Australasian Memory Pty Ltd v Brien

CATCHWORDS : CORPORATIONS- winding up - annual meetings and final meeting to be convened by liquidator in creditors voluntary winding up - company insolvent - failure to convene annual meetings - whether continuing default should be excused by court order - whether annual meeting of members should be dispensed with - whether members should be excluded from final meeting of members and creditors Companies Act 1862 LEGISLATION CITED : Companies (New South Wales) Code Corporations Act 2001 (Cth) Corporations Regulations 2001 (Cth) Australasian Memory Pty Ltd v Brien (200) 20 CLR 270 Re Direct Acceptance Corporation Ltd (1987) 5 ACLC 1037 CASES CITED : Gibbons v LibertyOne Ltd (2002) 41 ACSR 442 Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434 Re One.Tel Ltd; Walker and Sherman (as liquidators) (2002) 43 ACSR 305 Re Walker (as liquidator of One.Tel Ltd) [2002] NSWSC 705 PARTIES : Andrew John Love (as liquidator of ACN 077 368 257 Limited) - Plaintiff FILE NUMBER(S) : SC 6000/02 COUNSEL : Mr T.G.R. Parker - Plaintiff SOLICITORS : Allens Arthur Robinson - Plaintiff

• 16 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

6000/02 - ANDREW JOHN LOVE IN HIS CAPACITY AS LIQUIDATOR OF ACN 077 368 257 (In Liquidation) JUDGMENT Introduction 1 The plaintiff is the liquidator of ACN 077 368 257 (formerly eisa Limited) which is subject to the form of creditors' voluntary winding up created by s.446A of the Corporations Act 2001 (Cth) as a consequence of Part 5.3A administration. In that capacity, he seeks an order under s.447A having the effect of removing the need for the annual meetings of members and creditors of the company called for by s.508 and the need for members, as well as creditors, to be included in the final meeting required by s.509. 2 The Part 5.3A administration commenced on 21 September 2000. Translation to creditors' voluntary winding up under s.446A occurred on 15 December 2000. The business of the company was sold in the course of the Part 5.3A administration. Residual assets have also been converted into cash. As liquidator, the plaintiff investigated possibilities of insolvent trading and voidable transactions. One claim was identified and pursued. The claim resulted in a settlement involving the payment of money to the company. The plaintiff confirms that all assets have been realised and all investigations and recoveries are complete. ASIC has confirmed to the plaintiff that it does not intend to pursue any further investigations in respect of matters reported by the plaintiff. Little remains to be done to complete the winding up. 3 On 10 February 2003 I heard an originating process by which the plaintiff, as liquidator, sought the order under s.447A to which I have referred. The terms of the order are: "An order that Part 5.3A of the Corporations Act operate in relation to ACN 077 368 257 Limited (in liquidation) as if section 446A had the following additional sub-section: (8) In the winding up: (a) section 508 shall not apply; and (b) section 509 shall apply as if: (i) in sub-section (1), 'a meeting of the creditors and members of the company' read 'a meeting of the creditors of the company'; and (ii) in sub-section (4), '2 creditors and 2 members' read '2 creditors'." 4 It is also appropriate to set out the whole of s.508 and the first four sub-sections of s.509: "508. Annual meeting of creditors (1) If the winding up continues for more than 1 year, the liquidator must: (a) in the case of a members' voluntary winding up---convene a general meeting of the company; or (b) in the case of a creditors' voluntary winding up---convene a general meeting of the company and a meeting of the creditors; within 3 months after the end of the first year from the commencement of the winding up and the end of each succeeding year, and must lay before the meeting or each meeting an account of his or her acts and dealings and of the conduct of the winding up during that first year or that succeeding year, as the case may be.

(2) The liquidator must cause the notices of the meeting of creditors to be sent by post to the creditors simultaneously with the sending of the notices of the meeting of the company.

509. Final meeting and deregistration (1) As soon as the affairs of the company are fully wound up, the liquidator must make up an account showing how the winding up has been conducted and the property of the company has been disposed of and, when the account is so made up, he or she must convene a general meeting of the company, or, in the case of a creditors' voluntary winding up, a meeting of the creditors and members of the company, for the purpose of laying before it the account and giving any explanation of the account.

(2) The meeting must be convened by an advertisement published in the Gazette at least 1 month before the meeting specifying the date, time, place and purpose of the meeting.

(3) The liquidator must, within 7 days after the meeting, lodge a return of the holding of the meeting and of its date with a copy of the account attached to the return.

(4) At a meeting of the company, 2 members constitute a quorum and, at a meeting of the creditors and members of the company, 2 creditors and 2 members constitute a quorum and, if a quorum is not present at the meeting, the liquidator must, in place of the return mentioned in subsection (3), lodge a return (with account attached) stating that the meeting was duly convened and that no quorum was present and, upon such a return being lodged, the provisions of that subsection as to the lodging of the return are taken to have been complied with." 5 In the circumstances of this particular insolvent administration, s.508 required the plaintiff to convene a meeting of members and a meeting of creditors not later than 21 December 2001. He did not convene either such meeting by that date or at all. The next period for the convening of s.508 meetings expired on 21 December 2002 and again the plaintiff failed to convene either a meeting of members or a meeting of creditors by the due date or at all, although he had, by 21 December 2002, initiated the present application. It was filed in court three days earlier by leave granted by Campbell J sitting as Duty Judge. 6 The plaintiff's description of the state the winding up has reached suggests that it is unlikely that another occasion for the holding of s.508 meetings will arise. It is much more likely that, before December 2003, the affairs of the company will have been fully wound up and that the s.509 requirement that a final meeting of creditor and members together be convened will have come into play. Jurisdiction to make the order sought 7 The question whether the court has power to make such an order is one on which I need not dwell. The availability of s.447A to modify s.446A in a way that alters what would otherwise be incidents of a winding up generated and sustained by s.446A, as this one is, was recognised in Gibbons v LibertyOne Ltd (2002) 41 ACSR 442, Re Walker (as liquidator of One.Tel Ltd) [2002] NSWSC 705 and Re One.Tel Ltd; Walker and Sherman (as liquidators) (2002) 43 ACSR 305. The fact that an order will operate upon or in relation to some past event (or, as here, non-event) or some already established state of affairs by changing what would otherwise be its consequences does not mean that the order is not properly grounded in s.447A. So much is made clear by the decision of the High Court in Australasian Memory Pty Ltd v Brien (2000) 20 CLR 270 and by the analysis of that decision made in Gibbons v LibertyOne (above). The court has jurisdiction to make the orders sought. The context in which the order is sought 8 I proceed then to the question whether the court should, in the exercise of its discretion, make the order sought and thereby deprive both members and creditors of the opportunity to attend any meeting at all under s.508 (that is to say, the meetings that should have been convened not later than 21 December 2001 and 21 December 2002, plus any further annual meetings that the section may require in the future) and deprive members (but not creditors) of the opportunity to attend the final meeting that, in conformity with s.509, must be convened as soon as the affairs of the company are fully wound up. 9 The company has about 8,300 members and 193 creditors. The winding up is one in which there will be no return to shareholders. Proofs of debt have been called for and adjudicated upon by the plaintiff. Three interim dividends have been paid to creditors and, subject to the outcome of the present application, the plaintiff is ready to pay a final dividend. Whatever happens, creditors' total dividends will fall well short of 100 cents in the dollar. The outcome for both creditors and contributories has been clear for a considerable time. Furthermore, a committee of inspection has been in office for the duration of the winding up. Its members account for 51% in value of all unsecured debts. The plaintiff, as liquidator, has delivered four reports to the committee of inspection (in March 2001, September 2001, November 2001 and October 2002). He has also made reports to the creditors as a whole (September 2001 and October 2002). In these circumstances, the plaintiff maintains that there has been adequate communication with creditors during the winding up. I accept that the plaintiff has reported to the committee and to the creditors generally in an appropriate way. But he has, as to the past at least, failed to create for them and for members the forums the legislation requires. The purpose and operation of s.508 10 The object of each annual meeting required by s.508 (that is, the meeting of members and the meeting of creditors) is stated in the section itself. It is that the liquidator should "lay before" the meeting "an account of his or her acts and dealings and of the conduct of the winding up during" the particular year. One view of a requirement that someone lay a particular report before a meeting is that the person need do no more than take steps to ensure those at the meeting receive the report, without any requirement that there be opportunity for discussion. That is, to my mind, an altogether too narrow view of such a requirement. 11 Implicit in any provision that a report or accounts or any other document be "laid before" a meeting by a particular person are three clear expectations: first, that the person concerned will be in attendance at the meeting; second, that the document in question will be then and there in the possession of those present at the meeting or, at least, readily available to those of them who wish to have it; and third, that the content of the document and matters arising from it may be discussed by those present in the hearing of the person who has laid it before the meeting. Part of that process of discussion may be an opportunity for those present to direct questions to the person concerned, although probably without any implied obligation upon that person to answer any such questions. The requirement under the Companies (New South Wales) Code that accounts and a report and statement of directors be laid by directors before an annual general meeting was assumed by McLelland J in Re Direct Acceptance Corporation Ltd (1987) 5 ACLC 1037 to entail an opportunity for those items to be considered at the meeting itself. Such an expectation is recognised, in the case of a company's annual general meeting, by s.250R(a) of the Corporations Act. 12 Meetings have always played a central part in our system of corporate regulation. Questions are from time to time raised as to the continued appropriateness of meetings as a means of communication and decision-making. Referring to the requirement that a company hold an annual general meeting (now applicable in Australia to certain companies only), the Law Commission for England and Wales said in its consultation document "Company General Meetings and Shareholder Communication" (October 1999), under the heading "The Theory": "There are no statutory requirements as to the agenda of an AGM, but the General Meeting of the company's members provides the members with the opportunity to debate amongst themselves, with the benefit of information in the company's annual report and accounts, and to take decisions on those matters (normally few in number) which the law, or the company's own constitution, reserve for decision by the membership; to hear answers to questions put to directors of the company; and to hold the directors, whose duty is to operate the business in the interests of the members, accountable for their stewardship. Obvious analogies are the accountability of elected politicians to their electorate, or of the officers of a club to the members."

The consultation paper went on to discuss the limitations of such meetings and the opportunities presented by other means of communication now available. 13 Unless and until other means are adopted by statute, those involved in the administration of companies must recognise and respect the need to afford to members or creditors (or both) the opportunity for informed consultation intended to be secured by provisions requiring that meetings be held and that particular documents be laid before those meetings. Such an opportunity is something to which all relevant members or creditors have a statutory right. The right exists in support of their common interest in responsible administration. And, where a particular officer or official is required to lay before the meeting an account of his or her administration, the meeting serves as a medium for communication both by and to the officer or official and a means by which accountability is enhanced. The effect of the order sought as it affects s.508 14 The opportunities for reporting and communication intended to be available in this insolvent administration not later than 21 December 2001 and 21 December 2002 cannot be retrieved or recreated. The practical position is that both those meetings will be replaced by or subsumed in the final meeting under s.509 which, on present indications, will be held before the need for a third s.508 meeting arises. In those circumstances, it is necessary to ask what purpose will be served by an order of the court dispensing with the need for s.508 meetings generally. 15 Because it is most unlikely that there will be an occasion for the convening of any future s.508 meeting, the order will most likely have no impact at all so far as future events relevant to s.508 are concerned. But it will have a clear and significant impact in relation to the past. The order, if made, will exclude, in relation to this insolvent administration, the statutory requirements with which the plaintiff has already failed to comply. What is, at this point, a situation of default on his part will thereby be rectified and he will be freed from the effects of failure properly to perform his statutory duties. Indeed, such exoneration will be the only effect of the order. 16 This leads to the question whether the plaintiff should be absolved from subsisting default by an order of the court changing rules that have already been broken. 17 As I have said, the present application first came before Campbell J as Duty Judge on 18 December 2002: [2002] NSWSC 1258. His Honour declined on that occasion to make the order sought. He made it clear that he regarded it as wholly inappropriate to make orders effectively excusing statutory non-compliance by a liquidator where no attempt was made to offer any explanation. I endorse his Honour's sentiments. By a subsequent affidavit (sworn on 7 February 2003) read when the application came before me in the Corporations List on 10 February 2003, the plaintiff offered the following by way of explanation, referring to the meetings that should have been convened on or before 21 December 2001: "4. Neither of these meetings were held on or before that date due to an oversight on my part. I had a number of people assisting me in carrying out my duties as the liquidator of eisa. However, it appears that, whilst aware of the need to convene the meetings pursuant to section 508, both my staff and I overlooked the performance of the work which was necessary to satisfy those requirements. 5. I recognise that this explanation of the failure to convene the meetings is not satisfactory and does not excuse the failure in any manner. My explanation causes me significant embarrassment but represents the only explanation which I can provide." 18 The explanation is thus one of pure inadvertence and, while I accept what the plaintiff says, I cannot help but express surprise and concern that an experienced liquidator in a substantial firm appears not to have in place compliance systems appropriate to identify sufficiently in advance all relevant milestones along the road to conclusion of the statutory process of insolvent administration, including measures to ensure that some responsible person is alerted if some necessary step is not initiated in a timely fashion. The plaintiff does not suggest that, at the times for compliance with s.508, he regarded the meetings as pointless. Nor, of course, is it any part of the function of a liquidator to question a statutory command in that way. The plaintiff has been frank in his explanation and, as I have said, I accept it. 19 As for the meetings due to be convened on or before 21 December 2002, the plaintiff says that he decided to defer action pending the court's decision on his application which had been filed three days beforehand. 20 I turn now to the evidence of Mr Dunstan, a solicitor employed by the solicitors for the plaintiff. Mr Dunstan deposes to having faxed to ASIC on 13 December 2002 a letter stating the plaintiff's intention to apply to this court "today" for orders that the plaintiff "be absolved from holding meetings of the Company pursuant to section 508 of the Act and a meeting of members of the Company pursuant to section 509 of the Act". The letter was accompanied by a copy of the proposed originating process and concluded by asking that the solicitors be informed whether ASIC wished to oppose the application. On the same day, Mr Dunstan spoke by telephone with an officer of ASIC and, by a subsequent letter of that day, sent to the officer copies of the plaintiff's affidavits of 22 November 2002 and 12 December 2002 and expressed the plaintiff's wish to have the application heard and determined by 20 December 2002. By letter dated 17 December 2002, ASIC informed the plaintiff's solicitors that it did not propose to intervene in the proceedings or to appear on the hearing of the matter and that it neither consented to nor opposed the plaintiff's application. Attention was drawn to the decision in Gibbons v LibertyOne Ltd (above) in which, the writer said, Austin J "considered a similar application". 21 The significant thing about this correspondence is that the plaintiff's solicitors did not expressly draw ASIC's attention to the fact that the plaintiff had already defaulted in the observance of the s.508 requirements and that the effect of the orders of the court, if made, would be to cure the default. Furthermore, the ASIC letter of 17 December 2002 seems to me to imply that ASIC had not appreciated that the situation was one of subsisting default by the liquidator, although the material sent to ASIC would, upon close examination, have shown the timing factors from which that could have been deduced. The reference in ASIC letter to Gibbons v LibertyOne as involving a "similar application" suggests that ASIC may have approached the matter as one in which only relief as to the future was to be sought. 22 In short, it is by no means clear to me that ASIC's letter of 17 December 2002 was composed and sent in the knowledge that the effect of the orders the plaintiff intended to seek from the court would be to excuse him from pre-existing statutory default. Decision on s.508 aspect 23 Section 536 of the Corporations Act is in the following terms: 536. Supervision of liquidators (1A) In this section: "liquidator" includes a provisional liquidator.

(1) Where: (a) it appears to the Court or to ASIC that a liquidator has not faithfully performed or is not faithfully performing his or her duties or has not observed or is not observing: (i) a requirement of the Court; or (ii) a requirement of this Act, of the regulations or of the rules; or (b) a complaint is made to the Court or to ASIC by any person with respect to the conduct of a liquidator in connection with the performance of his or her duties; the Court or ASIC, as the case may be, may inquire into the matter and, where the Court or ASIC so inquires, the Court may take such action as it thinks fit.

(2) ASIC may report to the Court any matter that in its opinion is a misfeasance, neglect or omission on the part of the liquidator and the Court may order the liquidator to make good any loss that the estate of the company has sustained thereby and may make such other order or orders as it thinks fit.

(3) The Court may at any time require a liquidator to answer any inquiry in relation to the winding up and may examine the liquidator or any other person on oath concerning the winding up and may direct an investigation to be made of the books of the liquidator. 24 In Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434, McLelland J said of the predecessor to s.536 that it "is concerned with aspects of the conduct of liquidators and others which are liable to attract sanctions or control for what might be broadly described a disciplinary reasons". 25 It appears from the material before the court that compliance systems within the plaintiff's firm either were not capable of identifying the need to convene s.508 meetings or, being so capable, did not operate to do so in this case and that the liquidator simply did nothing for almost a year after the first deadline of 21 December 2001 had passed. These are circumstances calling for the kind of inquiry with which s.536 is concerned. ASIC has a clear role to play in a case where there is reason to think that a liquidator's statutory compliance systems may be defective. ASIC also has at its disposal a range of powers calculated to facilitate the gathering of information. The present circumstances should, in the first instance, be brought to the attention of ASIC so that it may consider whether it should inquire into them and, in due course, place before the court in accordance with s.536 anything it thinks should be the subject of attention by the court. 26 Because the effect of the order sought by the plaintiff, insofar as it relates to s.508, will be to absolve the plaintiff from the consequences of past non-compliance with that section in circumstances where, in my judgment, assessment by ASIC of the kind I have mentioned should first be undertaken, it is not appropriate that the order be made at this stage. The s.509 aspect 27 I pass now to what is the quite separate issue posed by the part of the order claimed that relates to future compliance with s.509 and the question whether s.446A, insofar as it causes s.509 to require that members as well as creditors should be included in the final meeting not yet due to be convened, should have a modified operation in this case so that members are ignored for all purposes of s.509. 28 The reality in this case is that there will be no return to members and that creditors will receive less than 100 cents in the dollar. The situation is accordingly one in which the interests to be served by the liquidator are, in a realistic sense, confined to creditors' interests. At paragraphs 53 to 62 of his judgment in Gibbons v LibertyOne (above), Austin J traced the history of what is now s.508 and, in particular, the recognition by the Greene Committee in its report of 1926 (Report of the Company Law Amendment Committee, HMSO Cmd 2657) that provisions originating in the Companies Act 1862 and requiring only an annual meeting of the members of a company in the course of winding up should, in the case of an insolvent administration, be modified to encompass creditors as well. The Greene Committee made precisely the same recommendation with respect to the final meeting now dealt with by s.509 (Report, para 80 III (b) (vii)). Austin J's exegesis on s.508 concluded: "In my view, this brief history of the development of s 508 is of some assistance in the resolution of the questions before me now. It shows that s 508 was treated in the process of law reform as an ancillary or consequential provision, rather than a primary focus of legislative policy-making. Moreover, it suggests the possibility that no rigorous thought has been given to the need to have any meetings of members at all, in a case where the company is hopelessly insolvent, the shares are fully paid-up and on any view of the matter, the members do not stand to receive any distribution. The policy underlying the Greene Committee's recommendations is that where a company is insolvent, control of the liquidation should be transferred from the members to the creditors. It is arguable that, notwithstanding that overall policy, members should retain an entitlement to information and the opportunity to play a limited role at meetings of members - although that has never been a requirement in the case of a court-ordered winding up. However, where it is clear that the members will receive nothing out of the winding up, rigorous application of the policy enunciated by the committee should lead to a total transfer of control to the creditors, and therefore the removal of the requirement for meetings of members would be justifiable. This is particularly so where, as here, the cost of convening meetings of members is substantial. In effect, that cost is borne by the creditors to whom (as Mr Maugham put it) "the assets belong". 29 These statements made in relation to s.508 in the case of a winding up such as the present apply with equal force to s.509. The accountability of the liquidator, in the case of an insolvent administration, is to the creditors. The interests of members are subordinated in such a way that they may, as a general matter, be regarded as somewhat academic. 30 It is to be remembered, however, that a meeting under s.509 is a single meeting comprising both members and creditors together. The plaintiff does not seek to dispense with the meeting altogether. Nor would there be grounds for doing so, given the clear interest of creditors in the matters with which the meeting is intended to deal. The plaintiff merely seeks to bring about a situation where the meeting will be a meeting of creditors only, with members excluded. 31 It is true that the interests of members in the winding up are probably little more than theoretical. But that alone is scarcely enough to deprive them of a statutory right to be part of the s.509 meeting should they wish. The only cogent basis for their exclusion would be, I think, some burden or detriment that was seen to outweigh the statutory right which, in the circumstances outlined, cannot be regarded as a particularly valuable right. The plaintiff points to matters of cost. According to the evidence the plaintiff has adduced, it will cost $750 to hire a suitable meeting venue. Inclusion of members as well as creditors involves no incremental cost in that respect. Nor is there incremental cost in the publication of the advertisement called for by s.509(2). Inclusion of members in addition to creditors will, however, entail significant additional cost in the copying, enveloping and posting of material to be sent individually to some 8,300 shareholders, as well as 194 creditors, in conformity with reg. 5.6.12(1)(b) of the Corporations Regulations 2001 (Cth), the meeting concerned being one to which that provision applies by virtue of reg. 5.6.11(2)(a)(ii). The evidence shows that additional cost to be of the order of $9,500. 32 I accept that this additional cost of $9,500 may be regarded as out of proportion to the benefit involved in complying with reg. 5.6.12(1)(b) by way of individual communication with 8,300 persons whose interest in the winding up may be regarded as theoretical only, with the result that those persons may appropriately be deprived of the right to receive the individual communication. But it does not follow that the persons concerned should be deprived of participation rights the fulfilment of which, although reflecting or protecting no more than a theoretical interest, does not entail any incremental cost or other apparent burden.

Decision on s.509 aspect 33 So far as the s.509 aspect is concerned, a case has been made out for relief from the requirement in reg. 5.6.12(1)(b) of the Corporations Regulations 2001 (Cth) insofar as it applies to require that notice be given in a manner specified in reg. 5.6.12(2) to members as well as to creditors. I am not persuaded, however, that a sufficient case has been shown for abolishing the statutory right of members to participate in the meeting. Conclusion 34 For reasons stated, I am not prepared to make at this stage an order that has the effect the plaintiff seeks in relation to the operation of s.508. Nor am I prepared to make an order that has the effect of removing the rights of members to participate in the s.509 meeting. I shall, however, make an order under s.447A that dispenses with the operation of reg. 5.6.12(1)(b) in relation to the s.509 meeting yet to be convened should the plaintiff seek to amend his originating process to claim such an order. 35 For the moment, the appropriate course is to stand over the originating process to 9.30 am on Tuesday, 11 March 2003 before me, with leave for the plaintiff to amend in the way I have outlined and also liberty to apply. 36 I direct that the plaintiff furnish a copy of these reasons to the Australian Securities and Investments Commission within seven days. **********

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