- Boral Resources (SA) Ltd v Rick Martin Nominees Pty Ltd

Supreme Court of NSW|2018-05-28|Before: Black J

Solicitors: O'Neill Partners (Plaintiff) LAS Lawyers (Second Defendant) File Number(s): 2017/359162

Judgment

By Amended Originating Process filed, by leave, on 28 May 2018 the Plaintiff, The Owners - Strata Plan 84741 ("Owners Corporation"), seeks orders to give effect to a resolution, previously not passed at a creditors' meeting, for the removal of Mr Henry McKenna as liquidator of Iris Diversified Property Pty Ltd (in liq) ("Company") and the appointment of Messrs Bailey and Palmer as liquidators of the Company.

Whether Mr McKenna had power to exercise a casting vote against the resolution for his removal

First, the Owners seek a declaration that Mr McKenna had no power, by reason of r 75-115(5) of the Insolvency Practice Rules (Corporations), to exercise a casting vote against the resolution that he be removed as liquidator of the Company and that Messrs Bailey and Palmer be appointed as replacement liquidators put at the meeting of the Company's creditors held on 16 November 2017. Rule 75-115 of the Insolvency Practice Rules (Corporations) relevantly provides for the circumstances in which a resolution is passed at a meeting of creditors after a poll is demanded and provides that, if no result is reached by a majority in number and in value of creditors voting in favour or against the resolution, and the resolution relates to the removal of an external administrator of a company, then the external administrator may exercise a casting vote in favour of the resolution, in which case the resolution is passed, or, if that paragraph does not apply, the resolution is not passed. That rule does not contemplate the external administrator exercising a casting vote against the resolution to remove him or her.
It was common ground between the parties that Mr McKenna did not have power to vote against the resolution to remove him as liquidator by reason of r 75-115(5) and that that resolution was not passed by reason that the Owners Corporation had voted for it, IGM had voted against it and Mr McKenna had failed to exercise a casting vote in favour of it. I am content to proceed on that basis, and it is not necessary to determine whether the effect of that rule is that Mr McKenna had, in the language of the declaration sought, no "power" to exercise a casting vote or if its effect is merely that his vote against the resolution was to be disregarded. Mr McKenna's error in considering that he was permitted to exercise that casting vote against that resolution (as distinct from his decision to do so) appears to have reflected the legal advice he had received, and it does not seem to me that that, in itself, supports his replacement as liquidator. It is not necessary or appropriate to make a declaration as to that matter where it will have no impact on the outcome of the resolution or this application.

Application for order that the resolution to remove Mr McKenna be taken to have been passed at the meeting

The Owners Corporation seeks an order under s 75-41(3)(d), or s 75-43(4) or s 90-15(1) of the Insolvency Practice Schedule (Corporations) that Mr McKenna's decision to exercise his casting vote against the resolution be set aside; that the resolution for his removal as liquidator be taken to have been passed at the meeting; and that Messrs Bailey and Palmer be appointed as joint liquidators of the Company.
Section 75-41 of the Insolvency Practice Schedule (Corporations) applies if, on the application of a creditor of a company under external administration (relevantly, the Owners Corporation), the Court is satisfied that a proposal has been voted on by creditors; and, if the vote that a particular related creditor of the company (relevantly, IGM) cast on the proposal had been disregarded for the purposes of determining whether the proposal was passed, the proposal that had not been passed would have been passed; and the failure to pass the proposal is contrary to the interests of creditors as a group or has prejudiced, or is reasonably likely to prejudice, the interests of the creditors who voted against the proposal to an extent that is unreasonable having regard to specified matters. The matters to be taken into account in determining whether prejudice to the relevant creditors is unreasonable are specified in s 75-41(2) as the benefits resulting to the related creditor from the failure to pass the proposal; the nature of the relationship between the related creditor and the company; and any other relevant matter. Where the requirements of that section are satisfied, the Court may make specified orders, including such other order as the Court thinks fit.
Mr Glasson, who appears for the Owners Corporation, submits that the resolution to remove Mr McKenna would have passed had IGM's vote been disregarded, because Mr McKenna could not have exercised a casting vote against it. Mr Glasson also submits that the failure of the resolution was contrary to the interests of IDP's creditors, because of the lack of funding available to Mr McKenna, without which he cannot investigate the transactions that he says have been identified and that he would pursue if he had such funding.
Mr Marshall, who appeared with Mr Chapman for Mr McKenna, fairly accepted that s 75-41 of the Insolvency Practice Schedule (Corporations) may be engaged on the present facts, where the resolution would have passed, if IGM's vote had been discounted. However, Mr Marshall submits that the Owners Corporation has failed to satisfy the test in s 75-41(1)(c), to which I will refer below, and the Court should decline to grant the relief sought on that basis. Mr Marshall submits that it is not a relevant prejudice, for the purposes of s 75-41, that the Owners Corporation proposes to fund an alternative liquidator and that there is no evidence that IGM has received any identifiable benefit and no evidence of any claim made against it or any financial gain that would accrue to it. It seems to me, however, that there is prejudice to the Owners Corporation if it is left in the position that a liquidator remains in place without funding to pursue an investigation or proceedings, or that it must fund Mr McKenna, in whom it lacks confidence, in order to have such an investigation or proceedings conducted.
In making that observation, I have not neglected Mr Marshall's further submission that the Owners Corporation may change its mind as to funding Mr McKenna, if he remains in office. It seems to me that that proposition is speculative, and there is also little attraction in any implication (which Mr Marshall wisely did not put expressly) that the Owners Corporation should be left with have no practical choice other than to do so, despite its expressed lack of confidence in Mr McKenna, or lose any practical prospect of a recovery in the liquidation. In supplementary submissions by leave, Mr Marshall points to efforts that had been made by Mr McKenna to secure funding, including from the Owners Corporation. While that may be an answer to any criticism of inactivity by Mr McKenna in that respect, it does not address the practical unlikelihood of Mr McKenna achieving such funding in the present circumstances. I have also not neglected Mr Marshall's further submission, in supplementary submissions by leave, that the Owners Corporation has not lost confidence in Mr McKenna, but never had such confidence and always wished to replace him. It seems to me that the Court must have regard to the Owners Corporation's attitude as it exists, and the question of how long it has existed is of limited significance in that respect. Mr Marshall also submits that an existing liquidator should not be removed merely because a particular creditor, for whatever reason, will not fund work by that liquidator. It seems to me that that matter is of lesser weight where the question here is whether effect should be given to the resolution to replace Mr McKenna with another liquidator, which failed by reason of an associated entity's vote, and Mr McKenna's failure to exercise the casting vote for his replacement.
The first requirement of s 75-41(1) is satisfied in this case, where the proposal to remove Mr McKenna was voted on and defeated at a meeting of creditors. The second requirement of s 75-41(1) is satisfied, since, if the vote of IGM had been disregarded for the purpose of determining whether the proposal was passed, the proposal to remove Mr McKenna would have passed by the vote of the Owners Corporation. I am also satisfied that the failure to pass the resolution for the removal of Mr McKenna as liquidator was contrary to the interests of the creditors as a whole, satisfying the requirement in s 75-41(1)(c)(i) of the Insolvency Practice Schedule (Corporations).
At the time the resolution was put to the creditors' meeting, the Owners Corporation had expressed its lack of confidence in Mr McKenna, whether that lack of confidence was justified or not, and indicated that it was not prepared to fund further investigations by Mr McKenna, and it was plain that IGM and other entities within the Iris Group would not fund such investigations where they were adverse to the interests of the Iris Group. It does not seem to me that the Owners Corporation's preference to fund another liquidator can be said to be irrational, where at least some of the case law, to which Mr Glasson referred, also indicates a preference that a liquidator not be the appointee of the directors of a company, although I recognise that that result will commonly arise where a company is placed in voluntary liquidation or passes from voluntary administration to voluntary liquidation: see, for example, Unifor Office Systems Aust Pty Ltd v Brewer Partnership Pty Ltd (1999) 17 ACLC 642 at [6]-[7]; Redowood Pty Ltd v Goldstein Technology Pty Ltd [2004] NSWSC 317; Boral Resources (SA) Ltd v Rick Martin Nominees Pty Ltd (No 2) [2012] SASC 192 at [16].
The Owners Corporation's unwillingness to fund further investigations by Mr McKenna and Iris Group was relevant to the assessment of creditors' interests, as has been recognised in the context of applications for the appointment of a special purpose liquidator, although I note that the Court may give less weight to that matter in an application for an incumbent liquidator's removal: Lo v Nielsen & Moller (Autoglass) (NSW) Pty Ltd [2008] NSWSC 407; (2008) 26 ACLC 497; Re Ambient Advertising Pty Ltd (in liq) [2015] NSWSC 1079; State of Victoria v Goulburn Administration Services (in liq) [2016] VSC 654; James, in the matter of Liquor National Pty Ltd (in liq) v Liquor National Pty Ltd (in liq) (No 2) [2017] FCA 1154 at [6]; compare Re ACN 151 726 224 Pty Ltd (in liq) previously Ridley Capital Holdings Pty Ltd [2016] NSWSC 1801 at [44]. Mr McKenna had not taken any substantial steps to obtain third party litigation funding for such investigations or subsequent proceedings, and (as I noted above) he accepted in cross-examination that his investigations were not sufficiently far advanced that he was likely to be able to obtain such funding and that he could not further advance those investigations or proceedings without funding that was not available to him. It seems to me that the failure to pass that resolution would therefore prevent such further investigations and proceedings and that was, in the relevant circumstances, adverse to the interests of the creditors of the Company as a whole.
I am also satisfied that the failure to pass the resolution prejudiced, or is reasonably likely to prejudice, the interests of the Owners Corporation as the creditor which voted against the proposal, to an extent that is unreasonable having regard to the matters specified in s 75-41(2). The case law in respect of former s 600A of the Corporations Act 2001 (Cth) suggests that unreasonable prejudice and not merely prejudice is likely required to satisfy this paragraph: Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 99; (2000) 156 FLR 453; 34 ACSR 391 at [89]-[92]. The benefit to IGM from the failure of the resolution is the reduction in the practical likelihood that proceedings that would be bought against its associated entities, as a result of the Owners Corporation's lack of confidence in Mr McKenna and its unwillingness to fund his further investigations, and the absence of alternative funding available to Mr McKenna. It is apparent that IGM believes that benefit exists, because it provided an indemnity to Mr McKenna against any adverse costs order made against him by reason of his opposition to this application, and there is no commercial explanation for that course other than a perception that IGM is advantaged by Mr McKenna remaining in office, by comparison with the position if another liquidator were appointed. The conclusion that the failure to pass the resolution has unreasonably prejudiced, or is likely to prejudice, the interest of the Owners Corporation as the creditor which voted against the proposal is reinforced by the nature of the relationship between IGM and the Company, since IGM is a relatively small creditor of the Company, at least in proportionate terms, which exercised its vote to preserve its associates' choice of liquidator, against the objection of a creditor to whom a substantial part of the debt owed by the Company was due. I am satisfied that prejudice is unreasonable in the relevant circumstances.
For these reasons, I am satisfied that the orders that the resolution for Mr McKenna's removal be treated as passed and that Messrs Bailey and Palmer should be appointed as liquidators of the Company should be made under r 75-41(3)(d) of the Insolvency Practice Schedule (Corporations). That is sufficient to determine the application in the Owners Corporation's favour.

Whether orders should be made by reason of Mr McKenna's failure to exercise a casting vote in favour of the resolution for his removal

Alternatively, the Owners Corporation sought an order to similar effect under s 75-43(4) of the Insolvency Practice Schedule (Corporations) which applies where a resolution is not passed at a meeting of creditors of a company under external administration, and the resolution is not passed because the person presiding at that meeting relevantly refuses or fails to exercise a casting vote. In this case, the resolution to remove Mr McKenna as liquidator was not passed by reason of his refusal or failure to exercise a casting vote in favour of that resolution. As I noted above, Mr McKenna went further to exercise a casting vote against it, notwithstanding r 75-115(5) of the Insolvency Practice Rules (Corporations) to which I have referred above. In that situation, the Court may order that the proposed resolution is taken to have been passed at the meeting, where the Owners Corporation had voted for the resolution of Mr McKenna's removal.
Mr Glasson submits that Mr McKenna could only have exercised his casting vote in favour of the resolution, by reason of r 75-115(5) of the Insolvency Practice Rules (Corporations) but failed to do so and, had he done so, the resolution would have passed. Mr Glasson also submits that s 75-43(1) of the Insolvency Practice Schedule (Corporations) therefore applies and that an order should be made that the resolution is taken to have passed, because the resolution was in the best interests of the Company's creditors and by reason of other factors on which the Owners Corporation relied on to support Mr McKenna's removal. Mr Marshall accepts that s 75-43 of the Insolvency Practice Schedule (Corporations) may be engaged on the facts, but contends that the Court should not grant the relief sought.
There are some similarities between this aspect of this application and the position considered by Gordon J in an application to remove a liquidator, under s 503 of the Corporations Act, in Brisconnections Management Company Ltd v Burness [2009] FCA 626; (2009) 72 ACSR 233, on which Mr Glasson relies. In that case, her Honour removed a liquidator, although there was no suggestion that he was not competent or had a prior relationship with the relevant company, on the application of a creditor which accounted for 99.8% of the company's debt and was the "only truly independent creditor" (at [10]). Her Honour observed at [12] that: "The exercise of the casting vote is most appropriate in circumstances where a creditor with a majority in value (such as the Applicant) has such an overwhelming interest that it is inappropriate to allow a majority in number who do not have the same monetary interest to carry the day. As the case law and the Code makes abundantly clear, there is no presumption in favour of the majority in value. However, where there is large disproportion between the values of the debts of the numerical minority and the numerical majority (as is the position here) it must be a factor to be taken into account." Her Honour there set aside the liquidator's decision not to exercise the casting vote in favour of his removal in that case and then exercised the discretion in favour of the resolution that the liquidator be removed.
Mr Marshall seeks to distinguish Brisconnections above on the basis that there is here no concern as to the competence or independence of Mr McKenna, and that he had addressed the issue of the relative size of the creditors' claims at the creditors' meeting. While I accept that Mr McKenna addressed the latter matter at that meeting, it seems to me that it should have been given substantially greater weight than Mr McKenna allowed to it, both in his explanation of his casting vote and the way in which he cast it. It does not seem to me the decision can be sufficiently distinguished on these bases, where it is plain that her Honour considered that substantial weight should be given to the view expressed by an independent creditor owed a substantial portion of the debt. These factors are also present in this case. Although I recognise that Brisconnections above was a particularly strong case, where the creditor's debt was there 99.8% of the debt, the 90% proportion of the debt owed to the Owners Corporation is still a very substantial component of the debt owed by the Company.
Had I not found that the Court should make the orders sought by the Owners Corporation under s 75-41 of the Insolvency Practice Schedule (Corporations), I would have made those orders under s 75-43(4) of the Insolvency Practice Schedule (Corporations). I am satisfied that the proper order under s 75-43(4) of the Insolvency Practice Schedule (Corporations) would be an order that the resolution be taken to have been passed at the meeting and that Messrs Bailey and Palmer be appointed as joint liquidators of the Company. There would be no useful purpose in ordering a further meeting to consider the resolution for Mr McKenna's removal and directing that IGM not be entitled to vote at that meeting, where the inevitable result of that further meeting would be the passage of the proposed resolution and the consequent appointment of Messrs Bailey and Palmer as liquidators of the Company.
The Owners Corporation alternatively sought the relevant orders under s 90-15(1) of the Insolvency Practice Schedule (Corporations), which allows the Court to make such orders as it thinks fit in relation to the external administration of a company. Mr Marshall accepts that s 90-15 may be engaged on the facts, but again submits that the Court should not grant the relief sought. It is not necessary to make orders under that section, where the orders sought are properly made under ss 75-41 or 75-43 of the Insolvency Practice Schedule (Corporations).

Whether Mr McKenna should be removed as liquidator of the Company

In the further alternative, the Owners Corporation sought an order that Mr McKenna be removed as liquidator of the Company. The Owners Corporation initially did not contend that there was any actual lack of independence or actual misconduct of Mr McKenna warranting misconduct, and I did not understand that position to have been substantially altered by several further criticisms made by Mr Glasson of Mr McKenna's evidence in cross-examination. The Owners Corporation submitted that Mr McKenna should be removed because the Owners Corporation was concerned that he will favour the interests of the Company's director or its related parties who appointed him, paid an initial contribution for his costs and indemnified him for adverse costs orders in respect of this application; that funding is only available from the Owners Corporation for another liquidator, so that it is objectively in creditors' best interests that he be replaced; and that he exercised a casting vote against the resolution when he had no power to do so and preferred the interests of IGM in doing so.
Mr Marshall responded that there is no basis for concerns of conflict of interest or lack of independence on Mr McKenna's part. That submission finds support in the fact that Mr McKenna had identified claims that may be available to the Company against Mr Arnaout or companies associated with him, and the Owners Corporation did not put a claim for actual conflict on his part. Mr Marshall also draws attention to factors which are relevant in determining whether to remove a liquidator, including those specified in s 90-15(4) of the Insolvency Practice Schedule (Corporations). Mr Marshall also submitted that public policy considerations tended against a removal of an incumbent liquidator, and Mr McKenna should not be removed unless allegations against him or her are reasonably proven. I give less weight to that submission, where I have held above that effect should be given to a creditors' resolution under s 90-35 of the Insolvency Practice Schedule (Corporations) to replace a liquidator, as that section permits.
Given the conclusions that I have reached above on other grounds, it is not necessary to determine the application for removal of Mr McKenna as a liquidator, on any wider basis than that effect should be given to the resolutions for his removal and the appointment of replacement liquidators. It seems to me to be preferable not to determination any wider question that is not necessary to the determination of the application.

Application for appointment of special purpose liquidator

Alternatively, the Owners Corporation applied under s 90-15 of the Insolvency Practice Schedule (Corporations) for the appointment of Messrs Bailey and Palmer as joint special purpose liquidators of the Company, with specified powers. Both parties ultimately accepted in oral submissions that there was likely to be little utility in Mr McKenna remaining as general purpose liquidator, if the Court would otherwise be satisfied that a special purpose liquidator should be appointed, since there would be little to be done in the liquidation beyond the matters to be dealt with by the special purpose liquidator. It was common ground that, in those circumstances, the preferable course was likely to be to remove Mr McKenna as liquidator, or not to do so, rather than to leave him in place without any significant functions to perform, and with a potential for duplication of costs.
I have referred above to several cases in which a creditor's unwillingness to fund a particular liquidator has supported an order for the appointment of a special purpose liquidator, particularly if the Court is satisfied, as a matter of fact, that investigations will otherwise not be pursued. Had I not found that the Court should make the orders sought by the Owners Corporation under r 75-41 of the Insolvency Practice Schedule (Corporations), I would have been satisfied that a special purpose liquidator should be appointed, where the Owners Corporation are not prepared to fund Mr McKenna, and would have removed Mr McKenna as liquidator consequential on the parties' recognition of the lack of utility in his then remaining in place. It is not necessary to take that course given the conclusions that I have reached on other grounds.

Orders and costs

Mr McKenna took an active role in opposing the application, in his personal capacity, and he must pay the costs of the application, without recourse to the assets of the Company.
For these reasons, I make the following orders:
Order that a resolution that the Second Defendant be removed as liquidator of the First Defendant and that Messrs Bailey and Palmer be appointed as replacement liquidators of the First Defendant put at a meeting of creditors of the First Defendant held on 16 November 2017 be taken to have been passed at that meeting.
Order that Messrs Bailey and Palmer be appointed as joint liquidators of the First Defendant.
The Second Defendant pay the Plaintiff's costs of and incidental to these proceedings, as agreed or as assessed, without recourse to the assets of the First Defendant.

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Corporations Act 2001(Cth)ss 503, 600A, Sch

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