Breen v Williams [2006] NSWSC 782 | Case summary

3417/06 PETER KREJCI AS LIQUIDATOR OF EATON ELECTRICAL SERVICES PTY LIMITED JUDGMENT 1 The plaintiff is now the liquidator of Eaton Electrical Services Pty Limited under the form of creditors' voluntary winding up that follows on from voluntary administration under Part 5.3A of the Corporations Act 2001 (Cth). He was previously the administrator. He seeks certain relief in relation to the determination of both his remuneration as administrator under the voluntary administration and his remuneration as liquidator. 2 The second meeting of creditors in the Part 5.3A administration (that is, the meeting required by s.439A) was held on 2 June 2006. The plaintiff, as administrator, was chairman of the meeting: s.439B(1). At the meeting, the creditors resolved that the company be wound up: s.439C(c). Two further proposed resolutions were then submitted for decision by creditors: "That the Administrator's remuneration, calculated with respect to the Administrator, his principals and assistants, be fixed on a time basis in accordance with the GHK Green Krejci Pty Limited scale of fees, and that based on those rates the Administrator be authorised to draw an amount up to $52,565 (plus GST) for the period 8 May 2006 to 26 May 2006 and then to draw remuneration progressively for time spent up to the conclusion of the Voluntary Administration at a maximum of $10,000 (plus GST)." "That the remuneration of the Liquidator, calculated with respect to the Liquidator, his principals and assistants, be fixed on a time basis in accordance with the GHK Green Krejci Pty Limited scale of fees, and that the Liquidator be authorised to draw remuneration progressively for time spent up to a maximum of $30,000 (plus GST). Any amount in excess of this maximum would require the Liquidator to call a further meeting of creditors to seek approval of same or approach the Court for approval." 3 For the moment, I confine my attention to the first resolution which was intended, clearly enough, to have effect for the purposes of s.449E(1)(a). Section 449E is as follows: " Remuneration of administrator

(5) In this regulation 'creditor' includes a debenture holder." 5 Acting under regulation 5.6.21(4), the plaintiff, as chairman, exercised his casting vote in favour of the resolution and declared it passed (regulation 5.6.19(2)(a)). 6 In his affidavit, the plaintiff refers at some length to the considerations that led him to exercise the casting vote in the way he did. It is clear that he approached the matter thoughtfully, responsibly and conscientiously; also that he took and had due regard to the advice of his solicitor. He has nevertheless developed concerns about the course he took and has decided, as he says, "to bring these circumstances to the attention of the court". In doing so, he seeks, in the alternative: (a) a declaration that the resolution was validly passed; or (b) an order determining his remuneration as administrator as contemplated by the purported resolutions. 7 In support of the contention that the resolution was validly and regularly passed, the plaintiff points to regulation 5.6.33 which regulates voting by proxy in circumstances where a proxy holder has a particular kind of pecuniary interest. Regulation 5.6.33 is to the effect that, subject to certain exceptions, a person must not, as proxy, vote in favour of any resolution which would directly or indirectly place the person (or his or her partner or employer) "in a position to receive any remuneration out of assets of the company except as a creditor rateably with the other creditors of the company". Recognising that there was no corresponding written rule in relation to the casting vote made available under regulation 5.6.21(4), the plaintiff inferred that no similar constraint applied. 8 As far as the written law goes, that is so. But fundamental equitable principles need to be taken into account. In the first place, it is necessary to refer to the unwritten rule that a chairman exercising the casting vote given by regulation 5.6.21(4) must act "honestly and in accordance with what he believed to be the best interests of those affected by the vote": Kirwan v Cresvale Far East Ltd (2002) 44 ACSR 21 at p.101 per Young CJ in Eq. And as was recognised in the same case (see particularly the judgment of Giles JA at pp.67-72), it would be improper for an administrator to use the casting vote to keep himself in office regardless of other circumstances bearing upon the relevant decision-making (see also Young v Sherman (2001) 40 ACSR 12 at pp.32-33 per Austin J, that principle, not being challenged upon the subsequent appeal: Young v Sherman (2002) 170 FLR 86.) 9 This emphasises the point that a Part 5.3A is both a fiduciary and an "officer" within the s.9 definition of that term. The latter status attracts the statutory duties in Part 2D.1. 10 A Part 5.3A administrator occupies a position in which there arises an obligation to act in the interests of others. The administrator supplants the other decision making organs of the company while the administration continues and obtains sole jurisdiction over the company's property: ss.437A to 437F. The administrator's task is to promote the object stated in s.435A, that is, to maximise the chances of the company, or as much as possible of its business, continuing in existence; or, if that is not possible, to produce a better return for creditors and members than would result from an immediate winding up. The task is thus one of administering and applying the company's property for the benefit of others. This generates duties of the kind referred to by Gaudron and McHugh JJ in Breen v Williams (1996) 186 CLR 71 at p.113 in these terms: "In this country, fiduciary obligations arise because a person has come under an obligation to act in another's interests. As a result, equity imposes on the fiduciary proscriptive obligations - not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict. If these obligations are breached, the fiduciary must account for any profits and make good any losses arising from the breach. But the law of this country does not otherwise impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed." 11 As Young CJ in Eq pointed out in Kirwan v Cresvale Far East Ltd (above) at p.95, however: "[B]eing a fiduciary does not completely remove one's capacity for acting in one's own interest. Usually, one can only act in one's own interest if, by appropriate means, there is full consent of the beneficiary to the transaction, or the terms of engagement of the fiduciary provide for the transaction: see eg Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672 at 693-5 per Spigelman CJ." 12 It is an incident of a fiduciary's duties that he or she must subordinate personal interests to those of the person or group whose interests are to be served. Any profit derived from the fiduciary office without the informed consent of the person or group concerned may not be retained. A related aspect of the expectations to which fiduciaries are subject requires that they not put themselves in a position where their duties conflict with their interests. 13 In the present case, the availability of the casting vote to the plaintiff caused three courses to become open to him: he might exercise the vote in favour of the remuneration resolution; exercise the vote against the remunerative resolution; or not exercise the vote at all. Had he chosen the second or third course, the resolution would not have been passed. In that event, the fixing of the plaintiff's remuneration as administrator would have become a matter for decision by the court upon application made by the plaintiff as administrator: s.449E(1)(b). Either such course would thus have enabled the plaintiff to observe and give effect to the fundamental requirement that he avoid a situation in which his duty to serve the interests he was bound to serve (that is, the interests of the company as an embodiment of the interests of its creditors) conflicted with his personal interest in having his remuneration fixed so that he might then receive and enjoy it. 14 In the events that happened, the plaintiff chose the first of the three available courses and thereby failed to give effect to the fundamental requirement to which I have referred. His exercise of the casting vote was therefore a breach of the fiduciary duties he owed. As a result, equity will not allow him to regard the resolution as the source of a right to be remunerated and will not allow him to retain any remuneration received in reliance upon a purported right to be remunerated in accordance with the resolution. 15 There is, of course, a question as to the effect of the breach of duty upon the validity and effect of the purported resolution. This situation differs from that commonly encountered in the case of company directors where it is provided that an interested director may not vote and, if the director does vote, the vote will not be counted. There is no analogous provision here. In the end, however, I need not pursue the question of the effect of the tainted resolution. This is because I am of the view that the court should itself act to secure to the plaintiff as administrator remuneration in accordance with that resolution. 16 When this application first came before me on 3 July 2006, it had not been served on any person. I directed that each of the twenty creditors who had voted at the meeting of creditors be given notice of the application. In accordance with that direction, the plaintiff's solicitors wrote to all twenty persons on 5 July 2006 giving a fair summary of the application and indicating that a copy of the originating process and supporting affidavit would be made available on request; also that the application would again be before the court at 10am on 17 July 2006. 17 On or soon after 10 July 2006, a request for a copy of the documents was received by the plaintiff's solicitor from a solicitor who is himself a creditor, as well as being the legal representative of two other creditors. All three had voted against the resolution on 2 June 2006. Their combined debts were of the order of $96,000. 18 The request from the solicitor was promptly complied with. When the matter came back before me on 17 July 2006, Mr Golledge of counsel foreshadowed an application by one or more creditors to be joined or for leave to be heard. I made directions concerning the filing and service of any such application and supporting affidavit. The plaintiff's application was then adjourned to 31 July 2006. 19 On 31 July 2006, there was tendered a letter from the solicitor from whom the earlier letter had been received. He made it clear that the interests he represented did not object to the grant of the relief sought and that there would be no appearance upon the adjourned hearing of the application. 20 In these circumstances, I am satisfied, first, that each of the twenty creditors who participated on 2 June 2006 in decision-making with respect to the plaintiff's remuneration as administrator has had an adequate opportunity to be heard in relation to the general proposition that the plaintiff should be allowed to receive and retain remuneration of the sum referred to in the resolution purportedly passed on that day; and, second, that none of those creditors now wishes to quarrel with that proposition. There is accordingly no desire on anyone's part to see the resolution overturned. 21 That being so and in view of the fact that the plaintiff did not in any sense whatsoever act dishonestly, the appropriate course is that the court make an order of a contingent kind which will ensure that remuneration becomes available in accordance with the resolution. Of course, if the resolution is valid and effective despite the breach of fiduciary duty (and is merely voidable), any such order will not change the effect of the resolution. But if the situation is, in reality, that the remuneration has not been fixed by the creditors' resolution, the situation will be as described in s.449E(1)(b) and the remuneration will be such as the court, acting under that section, has fixed on the application of the administrator. In the circumstances to which I have referred (and having regard to the plaintiff's application, in the alternative, for an order fixing his remuneration) the court should make an order as follows: "Order that, if and to the extent that a resolution with respect to the administrator's remuneration passed at a meeting of creditors of Eaton Electrical Services Pty Limited on 2 June 2006 is invalid or impeachable by reason of the improper exercise of the chairman's casting vote, the remuneration of the administrator be fixed in the terms set out in that resolution." 22 I pass now to the second resolution, that is the resolution concerning the plaintiff's remuneration as liquidator under the creditors' voluntary winding up. 23 The circumstances surrounding the passing of the second resolution were precisely the same as those in relation to the first resolution. The voting by creditors was exactly the same and the plaintiff, as chairman, again exercised a casting vote in favour of the resolution. Again, it can be said that he acted thoughtfully, responsibly and conscientiously, paying due attention to the legal advice he was given. 24 In this instance, the plaintiff seeks, in the alternative: (a) a declaration that the resolution was validly passed; or (b) an order "pursuant to s.473(6) of the Corporations Act 2001 confirming the resolution of the creditors of the company passed on 2 June 2006 for the remuneration of the plaintiff as liquidator of the company". 25 The fiduciary considerations to which I have referred apply equally to the exercise of the casting vote in relation to the second resolution. Again, however, the events of the period between 3 and 31 July 2006 militate in favour of the position the plaintiff seeks to achieve. 26 The procedure for fixing a liquidator's remuneration in a creditors' voluntary winding up is prescribed by s.499(3): "The committee of inspection, or, if there is no such committee, the creditors, may fix the remuneration to be paid to the liquidator." 27 There is here no role for the court but I am satisfied that such a role arises by virtue of s.511(1)(b) in certain circumstances; also that, in this particular case, if the remuneration resolution is properly to be regarded as invalid because of the plaintiff's breach of fiduciary duty, the court has power, via s.511(1)(b), to fix the remuneration. I am also of the opinion that, because of the circumstances to which I have referred at paragraphs [16] to [19] above, the court should act to secure to the plaintiff remuneration as liquidator as provided by the resolution. 28 The process of analysis that persuades me that the court may fix the remuneration as liquidator (assuming the resolution is invalid) is an extension of that undertaken by me in Re Walker (2005) 54 ACSR 11 at [25]. Under s.511(1)(b), a liquidator in a voluntary winding up may apply to the court to exercise all or any of the powers that the court might exercise if the company were being wound up by the court. In a winding up by the court where there is no committee of inspection, the liquidator's remuneration is to be determined by resolution of the creditors or, "if no such resolution is passed - by the Court". In the present case, there is no committee of inspection. That circumstance distinguishes this case from Re Walker (above). Under s.473(3), the court has power to fix the remuneration if it has not been fixed by a resolution of creditors and by virtue of s.511(1)(b) that power is available in a voluntary winding up. An order analogous with that I have foreshadowed in relation to the remuneration as administrator is therefore appropriate, as follows: "Order that, if and to the extent that a resolution with respect to the liquidator's remuneration passed at a meeting of creditors of Eaton Electrical Services Pty Limited on 2 June 2006 is invalid or impeachable by reason of the improper exercise of the chairman's casting vote, the remuneration of the liquidator be fixed in the terms set out in that resolution." 29 I shall make both the orders I have outlined in paragraphs [21] and [28] above. 30 In relation to costs, I am of the view that the breaches of fiduciary duty, unintentional though they were, militate against any application of company funds towards the present application, which has been in the nature of a salvage exercise undertaken by the plaintiff for his own financial benefit and not as part of the conduct of the voluntary administration or the subsequent winding up. There will be no order as to costs. The plaintiff is not entitled to recoup his costs out of the assets of the company. **********

Breen v Williams

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