought a bootcamp course from the Company would be entitled to participate in a game to win certain prizes;
• if a customer opted in to the game, their name would be entered into a draw;
• the customer whose name was drawn would then select two envelopes from a pool of 250 envelopes.  Only two envelopes contained “winning” symbols;
• if the customer selected the two envelopes with the “winning” symbols, the customer would win the first prize, being a property in Cronulla, New South Wales (Cronulla Property) which was owned as tenants in common by Mr Tleis and Mr Alaouie and which had been valued in February 2024 at $10m;
• if the customer did not select the two envelopes with the “winning” symbols, the customer would instead receive a guaranteed second prize of $250,000 in cash;
• other draws would also be conducted for minor prizes including a Rolex watch, a Hermes Birkin bag and a Chanel wallet; and
• the draw of the winning customer would take place on 7 June 2024, and the game to win the Cronulla Property would take place on 29 June 2024.

The obligations of the Company and the directors and shareholders in relation to the above promotion (the Promotion) were set out in a Promotions Agreement dated 5 March 2024.

On 5 March 2024, the Company took out an insurance policy with respect to the above promotion (the Promotion) with an indemnity limit of $7m, and on 8 March 2024 Ms Davis-Jacenko commenced an extensive media campaign to publicise the Promotion on television, radio and online.

However, the following matters then occurred:

• on 15 April 2024, Ms Davis-Jacenko ceased to be involved in the Promotion and took steps to freeze the bank account of the Company;
• on 19 April 2024, Ms Davis-Jacenko resigned as a director of the Company;
• on 9 May 2024, Mr Alaouie resigned as a director of the Company;
• on or around 22 May 2024, the Company caused $250,000 to be transferred to a firm of solicitors to be held on trust for the Company as “funds for the first prize payout”;
• Ms Davis-Jacenko raised a number of claims against the Company, including that she is owned a total of $294,821.35 by the Company; and
• Mr Tleis and Mr Alaouie have maintained that they wish for the Company to continue with the Promotion, and claim that Ms Davis-Jacenko had failed to deliver the Rolex watch and Hermes Birkin bag. 

Then in late May 2024:

• Ms Davis-Jacanko, applied for orders for the appointment of provisional liquidators to the Company; and
• the Company, Tleis Investments and Salameh Investments opposed the application and applied for competing interlocutory orders that Ms Davis-Jacenko restore their access to various email and social media accounts, provide passwords to them and deliver to their solicitors the Hermes Birkin bag and the Rolex watch required for the Promotion.

Factors to Consider

McGrath J summarised the factors principles in deciding whether provisional liquidators should be appointed as follows:

1. the court should only appoint a provisional liquidator where the court is satisfied that there is a valid and duly authorised winding up application and that there is a reasonable prospect that a winding up order will be made;
2. the fact that the assets of the corporation may be at risk is a relevant consideration;
3. the provisional liquidator’s primary duty is to preserve the status quo to ensure the least possible harm to all concerned and to enable the court to decide, after a further examination, whether the company should be wound up;
4. the court should consider the degree of urgency, the need established by the applicant creditor and the balance of convenience.  The power to appoint a provisional liquidator is a broad one and circumstances will vary greatly;
5. it may be appropriate to appoint a provisional liquidator in the public interest where there is a need for an independent examination of the state of accounts of the corporation by someone other than the directors; and
6. where the affairs of the company have been carried on casually and without due regard to legal requirements so as to leave the court with no confidence that the company’s affairs would be properly conducted with due regard for the interests of shareholders, it may be appropriate to appoint a provisional liquidator.

Decision

Overall, McGrath J considered this to be a ‘paradigm case’ for the court to exercise its discretion to order the appointment of provisional liquidators in order to preserve the status quo.³

His Honour noted that ‘the extraordinary state the Company has reached necessitates the serious and drastic intrusion of external controllers into its affairs’.⁴

McGrath J cited the following reasons for appointment of provisional liquidators:⁵

• it was highly likely that an order would be made to wind up the Company on just and equitable ground as the nature of the Company was in effect a quasi-partnership (having regard to the terms of the applicable shareholders agreement) and there had been an irretrievable breakdown of the relationship between Ms Davis-Jacenko and Mr Tleis/Mr Alaouie;
• on 7 May 2024, Mr Tleis and Mr Alaouie had resolved that in their opinion the Company was likely to become insolvent at some future time and that administrators should be appointed to the Company;
• on 11 May 2024, Mr Tleis had agreed to the halting of all sales of the Roxy's Bootcamp courses;
• it appeared that the directors had each ceased to act in the interests of the Company as opposed to their own personal interests;
• it was the stated intention of the directors for the Company to cease operations within the near future;
• there were significant doubts over the solvency of the Company due to the fact that there were no books and records of the Company which contained a reliable basis upon which its financial position, including its assets and liabilities, could be established.  The Company only had approximately $3,000 in its bank account, with a prospective liability for Goods and Services Tax of $18,000;
• there was no evidence before the Court as to the respective financial positions of Mr Tleis and Mr Alaouie to establish whether they were in a position to provide the Company with funds to meet the estimated taxation liabilities of the Company;
• there was an urgent need to protect the public interest in advance of the draw of the prizes in the Promotion on 7 June 2024; and
• if any claim on the Insurance Policy by the Company is denied, there was no evidence to suggest how unencumbered title to the Cronulla Property could be given if the first prize in the Promotion was won.

Accordingly, McGrath J made orders pursuant to s 472(2) of the Act that provisional liquidators be appointed to the Company.  Furthermore, the interlocutory application made by the Company, Salameh Investments and Tleis Investments was dismissed.⁶

Lavan comment

This case provides a useful reminder of the factors that will be considered by the courts when exercising the discretion to appoint provisional liquidators.

In particular, this decision demonstrates that a rapid and irreconcilable deterioration of the relationship between a company’s directors and shareholders which significantly impacts on the continuation of business operations may create a situation which justifies the appointment of provisional liquidators.

If you have any questions about this decision, or relating to the appointment of provisional liquidators, the experienced Lavan team is here to help.