Application to this case
142 Bovis contended that Mr Franklin, who by 27 November 2001 had become a part-time consultant with Jones Condon, had an association with Mr Gilbert and Interline (NSW) from which various consequences flowed, as follows:
· Mr Wily's decision to appoint Mr Javorsky as administrator should be reversed by the Court under s 1321, because (inter alia) it was inappropriate for Mr Wily to appoint Mr Javorsky having regard to Mr Franklin's association with Mr Gilbert and Interline (NSW);
· the resolution passed by creditors at their meeting of 16 January 2002 was contrary to the interests of creditors as a whole and prejudiced or was likely to prejudice the interests of creditors who voted against it (s 600A(1)(c)), because (inter alia) the appointment of Mr Javorsky as deed administrator would carry with it the problems created by Mr Franklin's association with Mr Gilbert and Interline (NSW), and therefore the resolution should be set aside under s 600A(2);
· the decision by Mr Hurst at the meeting on 16 January 2002 to admit the proof of debt by Bovis for only $1 was erroneous, because (inter alia) he did not disclose to the creditors the facts relating to Mr Franklin's association with Mr Gilbert and Interline (NSW);
· similarly, the decision by Mr Hurst to admit the claim by Interline (NSW) in full for voting purposes was erroneous because it was influenced by partiality, having regard to the connection between Mr Franklin and Mr Gilbert and Interline (NSW);
· there were material omissions from Mr Javorsky's report to creditors, one of which was its failure to disclose in detail or in summary the facts concerning Mr Franklin's connection with Mr Gilbert and Interline (NSW), and therefore the DOCA should be terminated under s 445D(1)(c);
· Mr Franklin's involvement in preparation of Mr Javorsky's report to creditors, and in the administration generally, was impermissible having regard to his prior association with Mr Gilbert, and therefore the DOCA should be terminated for "some other reason" under s 445D(1)(g);
· Mr Javorsky should be removed from his position as deed administrator under s 449B, having regard to Mr Franklin's involvement in the day-to-day conduct of the administration and preparation of Mr Javorsky's report to creditors and his prior association with Mr Gilbert;
· the Court should review and reduce Mr Javorsky's remuneration under s 449E(2) on grounds including Mr Franklin's involvement in the administration following his association with Mr Gilbert and Interline (NSW).
143 Mr Javorsky submitted that Mr Franklin's link with Mr Gilbert and Interline (NSW) was a very limited one. According to this submission, in the period up to Mr Javorsky's appointment as administrator, Mr Franklin did no more than give Mr Gilbert advice about a possible administration, on the basis that he would, if required, procure a "consent of administrator to act". Mr Javorsky contended that Mr Franklin played no part in formulating the proposal for a deed of company arrangement, and he did not assist Mr Gilbert to write to Mr Wily on 25 July 2001 to reject Bovis' proof of debt. Nor, according to Mr Javorsky, did Mr Franklin play any role in seeking to persuade Mr Wily to appoint an administrator. Mr Javorsky said that Mr Franklin's involvement with Mr Gilbert was in accordance with standard and proper practice for insolvency practitioners, and conformed to the Code of Professional Conduct published by the Insolvency Practitioners Association of Australia ("IPAA Code").
144 The pertinent facts may be summarised as follows:
(1) Kamper & Co, the Company's accountants, were one of Mr Franklin's main sources of referred work as an insolvency practitioner in the year 2000;
(2) Mr Kamper arranged a meeting between Mr Franklin and Mr Gilbert in July or August 2000, in which Mr Franklin gave Mr Gilbert advice about the voluntary administration process generally;
(3) after noticing that the Company was subject to a winding up application, Mr Franklin contacted Mr Kamper who told him that Mr Gilbert did not need Mr Franklin's help;
(4) after the Company was placed in liquidation and Mr Wily endeavoured to collect its books and records, Mr Gilbert contacted Mr Franklin for advice as to whether he could do anything to stop the liquidation process, and Mr Franklin told him that while the company's director could not appoint an administrator, the liquidator could do so;
(5) Mr Franklin participated in a meeting with Mr Gilbert and representatives of Mr Wily on 21 June 2001, at which they discussed Mr Gilbert's interest in placing the Company into administration in order to propound a deed of company arrangement, and the liquidator's position that he would consider appointing an administrator after receiving a RATA and the Company's books and records, and Mr Franklin suggested Mr Javorsky or Mr de Vries as administrator;
(6) Mr Franklin later advised Mr Gilbert that it would be necessary for him to work up a proposal, and to prepare a RATA which Mr Franklin would check, and demonstrate that the Company's claim against Bovis was valid, and he referred Mr Gilbert to Cutler Hughes and Harris;
(7) Mr Franklin participated in a meeting with Mr Gilbert and representatives of Cutler Hughes and Harris on 25 June 2001, at which they discussed the proposal for a deed of company arrangement, the background to the dispute between the Company and Bovis (including a review of paperwork) and the assistance required of Cutler Hughes and Harris;
(8) Mr Franklin attended a meeting with Mr Gilbert, representatives of Mr Wily and of Cutler Hughes and Harris on 28 June 2001, at which it was said that Mr Higginbotham had been retained by Mr Gilbert to advise on the claim against Bovis, and to request Mr Wily to appoint an administrator, and to provide assistance in preparing a deed of company arrangement, and Mr Franklin reported to the meeting that both Mr Javorsky and Mr de Vries would consent to act as administrator;
(9) in his letter to Mr Murphy dated 4 July 2001 Mr Gilbert claimed (possibly on the basis of advice by Mr Franklin) that he had the requisite majority to ensure that the terms of the proposed Deed were within his control;
(10) between 5 July and 18 July 2001 Mr Franklin, on behalf of Mr Gilbert, exchanged five letters with Mr Wily concerning Mr Gilbert's RATA and the request by Mr Wily for provision of the books and records of the Company (including files relating to the claim against Bovis);
(11) Mr Franklin met with Mr Gilbert and representatives of Cutler Hughes and Harris on 9 July 2001, and at that meeting Mr Higginbotham gave his opinion of the merits of the claim against Bovis, and (according to his file note) Mr Franklin agreed to prepare the RATA, a proposal to Mr Wily and a letter concerning the claim by Bovis;
(12) in his letter to Mr Wily on 5 July 2001, seeking an extension for completion of the RATA, Mr Franklin described Mr Gilbert as "my client" and he wrote seeking a further extension, unsuccessfully, on 12 July;
(13) Mr Franklin assisted in the preparation of the RATA, in the manner described below;
(14) Mr Gilbert sent the RATA to Mr Wily on 25 July 2001, and on the same day he sent to each of Mr Franklin and Ms Staff of Cutler Hughes a copy of the document, thanking them both for "all [their] assistance", and Mr Franklin put it in a manila folder;
(15) Mr Gilbert copied to Mr Franklin his letter of 25 July 2001 to Mr Wily, in which he proposed voluntary administration and a deed of company arrangement, and his letter to Mr Wily setting out arguments as to why Mr Wily should reject Bovis' proof of debt;
(16) Mr Franklin attended a meeting on 7 September 2001, attended by Mr Gilbert, representatives of Mr Wily and of Cutler Hughes and Harris, to discuss Mr Gilbert's wish to propose a deed of company arrangement, and his wish that Mr Wily should convene a meeting of creditors to consider the appointment of an administrator; at this meeting the general nature of the proposed Deed, under which Mr Gilbert or a deed administrator would take proceedings against Bovis, was discussed, and Mr Higginbotham gave his views on the merits of the claim against Bovis, and Mr Gilbert explained his desire to take proceedings under a deed of company arrangement;
(17) copies of the correspondence between Cutler Hughes, Mr Wily and PW Turk of 14, 25 and 26 September 2001 were sent by Cutler Hughes to Mr Franklin;
(18) in October 2001 Mr Franklin began to work as a consultant to Jones Condon on a part-time basis, becoming full-time in December 2001;
(19) Mr Franklin met with Mr Javorsky and Mr Higginbotham of Cutler Hughes in October or November 2001, and they discussed Mr Gilbert's proposal that the Company be placed into administration in order to promote a deed of company arrangement, Mr Javorsky's willingness to act as administrator, and the willingness of Mr Gilbert and Interline (NSW) to fund the administration process and the proceedings against Bovis;
(20) Mr Higginbotham invited Mr Franklin to attend the meeting of creditors held on 27 November 2001, and after arranging for Mr Javorsky to sign a consent to act as administrator, Mr Franklin attended the meeting;
(21) at the meeting held on 27 November 2001, Mr Franklin was described as an observer but he purported to speak on behalf of Mr Gilbert, saying that if the proposed Deed proceeded, Mr Gilbert would arrange for the processing of outstanding tax returns;
(22) in the voluntary administration, Mr Franklin attended to the day-to-day running of the administration, overseen by Mr Hurst, who was a senior manager with Jones Condon, who in turn reported to Mr Javorsky as administrator;
(23) Mr Franklin attended the first meeting of creditors held on 6 December 2001;
(24) Mr Franklin prepared Mr Javorsky's Report to Creditors and Statement, with assistance from Ms Saheb, and they were settled and signed by Mr Javorsky;
(25) it was Mr Franklin who, when he read the letter from Freehills dated 11 January 2002, became concerned regarding the Puketapu claim and investigated it;
(26) Mr Franklin attended the second meeting of creditors held on 20 December 2001 and 16 January 2002, and was described as "assisting Administrator", and he spoke at the meeting generally in favour of the proposed Deed;
(27) there was no disclosure to the meeting of creditors that there had been any association between Mr Franklin and Mr Gilbert prior to the commencement of the administration.
145 The extent of Mr Franklin's involvement in preparation of the RATA was a matter of central importance, according to counsel for Bovis. Therefore the facts need to be set out in some further detail. Apart from seeking extensions of time for preparation of the RATA, Mr Franklin provided Mr Gilbert with a blank questionnaire for directors on 16 July 2001, which Mr Gilbert later completed and returned to Mr Franklin on 20 July 2001. It appears that Mr Franklin became responsible for collating certain information for the purposes of the RATA. On 19 July 2001 Mr Nock, on behalf of the Company, sent Mr Franklin a copy of a summary that the Company had submitted to Mr Murphy and Mr Bartlett for the purposes of the mediation. On 20 July 2001 Mr Griache on behalf of the Company sent Mr Franklin some further information about the dispute with Bovis. On 24 July 2001 Mr Franklin sent Mr Gilbert and Mr Higginbotham a "first draft" of the RATA, although it seems that only two schedules, schedules C and H, were sent. As I have said, in the covering note he asked Mr Higginbotham to look at and settle the claim against Bovis, noting that he had used "damages" as "a balancing figure to eliminate deficiency".
146 Mr Franklin gave evidence that he only prepared those two schedules, saying that he used information provided to him by Mr Gilbert, and used his experience to put that information into an appropriate format. He said he did not see the draft again before it was finalised, and there was no meeting for the purpose of finalising it, and he did not give any further advice. At that time, Mr Gilbert was being advised by Cutler Hughes and Harris on various matters including finalisation of the RATA. Mr Gilbert gave evidence that Mr Franklin assisted him to complete the RATA, by explaining items he did not understand.
147 I accept the evidence of Mr Franklin and Mr Gilbert on these points, but I do not regard it as telling the full story of Mr Franklin's participation in preparation of the RATA. I have reached this conclusion for two reasons. First, while it appears that Mr Franklin prepared the draft of only two schedules to the RATA, they were by far the most important parts of the document. After the meeting of 21 June 2001 Mr Franklin offered to check the RATA when it was prepared, and later he negotiated for extensions of time for lodgement of the RATA. As I have said, he took responsibility for collating information regarding the claim against Bovis which became draft schedule C, and he also collected information from the Company for the purpose of preparing the schedule of unsecured creditors, schedule H. It is therefore correct to characterise his involvement in the preparation of the RATA as a central involvement.
148 Secondly, I regard Mr Franklin's proposal in draft schedule C to include general damages of $3.521 million, as a balancing figure to eliminate deficiency, to be a significant involvement in the process of preparation of the RATA. Mr Franklin gave evidence that by doing so, he was giving effect to Mr Gilbert's statement that the Company would not have been insolvent but for Bovis' actions. That evidence seems to acknowledge that the claim for general damages, at least damages quantified at $3.521 million, was Mr Franklin's idea, and that in formulating the claim he was purporting to act either on the instructions or in the interests of Mr Gilbert.
149 Mr Gilbert gave evidence acknowledging that the calculations used by the Company for the purposes of the mediation were limited to the delay and disruption claim, and did not include any figure at all for general damages. He sought to explain this by saying that it was his understanding of what Bovis had requested, and "we weren't looking for anything more than to get out with the seat of our pants on". To the extent that this evidence implies that the general damages claim was in contemplation during the mediation but was withheld, I reject it as implausible.
150 Mr Franklin gave evidence that, having submitted the draft, he proceeded on the assumption that Cutler Hughes and Harris would settle the figure of the damages claim. I accept that evidence. Mr Gilbert gave evidence to like effect. He said that the damages claim shown in the final RATA represented the view of Cutler Hughes and Harris after they had reviewed the claim. Neither Mr Gilbert nor Cutler Hughes and Harris reverted to Mr Franklin with respect to the settling of the damages figure after he had transmitted the first draft. But all this is of limited significance. The important point is that Mr Franklin conceived the idea of inserting a claim for general damages as a balancing figure to eliminate the deficiency of liabilities over assets, and in that way he made a contribution to the preparation of the RATA which amounted to a significant involvement.
151 These considerations have led me to the conclusion that in the course of preparation of the RATA, Mr Franklin acted on behalf of, or in the interests of, Mr Gilbert, and not merely as a person who was there to procure the consent of an administrator.
152 The more general issue is whether Mr Franklin acted for or in the interests of Mr Gilbert, as his adviser on the Deed proposal, during the whole course of events leading to the development and making of the proposal for a deed of company arrangement to Mr Wily and its consideration at the meeting on 27 November 2001. I have decided that he did. I reject the submissions, and evidence by Mr Franklin and Mr Gilbert, to the effect that Mr Franklin had the more limited role of advising generally on the administration process and procuring the consent of an administrator.
153 I accept Mr Gilbert's evidence that Mr Franklin did not assist Mr Gilbert to draft the final proposal for the deed of company arrangement, but in light of the file note to which I refer below, I find it more likely than not that Mr Franklin assisted in the preparation of one or more earlier drafts of the proposal. Having regard to the sequence of events in which Mr Franklin participated in meetings at and in connection with which the proposal was generated and developed, I find it implausible to say that he did not tender advice and make contributions to the discussion, or that he did so only in the hope of participating in a later administration rather than as a representative of Mr Gilbert. The fact that Mr Higginbotham was present to provide legal advice with respect to the proposal did not mean that Mr Franklin's presence was somehow rendered unnecessary or redundant. He had the skills and experience of an insolvency practitioner, complementary to the skills and experience of Mr Higginbotham as a lawyer. I therefore cannot accept Mr Gilbert's evidence that Mr Franklin gave him no assistance in relation to putting together a proposal for a deed of company arrangement.
154 In reaching this conclusion, I have found three pieces of evidence to be particularly persuasive. First, there is the file note made by Mr Franklin in respect of the meeting held on 9 July 2001 which says "me to prepare RATA, Proposal, letter re BLL claim". Mr Franklin gave evidence that these were notes of the discussion at the meeting, recording comments by people at the meeting, and did not necessarily reflect what he was ultimately to do as a result of the meeting. But it is implausible that Mr Franklin would have noted matters raised at the meeting but not reflecting the outcome of the meeting, and very little else, especially as he acknowledged that the file note was not intended to be a transcript.
155 Secondly, there is Mr Franklin's letter to Mr Wily dated 5 July 2001 in which he referred to Mr Gilbert as his client. Mr Franklin's explanation, in his affidavit, was that he meant nothing by the terminology other than that he was writing on Mr Gilbert's behalf. He was not directly challenged on this evidence in cross-examination, although he was asked questions about the nature of his relationship with Mr Gilbert. There is no unfairness in Bovis inviting me to find that Mr Franklin had a connection with Mr Gilbert of which the letter of 5 July 2001 is some evidence. I accept that the letter does not establish that Mr Gilbert was Mr Franklin's client in any formal or contractual sense, but it shows that at least for certain purposes, Mr Franklin represented Mr Gilbert in dealings with Mr Wily.
156 Thirdly, at the meeting of creditors on 27 November 2001 Mr Franklin responded to a statement by Mr Dunne of the Australian Taxation Office about the Company's failure to lodge returns, by saying that if the proposed Deed proceeded then Mr Gilbert would arrange for the processing of the outstanding returns. His willingness to commit Mr Gilbert to this course of action implies that their relationship was closer than counsel's submissions contended. Mr Franklin said in cross-examination that he did not attend the meeting to represent the interests of Mr Gilbert, but to provide Mr Wily with the knowledge that an administrator would consent to act, and he denied that he made the statement about outstanding tax returns on Mr Gilbert's behalf. But in my opinion it cannot plausibly have been otherwise. Mr Gilbert was present. If Mr Franklin had no authority to commit him to lodge tax returns one would have expected him to say so, but he did not.
157 Counsel for Mr Javorsky contended that the whole of Mr Franklin's involvement in the period from June to November 2001 amounted to his taking a "practical approach" to the issues that arose, rather than acting as Mr Gilbert's adviser. The idea appears to be that if he thought it practical to do so, he acted of his own initiative without instructions in order to make things happen. In my opinion that is not an accurate account of Mr Franklin's involvement during the June to November period, and I reject Mr Franklin's evidence to that effect.
158 Mr Gilbert did not pay Mr Franklin for any of his assistance during the June-November period, but nevertheless the work that Mr Franklin did on behalf of or in the interests of Mr Gilbert caused a retainer-like arrangement to arise between them. There is an analogy between the facts of the present case in the facts of Re Club Superstores Australia Pty Ltd (in liq) (1993) 11 ACLC 751. There an insolvency practitioner gave advice to the directors of a company in financial difficulties, discussing the effect of winding up on them personally, and on creditor and debtor entities that they controlled. Subsequently the company went into liquidation and he was appointed liquidator. An application was successfully made to remove him from that office.
159 Thomas J noted that the insolvency practitioner did not charge a fee for the services he provided to the directors, but he found that a species of retainer or contingent arrangement arose by virtue of what had happened. The arrangement was that the insolvency practitioner accepted an obligation to give advice in circumstances that considerably increased his chances of being appointed liquidator of the company. The prospect that no fees would be recovered for the advice was commercially acceptable when balanced against the strong probability of significant remuneration in the liquidation.
160 The present case is a little more complicated than the facts before his Honour, because Mr Franklin was acting in the capacity of a consultant and for most of the period in question he worked as a consultant for Mr de Vries rather than Mr Javorsky. Nevertheless, Thomas J's analysis is applicable. I infer from the facts that the arrangement between Mr Gilbert and Mr Franklin was that Mr Franklin would provide certain advisory services to Mr Gilbert on the basis that he would be given the opportunity to nominate an administrator from whom he could hope to earn remuneration as a consultant. I think that is what he meant when he said, in cross-examination, "all through I saw my role as a representative of either potential administrator".
161 In the Club Superstores case, Thomas J acknowledged (as noted earlier) that a pre-appointment conference between a potential liquidator and a creditor or the directors of the insolvent company was common practice in Queensland. He insisted, nevertheless, that the insolvency practitioner must avoid giving the impression in the pre-appointment conference that he or she was giving personal advice to the persons in attendance. He decided that on the facts before him, the insolvency practitioner clearly crossed the line, although acting with the best motives and for no fee.
162 There is evidence that insolvency practitioners in New South Wales and elsewhere in Australia have a similar practice with respect to voluntary administration. Mr Wily, a person of considerable experience in voluntary administration, said he would often have discussions with the directors of a company prior being appointed as its administrator. During those discussions he would explain the administration procedure, identify the powers he would have as administrator, and canvass other options for external administration, explaining the differences between administration and liquidation. Mr Wily acknowledged, however, that there were limits upon the extent of an insolvency practitioner's permissible involvement with the directors prior to accepting an appointment as administrator. That is consistent with the principles stated by Branson J in Commonwealth v Irving (extracted above) and with Thomas J's idea that there is a "line" which ought not to be crossed by the insolvency practitioner in his or her dealings with the directors prior to the commencement of a voluntary administration.
163 The IPAA Code is intended to provide guidance on standards of practice and professional conduct expected of members of the IPAA (Code, paragraph 1). In my opinion, it is a useful guide to the common practice in such matters, and to the profession's own view of proper professional standards. It is permissible for the Court to take the Code into account, to that extent, in applying the law concerning independence and impartiality to the insolvency practitioner's conduct in the case before it: cf National Roads and Motorists' Association Ltd v Geeson (2001) 39 ACSR 401, 403; Permanent Trustee Australia Ltd v Boulton & Lynjoe Pty Ltd (1994) 33 NSWLR 735, 738.
164 The Code's general principle is that in every professional assignment that he or she undertakes, the IPAA member must both be, and be seen to be, free of any interest which is incompatible with objectivity and independence (Code, paragraph 2). Paragraphs 3 and 4 provide a more specific elaboration of the general principle. The relevant parts are as follows:
"3. Conflicts of Interest
Conflicts of interest affecting independence must be avoided.
(i) Pre-Appointment
Where it is apparent at the time a Member is approached to consent to act that there will be a conflict of interest if consent is given, then the Member shall not consent to act. When a Member is requested to consent to act and his or her review of the information available is such that he or she forms the opinion that a conflict of interest may arise during the appointment or administration, consent to act shall not be given unless all relevant parties (including the Court where appropriate) are advised of the possibility of a conflict arising, and they do not object to the appointment. …"
" 4. Appointment :
Without limiting in any way the general comments outlined above:
(a) Except in the case of a members' voluntary winding up:
(i) No person in a practice shall accept appointment as a liquidator, provisional liquidator, controller, scheme manager, or administrator of a company if any person in the practice has, or during the previous two years has had, a continuing professional relationship with the company. …
(b) For the purpose of (a)(i) above, a 'continuing professional relationship' shall not arise:
(i) by reason only of the appointment of a practice or person in a practice to investigate, monitor or advise on the affairs of a company on behalf of a third party so long as the professional obligation is to a party other than the company being investigated, or
(ii) if the professional relationship existed for less than two months, or …".
165 In the present case, my factual conclusions about the extent of his involvement imply that Mr Franklin crossed the line in his dealings with Mr Gilbert in the period from June to November 2001. He gave Mr Gilbert advice and assistance going beyond general advice about the administration process, both by participating in meetings in which the Deed proposal was developed, and by assisting in the preparation of the RATA, the lodgement of which was a prerequisite to Mr Wily appointing an administrator. His activities gave rise to a continuing professional relationship between himself and Mr Gilbert over the period from June to November 2001. A member of the IPAA Mr Franklin's position would have been precluded by the IPAA Code from accepting appointment as administrator of the Company. More importantly for present purposes, Mr Franklin's activities during the June-November period put him in a position where he could not thereafter discharge the duty of a voluntary administrator to act in a manner that would be, and would be perceived by a reasonable observer to be, independent of Mr Gilbert and impartial as between the interests of Mr Gilbert and his companies and the interests of other creditors including Bovis.
166 Counsel for Mr Javorsky carefully analysed the facts of the cases in which liquidators were found to have breached their duties of independence and impartiality, seeking to show that they were all more extreme cases than the present one. I find this analysis unhelpful, because the decisions tend to be based on their own facts. Although in some of the cases the liquidator's lack of independence was more extreme than Mr Franklin's position, my view is that the principles emerging from the cases, which I have described earlier in these reasons for judgment, and the approach taken by the courts of carefully assessing the facts in detail, lead to the conclusion that I have expressed.
167 I regard my conclusion on this matter as having a central significance. Mr Franklin had the day-to-day carriage of the administration, and (with his assistant, Ms Saheb) he drafted the Report and Statement. The fundamental issue for creditors to decide was whether to set up the Deed structure, as proposed by Mr Gilbert, to pursue the Company's claim against Bovis. They needed and were entitled to have an informed and independent assessment by the administrator of the viability of the claim. Mr Franklin's role in the administration ensured that this was not delivered.
168 Of course, it was Mr Javorsky rather than Mr Franklin who was appointed as administrator. To the extent that the complaints of Bovis relate to failure to discharge the duties of independence and impartiality in the chairing of meetings, it was Mr Hurst rather than Mr Franklin who presided at the meeting of creditors held on 20 December 2001 and 16 January 2002.
169 Mr Javorsky did not meet Mr Gilbert prior to his appointment on 27 November 2001, but he was aware that Mr Franklin had previously been in touch with Mr Gilbert about his problems. Mr Gilbert gave evidence that he did not recall knowing about any relationship between Mr Franklin and Mr Javorsky at the time of Mr Javorsky's appointment. He said he thought he might have been introduced to Mr Javorsky by Mr Higginbotham. He said he did not know that Mr Franklin had arranged to obtain Mr Javorsky's consent, and at one stage he assumed that Mr Franklin was part of "Wily's team". I accept this evidence, but Mr Gilbert's lack of knowledge of the connection between Mr Javorsky and Mr Franklin is not relevant to Bovis' complaints on this subject.
170 Mr Javorsky gave evidence that he saw no problem arising out of Mr Franklin's prior involvement with Mr Gilbert. He gave rather tentative evidence that he questioned Mr Franklin about his prior association with Mr Gilbert before accepting the appointment. But he does not seem to have appreciated the full extent of Mr Franklin's involvement with Mr Gilbert.
171 When asked in cross-examination whether he saw any problem in accepting the appointment knowing that Mr Franklin was a consultant to his firm, Mr Javorsky said:
"No, I didn't. I'm sometimes asked to do exactly the same thing that Mr Franklin has been asked to do where a referral of work brings me up and says 'A client is experiencing difficulties. He wants to know what his options are.' I'll go along and say, 'These are the options for your company. Let me know if you want to do something.' Typically those sorts of people will ask for quotes or an indication of what the price might be for particular options and they might go off and speak to other insolvency practitioners."
This evidence assumes that Mr Franklin did no more than provide general advice about the administration process of a kind regarded by Mr Wily in his evidence as appropriate and unproblematic.
172 Mr Javorsky's evidence implies that he was unaware of the extent of Mr Franklin's involvement in the preparation of the RATA, both at the time of his appointment and throughout the administration. He said in cross-examination that he had "subsequently [evidently after 16 January 2002] spoken to Mr Franklin about his involvement in the preparation of the report and he has told me that all he did was assist the director in the formatting of the report and where various amounts should go; that the information for the report was provided by the Company". Later, in response to a question as to whether he would have regarded Mr Franklin's involvement in preparation of the RATA as impugning his own independence as administrator, Mr Javorsky said that this would depend on what hand Mr Franklin played in preparing the RATA, adding that "if he merely assisted the director getting the report into a form admissible for lodgement with ASIC, I don't believe that is the case." I have found that Mr Franklin's involvement in preparation of the RATA was much more extensive than Mr Javorsky believed.
(2) The alleged benefits of the Deed proposal to creditors as a whole
173 The question whether the Deed proposal was of benefit to the creditors as a whole, and the question (considered under the next heading) whether it prejudiced the creditors as a whole, are relevant in the following ways:
· since the Deed proposal had been outlined before Mr Wily decided to appoint Mr Javorsky as administrator, these issues affect the appeal by Bovis against Mr Wily's decision under s 1321;
· these issues also affect Bovis' challenge to the validity of the resolution of creditors on 16 January 2002 under s 600A;
· they are also relevant to Bovis' case for termination of the DOCA under ss 445D(1)(f)(ii), (e) and (g).
174 Bovis submitted that the implementation of the Deed proposal would provide no real advantages to creditors, in comparison with the Company remaining in liquidation. This is a fundamental issue for the purposes of Part 5.3A, because under s 435A it is part of the object of Part 5.3A that, if it is not possible for the company or its business to continue in existence, then the business, property and affairs of the company are to be an administered in a way that results in a better return for the company's creditors and members than would result from immediate winding up: see Kalon Pty Ltd v Sydney Land Corporation Pty Ltd (1998) 26 ACSR 593, 597. As Davies AJA observed in Khoury v Zambena Pty Ltd [1999] NSWCA 402 at paragraph [105], "an arrangement under Part 5.3A may discriminate between creditors or classes of creditors; but nevertheless it ought to deal fairly with the interests of creditors of the insolvent company".
175 In the Statement attached to his Report, Mr Javorsky expressed the opinion that the Deed was in the best interests of creditors because it would provide the best chance of the litigation against Bovis succeeding, and would provide for an equitable distribution to the Company's creditors. The underlying idea seems to have been that if the Deed were executed, then Mr Gilbert would use his best endeavours to make the litigation against Bovis succeed, whereas if the company remained in liquidation he would not. Additionally, under the Deed proposal Interline (NSW) would provide funding for the litigation against Bovis, whereas if the Company remained in liquidation it would be necessary for the liquidator, if he chose to proceed with the Bovis litigation, to arrange for litigation funding at much more substantial cost.
176 Bovis challenged this reasoning of six grounds, submitting that:
(1) Under the Deed, clause 13.1, Mr Gilbert and Interline (NSW) are subject to no real obligation to fund proceedings against Bovis in any particular amount or for any particular time, and are free to cease any funding for any reason at any time. Further, clause 13.1 expressly recognises that it may be necessary to seek litigation funding.
(2) There was no adequate information concerning the capacity of Mr Gilbert and Interline (NSW) to fund substantial and lengthy proceedings.
(3) Mr Gilbert, as director of the Company, was under statutory obligations to co-operate with and assist the liquidator.
(4) Mr Gilbert would have an indirect financial incentive to pursue proceedings brought by a liquidator, because his company, Interline (NSW), claims to be a creditor of the Company for over $3.6 million.
(5) It would be equally open to Mr Gilbert and Interline (NSW) to agree with a liquidator terms relating to the funding of litigation such as those contained in the Deed.
(6) Mr Gilbert amended the terms of the proposed Deed to delete the requirement that he be remunerated for his time in prosecuting the proceedings. This, said Bovis, should be taken to manifest a willingness to assist the pursuit of proceedings without remuneration, irrespective of the status of the Company. In its submission, there would be no justifiable and acceptable basis upon which Mr Gilbert would devote time without charge under the DOCA but not in a liquidation.
177 I agree with the first three submissions, for reasons I shall give. Submissions (4) and (5) do not directly go to undermine the benefits to creditors which are alleged to flow from the DOCA, but instead they are submissions to the effect that some of the alleged benefits of the DOCA could be matched in a liquidation. It is unnecessary to say more than that I agree with submissions (4) and (5). I disagree with submission (6), if it is intended to invite a finding that Mr Gilbert is in fact willing to assist the pursuit of proceedings against Bovis if the company remains in liquidation.
178 As to submission (1), it is clear beyond dispute that clause 13.1 of the DOCA does not impose any enforceable obligation on Mr Gilbert or Interline (NSW) to provide funding. By that clause Mr Gilbert and Interline (NSW) jointly agree to provide funding, but the clause then contemplates what will happen if they do not wish to continue to fund the Company, or if they do not have the means to do so. Read as a whole, the clause gives Mr Gilbert and Interline (NSW) the option to choose not to provide funding even if they have the means to do so, and in that event their obligation is either to seek litigation funding or use their best endeavours to assist the Deed Administrator to obtain litigation funding from another source.
179 As to submission (2), Mr Javorsky gave evidence that Mr Franklin or Mr Higginbotham told him that Mr Gilbert had a company that was trading profitably (presumably Interline (NSW)), and that company was providing him with cash flow, which Mr Gilbert would use together with his own funds in order to finance the Bovis litigation. Mr Javorsky was also told that Mr Gilbert owned property, which he would sell to provide such funds. No further inquiries were made.
180 In my opinion, at no time until the execution of the DOCA on 6 February 2002 did Mr Gilbert provide to Mr Javorsky, Mr Hurst, Mr Franklin or Mr Wily information that would provide a reasonable basis for believing that they or either of them could provide the funds to maintain complex, expensive and probably lengthy proceedings against Bovis. In the absence of information that would provide a reasonable basis for that belief, there can have been no reasonable basis for any of them, or for the creditors generally, to believe that by resolving to execute the DOCA, the creditors would secure arrangements for funding that would be better than the arrangements for funding available if the Company were to remain in liquidation. Indeed, clause 13.1 expressly contemplates that Mr Gilbert and Interline (NSW) might not have adequate funding.
181 Creditors would be better off under the DOCA than in liquidation if Mr Gilbert or Interline (NSW) were to provide adequate litigation funding throughout the Bovis litigation, because of the probability that the cost of litigation funding from any other source (such as an external litigation funder) would be substantially greater. However, to the extent that Mr Gilbert and Interline (NSW) could not provide funds for the litigation against Bovis, then the Company's funding provision under the DOCA would be no better, for practical purposes, than its funding provision in liquidation. In each case, it would be necessary to seek external litigation funding. The only possible difference would be that under the DOCA, Mr Gilbert and Interline (NSW) would be obliged to use their best endeavours to assist the Deed Administrator to obtain litigation funding. Interline (NSW) was under Mr Gilbert's control, and there is nothing in the evidence to suggest that its use of its best endeavours would offer any advantage beyond Mr Gilbert using his best endeavours. I fail to see how their covenant to use best endeavours would have any practical advantage to the creditors over Mr Gilbert's statutory obligation to assist the liquidator, to which I shall now turn.
182 As to submission (3), Mr Gilbert, as an officer of the Company, had the statutory duties to assist a liquidator imposed by s 530A, including the duty to deliver up all books of the Company in his possession, to give the liquidator such information about the Company's affairs as he might reasonably require, and to do whatever the liquidator reasonably required to help in the winding up. He was not entitled, as against the liquidator, to retain possession of the books of the Company or to obstruct or hinder the liquidator's attempts to obtain possession of them: s 530B(1) and (2).
183 When the Deed was proposed, it was contemplated that there would be a provision for paying Mr Gilbert an hourly rate for his work on the Bovis litigation. However, that provision was removed from the Deed in its final form. Clause 14.2 of the final document contained a covenant by the directors that neither they nor any related party would receive remuneration for work done in relation to the Bovis proceedings. Therefore in its final form, the DOCA offered Mr Gilbert no financial incentive to prosecute the Bovis litigation, other than the incentive of receiving a distribution through Interline (NSW), which would participate as a major creditor in the distribution of the Administration Fund. That incentive would be equally available in liquidation.
184 By clause 14.3 (b) of the DOCA, the Company and its directors covenanted to conduct the Bovis proceedings with diligence. In my opinion that covenant had no greater effect than Mr Gilbert's statutory obligation to assist the liquidator. The difference between Bovis litigation under the DOCA and Bovis litigation by the Company in liquidation would essentially be that under the DOCA, the litigation would be conducted by Mr Gilbert subject to supervision by the Deed Administrator, while in liquidation the litigation would be conducted by the liquidator with the assistance of Mr Gilbert. While the latter might be more expensive than the former, because the liquidator's involvement and therefore the time devoted to the task, might be greater than the Deed Administrator's involvement, an advantage of having the litigation conducted by the company in liquidation would be that all decisions taken on behalf of the Company in the course of the litigation would be taken by an officer of the Court whose duty would be to act in the interests of the creditors as a whole.
185 Mr Gilbert gave evidence that it was important to him for the Company to be taken out of liquidation, because his association with the Company in liquidation would be regarded in the building industry as an association with a failed company, and therefore there would be an adverse effects on his reputation. I accept this evidence. It provides a reason for Mr Gilbert to give the promises contained in the DOCA, as the price of avoiding the adverse effect on his reputation that continuation of the liquidation would entail. However, once the DOCA was in operation, Mr Gilbert would have achieved his objective of avoiding or reversing adverse effects on his reputation, and his incentive to continue to prosecute the Bovis litigation for the benefit of creditors in compliance with the terms of the DOCA would, I think, be no stronger than the incentive he would have to assist a liquidator in compliance with the statutory obligations.
186 In summary, considering the evidence is a whole, I have decided that having Mr Gilbert and the Company bound by the DOCA to conduct the Bovis litigation with due diligence is not, on balance, better for the creditors as a whole than having Mr Gilbert bound by his statutory obligation to assist the liquidator in respect of the Bovis litigation.
187 I accept that it would have been open to individual creditors (who had the opportunity to observe Mr Gilbert at their meeting), in making their assessment of the likelihood of recovery under the proposed Deed as compared with liquidation, to conclude that there would be a better prospect of recovery under the proposed Deed. But to the extent that it is relevant for the Court to make an assessment on the evidence, my conclusion is that there is no case for believing that the proposed Deed would produce a better outcome for creditors in the Bovis litigation than would be obtained in liquidation.
(3) The alleged prejudice or disadvantage to creditors as a whole from implementation of the Deed proposal
188 Bovis submitted that creditors were disadvantaged under the Deed in six ways, namely by foregoing the prospects of:
· an independent investigation into the conduct of Mr Gilbert;
· a claim against Mr Gilbert for insolvent trading;
· claims against Mr Gilbert for breach of fiduciary and statutory duties;
· claims against Interline (NSW) for unfair preferences and uncommercial transactions;
· a claim against Interline (NSW) for knowing participation or accessorial liability; and
· a claim against NRMA to the return of $60,000 paid as a preference.
I shall refer to these various claims as "recovery claims".
189 As Davies AJA observed in Young v Sherman [2002] NSWCA 281, at paragraph [92], the examination of directors for insolvent trading is not a matter to be lightly overlooked. His Honour cited with approval some remarks by Sheppard J in a bankruptcy case, NZI Capital Corporation v Lancaster (unreported, Federal Court, 3 September 1991), where Sheppard J said "in the absence of complete agreement by creditors, and the petitioning creditor which is owed a substantial sum does not agree, there is something which, if not shocking, is at least something which takes one aback about a suggestion that someone who owes almost $5.5 million can offer $15,000 and walk away without there being any appropriate investigation of his affairs". Although the facts of the present case are very different, the potential disadvantage to creditors generally of the absence of a proper investigation into Mr Gilbert's conduct must be given careful consideration.
190 Bovis contended that the unfair preference and uncommercial transaction claims against Interline (NSW), and the insolvent trading claim against Mr Gilbert, may well be very substantial claims. It pointed out that the Company ceased to remit PAYG/PPS amounts to the Australian Taxation Office from September 1999, and yet it ceased to trade only on 30 November 2000. I agree that failure to make such payments to the Australian Taxation Office is some evidence, warranting investigation, that the Company may have been insolvent from the time those defaults commenced, although it is obviously not conclusive evidence. If the company was insolvent from September 1999, it would be reasonable to investigate whether Mr Gilbert had engaged in insolvent trading contrary to s 588G, subject to any available defences. Since 1 December 2000, the Company has made payments to Interline (NSW) totalling $418,821, and Interline (NSW) has made payments to the Company and/or its creditors totalling $1.556 million. If the Company was insolvent throughout that period, payments of those kinds may well have constituted unfair preferences or uncommercial transactions, subject to any available defences, and consequently further investigation would be warranted.
191 The response of the Javorsky and Gilbert interests was, in part, to rely on the provisions of the DOCA and the 19 March 2002 Deed. Clause 9.2(a) of the DOCA gives the Administrator the power to take and conduct the Puketapu proceedings, and proceedings against any Related Party in relation to any cause of action held by the Company. The 19 March 2002 Deed records the agreement of the parties to it that they will pay to the Company any amounts which would have been recoverable by a liquidator under the Corporations Act had the Company stayed in liquidation, subject to any defences they may have under the Act.
192 Bovis contended that these provisions failed as an attempt to protect the DOCA from attack. First, Bovis pointed out that while clause 9.2 purported to extend the prospect of recovery to related parties associated with Mr Gilbert, no amendment had been made to the description of the Administration Fund in clause 6.1, so that any recoveries under the 19 March 2002 Deed would not be required to be paid into the Administration Fund and would therefore not be available for distribution to creditors under clause 6.2 of the DOCA. I agree with this submission. There is no covenant in the DOCA for the Administrator to pay related party recoveries into the Administration Fund. Under the terms of the 19 March 2002 Deed, the agreement by the related parties was with the Company, day-to-day control of which had by that time reverted to its director under clause 12.1 of the DOCA.
193 Secondly, Bovis submitted that clauses 2.1 and 2.2 of the 19 March 2002 Deed contemplate amounts recoverable by a liquidator, whereas s 588FF(1), 588FH(2), 588M(2) and 588W(1) contemplate orders for payment to a company or debts due to a company (see Elfic Pty Ltd v Macks (2001) 181 ALR 1, 41-2), and s 588FJ contemplates charges being void rather than recovery of amounts. I do not accept this submission. In my opinion it is necessary, in order to give a sensible meaning to the 19 March 2002 Deed, to read references to an amount a liquidator would have been able to recover as including an amount ordered to be paid to the company in liquidation at the suit of the liquidator. I acknowledge, however, that the wording of the 19 March 2002 Deed is inappropriate to the circumstances contemplated by s 588FJ, notwithstanding that this is one of the sections expressly mentioned in clause 2.2 of that Deed.
194 Bovis also submitted that clauses 2.1 and 2.2 of the 19 March 2002 Deed are unworkable in several ways, and therefore the Deed is void for uncertainty. I agree that there would be some serious difficulties giving effect to the provisions of the Deed. First, in the case of unfair preferences s 588FA(1)(b) requires the Court to determine whether a transaction results in a creditor receiving more from the company that it would have received if the transaction were set aside and the creditor were to prove for the debt in the winding up of the company. In circumstances where the company has entered into a deed of company arrangement, the hypothesis which this provision would require the Court to apply is inherently uncertain. Secondly, if an unfair preference or uncommercial transaction were to be established as an insolvent transaction, the Court would have the discretion to make one or more of the orders set out in s 588FF(1). In my opinion the 19 March 2002 Deed is inherently obscure as to the assumptions to be made for the purpose of determining how the Court would exercise its discretion with respect to the making of orders. Thirdly, various provisions of the Corporations Act contemplate that a related party or other person making a payment in respect of an insolvent transaction may be entitled to lodge a proof of debt in respect of that payment (see ss 588FF(1)(g), 588FH(4), 588FI(3) and 588M(3)). It is not clear whether those provisions would have any relevance if a recovery were made under the 19 March 2002 Deed.
195 Although a court would strive to give a commercial agreement of this kind a comprehensible field of operation, it is not easy to identify an approach to its construction that would overcome these problems, consistently with established principles. However, it is unnecessary for me to decide whether these difficulties render the 19 March 2002 Deed void for uncertainty. Even if the 19 March 2002 Deed is valid, it provides no answer to Bovis' complaint about the disadvantages to creditors arising under the DOCA. This is because, as I have said, the 19 March 2002 Deed (if effective) gives rise to causes of action in the Company with no provision for recoveries to be made available to the creditors under the DOCA.
196 Actions for insolvent trading, unfair preferences and uncommercial transactions would raise questions about the solvency of the Company. An investigation of solvency would require an assessment of the viability and strength of the Company's claim against Bovis, although it may be that some parts of the recovery claims would relate to a period before the Bovis claim arose. An action against Mr Gilbert for insolvent trading would almost certainly be resisted by Mr Gilbert invoking the defence in s 588H(2), in view of Mr Gilbert's evidence that he believed that the company's difficulties flowed from Bovis' actionable failure to meet its obligations to the Company. Actions alleging unfair preferences or uncommercial transactions might be met with defences, including the defence in s 588FG(2), which would also raise the question whether there were grounds to suspect in solvency in light of the Bovis claim.
197 Therefore any assessment of the viability of recovery claims, made by a person in the position of Mr Wily or Mr Javorsky, or made by any creditors at their meetings, would necessarily involve an assessment of the viability and strength of the Company's claim against Bovis. This is not to say, however, that a judgment that the Company had a reasonably arguable claim against Bovis would entail that the recovery claims had no prospect of success, or that no further investigation of them was warranted. A company may be insolvent even though it has a claim which, if realised, would enable it to pay all of its debts, where the claim is uncertain and will take substantial time to prosecute. And there may be reasonable grounds to suspect insolvency notwithstanding the existence of a reasonably arguable claim.
198 The Court is not in a position to decide that recovery proceedings would have produced funds for distribution to creditors. What can be said, however, is that the recovery claims warranted further investigation, and the DOCA deprived creditors of investigations that might have clarified the viability of such claims, and also (having regard to the deficiencies of the 19 March 2002 Deed) deprived them of the prospect of recovery in such proceedings.
The issues
199 The three proceedings presently before the Court raise the following issues:
(a) whether the Court should reverse Mr Wily's decision to appoint Mr Javorsky Administrator of the Company, under s 1321, and/or declare that the appointment of Mr Javorsky as Administrator was invalid, under s 447C ( The Challenge to the Appointment of Mr Javorsky as Administrator );
(b) whether the resolution to execute the DOCA, adopted at the adjourned second meeting of creditors, was and should be declared to be invalid or set aside, and if so, with what consequences in light of s 435C(3)(e) and s 439A(2) ( The Validity of the Resolution of Creditors ), on grounds relating to: the non-attendance of Mr Javorsky in spite of s 439B(1) ( Non-attendance by Administrator ); whether Mr Javorsky's decisions to admit of Interline (NSW)'s proof of debt and to admit of the proof of debt by Bovis for only a nominal amount were authorised under Corporations Regulation 5.6.26 and were otherwise valid ( Admission of Proofs of Debt ); and the voting power of related creditors having regard to s 600A ( Related Creditors );
(c) whether the Deed of Company Arrangement should be terminated under s 445D ( Termination of the Deed of Company Arrangement ), and in particular, on the basis that the Deed was, or acts done under it were, or would be, contrary to the interests of the creditors of the company as a whole (s 445D(1)(f)(ii)); or that effect cannot be given to the Deed without injustice (s 445D(1)(e)); or that there were material omissions from the Administrator's report (s 445D(1)(c)); or that the Deed should be terminated for some other reason (s 445D(1)(g));
(d) whether grounds exist under s 449B to remove and replace Mr Javorsky as administrator ( Removal of Administrator );
(e) whether there are grounds for reducing or removing Mr Javorsky's entitlement to remuneration as administrator, under s 449E(2) (and s 447A) ( Remuneration of Administrator );
(f) whether the Court should declare that the winding up of the Company was automatically terminated when Mr Javorsky was appointed administrator, or should now be terminated or stayed under s 482 ( Termination of Liquidation ).
I shall consider each of these issues in turn.
The Challenge to the Appointment of Mr Javorsky as Administrator
200 Section 1321 allows a person aggrieved by a decision of a liquidator to appeal to the Court. The Court may confirm, reverse or modify the decision, and make such orders and give such directions as it thinks fit. An appeal under s 1321 involves a hearing de novo (Tanning Research Laboratories Inc v O'Brien (1990) 169 CLR 332, 340-341), and the Court is not confined to a consideration of the correctness of the grounds stated by the liquidator (Murray v Donnelly [2000] NSWSC 634 (6 July 2000), per Bryson J at [3]). Bovis is a person aggrieved by Mr Wily's decision to appoint Mr Javorsky as administrator, and therefore has standing to appeal under s 1321.
201 Section 447C applies where there is "doubt, on a specific ground" about whether a purported appointment of a person as administrator of a company is valid. The section permits, inter alia, any of the company's creditors to apply to the Court for an order declaring whether or not the purported appointment was valid on the ground specified in the application or on some other ground. Bovis seeks relief under this section in its capacity as a creditor of the Company. Its status as a creditor depends upon some other matters to which I shall refer later. In this part of my judgment, I shall assume that Bovis has standing as a creditor to seek the relief that s 447C allows.
202 The amended originating process in proceeding No 6062 of 2001 purports to invoke s 1322, as well as ss 1321 and 447C, but in submissions Bovis did not rely on that section. The substantive relief sought in the proceeding is an order setting aside the appointment by Mr Wily, on 29 November 2001, and of Mr Javorsky as administrator of the Company, and a declaration that the Company is in liquidation and Mr Wily remains its liquidator, but that it is not in voluntary administration.
203 The amended originating process sets out ten "brief grounds on which the appeal is made", which I take also to be the "grounds" to be specified in the application for the purposes of s 447C(2). I shall set out the grounds, and my reasoning and decisions in respect of them, one by one. In written submissions Bovis departed from the structure provided by the ten grounds, but I shall do my best to deal with the submissions as they arise in my consideration of the ten grounds.
A. That the reasons put forward by the Company's director [Mr Gilbert] for suggesting that administration, rather than liquidation, was the more appropriate course were insufficient, when properly considered, to warrant [Mr Wily] making the appointment.
204 Mr Gilbert made a proposal for a deed of company arrangement in his letter of 25 July 2001, but that letter did not include any reasons to support the proposal. Mr Higginbotham, acting for Mr Gilbert and Interline (NSW), wrote to Mr Wily on 14 September 2001, referring again to the proposal for a deed of company arrangement. The reasons supporting the proposed deed of company arrangement, given by Mr Higginbotham, were that
· Interline (NSW) would be prepared to fund the proceeding against Bovis (which was said to have "more than reasonable prospects of success") on condition that an administrator was appointed;
· while Mr Gilbert would fulfil his obligations as a director, he did not have the financial resources to fund the litigation against Bovis, nor to spend many hundreds of hours instructing on the claim;
· if a deed of company arrangement were entered into the company could continue trading [I take this to mean "resume trading"] and retain its goodwill in the marketplace, whereas its goodwill would be extinguished if it were to remain in liquidation.
205 No additional reasons to support the proposed deed arose out of the exchange of correspondence comprising PW Turk's letter of 26 September 2001 and Mr Higginbotham's reply dated 31 October 2001. In those circumstances Mr Gilbert's reasons for supporting the deed proposal, as presented to Mr Wily, were the reasons stated in Mr Higginbotham's letter of 14 September 2001.
206 It is necessary to assess the adequacy of Mr Gilbert's reasons in light of the circumstances that existed when Mr Wily made his decision. Apart from the fact that there had been a meeting of creditors, Mr Wily was presented with a firm assertion that under the proposed Deed, the Company would retain its "goodwill" (presumably meaning its trade reputation). Moreover, the funding offer by Interline (NSW) was conditional upon the adoption of the proposed Deed. To the extent that Mr Gilbert's reasons implied that he would work harder under the proposed Deed than in assisting a liquidator, there was some plausibility to the claim because at that time, it was proposed that Mr Gilbert would be paid under the Deed.
207 In my opinion it was not open to Mr Wily to accept Mr Gilbert's reasons without further investigation, as a basis for appointing Mr Javorsky as administrator. But he did not do so. He made further inquiries, and by PW Turk's letter of 26 September 2001 he raised some objections which invited response. While, therefore, I agree that Mr Gilbert's reasons were not of themselves sufficient to warrant making the appointment, I do not regard that conclusion as itself undermining the appointment.
B. That no proper notice was given to [Bovis] of the meeting held on 27 November 2001 at which creditors expressed their views on and passed a resolution in favour of administration, and [Bovis] was thus deprived of the opportunity to draw to the attention of creditors the reasons for [Mr Wily] not to make such appointment.
208 As I have said, Mr Bartlett was informed of the creditors' meeting of 27 November 2001 at about 5pm on the previous day. Although there is some evidence that Mr Wily's mailing list was amended by hand to include the name and address of Bovis, it is not clear whether this occurred before the list was used for the purpose of convening the creditors' meeting held on 27 November, or only later, when the list was sent by Mr Wily's firm to Mr Javorsky in December 2001. In my view, it has not been established that written notice of the meeting of 27 November was sent to Bovis.
209 Mr Bartlett gave affidavit evidence that at such short notice, it was not possible for him to attend or to arrange for somebody else to do so. In cross-examination he agreed that as in-house counsel to Bovis he had access to solicitors, but he did not seek to contact Bovis' solicitors to arrange for someone to attend. In my view, Mr Bartlett's evidence is consistent and establishes that, while he had access to solicitors, he did not seek to use that access because he decided that there was insufficient time to brief is solicitors to attend.
210 It is therefore true that no proper notice was given to Bovis of the meeting held on 27 November 2001, and necessarily true that Bovis was consequently deprived of the opportunity to argue at the meeting against the appointment of Mr Javorsky. However, the meeting was no more than a meeting to ascertain the wishes of creditors, convened under s 479(2). It was not a meeting at which an operative decision would be made. Section 436B (1) vests the decision-making power in the liquidator, rather than in the creditors. There being no evidence of lack of good faith on the part of Mr Wily, the fact that Bovis was not given the opportunity to make submissions to the creditors at their meeting would not invalidate Mr Wily's decision, if there were sound reasons for it.
C. That [Bovis] was given no opportunity thereafter to put before [Mr Wily] its views on the advantages to creditors of [Mr Wily] not making such an appointment.
211 This is true, but the position is governed by my observations under the previous heading.
D. That [Mr Wily] decided to appoint [Mr Javorsky] despite his not having received satisfactory answers to the questions raised by his solicitors in their letter dated 26 September 2001 to Cutler Hughes, which answers would have been material to his decision.
212 To the extent that PW Turk's letter of 26 September 2001 relates to Mr Gilbert's failure to provide books and records of the Company, I shall deal with it under heading E below. There were three other matters raised in the letter.
213 First, the letter contended that the materials supplied to Mr Wily by Mr Gilbert and Interline (NSW) fell short of quantifying the claim against Bovis. I shall describe what was supplied, and what was not supplied, under heading E. However, although additional material was supplied to Mr Wily after 26 September 2001, it remained true on 27 November 2001 that the materials supplied in relation to the Bovis claim fell well short of quantifying it. I have described how the general damages claim in the RATA was initially put forward as a balancing item. Very limited information was given about the delay and disruption claim.
214 On the other hand, Mr Wily had the assessment of Mr Higginbotham, an experienced solicitor acting for Mr Gilbert, to the effect that the Company had a good arguable case against Bovis. The issue for Mr Wily was not whether to commence proceedings against Bovis, or even to recommend a DOCA which would establish a framework for the commencement such proceedings. The issue for Mr Wily was whether to appoint an administrator whose statutory obligation would be to investigate matters relevant to whether a DOCA should be executed. In my opinion it was reasonable for him to make a decision on the basis of the evidence before him, including Mr Higginbotham's opinion, even though the claims that were to be pursued against Bovis had not been properly quantified.
215 The second statement made in PW Turk's letter was that there was no particular urgency in appointing an administrator. That may well have been true, but was beside the point. There is no suggestion that Mr Wily rushed his decision. He did not take it for another two months.
216 The third point made by PW Turk was that Mr Gilbert and Interline (NSW) had not specified precisely what benefit they suggested there was to the general body of creditors in appointing an administrator, nor why it was preferable to appoint an administrator rather than to allow the liquidator to conduct the Bovis litigation. That is true, although a partial answer had already been advanced by Mr Higginbotham, in what I described above as "Mr Gilbert's reasons". In my opinion there was enough in the materials before Mr Wily to justify his deciding that it was desirable to appoint someone who would be charged with the specific task of investigating the case for and against a DOCA.
E. That [Mr Wily], by failing to invoke his powers compulsorily to obtain all the Company's books and records, deprived himself of the ability to make an informed report to creditors, and deprived creditors and himself of the ability to make an informed decision in relation to the appointment of an administrator.
217 My finding is that, while a substantial quantity of corporate documentation was provided, it did not constitute all of the books and records of the company which Mr Wily was entitled to possess or inspect as liquidator. The evidence indicates, in particular, that there were 34 lever arch files relating to the Company's claim against Bovis in the possession of Cutler Hughes and Harris that were not provided to the liquidator, and the boxes of documents that were provided did not include important corporate information such as payment vouchers, journals, ledgers, profit and loss statements on contracts, or histories of trading payments with major suppliers.
218 The Company's books and records were property of the company and therefore Mr Wily as liquidator was entitled and required (subject to any prior ranking proprietary claim, other than a lien: see s 530B(1)(b)) to take custody of them under s 474(1) of the Corporations Act. He was entitled to inspect the Company's books under s 477(3), even if there was some such proprietary claim: see s 530B(2). It was open to Mr Wily to apply to the Court to require Mr Gilbert to deliver the books of the Company to him under s 483(1). As I have said previously, Mr Gilbert had the statutory duties to assist Mr Wily under s 530A, including the duty to deliver up all books of the Company in his possession, to give Mr Wily such information about the Company's affairs as he might reasonably require, and to do whatever Mr Wily reasonably required to help in the winding up. He was not entitled, as against Mr Wily, to retain possession of the books of the Company or to obstruct or hinder Mr Wily's attempts to obtain possession of them: s 530B(1) and (2). It was open to Mr Wily to conduct an examination of Mr Gilbert under Part 5.9 of the Act, and in that context to obtain a direction by the Court under s 597(9) requiring Mr Gilbert to produce for examination all books of the Company that were in his possession. He could have applied for the issue of a warrant to search Mr Gilbert's premises and seize books or property under s 530C: see Cvitanovic v Kenna & Brown Pty Ltd (1995) 13 ACLC 1654; Wily v Parker (1996) 14 ACLC 1432.
219 Therefore Mr Wily had ample powers to require Mr Gilbert to provide the missing information and documents, but he did not do so. Instead, he gave Mr Gilbert time to comply and then, when Mr Gilbert procured a requisition by 10% in value of the creditors for a meeting to be held, Mr Wily convened the meeting without first pursuing recovery of the missing books and information. After the creditors resolved in favour of the appointment of an administrator, Mr Wily made the appointment, still without pursuing the missing books and information.
220 In my opinion it was unnecessary for Mr Wily to make his own assessment of the prospect for success of the claim against Bovis before making his decision to appoint Mr Javorsky as administrator. By making that decision, he was ceding to others, namely the creditors and Mr Javorsky, the responsibility for deciding whether to adopt arrangements under which the claim against Bovis would be pursued. It may well have been unreasonable for him to make that decision if the evidence already in his possession suggested that the claim was not viable, or if there were no evidence in his possession as to the strength of the claim. But he had the assessment of Mr Higginbotham. The assessment was not independent because Mr Higginbotham was acting for Mr Gilbert, who was agitating for the appointment of an administrator, and also for Interline (NSW) which was proposing to fund the litigation. But it was an assessment in writing, evidently after consideration, by a commercial lawyer who had access to the facts.
221 The evidence indicates that Mr Wily did not have funds to instruct a lawyer to carry out the substantial work that would have been necessary to form a conclusion, even on a prima facie basis, as to the likelihood of success of the claim against Bovis. It has not been suggested that Bovis was prepared to fund Mr Wily to make an application to the Court for an order for production of books, or for the public examination of Mr Gilbert, nor that it would have offered him an indemnity for the liabilities and costs associated with such an application. Additionally, Mr Wily was faced with the assertion, which he was in no position to challenge effectively, that Interline (NSW)'s offer to fund the litigation was conditional upon an administrator being appointed.
222 In those circumstances, my opinion is that Mr Wily's decision was not vitiated by failure to pursue and inspect all of the books and records of the Company.
F. That [Mr Wily's] report to creditors was not circulated to them prior to the meeting of 27 November 2001.
223 This is true, but it does not undermine Mr Wily's decision, particularly bearing in mind that a meeting convened under s 479(2) is a meeting to ascertain the creditors' wishes, and under s 436B(1) the decision to appoint an administrator was for Mr Wily to make.
G. That to the extent that it was appropriate for [Mr Wily], in making his decision to appoint [Mr Javorsky], to have regard to the wishes of creditors as expressed at the meeting of 27 November 2001, [Mr Wily] should have had, but failed to have, regard to the following matters:
(a) that Mr Nock should not have been regarded as a creditor in the sum claimed of $760,000 in view of [Mr Wily's] view that the claim was excessive and that in part it was contingent on a successful claim against [Bovis], the likelihood of which [Mr Wily] was in no position to evaluate;
(b) that [Interline (NSW)'s] claimed debt of $3,659,677 was one which [Mr Wily] considered required further investigation;
(c) that [Interline (NSW)] should have been admitted to vote for only $1 in view of the doubts surrounding its claim;
(d) that had Mr Nock been admitted to vote for only $1 as he should have been (and as he was subsequently in the administration of the Company), and [Interline (NSW)] been admitted to vote for only $1 (as it should have been) the resolution directing [Mr Wily] to appoint [Mr Javorsky] would not have been passed (as there would then have been a majority in value voting against the resolution, and a majority in number voting for it);
(e) that [Interline (NSW)] was a related entity of the Company;
(f) that had Mr Nock been admitted to vote for only $1 (as he should have been and as he was subsequently in the administration) then even if [Interline (NSW)] was properly admitted to vote in the sum of $3,659,677 the resolution directing [Mr Wily] to appoint [Mr Javorsky] would not have been passed but for the vote of the related entity, [Interline (NSW)] (as there would then have been a majority in value voting against the resolution, and a majority in number voting for it).
224 In his letter dated 15 January 2002, Mr Wily said he considered seven matters, set out earlier in these reasons for judgment. One of them was that a resolution had been passed at a meeting of creditors on 27 November 2001 which indicated that the creditors supported and requested the liquidator to appoint an administrator. The letter does not say that in considering the opinion of the creditors, Mr Wily had regard to any particular values attached to votes. However, he had already noted his reservations about the claim of Mr Nock, and his view that the claim by Interline (NSW) required further investigation. It seems to me plain from the terms of his letter of 15 January 2002, and his evidence to the Court, that the view of creditors was only one matter influencing his decision, and the overwhelming thrust of his reasoning was directed towards identifying the most practical way forward in the interests of creditors.
225 Bovis pointed out that, strictly speaking, the vote at the meeting on 27 November 2001 was tied, because there was only a show of hands upon which Mr Higginbotham voted in favour of the resolution and Mr Dunne of the Australian Taxation Office voted against. Mr Higginbotham had only one vote on a show of hands, although he held multiple proxies: Ernest v Loma Gold Mines Ltd [1897] 1 Ch 1. Since, however, the meeting had only an "advisory" status under s 479(2), the technical invalidity of the resolution on this ground was, in my view, of no significance. It was open to Mr Wily to take into account that Mr Higginbotham held proxies that would have caused the resolution to be carried had a poll being taken.
226 Bovis also contended that Mr Wily should not have taken into account the creditors' resolution of 27 November because it was procured by the vote of a related creditor (Mr Nock) contrary to s 600A. In my opinion, this submission is unsuccessful because the resolution of the creditors was not, in the circumstances then existing, contrary to the interests of the creditors as a whole, or unreasonably prejudicial to the interests of the creditors who voted against it. The proposal under consideration was whether to move the company into voluntary administration so that the Deed proposal could be further developed and presented to the creditors for decision. The submission that the decision on that matter (in fact taken by Mr Wily rather than by the creditors) was contrary to the interests of the creditors or unfairly prejudicial requires the Court to treat the decision taken in November as if it were the decision taken by creditors on 16 January 2002. While, for reasons I shall give, the decision of January 2002 was open to attack under s 600A, the decision of November 2001 to initiate a process that would enable the creditors to make their January 2002 decision was not, in my view, a decision falling within s 600A(1)(c).
H. That [Mr Wily's] appointment of [Mr Javorsky] was made in circumstances in which [Mr Wily] knew
(a) that Mr Franklin was a consultant to or associated with [Mr Javorsky's] firm; and
(b) that Mr Franklin had previously acted for the Company's director, Mr Gilbert in relation to the Company and the appointment of an administrator so that [Mr Javorsky] would or might not be wholly independent of the director into whose actions he would be required to inquire and on whose proposal he would be required to express an opinion.
227 Mr Wily was aware that Mr Franklin was a consultant to Jones Condon, and that Mr Franklin had acted in connection with Mr Gilbert in relation to the Company. Mr Franklin had written to Mr Wily describing Mr Gilbert as his "client", in connection with an application for extension of time to file the RATA. Mr Franklin had participated, with a partner and the employee of Mr Wily's firm, in the meeting of 21 June at which the possibility of a deed of company arrangement was explored. Mr Wily personally attended the meeting of 7 September, where Mr Franklin was present, at which the general terms of the proposed Deed were described and Mr Wily was asked to convene a meeting of creditors.
228 Notwithstanding that degree of connection between Mr Franklin, and Mr Wily and his staff, I am not persuaded that Mr Wily or his staff were aware of the extent to which Mr Franklin had acted in Mr Gilbert's interests. As I have said, a degree of connection between the director of a company and a proposed administrator (or, a fortiori, a consultant to a proposed administrator) is permissible, as Mr Wily himself said in his oral evidence. A problem arises where the insolvency practitioner "crosses the line" and comes to act on behalf of or in the interests of the director. I have found that Mr Franklin put himself in such a position, by virtue of such matters as his role in the drafting of the RATA and in meetings with Mr Gilbert and Mr Higginbotham, at which no representatives of Mr Wily were present. It is unlikely that Mr Wily or his staff were aware of the extent of Mr Franklin's role in preparation of the RATA, especially schedules C and H. The letter describing Mr Gilbert as Mr Franklin's "client" would have some significance if Mr Wily or his staff were aware of other activities by Mr Franklin, but not in isolation. Mr Franklin "crossed the line" but in my judgment, Mr Wily and his staff were not aware of essential facts and circumstances which have led me to that conclusion.
I. That it is inappropriate, in circumstances where a sole director has failed to provide to the liquidator all the books and records of the company (including documents relating to the alleged principal asset of the company) and refused to co-operate fully with the liquidator in the realisation of that alleged principal asset, for the liquidator to appoint an administrator for the purpose of allowing the director to propound a deed of company arrangement designed to enable him to regain control of the company, using related entity voting power, where the deed of company arrangement would have or be likely to have the result that the director's conduct would not be fully investigated and that any claims against the director or his associated companies would not be pursued.
229 This submission implies that Mr Wily should have formed a view as to the likely outcome of a process of administration that had not begun, that he should have concluded that the process could not be in the interests of creditors, and that he should have substituted his own judgment for the judgment of the proposed administrator as the desirability of the Deed proposal before it had reached its final form. In my opinion Mr Wily was not required to anticipate the outcome of the voluntary administration in this way.
230 In written submissions counsel for Bovis added to this proposition by pointing out that this was a case where the liquidator insisted upon payment of his fees by the director or an associated company prior to any appointment (citing Re Allebart at 29-30; Aloridge Pty Ltd v Christianos (1994) 13 ACSR 99; Re Southern Resources Ltd (1989) 15 ACLR 770, 787-8; Re G K Pty Ltd; ex parte Deputy Commissioner of Taxation (1983) 7 ACLR 633, 639). The last of these cases reminds us that a liquidator occupies a fiduciary position and therefore must avoid putting himself in a position where his personal interest conflicts or may possibly conflict with his duty. The Southern Resources case is cited for the proposition that an exercise of power by a fiduciary, if taken for several purposes only one of which is impermissible, will be invalidated if the impermissible purpose is causative in the sense that, but for its presence, the power would not have been exercised. However, the fact that a liquidator requires that his fees be paid before he takes a decision that will (in a practical sense) put the company beyond his control does not necessarily invalidate his decision, as was explained in Re Allebart, in the passage that I cited earlier; although the Court will be anxious to ensure that a liquidator in such a position takes care that "all steps [are] taken regularly, properly, and remote from any appearance of favour to one side or the other" (at 29).
231 In the present case, while it appears that payment of his fees was imposed by Mr Wily as a condition precedent to his decision, it does not seem to me that in fact his motivation of having his fees paid was causative in the "but for" sense or, indeed, influential at all as a motive or purpose for the decision. According to the evidence, the decision was taken for the reasons set out in Mr Wily's letter dated 15 January 2002. As I have pointed out, in applying the fiduciary principles to the external administrators of companies, courts have taken a practical approach, inquiring into whether there is any real sensible possibility of conflict, rather than a merely theoretical possibility, and consequently a real rather than a theoretical compromising of independence and impartiality. Street J's observations in Re Allebart show how this approach is applied to a case where a liquidator negotiates with a creditor for payment of his fees. In the present case I am satisfied that when he insisted on payment of his fees, Mr Wily did not put himself in a position where there was any real sensible possibility of conflict between his personal interest in being paid his fees and his duty to act in the interests of creditors. He was endeavouring, before the Deed proposal was put to him, to administer the affairs of the Company in liquidation and to that end, to obtain the Company's books and records and the RATA. There is no reason to think that he would not have continued with the process of investigation and winding up, had the Deed proposal not come forward.
232 Counsel for Bovis submitted that the present situation is analogous to cases in which the Court, in the exercise of its powers in bankruptcy or winding up, will not condone conduct which is detrimental to commercial morality or contrary to the public interest. He referred to the well-known liquidation case, Re Data Homes Pty Ltd [1972] 2 NSWLR 22, at 26-27, and also Re Denistone Real Estate Pty Ltd [1972] 3 NSWR 327, at 329-31. He contended that the approach exhibited by those cases has been carried across to s 436B, citing Re Depsun Pty Ltd (1994) 13 ACSR 644, at 646 and 648, and Deputy Federal Commissioner of Taxation v Foodcorp Pty Ltd (1994) 13 ACSR 796, at 798-9.
233 I agree that if a liquidator's decision to appoint an administrator under s 436B amounts to condoning commercially immoral conduct or a proposal contrary to the public interest, then the Court will take those matters into account and will ordinarily decline to exercise any relevant discretion in the liquidator's favour. The Depsun and Foodcorp cases were applications by a liquidator for leave to appoint himself as administrator under s 439B(2), but I have no difficulty accepting the proposition that the same approach would be taken by the Court under s 1321. However, in the present case Mr Wily's decision cannot be condemned on those grounds. The Deed proposal was not in its final form. An indication of this is the amendment on 16 January 2002 by which an attempt was made to preserve the Company's rights against some related creditors. Mr Javorsky was to be responsible, as administrator, for investigating the proposal, and as far as Mr Wily knew, that process may have caused the proposal to change in such a fashion as to put it beyond objections even from Bovis.
J. It is to the greater advantage of creditors that the Company should remain in liquidation than that a deed of company arrangement such as proposed by the director should be entered into through a voluntary administration.
234 For reasons I have explained, I have reached the conclusion that this proposition is correct. In part, this is because of the particular terms of the DOCA. It is also, in part, because of the absence of information about important issues such as the ability of Mr Gilbert and Interline (NSW) to fund the Bovis proceedings, matters which Mr Wily might reasonably have expected to be addressed during the voluntary administration. However, it is not necessary or appropriate to reverse Mr Wily's decision in order to return the Company to liquidation. I shall reach that result by another route.
235 My conclusion is that the appeal against Mr Wily's decision to appoint Mr Javorsky is administrator is unsuccessful.
The Validity of the Resolution of Creditors
236 Bovis contends that the resolution by the creditors at their second meeting to execute the Deed was invalid for three reasons:
· because Mr Javorsky did not attend and chair the meeting;
· because incorrect decisions were made as to the admission of Bovis and Interline (NSW) for voting purposes;
· because the resolution was passed by the exercise of the voting power of a related creditor.
Non-attendance by Administrator
237 Mr Javorsky, the administrator, did not attend the meeting, either on 20 December 2001 or at its adjournment on 16 January 2002. The meeting and its adjournment were chaired by Mr Hurst, an employee of Jones Condon, who had the written authority of Mr Javorsky to do so. Mr Javorsky met with Mr Hurst before the meeting and they made decisions with respect to the admission of proofs of debt for voting purposes. He received a report from Mr Hurst after the meeting was adjourned in December and ascertained that the creditors did not require him to do anything until the meeting resumed.
238 Bovis contends that Mr Javorsky did not comply with s 439B(1) and consequently the meeting was not validly held. Mr Javorsky contends that he was authorised by reg 5.6.17(1) to appoint a nominee to attend in his place at the meeting, but if that is not the case, the Court should cure the deficiency under either s 447A(1) or s 1322.
239 Section 439B(1) does not sit easily with reg 5.6.17(1). The two provisions are as follows:
"439B(1) At a meeting convened under section 439A, the administrator is to preside".