Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883 | Case summary

1 By its further amended originating process filed on 22 September 2003, the plaintiff seeks, as principal relief, an order that the administration of the defendant under Pt 5.3 A of the Corporations Act 2001 (Cth) should end and an order that the defendant be wound up or that a provisional liquidator be appointed. If that relief is not granted, the plaintiff seeks certain orders regulating the administration and altering what would otherwise be its course. 2 The plaintiff and the defendant are parties to two actions in the District Court. In each case, the plaintiff sues the defendant for damages essentially for negligent or otherwise faulty advice. One action was commenced in June 1998, the other shortly afterwards by way of cross-claim in proceedings initiated by landowners against the present plaintiff. The landowners' claims were compromised. The cross-claim by the present plaintiff remained, together with a second cross-claim by the present defendant against QBE Insurance Limited which had extended professional indemnity cover to the defendant under a claims made and notified policy. 3 In December 2002, the second proceeding to which I have referred was set down for hearing for two weeks commencing on Monday 18 August 2003. On 11 August 2003, the defendant, through its solicitors, engaged in what might be termed normal pre-trial correspondence. On the afternoon of Friday 15 August 2003, however, the defendant's solicitors gave notice that the defendant had no assets, was not trading and was "in the process of appointing an administrator." At 8.36 that night, there arrived by fax at the office of the plaintiff's solicitors notice that an administrator had been appointed. Because the office was then closed for the weekend, the fax was not received by anyone until the Monday morning, 18 August. At that point, therefore, the District Court proceedings against the defendant were seen to be stayed by operation of s.440D of the Corporations Act. The two week hearing fixed some nine months earlier and due to begin on that Monday morning was therefore aborted. 4 The sole director and shareholder of the defendant is one Lawrence Michael Cullen. It is he who appointed the administrator and brought the s.440D stay into operation. Mr Cullen is an engineer by profession. The defendant provided his services to clients in need of engineering assistance. At the time of the events giving rise to the District Court proceedings, the defendant's name was "Macarthur Regional Constructions Pty Ltd". A new company was formed by Mr Cullen in July 1998. In the following month (that is, soon after the initiation of the first District Court proceeding and shortly before the initiation of the second), the defendant's name was changed to "Macarthur Telecommunications Pty Ltd". Five months later, the name of the new company was changed to "Macarthur Regional Constructions (NSW) Pty Ltd", being a name identical with the former name of the defendant, save for the addition of "(NSW)". Seven months after that change, there was a further name change to "Macarthur Regional Constructions Pty Ltd", being precisely the name that the defendant had had until a year earlier. 5 There are in evidence financial statements of the defendant for the end year ended 30 June 2001. In that year, the defendant derived revenue of $66,082 designated "Consultants Fees" and $3,420 designated "Water" (the significance of which is not clear) making a total of $69,502. The outgoings under the heading "Cost of Sales" were $73,660 designated "Consultants Fees and Expenses" which, when added to various miscellaneous expense items totalling $4,550 produced an operating loss of $8,709 for the year. The entries are consistent with a main activity of both acquiring and selling consultancy services, no doubt those of Mr Cullen. 6 The financial statements for the year ended 30 June 2002 are also in evidence. They show zero income, zero cost of sales, zero expenses and zero profit and loss. There is a balance sheet as 30 June 2003 but no profit and loss account for the year to that date. The balance sheet shows cash on hand of $43,328, equipment at cost less depreciation of $711 and furniture and fixtures net of depreciation of $184, making up total assets of $44,223 against total liabilities of $96,200, of which almost $95,000 represents loans from Mr Cullen. There is a deficiency in shareholders' funds of $51,976. This position is virtually the same as that reflected in the balance sheet as at 30 June 2002. 7 The financial statements reveal several things. For the moment I refer only to the revelation that the defendant has obviously not traded since at least 1 July 2001 and that it is insolvent. The insolvency of the defendant focuses attention on the insurance held by it in respect of the liability the plaintiff seeks to sheet home to the defendant in the District Court proceedings. The insurer apparently denies liability on the footing that the claim against the defendant was not notified in accordance with the policy. That is, of course, a matter yet to be determined. Subject to that, however, the plaintiff looks to s.6 of the Law Reform (Miscellaneous Provisions) Act 1946 as a source of security to it. If the defendant is, in reality, indemnified by the insurer against its liability to the plaintiff, that liability is, by operation of s.6, a charge on the insurance moneys that are or may become payable in respect of it and that charge subsists notwithstanding any winding up of the defendant. Section 562 of the Corporations Act may also apply in any such winding up of the defendant to give the plaintiff a preferred position in respect of insurance recoveries by a liquidator. 8 I return now to events following the appointment of the administrator and adjournment of the District Court hearing on 18 August 2003. Shortly afterwards, on 1 September 2003, Mr Cullen, using the defendant's letterhead, wrote to the administrator, Mr Smith, outlining a proposal for a deed of company arrangement. In essence, the proposal as outlined involved payment of $50,000 by Mr Cullen to the deed administrator in two installments of $25,000, one by 15 October 2003 and the other by 15 December 2003, with those sums, accompanied by the defendant's own liquid resources (such as they are), forming a "deed fund" for the benefit of creditors after meeting the costs of administration. One element of the deed fund was defined as "net funds of litigation" being: "… any moneys received by the company from litigation after deducting any expenses of or incidental to getting that amount other than moneys payable to third parties or creditors pursuant to the provisions of section 562 of the Corporations Act 2001."

How s.562 might operate in the case of a company not in the course of being wound up is not explained. The proposal also contained the following passage: "The director agrees to continue to prosecute the cross-claim against QBE Insurance Limited in District Court proceeding 6352/99 and to defend the litigation being brought against the company by Blacktown City Council, being matter 6351/99 in the District Court of New South Wales, subject to advice of the legal representatives acting for Macarthur and commercial judgment." 9 This proposal letter accompanied a report to creditors forwarded by the administrator on 3 September 2003. That report included an assessment of possible returns to creditors in various eventualities. The first of these was winding up. Returns to creditors in that eventually were estimated at zero. The second was adoption of the deed of company arrangement proposal, coupled with lack of success in both District Court actions. The estimated return in that case was shown as zero but may, in reality, be some fraction of a cent in the dollar. In the third case (deed plus lack of success in one proceeding), the estimated return is 8 cents in the dollar; in the fourth case (deed plus lack of success in the other proceeding), it is 3 cents in the dollar. In the case of deed plus success in both proceedings, the estimated return is 38 cents in the dollar. The meeting of creditors at which the deed proposal would in the normal course be considered by creditors was postponed until today by order made by Campbell J pending determination of the present proceedings. 10 Apart from the plaintiff and its prospective or contingent claim, there are only three creditors of the defendant. These are Mr Cullen in respect of his loan account of almost $95,000, the defendant's accountants ($5,500) and the defendant's solicitors ($237,449). I mention two things about this. The first is that the balance sheet as at 30 June 2003 shows Mr Cullen's loan account but otherwise discloses liabilities of only $1,500, being trade creditors. This is very substantially less than the claims of the accountants and solicitors. Two possibilities exist: first, that those debts existed in whole or in part at 30 June 2003 but were omitted from the balance sheet; and, second, that they have been wholly incurred since 30 June 2003. 11 The second matter I mention is that Mr Cullen and the accountants, who prepared the financial statements, were clearly aware of the defendant's extremely unhealthy financial state at all material times and it is quite likely that the solicitors were likewise aware. 12 On the evidence as it stands, it seems probable that the plaintiff's informal proof of debt will be accepted but without any meaningful quantum ascribed to its claim, with the result that it is unlikely that the plaintiff will have an realistic opportunity to vote, as to value, on any deed of company arrangement proposal. The debts of Mr Cullen, his accountant and his solicitor alone will count in the value component of creditor voting in relation to any deed of company arrangement. 13 On 16 September 2003, the solicitors for the plaintiff were furnished with a copy of the proposed deed of company arrangement. This disclosed certain imponderables. There is reference to two payments each of $25,000 into the deed fund but there is no indication of their source and nothing at all to indicate any obligation of Mr Cullen to make the payments. There are references to the District Court proceedings and to the insurance held from QBE Insurance. It is envisaged that the defendant will continue to defend those proceedings, presumably using the deed fund for the purpose, as well as continuing the cross-claim against QBE, the fruits of which cannot accrue to the benefit of creditors generally unless section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 somehow does not operate. It is also envisaged by the deed that proceeds of the District Court actions will augment the deed fund, but there does not seem to be any basis on which this can happen, since the only element offering any prospect of recovery is the cross-claim against QBE which is affected by the operation of s.6 in favour of the plaintiff. There must therefore be an expectation that the nexus created by s.6 will in some unexplained way break down, but that the insurance proceeds will nevertheless be forthcoming. If there were any other resources (and it is not clear that there could be), the solicitors would likely have a lien on them for costs in the first instance. Another effect of the draft deed is to preclude the plaintiff's pursuit of the District Court action while the deed continues. 14 If such a deed of company arrangement came into operation, the defendant would be freed from its debts, subject to the operation of some not altogether clear provisions apparently intended to preserve the plaintiff's claim sufficiently to enable it to attract the continued operation of section 6, but on a deferred basis as to timing. There is substantial doubt as to whether the provisions would have that effect but if what appears to be the theory is pursued, one is apparently asked to accept that the company, thus freed from its debts, would return to the mainstream of commercial life; although the fact that it has been reduced to a mere shell with no operative capability really begs the question of what that life would consist of. Any goodwill the defendant may have had was presumably lost when Mr Cullen's other company took over its name and is, in any event, dependent on availability of his professional skills as to which there is no apparent plan for procurement. One consequence of rehabilitation, assuming it occurred, is that winding up would be avoided, as would the kinds of investigation that a liquidator undertakes. 15 This last point is significant. The financial statements show that the defendant has been insolvent for some time. They do not show - but the report as to affairs and the administrator's report do show - that debts of $240,000 are owed over and above those shown in the financial statements. The apparent nature of those debts, being fees for professional services, raises at least a strong inference that they were incurred after the state of insolvency had come into existence. The duty to prevent insolvent trading imposed on directors by Division 3 of Pt 5.7B is clear. Breach of that duty may lead to a compensation order or, depending on circumstances, to conviction of a statutory offence. 16 The plaintiff contends that the Pt 5.3A administration of the defendant should be terminated because provisions of that part are being abused. This is one of the circumstances expressly mentioned in s.447A as an example of cases in which that section may be used to end an administration. There is thus no need to deal with the question whether the section is an appropriate source of jurisdiction. Clearly, it is. 17 The words used in s.447A(2)(b) are "because provisions of this Part are being abused". The relevant concept of abuse is, clearly enough, that involved in an abuse of process. The specific aspect of the very wide s.447A jurisdiction described in s.447A(2)(b) is therefore akin, as to its content and purpose, to the court's inherent jurisdiction to stay proceedings permanently for abuse of process. As the decision of the High Court in Williams v Spautz (1992) 174 CLR 509 confirms, the use of a procedure or process for a purpose essentially foreign to the purpose it is designed to serve is the principal determinant of abuse. Resort to the procedure or process to effectuate some collateral purpose makes the use of the procedure or process improper. In the present context, this leads in the first instance to a consideration of what the proper purposes of the provisions of Pt 5.3 may be said to be. 18 The starting point in that enquiry is s.435A which states the object of Pt 5.3A: "The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that: (a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or (b) if it is not possible for the company or its business to continue in existence---results in a better return for the company's creditors and members than would result from an immediate winding up of the company." 19 But that is a broad statement only. Examination of Pt 5.3A as a whole shows that there are several purposes which together contribute to the widely stated object. The provisions imposing the various moratoriums show that there is a purpose of allowing time for unpressured but reasonably prompt consideration of possible reconstruction possibilities. The provisions as to creditors' meetings and creditor decision making, including those concerning deeds of company arrangement, show that there is a purpose of allowing reconstruction possibilities to be pursued in such a way that, if creditors so desire, a legacy of debt may be left behind and winding up, which would normally be the product of an intolerable debt burden, may be avoided. Implicit in that, of course, is the proposition that the company will thereby be permitted to return to the mainstream of commercial life. Another purpose is that, if the company is not capable of returning to the mainstream of commercial life, there will be some better outcome for creditors than that available in an immediate winding up. The importance of keeping that purpose in mind, in a case such as the present, was emphasised by Sundberg J in Dallinger v Halcha Holdings Pty Ltd (1995) 18 ACSR 835. 20 How would these purposes be served by the continuation of this particular administration, complete with the deed of company arrangement proposal that now forms part of it? That question needs to be addressed in the light of eight realities: first, that the company is insolvent and has been for some two years; second, that it no longer carries on any business activity and in that sense has been dormant for something like two years; third, that the deed of company arrangement proposal cannot involve any element of commercial rehabilitation and resumption of business activities; fourth, that the deed of company arrangement, as drafted, has what can best be described as a number of anomalous aspects, not the least of which is the lack of any assurance that the core fund of $50,000 will be forthcoming; fifth, that there are likely to be only three creditors voting as to value, one of them being the company's sole director and shareholder and the others being his solicitor and his accountant, from which it may be inferred that a meeting of creditors is likely to determine matters predominantly from the selfish viewpoint of the sole controller (who may be underwriting the professional fees anyway); sixth, that that particular viewpoint will lean heavily to an outcome that precludes the kind of investigation of insolvent trading and like possibilities involving the sole controller that emerge quite clearly from the circumstances surrounding the incurring of over $240,000 of debts to which I have referred; seventh, that the interests of that aligned group of specially interested creditors are accordingly distinct from the interests of the present plaintiff as a contingent or prospective creditor; and eighth, that the timing of the administration was obviously calculated to stifle the two week fixture in the District Court by bringing the statutory stay into operation. 21 My assessment of matters is that the administration in general and the deed proposal in particular were engineered by Mr Cullen in a clear and deliberate, but not subtle, attempt to stave off the District Court hearing by bringing the statutory stay of proceedings under s.440D into play and to provide a legal framework in which he, his accountant and his solicitor would become the sole effective decision makers in a process which, while ostensibly holding out some theoretical benefit of modest proportions to creditors, is really designed to forestall the obvious and inevitable fate of insolvent winding up, in which the conduct of Mr Cullen will come under scrutiny by reference to the insolvent trading provisions. There is, at best, mere lip service to the purposes of Pt 5.3A, the overriding purpose and motivation being the avoidance technique to which I have referred. In particular, there is not and could not be any real purpose of rehabilitating the company as a commercial concern. Nor can improved returns to creditors through the proposed deed of company arrangement be regarded as anything but purely speculative. 22 I quote at this point a passage in the judgment of Warren J in Rodgers v Radly (2000) 37 ACSR 158: "There is evidence before me arguably sufficient to demonstrate that the provisions of Pt 5.3 A of the Law may have been abused and continue to be abused by virtue of the appointment of the administrators on 3 October 2000. There is evidence also arguably sufficient to demonstrate other reasons for the purposes of section 447A(2)(c) of the law, such as to warrant the termination of the administration. The reasons are the timing of the administration, the apparent ingenuineness of the fact of the debts being allowed to lie for a period of two years and then suddenly being activated for the purposes of demonstrating insolvency, and the dormant state of the company for a period of two years. However, are these matters enough to lead me to conclude that it is appropriate to exercise the general powers under section 447A to terminate the administration?" 23 In the result, her Honour did not terminate the administration. This was because she considered the company insolvent and was of the view that it should remain under external control rather than being returned to the stewardship of its directors. In that case, the choice was between continuation of administration and restoration of control to the directors. Here that aspect is taken care of by the plaintiff's application for orders that would see winding up replace administration. 24 In Cawthorn v Keira Constructions Pty Ltd (1994) 13 ACSR 337, Young J observed that the statutory scheme under Pt 5.3A intends that the court should keep to the sidelines and become involved only to ensure that the spirit and object of Pt 5.3A are implemented. One instance where the court may leave the sidelines and enter the field of play is where voluntary administration is put in place with a view to securing compliant administration: see Aloridge Pty Ltd v Christianos (1994) 13 ACSR 99. I do not for a moment suggest that Mr Smith, the administrator in the present case, has acted or will act otherwise than with complete propriety. What I do suggest is that Mr Cullen, whose conduct would come under close scrutiny by a liquidator, has sought, with the aid of the deed proposal which is likely to be voted on, as to value, by him and his professional advisers only, to install a regime of its nature substantially compliant to his will as an alternative to the rigours of winding up. 25 I am satisfied, having regard to the whole of the circumstances to wind I have referred, that this is a case in which Pt 5.3 A administration should end because provisions of that Part are being abused. 26 The further relief sought by the plaintiff is an order for winding up or for the appointment of a provisional liquidator. The latter course is not warranted. The company has ceased business. The only question to be considered therefore is whether a winding up order can and should be made on the application of the plaintiff. The ground on which the plaintiff seeks winding up is insolvency. The evidence demonstrates that this ground is made out. Apart from the matters emerging from the accounts to which I have already referred, the administrator states in his report to creditors that "the company is presently unable to meet its immediate liabilities". This, in my view, is merely a polite way of saying, in terms of s.95A, that the company is unable to pay all its debts as and when they become due and payable. The financial information in evidence amply supports this conclusion. 27 The plaintiff, being a contingent or prospective creditor only, needs leave under s.459P(2) to make the winding up application. To obtain leave it must show a prima facie case of insolvency, a requirement that the evidence before shows to be satisfied. Separately, there is a requirement for leave under s.440D. That leave should also be granted. 28 It should be ordered that the defendant be wound up in insolvency and that a liquidator be appointed. The plaintiff made it clear that it would be content to see Mr Smith, the administrator, appointed liquidator. In my opinion, however, it is preferable that another qualified person be appointed. In saying that, I make no criticism of Mr Smith. It is just that I think that someone who has not come to any view about the matters in Mr Smith's report, particularly those concerning the District Court litigation, the deed of company arrangement proposal and the obvious insolvent trading question, should review things afresh. 29 I invite the plaintiff to tender, in due course, the consent of another qualified appointee. At that point I shall make orders generally as follows:

Blacktown City Council v Macarthur Telecommunications Pty Ltd

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