BRYAN KEVIN HUGHES as Administrator of WESTGEM INVESTMENTS PTY LTD (Receivers and Managers Appointed) -v- THE RECEIVERS AND MANAGERS OF WESTGEM INVESTMENTS PTY LTD (Receivers and Managers Appointed) (Administrator Appointed) [No 3] [2012] WASC 360 (2 October 2012)

4 These proceedings were commenced by the Administrator seeking directions under s 447D of the Corporations Act 2001 (Cth) (the Act), alternatively an order under s 447A. Subsequently, the Receivers also applied for orders under s 447A of the Act. The order that they sought was to vary the operation of pt 5.3A of the Act so a special purpose administrator might be appointed to Westgem. The reason for the Receivers' application was said to be a concern that 'there is an appearance or apprehension that [the Administrator] will not, without embarrassment, fully investigate and report on the matters encompassed by s 438A [of the Act] and as referred to in the [IPA Code of Professional Practice for Insolvency Practitioners] because he is in a position of conflict' (receivers and managers outline of submissions, par 24).

5 The question of whether a special purpose administrator should be appointed to Westgem was the matter on which the Administrator had sought a direction in initiating these proceedings. Consequently, the hearing was conducted by reference to the Receivers' application. That application was opposed by the Administrator.

6 I am not satisfied that the Receivers have demonstrated that it is necessary to appoint a special purpose administrator to Westgem for the reasons that follow.

7 The Receivers sought to have a special purpose administrator appointed to investigate:

(a) any transactions that had been entered into between Westgem and any related entity, including but not limited to considering whether any such transaction might be a voidable transaction under div 2 of pt 5.7B of the Act;

(b) the payment of approximately $1.3 million by Westgem to Saracen Project Management Pty Ltd (Saracen) on 10 January 2011 (Saracen was a company that was associated with Mr Saraceni; it had been engaged to provide project management services in connection to the Raine Square project);

(c) whether there had been any breaches of duty by Mr Saraceni as director of Westgem or by any other officer of Westgem, including but not limited to investigating the treatment by Westgem of GST input tax credits received from the Australian Taxation Office (ATO);

(d) the extent to which debts owed to Westgem by related entities remained outstanding; and

(e) any other claims that Westgem might have against any related entity.

8 The circumstances in which GST input tax credits were received by Westgem and in which the payment of approximately $1.3 million by Westgem to Saracen in January 2011 was made are further explained in Westgem Investments Pty Ltd (Receivers and Managers) (Administrator Appointed) v Saracen Project Management Pty Ltd [2012] WASC 358, delivered in COR 22 of 2011. It is alleged in that matter that Mr Saraceni acted in breach of his duties as a director of Westgem by causing or permitting the payment to Saracen to be made. No finding has been made about that allegation. It has, however, been held on an interlocutory application that the payment was made in breach of a trust over refunds of GST tax input credits created by the agreement by which the Financiers made their facilities available to Westgem.

9 The reasons delivered in Westgem v Saracen foreshadowed an order requiring Saracen to pay the amount received from Westgem (currently held on trust by Saracen's solicitors) into an account maintained by BankWest pursuant to one of the facilities that the Financiers had made available to Westgem (the GST Account). It must be emphasised that the findings in Westgem v Saracen were on the prima facie case test for an interlocutory injunction. No final determination has been made on any matter raised in COR 22 of 2011.

10 The Administrator made an affidavit in support of his application for directions (affidavit of Bryan Kevin Hughes sworn on 5 October 2011). The affidavit attached correspondence between the Administrator and solicitors acting for the Receivers, Norton Rose Australia. Norton Rose has also acted for the Financiers in connection with matters relating to Westgem and the Raine Square project.

11 It is not necessary to recount the detail of the correspondence attached to the Administrator's affidavit as it foreshadowed matters that were raised in the application and which are summarised in what follows.

(a) He was first contacted by Mr Saraceni regarding the financial position of Westgem in May 2010. He attended approximately four meetings with representatives of Westgem, including Mr Saraceni. The possibility of placing Westgem in voluntary administration was discussed at those meetings but no further steps were taken (par 9).

(b) The Administrator was next contacted by a representative of Westgem or by Mr Saraceni on 31 December 2010. He was informed that Westgem had received a 'formal' demand from the Financiers. He then met with representatives of Westgem on a daily basis until his appointment on 11 January 2011. The purpose of the meetings was to review Westgem's financial circumstances and to discuss its options and the implications of putting the company into administration (par 10). Apart from the meetings in May 2010, this was the first occasion on which the Administrator had been professionally involved with Mr Saraceni and Westgem (par 12).

(c) It was commonplace in his experience as an insolvency practitioner for administrators and practitioners to advise companies on their financial position and options in the period leading up to an appointment (par 13).

(d) In late January and early February 2011, the Receivers and Saracen and Mr Saraceni commenced separate proceedings relating to the affairs of Westgem (I interpose, those proceedings were the subject of the judgments delivered in Saraceni v Mentha and Westgem v Saracen) (pars 16 19).

(e) The Administrator was owed fees at the time that he made his affidavit. He had received funding from Saracen for the purpose of obtaining advice on and representation in the proceedings that had been commenced and to enable him to apply for extensions of time for convening the second creditors' meeting, to seek approval for his remuneration and for directions that he was justified in entering into a litigation funding agreement with IMF (Australia) Ltd. The amount of funding received from Saracen was approximately $375,000.

(f) There had been 'limited' contact with Mr Saraceni and his staff following the Administrator's appointment. That contact had been to obtain information about Westgem's financial records; to discuss the conduct of the litigation involving Westgem's affairs; to gain information about the progress and management of the Raine Square project and to seek funding for legal advice. He had also corresponded in relation to Saracen's status as a potential creditor of Westgem. The Administrator considered that his dealings with Westgem (and by inference, Mr Saraceni) did not affect his ability to properly investigate any claims that Westgem might have against Mr Saraceni or entities related to him (pars 22 24).

(g) The Administrator's investigations at the time that he made his affidavit had revealed one potential claim that Westgem might have against Mr Saraceni or entities related to him. That concerned the payment by Westgem to Saracen of approximately $1.3 million to which reference has already been made. However, he considered that it was premature to investigate those matters pending the determination of the proceedings that had been commenced relating to the payment (pars 30 32).

13 The Administrator gave evidence in his affidavit about the steps that he had taken to disclose his dealings with Westgem and Mr Saraceni prior to his appointment as administrator. He also expressed a view regarding the possible prejudice to Westgem of the appointment of a special purpose administrator. That focussed on the expense that might be incurred if an appointment was made.

14 The Receivers relied primarily on an affidavit made by Mr Mentha (affidavit of Mark Francis Xavier Mentha sworn 2 November 2011) in support of their application for the appointment of a special purpose administrator. The general effect of Mr Mentha's affidavit was to set out reasons why the Receivers considered that an additional administrator should be appointed. Consequently, some of the statements made by Mr Mentha were for the purpose of identifying aspects of the evidence given by the Administrator that were considered to be relevant to the Receivers' application. In addition to those matters, Mr Mentha stated that:

(a) BOSI Security Services Ltd, in its capacity as security trustee appointed pursuant to a deed made between the Financiers and Westgem for the purpose of the facilities that had been made available by the Financiers, had submitted a proof of debt at the first meeting of creditors of Westgem for $333,476,656. In addition, the Financiers had made funds available to the Receivers, on behalf of Westgem, to pay creditors to enable work to continue on the completion of the Raine Square project. Debts of approximately $679,000 had been assigned to the Receivers (pars 6 7).

(b) The Administrator had advised at the first meeting of creditors of Westgem that proofs of debt had been lodged by other creditors totalling approximately $93 million. Mr Mentha believed from information provided by the Administrator that approximately $83 million had been claimed by entities related to Westgem, Saracen and Mr Saraceni (pars 9 11).

(c) The Financiers supported the Receivers' application for the appointment of a special purpose administrator. They had advised that they would provide funding to enable any administrator who was appointed to undertake investigations into matters such as whether there had been voidable transactions by Westgem involving related parties prior to the appointment of the Administrator and whether Mr Saraceni had breached his duties as a director of Westgem. It was anticipated that those investigations would include public examinations (pars 14 15).

(d) Although it was not unusual for insolvency practitioners to advise companies prior to the appointment of an external administrator, in Mr Mentha's experience it was unusual for a practitioner to meet with a director and shareholders of a company and representatives of related creditors for 10 successive days before accepting an appointment as a voluntary administrator (par 21).

(e) Information provided by the Administrator indicated that he had received approximately $83,000 in funding from IMF (as at July 2011) in addition to the funds provided by Saracen (par 34).

(f) A claim for damages by Westgem, Mr Saraceni and related entities against the Financiers and related entities had been foreshadowed. Media reports indicated that the Administrator was proposing to join in that claim as a plaintiff. It appeared that the claim would be funded by IMF (pars 40 41). Mr Mentha stated (pars 42 43):

Based on my experience in conducting litigation as an insolvency practitioner, I believe that in order to minimise the costs of running the Damages Claim there will be a sharing of resources in order to avoid duplication of work and there are likely to be many meetings and exchanges of emails and correspondence between Mr Saraceni and IMF staff, or Mr Hughes and [staff of his firm] in the investigation and articulation of the Damages Claims.

Therefore, I believe that Mr Hughes and Mr Saraceni will inevitably have a high level of interaction during the prosecution of the Damages Claim and that they have a shared and common interest in its outcome.

(g) The Administrator and Mr Saraceni and related entities had used the same solicitors in the litigation that had been conducted over the affairs of Westgem (pars 44 46).

(h) The Administrator had spent much time investigating the validity of the appointment of the Receivers pursuant to the charge granted by Westgem. However, significantly less time had been spent in investigating matters such as the payment made by Westgem to Saracen in January 2011 (pars 47 53).

15 Supplementary affidavits were sworn by the Administrator (affidavit of Bryan Kevin Hughes sworn on 17 and 28 November 2011) and Mr Mentha (supplementary affidavit of Mark Francis Xavier Mentha sworn on 23 November 2011). The Administrator explained in his supplementary affidavits that his position in the litigation involving the affairs of Westgem reflected his view as to what was in the best interests of the company's creditors based on independent legal advice. The funding that he had received from IMF was in connection with those proceedings. He also deposed to further matters relating to the complexity of the financial affairs of Westgem as an explanation for the extent of his dealings with representatives of the company and Mr Saraceni prior to his appointment as administrator.

16 Mr Mentha's supplementary affidavit dealt with matters relating to the Receivers' access to the books and records of Westgem. Mr Mentha stated that the Receivers had not been given access to certain books and records of the company and accordingly, they had not been able to complete their review of aspects of its affairs and finances.

17 There was little difference between the parties regarding the principles relevant to the appointment of a special purpose administrator. The Receivers emphasised that it was essential that an administrator be impartial, that he/she act fairly in dealing with the creditors of the company and that there be no reasonable grounds for the perception of a conflict in her/his position. The Administrator did not put those basic principles in issue.

18 The principles directly relevant to the determination of this application were in summary:

(a) Section 447A of the Act empowers the court to make such order as it thinks appropriate about how pt 5.3A ('administration of a company's affairs with a view to executing a deed of company arrangement') is to operate in relation to a particular company. It was accepted that the general power conferred by that section extended to the appointment of a special purpose administrator where there was a nexus between the proposed order and how pt 5.3A is to operate in relation to a company in administration: see Honest Remark Pty Ltd v Allstate Explorations NL [2006] NSWSC 735; 234 ALR 765 [65] [69] in which Brereton J accepted, by reference to the observations of Finkelstein J in Re Pasminco Ltd (No 2) [2004] FCA 656; 49 ACSR 470, that a special purpose administrator could be appointed in appropriate circumstances.

(b) An obvious instance of when it will be appropriate to appoint a special purpose administrator is where there is a conflict of interest. Thomas J observed in Re Obie Pty Ltd (in liq) (No 4) (1984) 8 ACLR 967, in relation to the appointment of a special purpose liquidator, that (at 971):

In my own experience courts have made such orders when there is a matter to be dealt with in a liquidation which it would be embarrassing for the liquidators to handle. In such circumstances an additional liquidator is appointed to handle that matter, and the great expense and loss of efficiency involved in resignation and replacement in a partially completed administration is avoided.

See also the reasons of Barrett J in Re McGrath; HIH Insurance Ltd [2006] NSWSC 385.

(c) Administrators are officers of the corporations to which they are appointed: s 9 of the Act. They are subject to fiduciary and statutory obligations in discharging their duties: see s 601FD. As such, they are required to act impartially in the interests of all creditors and to avoid conflicts of duty and interest. They have the same duty of impartiality as courts of equity impose on trustees: Commonwealth Bank of Australia v Fernandez [2010] FCA 1487; 81 ACSR 262 [63] (Finkelstein J).

(d) A liquidator is an officer of the court. Consequently, a liquidator acts in a quasijudicial capacity in determining whether to admit or reject a proof of debt and must act according to the standards of the court. Some cases concerning the duties of independence and impartiality have emphasised this quasijudicial aspect of the liquidator's office. However, the duties extend to all facets of the liquidator's conduct of a liquidation and no distinction has been drawn between court appointed liquidators and liquidators appointed in a voluntary winding up. In Bovis Lend Lease Pty Ltd v Wily [2003] NSWSC 467, Austin J accepted that the principles of independence and impartiality relevant to liquidators were equally applicable to voluntary administrators [133]. His Honour noted that, 'even a cursory review of the scope and objects of Part 5.3A would establish that voluntary administrators have implied duties of independence and impartiality, which are part of the very marrow of the voluntary administration system' [133].

(e) A person is not disqualified from being appointed an administrator merely because he/she gave advice to the corporation about its financial position and options prior to the appointment: 'the essential requirement in every case is that the insolvency practitioner at all times before appointment as administrator, and after the appointment, act objectively in a manner which gives due regard and balance to the interest of all creditors, including different classes of creditors where different classes exist': (Lam Soon Australia Pty Ltd (administrator appointed) v Molit (No 55) Pty Ltd (1996) 70 FCR 34). In Commonwealth of Australia v Irving & NPC Manufacturing Pty Ltd (1996) 65 FCR 291, Branson J observed at 296:

It is not, in my view, the law that a person appointed is an administrator of a company under Pt 5.3A of the Corporations Law may not have had any prior contact with the company or its directors or officers. It is now common place for a company to seek professional advice respecting actual or apprehended insolvency and for the advice received to be to appoint an administrator pursuant to Pt 5.3A of the Corporations Law. Not infrequently, and, in my view, not improperly, the proponent of the advice to appoint an administrator then accepts appointment as that administrator. There would, I consider, be an air of commercial unreality about any suggestion that this course of events is necessarily improper ...

However, the authorities make it plain that substantial involvement with a company prior to its administration will disqualify a person from appointment as that company's administrator. Such involvement will be seen to detract from the ability of the person to act fairly and impartially during the course of an administration.

It should be noted that her Honour's comments were made in a context where there had been a long professional and personal relationship between a director of a company and the accountant who was appointed administrator of that company.

(f) However, the risk that 'Pt 5.3A could be abused the directors of the company appointed "friendly" or "sympathetic" administrators' must be acknowledged: see the discussion in O'Donovan J, Company Receivers and Administrators (loose leaf) [41.60]. Whether there is a reasonably based apprehension that this has or may occur will, of course, depend on the particular circumstances. An administrator may be appointed by the company where, in the opinion of the directors, the company is insolvent or likely to become insolvent at some future time or by a liquidator or a secured creditor. Consequently, administrators are appointed in circumstances of financial distress where the interests of creditors are likely to conflict, particularly where there is a secured creditor. The fiduciary nature of the duties owed by an administrator cannot be allowed to be undermined by commercial exigencies. However, courts should also be alert to the possibility that allegations of bias and conflict may nearly reflect the tensions often present in an administration.

(g) In Smarter Way (Aust) Pty Ltd v D'Aloia (As Administrator of) Smarter Way (Aust) Pty Ltd [2000] VSC 408; 35 ACSR 595, Byrne J observed that it was undesirable for an administrator appointed by a chargee to engage the solicitors retained by the appointor to also advise and act for her/him. However, the comments of Burchett AJ in National Australia Bank Ltd v Wiley should also be noted: 'there is, of course, no objection, in itself, to the engagement by a liquidator of a solicitor who is also acting for one of the parties interested in the liquidation. It depends on the circumstances' [9].

(h) It is not necessary to establish that an administrator had an actual conflict where it is sought to appoint a special purpose administrator on the ground that there may be a conflict of interest and duty. In relation to liquidators, Thomas J in Re Club Superstores Australia Pty Ltd (in liq) (1993) 10 ACSR 730 stated at 735:

I accept the submission of Mr Jackson QC for the liquidator that some realistic prospect of embarrassment or a serious possibility of conflict in his continuing to act needs to be seen before a dismissal is required. But once a realistic possibility of conflict arises, it is not possible to wait and see. It is necessary in the interests of efficiency and of avoiding disquiet that an order be made.

Obviously, the conflict rules and principles applicable to trustees and fiduciaries apply. The impartiality and independence of the administrator must be manifest: refer Re Allebart Pty Ltd (in liq) [1971] 1 NSWLR 24.

(i) Liquidators and administrators will often be founded by one creditor or a subset of all creditors. They are required to be 'on guard' to prevent that from compromising the independence and impartiality: Re Allebart (24) (Street J).

19 I am not satisfied that it is necessary to appoint an additional administrator to Westgem for the purposes identified by the Receivers for the following reasons:

(a) The only particular matter that was identified by the Receivers as requiring investigation concerned the payment of $1.3 million by Westgem to Saracen in January 2011. In relation to that matter:

(i) I consider that it was appropriate for the Administrator to have adopted the position that he did in the interlocutory application by the Receivers for an order requiring Saracen to pay the amount it received into the GST Account. There was (and remains, given that the decision was interlocutory) a real issue over whether the money concerned was held on trust by Westgem or whether it belonged absolutely to the company. The Administrator would not have had the benefit of fully informed legal advice at the time of the substantive hearing of the application as a document that I regarded as significant for that issue only emerged later.

(ii) I also consider that the Administrator was justified in waiting for the determination of, at least, the Receivers' interlocutory application before deciding whether the payment requires further investigation.

(b) I also consider that it was appropriate for the Administrator to have sought leave to appear at the trial of the preliminary issues in COR 22 of 2011 to contest the efficacy of the deed of charge pursuant to which the Receivers were appointed and the question of whether any charge that was created was void as against him under s 266 of the Corporations Act. Those matters were central to his administration and on which he was required to form a view with the benefit of legal advice. They were issues of some complexity - the drafting techniques adopted in the deed of charge caused uncertainty and there were real issues over the application of s 2K.2 of the Corporations Act to the circumstances surrounding the registration of the charge.

(c) It will be a matter of impression and degree whether there is real not merely theoretic possibility of conflict as a result of an administrator being involved in advising the company prior to his/her appointment or through reliance on a particular source of funding. However, I am not persuaded that, objectively considered, the matters to which the Receivers have referred establish more than a theoretical possibility. In particular,

(i) I accept the Administrators' explanation for the time spent in advising Westgem prior to his appointment. The company was involved in a large commercial property development. There had been a dispute between the company and the head contractor for the development. No doubt, the question of whether an administrator should be appointed required an understanding of complicated issues relating to the project (which was still in its construction phase) and its funding.

(ii) The question of the validity of the charge pursuant to which the Receivers were appointed was raised at the outset of the administration. It was reasonable for the Administrator to be primarily concerned with that issue immediately following his appointment. The issue and questions surrounding the payment made by Westgem to Saracen in January 2011 quickly became the subject of proceedings. The nature of the issues raised in those proceedings explained why they would have been the primary focus of the administration.

(iii) It was apparent from the multiple actions that have been commenced and from the various matters before me that there are significant and deep rooted differences between the Financiers and Mr Saraceni. That is hardly surprising given the circumstances surrounding and the nature of their disputes. However, those differences, and the fact that he was appointed by Mr Saraceni are not, by themselves, sufficient to establish a reasonable apprehension that the Administrator is in a position of conflict. Similarly, the fact that she/he is funded by one creditor or a group of creditors would not, in itself, provide a basis for finding that there was a reasonable apprehension that an administrator was in a position of conflict. Matters of that kind form part of the commercial context within which many external administrations are conducted.

(d) Solicitors engaged by Mr Saraceni and Saracen have indicated that proceedings will be shortly commenced claiming damages for a substantial amount against the Financiers. However, I do not know what role the Administrator proposes to play in those proceedings. It is not possible to reach any conclusion at this time about the possibility of a conflict arising out of the foreshadowed proceedings in the absence of pleadings and without further advice from the Administrator on the position that he intends to adopt. I would only comment that, no doubt, the Administrator will need to carefully consider how he is to be represented in the proceedings if he is a party or he proposes to seek leave to be heard.