Bauhaus Pyrmont Pty Ltd (in liq) in the matter of Andrew H Wily as Liquidator [2007] NSWSC 936

Supreme Court of NSW|2007-08-22|Before: Bergin J

CITATION : Bauhaus Pyrmont Pty Ltd (in liq) in the matter of Andrew H Wily as Liquidator [2007] NSWSC 936

DECISION : Orders made in liquidator's favour

CATCHWORDS : [LIQUIDATORS] - Prior adverse findings in relation to liquidator's conduct - further facts available demonstrating liquidator's conduct proper - litigation funding - question to be determined under s 511 of Corporations Act 2001 - whether liquidator justified in giving effect to Deed of Settlement.

In the matter of Bauhaus Pyrmont Pty Ltd (in liq) [2006] NSWSC 543 CASES CITED : Re Addstone Pty Ltd (1997) 25 ACSR 357 Re Spedley Securities Ltd (1992) 9 ACSR 83

PARTIES : Bauhaus Pyrmont Pty Limited (in liquidation) in the matter of Andrew H Wily as Liquidator (applicant) Andrew Timothy Roberts & Ors (respondents)

R Beech-Jones SC/G Lucarelli/G Horan/F Berglund (applicant) COUNSEL : BJ Coles QC/SA Kerr (respondents)

SOLICITORS : Landerer & Co (applicants) Clayton Utz (respondents)

1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

1486/06 BAUHAUS PYRMONT PTY LTD (IN LIQUIDATION) IN THE MATTER OF ANDREW H WILY AS LIQUIDATOR

JUDGMENT 1 There were originally two sets of proceedings before me for determination. The first 2074 of 2007 was an application by the Deputy Commissioner of Taxation (the Commissioner) seeking the removal of Andrew Wily as liquidator of Bauhaus Pyrmont Pty Limited (in liquidation) (the company). The Commissioner no longer presses for that order and those proceedings have been finalised earlier today. The second and now only application before me is 1486 of 2006, which is an application by Mr Wily, as liquidator of the company, to have the court deal with a question under s 511 of the Corporations Act 2001 (Cth) (the Act). The question that has been posed is whether the liquidator is justified in giving effect to the provisions of the Deed of Release and Settlement (the Deed) in these proceedings, 1486 of 2006. 2 The company was previously known as Multiplex Bauhaus Pty Limited and was previously a subsidiary of Multiplex. It was incorporated for the purposes of developing and constructing a block of units, both residential and commercial, in Pyrmont known as the Bauhaus Apartments. In April 2002 all of the shares in Multiplex Bauhaus were sold in equal parts to Consolidated Byrnes Holdings Pty Limited and a company known as Finbell Pty Limited, companies owned and controlled by Mr James Byrnes and Mr Ian Widdup respectively. 3 In June 2003 Christopher Palmer of O'Brien Palmer was appointed as a voluntary administrator of the company, which occurred as a consequence of a demand from the Australian Taxation Office for unpaid GST which the company was unable to pay. Mr Palmer subsequently became the liquidator of the company. 4 On 23 September 2005 there was a general meeting of the company in liquidation held concurrently with a meeting of creditors. At that meeting, amongst other things, it was proposed that Mr Wily be appointed liquidator of the company. During that meeting, at which the Commissioner was represented, the Commissioner was asked why the Australian Tax Office (ATO) had not provided funding for any legal proceedings. It was noted that Mr Palmer, as liquidator, had made inquiries of the ATO and had been advised that the ATO was not prepared to fund a cause of action that Mr Palmer was of the view should be brought against the former directors of the company for allegedly allowing the company to trade whilst insolvent. 5 There was discussion in respect of future funding and the representative of the Commissioner asked Mr Byrnes, who was also present at the meeting representing a creditor, whether his company had sufficient funds to provide litigation support funding. Mr Byrnes advised that his company was prepared to arrange for an immediate transfer of somewhere between $50,000 to $100,000 into the trust account of Mr Wily to support his "bona fides", if Mr Wily were to be appointed liquidator. At that meeting Mr Byrnes moved for the resolution that Mr Palmer's resignation be accepted and that Mr Wily be appointed as liquidator. That was seconded by the Commissioner's representative and ultimately, the resolution was passed on the casting vote of the Chairman. 6 Mr Wily entered into a funding arrangement with Australian Litigation Funders Pty Ltd (ALF), a company controlled by Mr Byrnes. That agreement required consent from the creditors within six months of the date of entry into the agreement. Although there has been some suggestion that there may be some ambiguity about the time frame for the obtaining of consent, no party has addressed me in respect of that aspect of the matter and it seems to me reasonable to conclude that the consent was required within the six months period rather than on execution or prior to execution. 7 Mr Wily formed the view that it was appropriate to issue examination summonses against the former directors of the company. On 17 February 2006 those proceedings, being the present proceedings 1486 of 2006, were commenced. The examination summonses were issued on 1 March 2006 and within about a week, the former directors filed within the proceedings, interlocutory process against Mr Wily seeking to set aside the examination summonses and also to remove him as liquidator. 8 The funding agreement included clause 8.2, in which the liquidator undertook to keep the funder advised of the progress and status of any proceedings and to consult with and consider the views of the funder in relation to any material issues arising from the conduct and/or the progress of any proceedings and to provide such information from time to time to the funder as may be reasonably required by the funder in relation to the proceedings. What was occurring concurrently with the liquidator's work towards issuing the proceedings was that Mr Byrnes was conducting himself in a manner that was very unhelpful to the liquidator's task. Prior to Mr Wily accepting appointment, Mr Byrnes had written letters which are contained in an exhibit to Mr Cowling's (the solicitor for the former directors) affidavit, DPC1, which are at the least robust, but have been described as rather threatening. Closer to the time of the liquidator's decision to file process and to issue the examination summonses Mr Byrnes wrote directly to one of the parties the subject of the examination summons. That email, dated 1 March 2006, appears behind tab 20 in DPC1, and it is not necessary to set its contents out other than to describe it as further inappropriate correspondence, particularly having regard to the fact that Mr Byrnes' company, ALF, was then funding the litigation. 9 It is of note that such correspondence and that email was not provided to Mr Wily at that time. However, Mr Wily was subsequently provided with Mr Cowling's affidavit and the material to which I have just referred. When that occurred Mr Wily instructed his solicitors, Landerer & Co, to write a letter dated 10 March 2006 to Mr Byrnes referring to the fact that the affidavit and the supporting material to which I have referred had been received. That letter also advised of the amounts that were due to be paid by the funder in respect of the litigation to that date. The letter included the following: This correspondence does little to enhance the liquidator's case and is embarrassing. In our view it is unfortunate that you have chosen to send such correspondence, particularly without any consultation with us. Such conduct has the potential to be detrimental to the liquidator's case and impedes us in properly acting in this matter. Accordingly, we request in the strongest terms that you refrain from such conduct in the future. If there are future instances we will have to give consideration to ceasing to act in the matter.

10 By then the former directors had already commenced proceedings to remove Mr Wily. On 10 March 2006 Mr Byrnes wrote to Landerer & Co expressing views about what should be done in the litigation. By that stage the solicitors for Mr Wily had written to him asking for his instructions as to whether they, the solicitors, could accept instructions directly from Mr Byrnes. Mr Wily advised that the solicitors should run everything past him for clearance and that "all instructions will be from me as liquidator", with the observation that as the solicitors appreciated, the funder was paying the bills. 11 Mr Wily also advised the solicitors that there were very good reasons why they needed to be seen to be taking instructions from him and that they should be careful what correspondence went out from their office in the matter. Prior to the Commissioner's proceedings (2074/2007) being finalised, there was cross-examination of Mr Wily to suggest that those statements demonstrated inappropriate conduct, however I am not satisfied that such a conclusion is warranted. This is so particularly having regard to the liquidator's obligations to ALF and the need for the solicitors not only to act properly but to be seen to be acting properly. It is obvious that if solicitors sent emails, of the kind referred to above, there would possibly be a perception that there was something odd going on. 12 An additional affidavit was filed in the proceedings in which Mr Byrnes' conduct was further exposed. That was an affidavit of Christopher Johnston sworn 27 April 2006 (another solicitor acting for the former directors) that was also provided to Mr Wily. This time Mr Wily wrote to Mr Byrnes by letter dated 2 May 2006 at ALF's office. Mr Wily noted that Mr Byrnes was free to pursue his own interests but as the liquidator he, Mr Wily, was the only one entitled to pursue any claims the company had or may have against any third parties, including Multiplex or any of its officers. He stressed that it was his role to investigate the company's affairs and to bring to the attention of ASIC any matter he considered to be a breach or potential breach of the Corporations Act or the criminal law. He noted that Mr Byrnes' emails to Mr Cowling in April 2006 had in fact mentioned private prosecutions under various taxation laws. He also referred to the previous letter that his solicitors had written to Mr Byrnes, no doubt referring to the letter to which I have already referred dated 10 March 2006. That letter concluded with the following: I require you to immediately cease all further communications with Mr Cowling and with any other third person concerning the affairs of the company. To the extent you have evidence or information as is relevant to the affairs of the company or to my functions as its liquidator, then the proper course is to submit that information to my office.

13 It is apparent that some time prior to 5 April 2006 the liquidator had sought to extract the company from the funding arrangement because there was an approach made to the Commissioner to fund the proceedings. The response from the Commissioner was by letter of 5 April 2006 to Mr Hamilton, a then partner of Mr Wily, in the following terms: While the ATO is not in a position to provide funding in this matter, it supports any action taken by the liquidator which may result in recoveries for the benefit of the creditors. If you require any further information please phone (details provided).

14 The breadth of that letter is notable. The "support" from the Commissioner was not limited to certain types of action. The support was for "any action". It is also to be noted that the Commissioner's support was not conditional upon a certain result. The support was available even if the result of a recovery was not obtained. That much is clear from the use of the words "which may result in recoveries". 15 Notwithstanding the former directors' claims against Mr Wily that he should be removed, Mr Wily continued with his obligations as liquidator and prepared a document entitled "Areas for Potential Recovery" to be used, inter alia, for the purposes of persuading the Commissioner to perhaps change the view of the office to fund the litigation. It is apparent that that document was provided to the Commissioner in about May or June 2006. 16 There was an application before Justice Austin in respect of some claims of privilege and the like in respect of a document under subpoena. That hearing took place on 31 May 2006. His Honour delivered judgment on 6 June 2006 in which he set out some factual background and then dealt with, inter alia, the question of whether privilege had been waived and whether there had been a loss of client privilege by reason of misconduct: In the matter of Bauhaus Pyrmont Pty Ltd (in liq) [2006] NSWSC 543. It is apparent that the correspondence that was contained in DPC 1 was before his Honour and it is also apparent that some of the emails and letters to which I have referred, were before his Honour. However it is clear that the letter of 10 March 2006 from Landerer & Co to Mr Byrnes and Mr Wily's letter of 2 May 2006 to Mr Byrnes were not before his Honour. Nor, it appears, was the letter from the Commissioner to Mr Wily of 5 April 2006. His Honour reviewed the correspondence that was before him and formed the view that a reasonable liquidator might have endeavoured to clarify the respective roles of the funder and himself in some fashion such as by correspondence with the lawyers, and that a reasonable liquidator in such a position should have done so if the funder's participation had reached the level of Mr Byrnes' participation in the present case. 17 His Honour concluded in paragraphs 93 and 94 that there were reasonable grounds for inferring on the basis of the evidence that the liquidator shared Mr Byrnes' improper purpose of using the examination proceedings to embarrass the former directors in a public forum and to apply pressure on them to settle favourably with Mr Byrnes. 18 Those were findings that adversely affected the Commissioner's attitude that had previously been one of very positive and general support for the liquidator. 19 Mr Wily, no doubt having read Austin J's judgment, wrote another letter to Mr Byrnes on 10 June 2006, in which he noted that despite his previous correspondence and numerous express directions to cease communications with the previous directors and their legal representatives, he had discovered that Mr Byrnes had continued to communicate with those persons and parties. He advised Mr Byrnes that his actions were potentially in breach of the funding agreement and that his continued communications may be detracting from his express right under the funding agreement to direct, conduct and conclude the proceedings being funded. He gave an ultimatum to Mr Byrnes that unless he received written assurance from him that he would not communicate with those parties he would seek advice concerning termination of the funding agreement. 20 Things did not get any better. Mr Wily sought the Commissioner's consent to the funding agreement, but after providing further time for consideration of the request to the Commissioner and Mr Widdup, the Commissioner refused to consent. This is not surprising having regard to Austin J's findings. 21 By 1 September 2006 Mr Wily had reached the Plimsoll line in respect of Mr Byrnes' conduct. It is all very well to say (as the Commissioner suggested in the other proceedings 2074/2007) that the liquidator should have done something more robust, but the liquidator was bound by a legal agreement, which entitled the funder to be kept informed. It was not the easiest of positions and it was exacerbated enormously by the inappropriate conduct of the director of the funder. 22 On 1 September 2006 Mr Wily terminated the funding agreement and the notice of termination included the following: "The funder by its director Jim Byrnes has, despite written requests, acted in a manner that has detracted from the liquidator's rights and entitlements pursuant to clause 8.1 of the funding agreement to direct, conduct and conclude the proceedings. The funder has, despite written requests, failed, refused or neglected to make payments in accordance with the funding agreement."

23 Mr Wily issued examination summonses directed to Mr Byrnes and Mr Widdup later in 2006, and negotiations commenced with the former directors and continued into the latter part of 2006 when the Deed was proposed and ultimately agreed. The question for determination that is raised under s 511 of the Act relates to that Deed, which is Exhibit 1 before me. The Deed evidences a proposed settlement subject to the liquidator obtaining court approval to enter into it. There are other aspects of the conditions precedent with which I do not need to deal. 24 The settlement sum upon which the liquidator agreed to settle the proceedings is $425,000 to be paid by the former directors, $138,000 of which is to be paid to the funder, being an amount that has priority, an amount of $2,000 in favour of Hancock & Associates, which is really an amount that the funder agreed to pay by reducing the priority amount from $140,000 to $138,000, and an amount of $285,000 payable to the company in liquidation, being for the payment of other priority debts, for legal fees and costs. The liquidator does not receive anything and neither does the Commissioner. 25 The Deed annexes some Short Minutes of Order that are to be filed dismissing the proceedings and interlocutory processes with all previous costs orders being vacated with no order as to costs. Clause 5.4 of the Deed provides as follows: 5.4 No further examination summonses or orders for production (a) The Liquidator warrants that he is familiar with the books and records currently held and the examinable affairs of Bauhaus. (b) The Liquidator acknowledges and agrees that on the matters presently known to him and in accordance with the warranty at (a) above, there is no need for the issue of any further examination summonses or orders for production to any of Multiplex, its subsidiaries, its servants, its agents (including professional advisors), any past or present officer of Multiplex or Multiplex Parties in relation to the examinable affairs of Bauhaus. (c) The Liquidator covenants that unless he obtain new information and it would be, in his professional opinion, directly inimical to the interests of Bauhaus not to pursue such new information, he will not seek to issue any further examination summonses or orders for production to any of Multiplex, its subsidiaries, its servants, its agents (including professional advisors), any past or present officer of Multiplex or the Multiplex Parties in relation to the examinable affairs of Bauhaus. For the avoidance of doubt, the reference in this clause to "new information" will not include information in relation to any matter that is reasonably discoverable to the Liquidator as at that date of this deed.

26 Clause 6.2 records the agreement of the directors and Multiplex to withdraw any proofs of debt lodged in the liquidation and not to prove as creditors in the winding up of the company. There is a release in cl 6.1 which provides as follows: 6.1 Release Subject to the satisfaction of clauses 2.1, 3.1 and 3.2 above, and in consideration of the terms set out herein, Multiplex and the Multiplex Parties hereby release and discharge the Liquidator and Bauhaus from any and all actions, suits, claims, demands, causes of action, legal, equitable, under statute or otherwise, and any costs and expenses (including any existing unsatisfied costs orders) and all other liabilities of any nature (whether or not the Parties were or could have been aware of them) which Multiplex or the Multiplex Parties:

(d) but for this deed, could or might have had, against Bauhaus or the Liquidator and the Liquidator's servants, agents or employees related to the Proceedings, the Liquidator's conduct of the liquidation, or the circumstances recited in this deed or anything in any way related to them. 27 It is to be noted that clause 6.4 does not provide a release to Mr Byrnes or Mr Widdup. There is a warranty by the liquidator that he had taken independent legal advice as to the nature, effect and extent of the Deed. 28 The complexities of the liquidator's task is evidenced in part by some documentary evidence, some of which was prepared by one of the junior counsel for the liquidator. When the transfer of shares occurred and the former directors left the company, there was a clause in a Deed known as the Bauhaus Completion Deed relating to GST. 29 The liquidator, having been pursued and having been the subject of the findings in Austin J's judgment on 6 June 2006, was, as Mr Beech-Jones SC for the liquidator put it, the subject of a fairly vigorous amount of litigation against him in what may have otherwise been anticipated to be a straightforward process of issuing examination summonses. In his affidavit evidence (which was not really challenged in this aspect of the matter) the liquidator sets out his approach to the way in which the settlement negotiations with the former directors proceeded. He exposes his reasoning and the basis of what he referred to as his "commercial judgment" about the settlement and sets out in detail from paras 103 through to 114 the matters that he weighed up and the Court would have regard to in answering the question. 30 It must be remembered that this is not a court ordered liquidation and that this is a settlement reached on the basis of a commercial assessment made by a liquidator who, as Mr Coles QC who appears for the former directors submitted, could have proceeded to settle the proceedings without seeking to come Court for approval. In Re Addstone Pty Ltd 25 (1997) ACSR 357 Mansfield J said at 363: While the Court may be reluctant to give directions when purely commercial considerations are relevant to the liquidator's decision, even in relation to the conduct of litigation, there will be circumstances where it is or may be appropriate to do so. One of those circumstances may be where the liquidator's proposed decision is the subject of criticism by a particular creditor or creditors as being unreasonable or mala fides. 31 In Re Spedley Securities Ltd (1992) 9 ACSR 83 Giles J said at 85-86: In any application pursuant to s 377(1) the court pays regard to the commercial judgment of the liquidator ( Re Chase Corporation (Australia) Equities Ltd (1990) 8 ACLC 1118). That is not to say that it rubber stamps whatever is put forward by the liquidator but, as is made clear in Re Mineral Securities Australia Ltd [1973] 2 NSWLR 207 at 231-2, the court is necessarily confined in attempting to second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error in law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct. The same restraint must apply when the question is whether the liquidator should be authorised to enter into a particular transaction the benefits and burdens of which require assessment on a commercial basis. Of course, the compromise of claims will involve assessment on a legal basis, and a liquidator will be expected (as was made plain in Re Chase Corporation (Australia) Equities Ltd ) to obtain advice and, as a prudent person would in the conduct of his own affairs, advice from practitioners appropriate to the nature and value of the claims. But in all but the simplest case, and demonstrably in the present case, commercial considerations play a significant part in whether a compromise will be for the benefit of creditors. 32 As Giles J said in the passage cited above, there must be "real and substantial grounds for doubting the prudence of the liquidator's conduct" or, alternatively, his commercial judgment in reaching the settlement that he did. 33 During the course of the proceedings when both sets of proceedings were on foot I indicated to Mr Gibb SC, who appeared for the Commissioner, that there seemed to me to be some correspondence within the material that indicated firstly that Austin J did not have the full picture when he delivered his judgment and, secondly, that prior to that judgment the Commissioner had been rather fulsome in his support for the liquidator. The orders finalising those proceedings noted that the Commissioner would make no further submissions in relation to the question before the Court in those proceedings. To be fair to the Commissioner, it seems to me that I need to consider the main and really only issue previously raised by the Commissioner as to whether the liquidator has acted in a manner that prefers one creditor over another, in breach of the pari passu principle in s 555 of the Act. 34 This has been a most difficult time for not only the liquidator but also for the Commissioner and no doubt the former directors, in that for the last twelve months there has been a perception that the liquidator was in cahoots with a man who was acting quite inappropriately. The exposure of the facts above should dispel that perception. It seems to me that the Commissioner sensibly decided to withdraw from the proceedings having seen the different landscape that now appears on the facts as I have found them, including that Mr Wily tried in very difficult circumstances to deal with a funder in the best interests of the creditors. I am satisfied that Mr Wily was seeking to pursue actions in their best interests to obtain recovery but was met, not only with resistance by the former directors but also having his very actions white-anted by the funder as he went along. It seems to me that no liquidator would willingly act were he or she to know that the company's own funder would act in such an inappropriate fashion. 35 Section 556 of the Act provides relevantly that: (1) Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims: (a) first, expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company or in carrying on the company's business;

… (dd) next, any other expenses (except deferred expenses) properly incurred by a relevant authority; 36 The question of whether the expenses were "properly" incurred should be considered. If the expenses were not properly incurred then there may be something in the Commissioner's former submissions. There is no evidence that the expenses were other than properly incurred, albeit that the expenses incurred by the lawyers would have included having to deal with the conduct of Mr Byrnes. In my view the liquidator was acting properly firstly, in trying to keep the funder informed and secondly, to try and keep its director under control so as not to compromise his duties. The fact of the matter is that the expenses that are the subject of the compromise reached by the liquidator take priority over the claim by the Commissioner in respect of the unpaid GST. Accordingly, it does not seem to me that the Commissioner's former claim that there was a preference (perceived or real) of one creditor over the other by the liquidator. 37 Other aspects of concern to the Commissioner were whether the GST would ultimately be recovered debt and whether the Deed deals appropriately with the release of the former directors and Multiplex. The effect of the Deed from the provisions outlined above is that if new information were to be obtained by the present liquidator then the present liquidator could issue further examination summonses if he thought fit. The basis of the settlement is on what is presently known so that the litigation is presently settled and any future information that warrants investigation is not adversely affected. It is also to be noted that the liquidator is defined as "Mr Wily" and that the only person giving the acknowledgments in clause 5.4 is Mr Wily. It is also noted that Mr Wily is the only person giving the warranties and covenants. 38 During the course of the litigation when both matters were before me I had suggested that if both sets of proceedings continued, and depending upon what point they had reached, it may be necessary to have an independent liquidator, that is independent of all parties, confer or consult with Mr Wily and review the Deed. In my view there are no real or substantial grounds for doubting the prudence of the liquidator's conduct or commercial judgment in settling the proceedings. In the circumstances that now pertain, I am of the view that it is appropriate to answer the question in the affirmative. Accordingly, I answer the question yes. 39 I make orders in paragraph 2, deleting the words "further or in the alternative" and paragraph 4 of the Interlocutory Process filed on 3 April 2007 by the liquidator. **********

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