Supreme Court of WA|2006-06-16|Before: Mr J, Simmonds J

Brian Keith Mcmaster As Administrator of Eznut Pty Ltd (Administrators Appointed) & Anor v Eznut Pty Ltd (Administrators Appointed) & Ors [2006] WASC 109 (16 June 2006)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : BRIAN KEITH MCMASTER AS ADMINISTRATOR OF EZNUT PTY LTD (ADMINISTRATORS APPOINTED) & ANOR -v- EZNUT PTY LTD (ADMINISTRATORS APPOINTED) & ORS

MATTER : Eznut Pty Ltd (Administrators Appointed) ACN 102 508 789

BETWEEN : BRIAN KEITH MCMASTER AS ADMINISTRATOR OF EZNUT PTY LTD (ADMINISTRATORS APPOINTED) (ACN 102 508 789)

OREN ZOHAR AS ADMINISTRATOR OF EZNUT PTY LTD (ADMINISTRATORS APPOINTED) (ACN 102 508 789)

EZNUT PTY LTD (ADMINISTRATORS APPOINTED) (ACN 102 508 789)

Voluntary administration - Appointment of administrator - Declaration of validity of appointment - Whether opinion of directors that company is insolvent genuine and properly formed - Whether appointment of director for improper purpose - Whether appointment an abuse - Principles for "caretaker" directors - Whether reasonable notice of meeting of directors given - Order about how Pt 5.3A of the Corporations Act 2001 (Cth) is to operate in relation to a particular company - Whether such order should be made

Jurisdiction to make declaration of validity of appointment or order as to how Pt 5.3A is to operate - Whether a decision of an administrative character - Whether jurisdiction specifically conferred by Corporations Act

Practice and procedure - Whether leave to re-open a hearing before delivery of judgment should be granted

Autodesk Inc v Dyason (No 2) [1993] HCA 6; (1993) 176 CLR 300

Bell v St Michael's Golf Club [2003] NSWCA 159

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

Boothey v Boothey, unreported; FCt SCt of WA; Library No 970092; 13 March 1997

Brown v La Trindad (1887) 37 Ch D 1

Commonwealth Homes and Investment Company Ltd v MacKellar [1939] HCA 34; (1939) 63 CLR 351

Eastern Resources Of Australia Ltd v Glass Reinforced Products (GRP) Pty Ltd [1987] 2 Qd R 31

Eastland Technology Australia Pty Ltd & Ors v Whisson & Ors [2005] WASCA 144

Federal Airports Corporation v Aerolineas Argentinas [1997] FCA 723; (1997) 147 ALR 649

Hickey v Aselford & Anor [2003] NSWSC 185

Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317

La compagnie de Mayville v Whitley [1896] 1 Ch 788

Liwszyc & Anor v Smolarek & Ors [2005] WASC 199

Oil Basins Ltd v Commonwealth [1993] HCA 60; (1993) 178 CLR 643

Paringa Mining and Exploration Co Plc v North Flinders Mines Ltd (1988) 14 ACLR 587

Re Ansett Australia Ltd and Mentha sub nom Ansett Australia Ltd (No 1) [2001] FCA 1806; (2001) 115 FCR 376

Re Pasdonnay Pty Ltd (administrator appointed); McDonald & Anor [2005] FCA 335; (2005) 53 ACSR 717

Singh v Crafter, unreported; FCt SCt of WA; Library No 8434; 15 August 1990

Smolarek & Anor v Liwszyc & Ors [2006] WASCA 50(S)

Smolarek & Anor v Liwszyc & Ors [2006] WASCA 50

Sons of Gwalia Ltd v Margaretic [2006] FCAFC 17

Utilicorp NZ Inc v Power New Zealand Ltd (1997) 8 NZCLC 261,465

Wagner v International Health Promotions (administrator appointed) (1994) 15 ACSR 419

Woonda Nominees Pty Ltd v Chng [2000] WASC 173

Arrow Nominees Inc v Blackledge [2002] 2 BCLC 167

Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 99; (2000) 34 ACSR 391

Federal Commissioner of Taxation v St Helens Farm (ACT) Pty Ltd [1981] HCA 4; (1981) 146 CLR 336

Panasystems Pty Ltd v Voodoo Tech Pty Ltd [2003] FCA 428; (2003) 21 ACLC 842

Re Wood Parsons (in liq) [2002] NSWSC 1058; (2002) 43 ACSR 257

Shirlaw v Graham [2001] NSWSC 612

Toole v Flexihire Pty Ltd (1991) 6 ACSR 455

1 This is an application, by originating process under r 2.2 of the Corporations Rules, for an order under s 447C of the Corporations Act 2001 (Cth), and alternatively for an order under s 447A of the Act.

2 The order sought under s 447C is a declaration in accordance with s 447(2) that the plaintiffs were validly appointed as administrators of the first defendant under s 436A of the Act.

3 The order sought under s 447A is an order in accordance with s 447A(1) that Pt 5.3A of the Act, the Part to do with the administration of a company's affairs with a view to executing a deed of company arrangement, should operate in relation to the first defendant as if the plaintiffs had been validly appointed as its administrators under s 436A.

4 The issues raised by this application, the first four of which are the doubts specified in the application under s 447C, are:

• whether a resolution to appoint administrators under s 436A can be made as a result of a vote of directors who were themselves appointed following interlocutory orders for their reinstatement, orders which were at the time of the hearing subject to appeal, and were subsequently varied, and which were subject to final orders following a trial that has not yet occurred, in other proceedings, COR 144 of 2005 (the "caretaker" issue);

• whether the resolution in this case was bona fide and genuinely formed, as required by the authorities on s 436A: Kazar v Duus [1998] FCA 1378; (1998) 88 FCR 218, Merkel J, at 230 - 231;

• whether the resolution in this case was for an improper purpose;

• whether the second defendant, one of the first defendant's directors, was not given the required notice of the meeting of directors at which the resolution was passed; and

• whether this is a suitable case for the making of the order sought under s 447A(1).

5 I begin by describing the statutory framework for this application. I then turn to consider objections to this Court's jurisdiction, as well as to the position taken by certain parties in this action, and to the joinder of others. After a review of the factual background to the application, I describe the way these proceedings unfolded before me, including an application made after the end of the hearing to re-open it. I then turn to consider the issues listed, in the order given.

The statutory framework to this application

6 By s 436A of the Act, a company may appoint an administrator as the provision specifies. The appointment of an administrator is the first step in a process that can lead to the execution of a Deed of Company Arrangement, approved by the company's creditors as an alternative to liquidation.

7 As described in s 435A, the objects of Pt 5.3A, in which s 436A, as well as s 447C and s 447A fall, are to provide for an administration of the business, property and affairs of an insolvent company so as to maximise the chances of the company, or as much of its business as possible, continuing in existence; or, if continued existence is not possible, so as to result in a better return for the company's members and creditors than would result from an immediate winding up. See also Austin, R P and Ramsay Ford, I M Principles of Corporations Law 12th ed Sydney, LexisNexis Butterworths, 2005, at [25.080].

8 The relevant provisions of s 436A are:

"(1) A company may, by writing, appoint an administrator of the company if the board has resolved to the effect that:

(a) in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and

(b) an administrator of the company should be appointed."

9 The relevant provisions of s 447C, which are for the making of an order to validate the appointment of an administrator, are:

"(1) If there is doubt, on a specific ground, about whether a purported appointment of a person as administrator of a company, or of a deed of company arrangement, is valid, the person, the company or any of the company's creditors may apply to the Court for an order under subsection (2).

(2) On an application, the Court may make an order declaring whether or not the purported appointment was valid on the ground specified in the application or on some other ground."

10 The relevant provisions of s 447A, which are for the making of orders as to how the Pt 5.3A is to operate in relation to a particular company, are:

"(1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.

...

(4) An order may be made on the application of:

(a) the company; or

(b) a creditor of the company; or

(c) in the case of a company under administration - the administrator of the company; or

(d) in the case of a company that has executed a deed of company arrangement - the deed's administrator; or

(e) ASIC; or

(f) any other interested person."

11 There is a body of authority that an order may be made under s 447A which makes Pt 5.3A apply as if a person not validly appointed the company's administrator was in fact validly appointed: see Re Pasdonnay Pty Ltd (administrator appointed); McDonald & Anor [2005] FCA 335; (2005) 53 ACSR 717, Fed Ct, Giles J, and authorities cited there.

12 The second defendant submitted that this Court had no jurisdiction to entertain this application, under s 447C at least. In effect jurisdiction was only conferred on the Federal Court.

13 The second defendant's argument was based on s 1337B(2) of the Act. That provision confers jurisdiction "in civil matters arising under the Corporations legislation" (defined in s 9 "Corporations legislation" to include the Act) on State Supreme Courts, but "subject to s 9 of the Administrative Decisions (Judicial Review) Act 1977 [(Cth)]" ("the ADJRA"). It was submitted that the qualification was engaged here, and meant no jurisdiction was conferred on the Court in respect of the decision purportedly taken under Corporations Act, s 436A.

14 The ADJRA s 9(1) is as follows:

"(1) Notwithstanding anything contained in any Act other than this Act, a court of a State does not have jurisdiction to review:

(a) a decision to which this section applies that is made after the commencement of this Act;

(b) conduct that has been, is being, or is proposed to be, engaged in for the purpose of making a decision to which this section applies;

(c) a failure to make a decision to which this section applies; or

(d) any other decision given, or any order made, by an officer of the Commonwealth or any other conduct that has been, is being, or is proposed to be, engaged in by an officer of the Commonwealth, including a decision, order or conduct given, made or engaged in, as the case may be, in the exercise of judicial power."

15 There are definitions of terms used in s 9(1), in s 9(2), which in material part is as follows:

(a) a decision that is a decision to which this Act applies; ...

'review' means review by way of:

...

(c) the making of a declaratory order."

16 A "decision to which this Act applies" is in turn defined in s 3(1) of the ADRJA in material part as follows:

"(1) In this Act, unless the contrary intention appears:

'decision to which this Act applies' means a decision of an administrative character made, proposed to be made, or required to be made (whether in the exercise of a discretion or not and whether before or after the commencement of this definition):

(a) under an enactment referred to in paragraph (a), (b), (c) or (d) of the definition of enactment [which includes the Corporations Act]; ..."

17 The second defendant's submission is that these proceedings are an application for a "declaratory order" in respect of the validity of a decision (to appoint an administrator) which is a "decision of an administrative character made ... under" s 436A of the Corporations Act. Thus the proceedings are caught by s 9 of the ADJRA, and this Court has no jurisdiction to entertain them.

18 It does not appear to me that a decision to appoint an administrator under s 436A of the Corporations Act is a "decision of an administrative character" (emphasis supplied). There is authority that the latter sort of decision can include a decision of a commercial character: Federal Airports Corporation v Aerolineas Argentinas [1997] FCA 723; (1997) 147 ALR 649, per Lehane J, Beaumont and Whitlam JJ agreeing, at 658 (fixing of charges for the use by airlines of the facilities of airports). However, that authority also appears to me to confirm that the decision must be one that could also be characterised as in the execution or administration of the legislation under which the decision was authorised to be taken. The appointment of an administrator is one in the administration of the company for which the appointment is made, but not, it seems to me, in the execution or administration of the Corporations Act.

19 However, I do not have to reach a final view on that matter. That is because s 1337B is in Div 1 ("Civil Jurisdiction") of Pt 9.6A of the Corporations Act, and s 1337A(5), which is also in that Division, states: "Nothing in this Division affects any other jurisdiction of any court."

20 The Supreme Courts of the various States are a species of "court": s 58AA "Court". I note the references to "Court" in s 447C. I interpret those references as the conferral of jurisdiction on a "Court", which is thus not affected by s 1337B(2).

21 Accordingly, I conclude that this Court has jurisdiction to hear and determine, by the making of declaratory orders, applications under s 447C.

22 The position is in my view even clearer as to whether this Court has jurisdiction to make the orders sought under s 447A. That provision is not, it seems to me, concerned with "review" of a "decision", but rather consideration of the application of Pt 5.3A to the circumstances. In addition, I note that that provision also refers to the "Court" in a way that for present purposes is the same, in my view, as that used in s 447C.

23 There is considerable disagreement between the plaintiffs and the second defendant as to a number of aspects of the background to this application. So much is evident from the affidavits filed in support of their respective positions in this action. However, the basic picture is reasonably apparent.

24 Eznut Pty Ltd is a company whose business is concerned with the development of a device known as the "Eznut". This device is a self-tightening fastener which it is said will not come undone under extreme vibration and is said to have other advantages. There are two sets of patent applications, pending if not granted, both in Australia and elsewhere, in respect of different aspects of this device. One was a claim as to a washer and threaded fastener assembly incorporating the same, in the name of the second defendant; the other was a claim as to an elastic joint element and fastener assembly, in the name of the Eznut company. I call these respectively, as they were called in the hearing before me, "the First Patent" and "the Second Patent". The Eznut Company was incorporated in 2002, and has never had a "constitution" within the Act, with the result that the Act's "replaceable rules" have applied as they are from time to time (Act s 135).

25 The second defendant is an engineer and was an initial director of the Eznut Company when it was incorporated in 2002. At all material times she has been managing director of the company. The first-named fourth defendant was the other initial director. At incorporation the second defendant held the overwhelming majority of the shares of the Eznut Company.

26 By April 1995 there was a third person acting as a director, the second-named fourth defendant. While there appears to be no contest he was first appointed on 1 July 2003, there is a contest over how he was first appointed, whether by the board or the general meeting. There is no contest he was continuing to act as a director in April 2005 and indeed subsequently.

27 By 13 April 2005 it appears that the second defendant's beneficial holdings of shares in the Eznut company as a proportion of the total, as a result of share issuances since incorporation, had been reduced to 64.5 per cent. By that date, the other shareholders were family trusts for the first and second named fourth defendants as well as a number of other entities.

28 Following directors' meetings of 9 and 16 April 2005 efforts were made to raise a further $67,000 by an issue of shares. The second defendant had opposed the resolution at the board meetings to issue the shares. Shares were offered to all shareholders in proportion to their shareholding. The second defendant did not take up the offer to her, and those shares were offered to and the offers accepted by the remaining shareholders. There appears to be some contest over whether sums totalling $67,500 for all of the shares to be issued, numbering 1,500,000 in all, were paid to the company. However, it is not in contest that the company's share register was not changed to show the issue or share certificates issued, then or subsequently. I note, however, that the issue appears to be reflected in the records for the company at ASIC as at 2 February 2006.

29 By 27 May 2005 serious disagreements over matters to do with the company had developed between the first and second named fourth defendants and the second defendant. On that date what was said to be a general meeting of the company was held, attended only by the second defendant and the third defendant, who is her daughter. There is a contest between the parties as to whether there was a quorum at that meeting. The contest is largely but not entirely over the effectiveness of a purported transfer of shares from the second to the third defendant prior to the meeting.

30 At the 27 May 2005 meeting, there were resolutions passed to remove the first named fourth defendant as a director of the company and to appoint the third defendant as a director. Following the meeting, forms were lodged with ASIC to the effect that these changes had occurred, and also that the second named fourth defendant had ceased to act as a director of the company.

31 These events led to the fourth defendants commencing proceedings by originating process dated 17 June 2005, in COR 144 of 2005, against the second and third defendants in these proceedings, as well as against the Eznut Company, seeking the reinstatement of the first and second named fourth defendants as directors and related relief.

32 Two sets of interlocutory orders were made in COR 144 of 2005. Initially, an interlocutory order by a Master was made restraining the individual defendants in those proceedings from binding or purporting to bind the company without the approval and consent of the plaintiffs in those proceedings or the Court or both. This order was varied subsequently to allow the mother, the second defendant in these proceedings, to communicate with patent agencies in the United States with a view to keeping in force or maintaining the applications lodged with those agencies for the company, except that she was not at liberty to incur costs and expenses on behalf of the company.

33 The other set of interlocutory orders was the result of the decision in Liwszyc & Anor v Smolarek & Ors [2005] WASC 199, of Hasluck J, on 2 September 2005 ("Liwszyc"). Those orders, made 2 September and filed 9 September 2005, provided so far as is material for my purposes for the reinstatement of the plaintiffs in those proceedings (the first and second named fourth defendants in these proceedings) as directors of the company; until further order or pending the determination of the action, the daughter (the third defendant in these proceedings) be restrained from acting as a director of the company; and the orders stand in place of the restraining orders previously made, and the defendants' application to set aside the interim restraining orders previously made be dismissed. The mother (the second defendant in these proceedings) was required to take all steps and sign all documents necessary to give effect to among other things the reinstatement order. The orders included a stay of execution for a period of 21 days from 2 September 2005.

34 I note that, on the appeal from this decision, Smolarek & Anor v Liwszyc & Ors [2006] WASCA 50, a decision delivered on 29 March 2006 ("Smolarek"), the Court of Appeal (Steytler P, McLure and Buss JJA) confirmed that the order first referred to should be understood to be an interim one, pending the determination of the action, although it is not so expressed ([30]). The Court of Appeal also appears to me to have also confirmed that the orders third referred to should be understood to have superseded the previous interim orders restraining Ms Smolarek from acting or purporting to act for the company ([95], read with [99]).

35 I return to this decision of the Court of Appeal at a number of points below.

36 A general meeting of shareholders was called by the second defendant as the company's managing director for 21 November 2005. The meeting was called to consider a resolution for the removal of the first named fourth defendant as a director. Both of the fourth defendants attended that meeting, and the adjourned meeting on 29 November 2005. At both there was a dispute over whether the 1,500,000 shares were in fact validly issued. Had they been validly issued, the proportionate shareholding of the second defendant or the second and third defendants together would have been reduced from 64.5 per cent to 48.84 per cent.

37 There is evidence from the first named fourth defendant that no resolution for his removal as a director was passed at either meeting. I have no evidence in the form of minutes of such a meeting, or a filing or filings with ASIC, to indicate he was removed, at about that time or subsequently. A company search for the company indicates that both fourth defendants, with the second defendant, are shown as at 2 February 2006 as directors of the company. The first named fourth defendant continues to communicate with the second defendant describing himself as a director. And, as will be seen, he has acted as a director in other ways. I find then that he has since his reinstatement continued to be a director of the company.

38 There is also evidence that a board meeting was held on 29 October 2005 at which resolutions were passed to remove the second defendant as managing director and to appoint a replacement. However, as will be apparent below, following that meeting the first and second named fourth defendants treated the second defendant as a director, most relevantly in attempting to have her attend a meeting of directors to appoint an administrator of the Eznut Company. In addition, the company search for the company referred to also shows the second and third defendants as directors of the company, and makes no reference to any other directors than those two and the fourth defendants.

39 From 29 December 2005 to 5 January 2006 there were emails to, among others, the directors of the company sent by all of the individuals who had subscribed for the 1,500,000 shares, with one exception. These emails indicated the senders' wishes to have the funds provided for the respective shares returned. One of the emails was from the first named fourth defendant. The exception was the second named fourth defendant, who informed the first named fourth defendant otherwise than by email that he too required the repayment of the funds for the shares not issued to the trust on behalf of which he was acting.

40 The first named fourth defendant sought legal advice as to whether the subscribing shareholders had a claim for the return of their funds. He deposes that he received legal advice that it was more likely than not that they did have such a claim, and that they might be able to trace their claim into the company's cash at bank. If there were such claims, whether or not traceable into the cash at bank, they totalled about $67,500 before any interest.

41 The company's cash at bank as at 27 January 2006 (the significance of which date will shortly become apparent) was about $41,000, representing the company's only readily realisable assets.

42 There was evidence as well of other current liabilities as at that date. There was also evidence of a further liability to the second defendant, as well as the need to expend significant funds to maintain the Eznut Company's patent applications.

43 On 11 January 2006 a board meeting was held attended by both fourth defendants, but not by the second defendant, at which the financial condition of the company was discussed, and resolutions passed, to accept the offer of the share issue claimants to convert their claims to a secured loan, and to appoint the firm of which the present plaintiffs are partners as the administrator of the company. When the relevant partners of the firm were approached to act as administrator, it was indicated on their behalf that they would not be able to do so without an indemnity that would cover their remuneration and the anticipated costs of maintaining the company's intellectual property rights in the form of the patent applications. It would appear that the arrangement with the share issue claimants was not considered sufficient for this purpose. It was also indicated that prior to the acceptance of any appointment further resolutions of the company should be passed.

44 On 27 January 2006 there was a further meeting with the same attendance, this time at the plaintiffs' offices, at which resolutions were passed in the terms of Act s 436A(1). Subsequently, in exchanges with the second defendant, she expressed the concerns about the validity of the plaintiffs' appointments which they make the foundation of the current application under s 447C. One of those concerns had to do with what she said was a lack of proper notice to her of the meeting of 27 January 2006, as, on her understanding of the matter, she had been contacted about the meeting by telephone after the meeting had begun.

45 On their appointment, the plaintiffs secured the indemnities that had been sought.

46 On 29 March 2006, as I have indicated, the judgment of the Court of Appeal in Smolarek was delivered. In that decision, the judgment of the Court Appeal was that the appeal should be allowed, "but only to the extent of setting aside the order made by the primary Judge for the reinstatement of Mr Duta, [the second-named fourth defendant] as a director" (at [111]). At the delivery of that decision, the issue arose as to whether the order of the Court should take effect "from the date of its pronouncement" by the Court (on 29 March 2006), or "from the date of the primary Judge's order" (2 September 2005), leading to the delivery on 26 April 2006 of the Court of Appeal's supplementary decision in Smolarek & Anor v Liwszyc & Ors [2006] WASCA 50(S) ("Smolarek, supplementary"). In that decision, Court held in the circumstances outlined in that decision that their earlier order "should take effect from the date on which this Court's order is pronounced" (see [3] and [21]), and not be dated as of some earlier day (see [20]).

47 On 8 February 2006, the proceedings before me were commenced by the filing of originating process pursuant to the Act. Three affidavits, one an affidavit of Brian McMaster (one of the two administrators of the Eznut company), the second an affidavit of the first named fourth defendant, and the third an affidavit of the second named fourth defendant, all sworn on 8 February 2006, were filed on the same day. An original hearing date of 23 February 2006 was vacated on the application of the second and third defendants, appearing in person, and the original programming orders of the Court were varied accordingly to allow additional time to the defendants to file and serve any affidavits in opposition to the application, to the plaintiffs to file and serve any affidavit in reply, and the defendant to file and serve any outline of submissions and list of authorities in opposition to the application. An affidavit of the second defendant, sworn 27 February 2006, was duly filed, in response to which an affidavit in reply of the first named fourth defendant, sworn 28 February 2006, was duly filed. I note that a further affidavit was also filed in these proceedings, of Charles Nilant, a consultant to the firm of which the plaintiffs are partners, sworn 24 February 2006. It is not clear to me how this affidavit is provided for in the programming orders for these proceedings. However, the second and third defendants made no objection to it on that account, and indeed, as I will indicate, themselves made reference to material in it. I make a reference to that material later in my reasons.

48 In the event, the hearing commenced on 1 March 2006 and concluded on 2 March 2006. The plaintiffs appeared by counsel, and the second and third defendants appeared in person, as it appears they have done throughout the proceedings in this action. There were no appearances for the first and fourth defendants. The second and third defendants sought an adjournment of the hearing, to permit them more time to prepare for the hearing, and to allow for the then pending decision in the appeal from the decision of Hasluck J in Liwszyc (supra). In view of the circumstances, most notably the previous vacating of the hearing date and the variation of the programming orders, I determined that it was not appropriate to adjourn the hearing, which was listed for that day only. However, with the consent of counsel for the plaintiffs, I allowed for the continuation of the hearing to the following day, to accommodate the position of the second and third defendants as self-represented litigants who I judged needed that time to prepare their closing submissions.

49 In the event, at the hearing before me, it became evident to me that the second and third defendants required further time to understand the basis of the plaintiffs' objections to the second defendant's affidavit of 27 February 2006. Accordingly, I did not rule on those objections, and gave leave to the second and third defendants by 7 March 2006 to file and serve any written submissions in opposition to the plaintiffs' objections. I also gave leave to the second and third defendants by 7 March 2006 to file and serve any written submissions as to any objections on specified grounds to any of the plaintiffs' affidavits. I also granted leave to the plaintiffs by 8 March 2006 to file and serve any written submissions in response to submissions made pursuant to that second form of leave.

50 At the hearing the second and third defendants sought to make reference to the second defendant's affidavit sworn 26 July 2005 in COR 144 of 2005, as to certain paragraphs in it and annexures to it, as well as to annexure "R" to her affidavit in the appeal against the interlocutory orders of Hasluck J in that action, sworn 24 November 2005 (erroneously referred to before me as sworn 25 November 2005). Without objection from the plaintiffs, and notwithstanding the second and third defendants' non-compliance with O 36 r 10, I gave such leave, except as to one paragraph of the affidavit of 26 July 2005, and as to the annexure to the affidavit of 25 November 2005, to which the plaintiffs maintained objection. In respect of both of those, I gave leave to the second and third defendants by 7 March 2006 to file and serve any written submissions seeking leave to make reference to that paragraph and that annexure. I also gave leave to the plaintiffs by 8 March 2006 to file and serve any written submissions in response to submissions made pursuant to this third form of leave.

51 In the event, on 7 March 2006 the second and third defendants filed written submissions pursuant to the first and third forms of leave, and sought further time in relation to the second form of leave. On 8 March 2006 the plaintiffs filed written submissions in response to the second and third defendants' written submissions pursuant to the third form of leave.

52 The second and third defendants' written submissions of 7 March 2006 also contained material constituting further submissions on the duties of the first and second named fourth defendants as directors, their power to appoint administrators contrary to the wishes of the second defendant, the duties of the administrators in relation to the patents, the matters and their importance covered by those patents, the history of the internal relations in the Eznut company involving the first and second named fourth defendants and others associated with them, and involving the second and third defendants, the background to the issuance of 1,500,000 shares following the directors' meetings of 9 and 16 April 2005, the alleged irregularities in that issuance and their effects, the alleged removal of shares issued to the third defendant, and the argument that the appointment of the administrators is an insolvent transaction.

53 I do not grant leave to make such further submissions. The scope of the matter addressed to which I have referred is considerable. The hearing before me on 1 and 2 March 2006 itself was extensive, and gave the second and third defendants a considerable opportunity to address these matters, many of which were in fact addressed, as will be come evident in these reasons. In those circumstances, I do not consider this is a case involving exceptional circumstances such that it would appropriate to grant leave to make the further submissions to which I have referred. See Boothey v Boothey, unreported; FCt SCt of WA; Library No 970092; 13 March 1997, per Ipp J, at 4.

54 Nor, in view of the matters to which I have referred, do I consider it appropriate to further extend the time to make submissions in relation to the admissibility of the affidavits filed in support of the plaintiffs' position in these proceedings. In particular, considerable time was given over in the hearing before me to explaining to the second and third defendants the principles upon which objections of that sort might be taken. Time was then allowed for them to consider whether to make any such objections.

55 As to the balance of the submissions of the second and third defendants, I refer first to the material in the second defendant's affidavit in these proceedings to which the plaintiffs have objected. I have found that the second and third defendant's submissions which I consider below do not depend on any of that material. In any event, most of that material, particularly but not only that to which objection was taken on the basis it was "conclusionary", was in my view subsumed in the argument with which I deal below (see affidavit of Hanna Smolarek sworn 27 February 2006, pars 9, 15, 17, 18, 21, 24 - 34, 36, 41, 43, 51 - 52, 55 - 56, 58, 63 - 64, 66, 68, 70, 72 - 74, 76 - 81, 83 - 86, 89, 91 - 103 and 105).

56 This leaves the material in the second defendant's affidavit of 26 July 2005 in COR 144 of 2005 and annexure "R" to her affidavit of 24 November 2005 in the appeal in that action to which the plaintiffs maintained their objections. I return below to each of those, separately.

57 There was a further stage in these proceedings, however. It arose out of the delivery of the judgment in the Smolarek (supra). On 13 April 2006 the second and third defendants filed an application to re-open the proceedings to permit the Court to take account of the decision of the Court of Appeal in Smolarek, as well as to consider whether the decision would be backdated (which Smolarek supplementary subsequently resolved in the negative), her claims that minutes of the first creditors meeting had been falsified, and that the administrators had closed out the company's bank account, spending the Eznut company's money. As a result of a process of conferral between the plaintiffs (the respondents to the application) and the second defendant (the applicant), it was agreed I could deal with that application on the papers, which I understood to consist of the second defendant's application to re-open, her supporting affidavit sworn 13 April 2006, her written submissions, and the written submissions of the plaintiffs.

58 The plaintiffs consented to the reasons for decision of the Court of Appeal in Smolarek being referred to me, together with a covering letter containing submissions limited to the implications of that decision for COR 16 of 2006. There was no such covering letter sent to me. However, as the written submissions of the second defendant addressed the matter of the effect of the decision in Smolarek, I consider the consent of the plaintiffs allowed for me to take account of the reasons for the eventual decision in Smolarek supplementary.

59 The plaintiffs submitted, however, in opposition to the application to re-open in any other respect, that the matters of the minutes of the first creditor's meeting and the spending of the Eznut Company's money should not be entered into as the second defendant would have me do. Those matters it was submitted had occurred before the hearing before me that began on 1 March 2006. A number of the arguments made in relation to them were ones which were open to the second defendant at that hearing, and indeed, as I will indicate, were gone into at that hearing.

60 I agree. The jurisdiction to re-open after the delivery of judgment is one described in Autodesk Inc v Dyason (No 2) [1993] HCA 6; (1993) 176 CLR 300, per Mason CJ at 303 as one:

" ... not to be exercised for the purpose of reagitating arguments already considered by the court; nor is it to be exercised simply because the party seeking a rehearing has failed to present the argument in all its aspects or as well as it might have been put. What must emerge, in order to enliven the exercise of the jurisdiction, is that the court has apparently proceeded according to some misapprehension of the facts or the relevant law and that this misapprehension cannot be attributed solely to the neglect or default of the party seeking the rehearing. The purpose of the jurisdiction is not to provide a backdoor method by which unsuccessful litigants can seek to reargue their cases."

61 I consider that similar principles apply in a case where the matter was urgent, as was the case here, and to which I return below, and the matter to be adduced was available to the party seeking to re-open before the delivery of judgment. See also Singh v Crafter, unreported; FCt SCt of WA; Library No 8434; 15 August 1990 per Pidgeon J, at 16.

62 In this case, the minutes of the first creditors meeting had been lodged with the Australian Securities and Investments Commission on 14 February 2006, although the second defendant apparently only discovered them there in a search she did on 8 March 2006: affidavit of Hanna Smolarek sworn on 13 April 2006, par 17. She had previously asked one of the administrators for a copy of "all of the minutes you've held in relation to the company", by an email on 22 February 2006 (annexure "C" to that affidavit). The administrator had not responded to this request, it appears. However, the availability of the minutes at the ASIC web site, the concern of the second defendant to have them, and the concern of the defendant as to the suitability of the administrators in this case, to which her argument on one of the issues at the hearing before me on 1 and 2 March 2006 was addressed, all seem to me to weigh against re-opening the hearing in respect of the minutes.

63 It is the case of course that the second defendant in respect of the minutes was seeking to re-open to show that the minutes had been falsified, which would appear to go to the second defendant's claim she was made late for the meeting by the administrators "on purpose" (Smolarek affidavit of 13 April 2006, at par 19). This went to the honesty rather than the competence of the administrators, and the focus of her argument before me at the hearing on 1 and 2 March 2006, as I will explain below, was on the latter. This of course is a most serious allegation, which would require some hearing time to explore and test.

64 However, I note again the context to these proceedings, where urgent action is required, as had been evident to the second defendant from the outset of these proceedings, when the initial programming orders were made, and then varied. The conduct relied upon does not appear to represent matter which required the discovery of the minutes to bring to light. It appears to me it represented matter which she could have raised at the hearing before me, albeit without the support of the minutes. She did not raise it.

65 As to the closing out of the Eznut Company's bank account, the second defendant had been informed, by material attached to an email from solicitors for the plaintiffs to her shown as sent on 1 February 2006, that the plaintiffs intended "taking control of the Company's bank accounts": affidavit of Brian McMaster sworn 8 February 2006, annexure "BKM 8". That affidavit, as well as annexing that material, also confirms that the plaintiffs had, since their appointment, required the "Bank of Western Australia Ltd [to] remit to us all funds maintained in bank accounts in the name of the Company" (par 12(1)).

66 In respect of the bank accounts, the second defendant was seeking to raise the matter of the plaintiffs depleting the bank accounts when the matter of their lawful appointment had not been settled. However, the matter of lawful appointment was of course precisely what was in issue from the outset of the proceedings eventually heard before me, and the matters to do with the accounts were readily available to the second defendant. She did not raise as she now does the issue of the depletion (then in prospect). However, she did indeed raise the matter of the taking of any action by the administrators on the authority of an appointment by "caretaker" directors.

67 It is important in dealing with the application to re-open I not lose sight of the second defendant's position as a self-represented litigant who at the time of the hearing before me was involved not only in those proceedings but also in the appeal against the interlocutory orders of Hasluck J in COR 144 of 2005. However, I consider that there has been a substantial effort to accommodate that position, in the vacating of the original hearing in this matter, in the time allowed for the hearing, which extended over parts of two days, and in the leave to which I referred earlier.

68 In considering the interests of the second defendant in this case, I must also consider the interests of the plaintiffs in the circumstances of these proceedings as I have described them. I must also consider the public interest in the finality of hearings, especially in matters like an administration where, as has been apparent to the second defendant, it is important to resolve issues of the sort raised in these proceedings as a matter of urgency.

69 Accordingly, save to allow for my consideration of the reasons for decision in Smolarek and Smolarek supplementary (which does not require any further appearances or submissions), I do not grant the application to re-open.

70 Before I turn to consider the issues in these proceedings, there is a further issue with respect to them raised by the second and third defendants that I need to consider. It has to do with the position in these proceedings of the first and second named fourth defendants, and the joinder of the second and third defendants.

71 The written submissions for the second and third defendants put to me that the first and second named fourth defendants through their affidavits, sworn in support of the plaintiffs' application, took a position in these proceedings inconsistent with their status as defendants. Those written submissions also put to me that the second and third defendants were not proper parties to these proceedings.

72 As to the first matter, there is no reason why, in proceedings such as these, under the Act, s 447C, and in the alternative under s 447A, for what in substance is declaratory relief, a defendant might not take a position favourable to or in support of the position of another party, including that of a plaintiff: see Seaman, Civil Procedure Western Australia at [18.6.5A], and Oil Basins Ltd v Commonwealth [1993] HCA 60; (1993) 178 CLR 643, Dawson J, at 650. Resort to the principles for proceedings for declaratory relief to resolve issues arising in respect of proceedings for relief under Act s 447C or s 447A is warranted by the general reference, in the Supreme Court (Corporations) Rules (WA) 2004 r 1.3(2), to the Rules of the Supreme Court for proceedings under the Act, and also on general principle.

73 As to the second matter, the joinder of the second and third defendants, the Act provides for those who may be applicants, for s 447C, in s 447C(1) and, for s 447A, in s 447A(4): see above. Neither set of provisions describes who may be named as defendants. For that purpose, it is appropriate again to resort to the principles for proceedings for declaratory relief.

74 In such proceedings, there may on the authorities be a doubt whether or not it is proper to join a party simply in order to bind that party to the judgment sought: Seaman (supra), at [18.6.6]. There was no suggestion the joinder of the second and third defendants was simply to bind them, however.

75 Rather, the joinder of the second and third defendants appears to have been justified by reference to the general principles which govern the granting of declaratory relief, and which go to who may be properly joined as a defendant in such proceedings. Those principles were described in Bell v St Michael's Golf Club [2003] NSWCA 159, per Tobias JA, Sheller and Ipp JJA agreeing, as follows (at [26]):

"The general principles with respect to the granting of declaratory relief are not in issue. It is common ground that they are set forth in the judgments of the High Court in Ainsworth v Criminal Justice Commission [1992] HCA 10; (1992) 175 CLR 564 at 581-582, 595-597. Those principles have been applied in cases too numerous to mention. They consistently cite the following passage from the speech of Lord Dunedin in Russian Commercial & Industrial Bank v British Bank for Foreign Trade Ltd (1921) 2 AC 438 at 488 as setting out the requirements which must be satisfied before a court will exercise its discretion to make a declaration without other consequential relief:

'The question must be a real and not a theoretical question; the person raising it must have a real interest to raise it; he must be able to secure a proper contradictor; that is to say, someone presently existing who has a true interest to oppose the declaration sought.'"

76 As will become apparent, the second defendant as a director and substantial shareholder, and the third defendant as a person whose position as director is presently in issue in other proceedings, are strongly opposed to the granting of relief under s 447C or s 447A in this case, and the second defendant principally, with support from the third defendant, has made strong arguments in support of that opposition. It is difficult for me to consider the second and third defendants as other than persons with true interests to oppose the relief sought.

77 I turn then to consider the issues in these proceedings.

78 As I have indicated the first named and second named directors at the meeting of the board on 27 January 2006 resolved to appoint the plaintiffs as administrators of the first defendant. As I will indicate below, that is the only such appointment that may properly so operate in this case.

79 At that time the first and second named fourth defendants were in office as directors by virtue of the interlocutory orders of Hasluck J in Liwszyc (supra). Those orders were varied, as I have indicated, by the judgment in Smolarek (supra); however, those orders were not antedated, also as I have indicated: see Smolarek, supplementary.

80 The position of the second and third defendants is that the authority of the directors so in office derived only from the circumstances of their appointment under interlocutory orders of the Court. That authority was only to preserve the status quo in the company as at the date prior to the issue of shares in April 2005 (the validity of which issue is in contest between the parties), or at least as at the date of the interlocutory orders of Hasluck J in Liwszyc (supra). The actions of the first and second named fourth defendants as directors in appointing the plaintiffs as administrators of the company were such as to make a fundamental change in the company's affairs. Such action went beyond the authority, to preserve the status quo, those directors possessed.

81 It is undoubtedly the case that the interlocutory orders in Liwszyc (supra) were to preserve the status quo: see per Hasluck J, at [123]. However, it is also apparent from Hasluck J's reasons that the status quo being preserved was that of the board management structure, prior to the cessation or purported cessation of the authority of the first and second named fourth defendants as directors, and prior to the conferral or purported conferral of authority on the third defendant to act as a director: see [25] and [122], read with [123] and [124]. There is no indication in his reasons of any qualification of the authority of the board, or the authority of any of its members whose authority was confirmed by those orders. The purpose of the orders was to permit the management of the company to be conducted accordingly. I see nothing in Smolarek or Smolarek supplementary that casts any doubt on that understanding of Hasluck J's interlocutory orders.

82 It is also undoubtedly the case that, as at the times of the hearing and orders in Liwszyc (supra), the Court understood the position of the Eznut company as one of a viable concern which was not being pressed to meet claims by creditors or employees: per Hasluck J, at [122], [23].

83 However, since the date of Hasluck's decision in Liwszyc (supra), as I have already indicated, and will return to below, questions have arisen as to the solvency of the company. The Act s 436A permits the board of a company to respond to concerns about solvency by, among other actions, passing a resolution to the effect that, in the opinion of the directors voting for the resolution, the company is insolvent or is likely to become insolvent at some future time, and that an administrator should be appointed. I have already described the objects of an administration as set out in Act s 435A, which are in terms of maximising the chances of the company or so much as is possible of its business continuing in business; or, if that is not possible, producing a better return for the company's creditors and members than would result from an immediate winding up of the company. While a company's move into administration might properly be described as a fundamental change in its affairs, it is also clearly within the authority of a board of directors under the Act, for the purposes indicated.

84 In those circumstances, I do not consider that the actions of the board or its members in appointing administrators could be described, without more, as beyond the authority conferred by orders like those of Hasluck J in Liwszyc (supra).

85 However, the second and third defendants put considerable reliance upon the decision of the Full Court of the Supreme Court of South Australia in Paringa Mining and Exploration Co Plc v North Flinders Mines Ltd (1988) 14 ACLR 587. In particular they referred me to remarks by King CJ, in whose judgment White and O'Loughlin JJ concurred, at 591.

86 In Paringa there was an appeal from orders had been made to adjourn an extraordinary general meeting of North Flinders. The meeting had been requisitioned by Paringa, which held 49.59 per cent of North Flinders's shares, sufficient to give it control of decisions at such meetings. The meeting was to reconstitute the board of North Flinders to give directors nominated by Paringa control of the board. The managing director of North Flinders had, prior to the requisitioning of the extraordinary general meeting, received a request from Paringa for a reconstitution of the board to give them that control. The board had subsequently, but on the date of the requisitioning of the extraordinary shareholders meeting, resolved to have North Flinders make takeover offers for the shares of Paringa and another company, and to make a rights issue to finance the latter offer. The board had also set the date for the extraordinary general meeting at the latest date allowed under the legislation, some two months later. Shortly after those board decisions were made, Paringa had commenced an action to challenge the validity of and seek relief in relation to those offers and that rights issue, and it had obtained interlocutory orders to restrain the implementation of the offers and the rights issue. The adjournment order appealed from was to have the chairman adjourn the extraordinary general meeting until 57 days after the discharge of those interlocutory orders or until further order.

87 The Full Court in Paringa allowed the appeal against the adjournment order and quashed that order, while confirming that the court did have the power to make the adjournment order.

88 Of particular relevance to these proceedings, it had been argued for North Flinders that the adjournment order was necessary, to restore the status quo that had existed before the interlocutory orders to restrain the implementation of the takeover offers and the rights issue and to allow for the length of the trial in Paringa's action. King CJ said this, in relation to that argument (at 591):

"The argument assumes that it is a proper exercise of the powers of the directors to fix the meeting at the latest permissible time and to use the period so provided for the purpose of implementing decisions against the expressed wishes of the controlling shareholders. This is not the purpose, in my view, for which the two month period is allowed by the Code.

The controlling shareholder, or majority shareholders, are entitled to use their voting power to exercise such control of the company as is permitted to shareholders in general meetings. That power is exercised, of course, by means of a general meeting of the shareholders. A reasonable period of time is permitted after requisition to enable the meeting to be arranged, that is to say, to put in place the mechanism whereby the shareholders can exercise their power. The directors are, of course, free to exercise their powers during that interval, but the reality is that from the time a meeting is requisitioned for the purpose of replacing them, especially where it is requisitioned by a controlling shareholder, they are caretaker directors. If they choose to make use of the interval to circumvent the known wishes of the controlling shareholder who seeks to replace them, they cannot complain, in my view, if circumstances supervene to prevent them from so doing.

I know of no principle which requires the court to intervene to protect the directors' freedom to act in that way. The injunction against North Flinders was granted to preserve the status quo, pending a decision of the action. If its incidental effect is to deprive the directors of time which they would otherwise have had to implement their plans against the wishes of the controlling shareholder, no wrong or injustice is thereby done to them, nor is there any infringement of their legal rights. Still less does the injunction cause any wrong or injustice to or infringe the legal rights of the company, the controlling shareholder of which is opposed to the implementation of the directors' plans."

89 I have emphasised the words particularly relied upon by the second and third defendants.

90 It was put to me by counsel for the plaintiffs that the principle of the "caretaker" director has not been well developed in the law, and there is support for that view, as I will shortly explain. However, I consider I must proceed on the basis the principle is part of the law of companies, on Paringa, and on what appears to be the principal authority in this jurisdiction that has considered the principle identified with that case, Woonda Nominees Pty Ltd v Chng [2000] WASC 173, Owen J, at [44] and [46]. In Woonda Nominees an interlocutory injunction to restrain the implementation of a decision of directors approving the placement of shares was granted on the basis that there was a serious question to be tried in terms of a "caretaker" principle. Compare the rather more qualified discussion in Austin and Ramsay, (supra), at [7.410]. Neither case is on all fours with this one, in the sense that both involved decisions to make issues of shares in the shadow of general meetings to be held to remove directors. However, it seems to me that the principle is potentially applicable, on the authority of Utilicorp NZ Inc v Power New Zealand Ltd (1997) 8 NZCLC 261,465, which is referred to without disapproval in Woonda Nominees, Owen J at [45] as follows:

"In Utilicorp [supra] a majority shareholder asked the Court to restrain directors from accepting an offer to sell a strategic parcel of shares in a situation where, at a shareholders' meeting to be held on the day following the hearing of the injunction application, those directors were likely to be voted out of office. The injunction was granted. Giles J referred to Paringa Mining and other authorities. His Honour's conclusion, expressed at 261,469, was as follows:

'Having reviewed the cases in the limited time available to me I conclude that the more recent authorities relied upon by the plaintiff indicate that a principle may well be evolving whereby some limits are placed upon the rights of caretaker directors. ... It seems to me that the concept of some restricted power remaining with caretaker directors is a sensible development in today's modern commercial context. I do not suggest that a company cannot continue to be managed or to operate. What it means is that there is a need for compelling caution on the part of directors whose term of office is coming to an end not to make decisions which fall within the category of fundamental or significant.'"

91 In this case, there was the shareholders meeting of 21 November 2005 adjourned to 29 November 2005 I referred to above. The business at that meeting was the removal of the first named fourth defendant as a director: Smolarek affidavit of 27 February 2006, pars 33 and annexure "B", and pars 36 and 40. On the evidence before me that meeting has been further adjourned "pending court decision on the status of the shares": par 40.

92 I have already indicated that my understanding of the voting position in the Eznut Company is that the second defendant will, regardless of the outcome of that decision, have a majority of the votes at that meeting. Whether the exercise of her voting power at a meeting of shareholders would be sufficient to prevent the first named fourth defendant being a director, is, however, a different matter, which it appears is to be further addressed in COR 144 of 2005: see Smolarek (supra) at [77]. At the same time, there is support for the application of a "caretaker" principle to a case where the general meeting is one at which the director "may" be removed; however, the fact that there is no high level of certainty that will happen will affect how the principle is to be applied: Woonda Nominees, (supra), Owen J at [46], [47] and [48] (source of quotation).

93 In particular that authority supports the conclusion, in respect of the application of a "caretaker" principle in a case like this one, that it is necessary to consider, not only whether the directors' decision is a "fundamental or significant" one which is "not within the ordinary course of the day to day business of the company", but also whether the decision is "not otherwise necessary for the proper running of the company": Woonda Nominees, (supra), Owen J, at [48]; and see also [51]. At [55], his Honour, in considering the balance of convenience, said there was:

"I think, insufficient evidence upon which I could form the view that the proper running of the company will be prejudiced seriously if the placements do not go ahead."

94 See also Austin and Ramsay, (supra), at [7.410].

95 This case raises precisely the question of prejudice to the proper running of the company in the circumstances in which it found itself on 27 January 2006. That question, in my view, is answered by reference to the resolution of the four issues raised by these proceedings and considered below.

The resolution of the board was not bona fide and genuinely formed

97 The resolution of the board under s 436A must follow the form in that section, which by s 436(1)(a) requires a resolution that, in the opinion of those voting in favour of that resolution, the company is "insolvent or likely to become insolvent at some future time": Wagner v International Health Promotions (administrator appointed) (1994) 15 ACSR 419, Santow J, SC NSW (Eq). No such resolution was passed at the meeting of 11 January 2006: the only resolutions then passed, on the minutes of that meeting in evidence before me, was to accept an offer of certain claimants to convert their claims to secured debt in the terms I will return to, and to appoint the plaintiffs' firm as administrator of the Eznut company (affidavit of David Liwszyc sworn 8 February 2006, par 42 and annexure "DL9").

98 The board appears to have been advised in terms of the law I have just described when it passed its resolutions on 27 January 2006, apparently replacing that for the appointment of administrators of 11 January 2006. In any event, that earlier resolution cannot be relied upon for purposes of relief in these proceedings, as I have indicated, and no attempt was made to do so.

99 The opinion as to solvency referred to in Act s 436(1)(a) must be "genuine, bona fide and concluded", and in forming that opinion the board must address the question formulated in s 436A and not err in law in doing so: Kazar (supra), per Merkel J, at 231.

100 The resolution of the board on 27 April 2006 was in material part as follows (Liwszyc affidavit of 8 February 2006, annexure "DL 11"):

"1. 'That in the opinion of the directors, the company is insolvent, or is likely to become insolvent at some future time, and an administrator should be appointed.'"

101 It will be noted that the resolution refers to a single opinion expressed as to "actual or likely insolvency". Merkel J in Kazar (supra) confirmed (at 231) such a resolution would satisfy the requirements of s 436A if the opinion met the test referred to. It will also be noted that the resolution contains the language of both s 436A(1)(a) (on solvency) and s 436A(1)(b) (on the appointment of an administrator).

102 The second and third defendant's challenge to that part of the resolution of 27 January 2006 to which s 436A(1)(b) relates goes in my view to the issue reached in the next section of these reasons, concerning proper purpose.

103 As to the part of the resolution to which s 436A(1)(a) (to do with solvency), relates, the Act provides by s 95A(2) that a person who is not "solvent" is "insolvent". As to when a person is "solvent", s 95A(1) provides:

"A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable."

104 What matters for this purpose is the opinion of the board, provided the opinion addresses the question of solvency as formulated by s 95A as that provision is properly to be understood. However, while that question is on its face a subjective one, it will be of considerable practical importance to consider the financial circumstances of the company as they were known to the board at the time of the resolution: Kazar (supra), per Merkel J at 232, 234. The Court will consider whether those circumstances properly considered showed an actual or likely inability to pay all of the person's debts as and when they became due and payable, which would make relevant whether there were then or in prospect outstanding claims being or that would be pressed by creditors, claims the person was or would be unable to meet: see per Merkel J at 234.

105 Both the Liwszyc affidavit of 8 February 2006, par 30 (as to the first named fourth defendant) and the affidavit of Gheorghe Duta sworn 8 February 2006, par 7 (as to the second named fourth defendant) depose to the belief of each on 27 February 2006 that the Eznut Company was insolvent.

106 By 11 January 2006 there were claims being pressed by persons who had or said they had paid for 1,500,000 shares but who had not received any shares for return of their money, as I have indicated: Liwszyc affidavit of 8 February 2006, pars 27 and 28. The total amount was, also as I have indicated, $67,500. Of that amount, $31,612 represented contributions by trusts associated with the first and second named fourth defendants for the trusts' shares: Liwszyc affidavit of 8 February 2006, par 22. On the evidence before me both the first named and the second named fourth defendants were pressing those claims on behalf of the respective trusts: pars 27(4) and 28.

107 As I have previously indicated, legal advice as to the validity of the claims had been obtained by the first and second named fourth defendants. This advice was understood by the first and second named fourth defendants to have included that there was a possibility of a tracing claim on what all parties appear to have accepted was the company's only readily realisable asset, its cash at bank of approximately $41,000: pars 29 and 30.

108 I note that the second defendant before me contested both the validity (if not the fact) of the contract for the issue of those shares and the receipt of any funds for them.

109 The matter of the validity of the issue is also an important issue in COR 144 of 2005. For my purposes, however, I do not consider I need to go into it. I note again the issue posed by Act s 436A(1)(a), of the opinion of the directors.

110 If the contract to issue was invalid, then there would appear to be claims for the return of any funds paid. If the contract to issue was valid, then there was uncontested evidence that there was no issue of share certificates to the share issue claimants and no entry of them for the shares offered in the share register, with the result in my view that there would at least arguably not be a barrier (of the sort represented by Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317, recently considered in a different factual setting in Sons of Gwalia Ltd v Margaretic [2006] FCAFC 17) to any claim they might have for the return of any funds they provided to the Eznut company: see Austin and Ramsay, (supra), at [17.170]. At that point they were not members in respect of those funds: see Act s 231(b). The claim they would appear to have would appear to be based upon the repudiation of the contract to issue shares to them resulting in a total failure of consideration: see Act s 1071H; and see Commonwealth Homes and Investment Company Ltd v MacKellar [1939] HCA 34; (1939) 63 CLR 351, considered in Eastland Technology Australia Pty Ltd & Ors v Whisson & Ors [2005] WASCA 144, per McLure JA, Malcolm CJ and Steytler P agreeing, at [34] and [35].

111 I note that the lack of entry on the share register for the share issue claimants would appear to have had the effect that the share issue claimants would not have had at any material time any voting rights in respect of the shares purportedly offered to them: Austin and Ramsay, (supra), at [17.170]. Thus, whether or not the contract to issue the shares was valid, the second defendant would appear to have retained her majority voting position. The matter of the non-registration of the shares, and its impact on the voting position of the second defendant, appears to be part of the case for the first and second named fourth defendants in their capacities as plaintiffs in COR 144 of 2005: see Smolarek, (supra), per curiam at [77]. That aspect goes to the issue in that case, as indicated by that paragraph of the Court of Appeal's reasons, of whether or not the majority voting position of the second defendant meant she was therefore able to proceed as she did (or indeed proposes to do) with respect to the directorship of the first named fourth defendants. I have already referred to that issue, in connection with the "caretaker" issue in these proceedings.

112 This leaves the question of the receipt of funds by the Eznut Company from the persons concerned, whom from now on I will call "the share issue claimants".

113 The evidence referred to by the plaintiffs in support of the receipt of funds is the offers of shares to the share issue claimants with requests for payments, as annexed to the Liwszyc affidavit of 8 February 2006 (annexure "DL5"), and the Eznut company's cash at bank of $41,000 as at 27 January 2006, which that affidavit indicates was the balance of the funds remitted net of interest and small amounts received from the Australian Taxation Office (par 23). It is common ground that the Eznut Company had not been trading at any material time, and the second defendant does not suggest any other source of the funds in the account at that time.

114 In these circumstances, I find that the amount of $67,500 was indeed remitted to the Eznut Company, or that there was at least a reasonable basis for the directors so to conclude.

115 It should be noted that, following their reinstatement by the interlocutory orders of Hasluck J in Liwszyc (supra), and apparently after the demands received from the share claimants, the first and second named fourth defendants had sought the second defendant's approval to issue share certificates to the share claimants, which she had refused: Liwszyc affidavit of 8 February 2006, at par 26 and annexure "DL6". It is clear, and seems to have been clear to the first and second named fourth defendants at the time of the 27 January 2006 resolution, that the second defendant vigorously resisted any effect being given to the issue that would permit it to dilute her holding of shares in accordance with the terms of the issue. Indeed, as I have said, this appears to be one of the central issues in COR 144 of 2005. In those circumstances, it appears to me on the evidence that the first and second named fourth defendants would understand the share issue claimants' position to be that of a demand for the return of their funds for failure to provide them with what they had bargained for.

116 There were additional debts or claims, of $6,000 for payments made by the first named fourth defendant in respect of work done in relation to the Eznut company's patents, of $9,543 to a company associated with him for work in relation to the Eznut Company device, and of $1,500 to the Australian Securities and Investments Commission, and some indications that demand had been or would be made in the near future for the first two amounts at least: par 18 and annexures "DL7", at 81, and "DL9" (minutes of the meeting of directors of 11 January 2006, referring to total claims of "$17,000" without further specification).

117 There was considerable argument before me as to whether there were indeed debts owing to the first named fourth defendant or at least to the company associated with him, rather an amount owing to the Eznut Company by the latter. However, it was not put to me that this latter amount would exceed $3,590.40 (Smolarek affidavit of 27 February 2006, at par 75). The second defendant also appeared to contest that any more than $200 was owed to ASIC (par 75), while she also maintained that the first and second named fourth defendants owed the company the balance of $1,500, $1,300, as expenditures that had been unnecessarily incurred. I note, however, that the sum of these two amounts as claimed by the second defendant does not offset the sum of the amounts claimed by the share issue claimants so as to bring the net down to the level of the Eznut Company's cash at bank.

118 I note that there are references, in the affidavit of Hanna Smolarek of 26 July 2005 in COR 144 of 2005, pars 85 and 86, to shares issued to the first named fourth defendant in these proceedings and others, in respect of which it was put to me there were monies owing. Those paragraphs were ones to which the plaintiffs did not maintain any objection to their admission. They do not support the position put to me, in any event, as they do not describe an obligation to make payments but rather to provide services, nor do they support a readily realisable asset of any sort.

119 I should add that par 87 of the affidavit, the one in that affidavit to which objection was maintained by the plaintiffs, and which appears to have been put to me by the second defendant in relation to amounts owed by the first and second named fourth defendants to the Eznut Company, relates to what on its face is an agreement between the first named fourth defendant and the second defendant, which does not appear to go to funds owed to the Eznut Company by him. Thus, I do not consider that the paragraph is relevant to these proceedings, and I would uphold the plaintiffs' objection in that respect to my taking account of it.

120 Further, I also note the annual return for the Eznut company dated 26 September 2003, with corrections dated 30 April 2005 and 13 May 2005, all signed off by the second defendant, all of which would appear to show the shares in question as "fully paid" (Liwszyc affidavit of 28 February 2006, annexures "DL15", "DL16" and "DL17").

121 There was also a prospective liability of the Eznut Company for $20,000 for one of the Eznut Company's patents, due by the end of January 2006: Liwszyc affidavit of 8 February 2006, par 33 and annexure "DL9". There appears to be no contest over this amount or the necessity for its payment.

122 There was also a claim by the second defendant in the amount of $125,400 for salary since the incorporation of the Eznut Company, for which a written demand on her behalf by her then solicitor had been made, on 1 November 2005: Liwszyc affidavit of 8 February 2006, par 19 and annexure "DL4" at p 55, p 56. This claim was, however, disputed by the first named and second named fourth defendants. Further, it is not clear whether as at 27 January 2006 this claim was being pressed, and the second defendant appears not currently to be pressing for satisfaction of the claim, although she continues to maintain it.

123 It should be noted that, if the second defendant's claim is made out, it would, absent the establishment of other creditor's claims not so far referred to, make the second defendant the predominant creditor by value. In turn, this would be sufficient to give the second defendant voting control at meetings of the creditors: Corporations Regulations 2001 (Cth), reg 5.6.21.

124 It should also be noted that the share issue claimants had proposed to have their claims satisfied by loans to the Eznut company secured on all of the assets of the company, an offer which it appears the board of directors resolved to accept at its meeting of 11 January 2006 (Liwszyc affidavit of 8 February 2006, at pars 35, 36 and annexure "DL 9"). It is not clear to me how any such acceptance could be effective, given the interest of both the first and the second named fourth defendants in the resolution, arising out of the status of the trusts associated with them as share issue claimants as I previously described that status. In any event, by the terms of that resolution those loans were to fall due on 20 February 2006 (Liwszyc affidavit of 8 February 2006, annexure "DL9"), and the transaction was apparently on the basis that the moneys in the Eznut company's bank account were to be used "for patent support and administrator cost".

125 I note that this is the only evidence before me of the ability of the Eznut Company at the time of the 27 January 2006 resolution readily to access credit by way of loan, on the security of its assets or otherwise. Nor is there any other evidence of inflows of readily realisable assets that could reasonably be counted upon at that time otherwise to cover any deficiency in the realisable asset position of the company. See Keay A, McPherson A R, "The Law of Company Liquidation", 4th ed Sydney, LBC Information Services, 1999, at 437 - 438. I do not doubt there might have been prospects of transactions of benefit to the company that might have been concluded, of the sort a company with new technology but no trading record might be able to identify. However, there is no evidence that there were any such prospects that on 27 January 2006 could reasonably be counted upon to mature in time to meet the claims that had been made.

126 For the second and third defendants, it was argued that it was the responsibility of the first and second named fourth defendants, by virtue of the undertakings they had given in relation to the interlocutory orders of Hasluck J in COR 144 of 2005, to provide funds for the company as needed to preserve the status quo, at least as to the First and Second patents.

127 However, the purpose of such an undertaking is (Owen J, "The Interlocutory Injunction", in Carroll, R ed, Civil Remedies: Issues and Developments Sydney, Federation, 1993, at 258):

"To compensate the defendant for any loss that might be suffered by the defendant if it is later established that the restraint was contrary to the defendant's rights as finally adjudicated."

128 Thus, such an undertaking is not a basis for an obligation to make payments in advance of such establishment. Such an undertaking has no bearing on the present issue, in my view.

129 It should further be noted that there is evidence the proposal of the share issue claimants with respect to converting their claims to secured debt had been put to the second defendant by the first named fourth defendant on 23 December 2005 (Liwszyc affidavit of 8 February 2006, at par 36), and she had responded on the same day (Liwszyc affidavit of 8 February 2006, at par 37) that the Eznut company was "not in a position to take any loans" and that

"You cannot make a loan against the company's assets in the situation where the Company's creditors recovery might be compromised.

This is a criminal matter[.]"

Brian Keith Mcmaster As Administrator of Eznut Pty Ltd (Administrators Appointed) & Anor v Eznut Pty Ltd

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Judgment (280 paragraphs)

Brian Keith Mcmaster As Administrator of Eznut Pty Ltd (Administrators Appointed) & Anor v Eznut Pty Ltd (Administrators Appointed) & Ors [2006] WASC 109 (16 June 2006)

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Legislation Cited (1)

Cases Cited (9)