Cadwallader v Bajco

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION AUSTIN J FRIDAY 24 DECEMBER 2001 1347/98 - ALAN NORMAN CADWALLADER v BAJCO PTY LTD & ORS JUDGMENT (revised to correct typographical errors, 21 January 2002)

HIS HONOUR: Introductory facts 1 This proceeding concerns the affairs of the first defendant, Bajco Pty Ltd, a company formed by Eric Cadwallader and his wife Jean, and owned since their deaths by their six children: Alan Cadwallader (the plaintiff), Bruce Cadwallader, Jeanine Hatton, David Cadwallader, Marilyn Wintzloff (David and Marilyn are together the third defendants) and Glyn Cadwallader. For convenience, I shall refer to the six children by their first names. 2 Sadly, the Cadwallader family has been riven by feuds for many years. Alan and Bruce have a long-standing dispute about the financial management of another company called Cadwallader Engineering (NSW) Pty Ltd. Alan has a long-standing dispute with David and Marilyn about the financial relationship between Bajco and Cadwallader Engineering (NSW), and in this dispute Bruce has at times sided with David and Marilyn and at times with Alan. Correspondence between the siblings, in evidence before me, and their oral evidence, show just how intense and bitter the feuding has been. 3 A "final resolution" of the feuding would be desirable, and since the subject matter of the feuds is essentially the control of economic assets, resolution ought to be possible. I do not believe that any resolution can be achieved by me in the present proceeding, as it is constituted. What is needed is a process of negotiation in which everyone puts their personal hurt and resentment to one side, with a view to reaching a rational commercially-driven settlement. But as the history of the feuding shows, that is much easier said than done.

The early development of the Cadwallader business 4 Bajco was formed by Eric and Jean Cadwallader to take over a business conducted by Eric. It was originally called Cadwallader Engineering Pty Ltd. It was incorporated on 19 September 1967. 5 Eric Cadwallader was governing director under the constitution of the company. Alan joined the business as a full-time employee in 1968 when he was about 21 years of age, and he has worked for the business ever since that time. Bruce commenced working for the business in 1965 when he was 17 years old, and still works for the business. Glyn has worked for the business from time to time, but not in a management role. Jeanine, David and Marilyn have not worked in the business. 6 The company conducted the business of making electrical transformers. In 1974 it acquired the premises at 3 King Street Concord West ("the Property"), which had been owned until then by Eric Cadwallader. The electrical transformer business had been conducted in those premises since about 1974. 7 Eric Cadwallader died on 19 May 1975. Thereafter the business of Cadwallader Engineering was conducted by Alan and Bruce. Alan had become manager of the business about a year before his father died. Alan and Bruce, and their mother Jean Cadwallader, constituted the board of directors and owned the majority of the shares in the company. Jean Cadwallader became governing director. The other shareholders were the remaining four Cadwallader children, namely David, Marilyn, Glyn and Jeanine.

Transfer of the business, and death of Jean Cadwallader (1979-1985) 8 In 1979 Jean Cadwallader decided as governing director that the business should be transferred into a separate company owned and operated by those who in fact worked for the business. In 1978 the company had been threatened with legal action following failure of some of its equipment in service, and although a lawsuit was averted, the vulnerability of the company was exposed. Mrs Cadwallader consulted Leith Cameron of Lean, Cameron & Co, the company's accountant as well as her personal friend, regarding the protection of the business and its assets. She decided to separate the business from the assets in order to protect the assets. 9 Thus in 1979 the business owned by Cadwallader Engineering, but not the Property, was transferred to a new company called Cadwallader Engineering (NSW) Pty Ltd, which was incorporated on 11 June 1979. Jean, Alan and Bruce each held two shares in the new company. On about 27 December 1979, Cadwallader Engineering changed its name to Bajco. Thereafter Cadwallader Engineering (NSW) owned and conducted the engineering business, and Bajco owned and managed the Property. That has remained the situation until the present time. 10 The 1979 transaction took the form of a sale from Bajco to Cadwallader Engineering (NSW) at a price determined by a valuation of plant, equipment, stock and goodwill made by Lean, Cameron & Co. The operating capital of the new company was borrowed from Bajco and a loan account was established between the companies. The new company acquired the business assets of Bajco, other than the Property, and provided consideration by way of the obligations represented by its loan account with Bajco, but it did not provide any cash payment for the assets. 11 According to an outline of the transaction prepared by Lean, Cameron & Co on 9 May 1979, the purchase of the assets from the company which became Bajco was "to be settled by loans from shareholders leaving no loans between the new and old company". However, the transaction took its final form when Alan instructed Mr Cameron that the shareholders of the company should not be involved and his outline should be changed to read "to be settled by loans from [Bajco]". 12 David and Marilyn have for many years been unhappy with the 1979 transaction. They believe that it was carried out without proper notice to the "minority" shareholders of Bajco (the children other than Alan and Bruce), and that no true or adequate consideration was provided to Bajco. They believe the business was unfairly taken away from the brothers and sisters as a whole and given to only two of them, Alan and Bruce. Alan denies that the 1979 transaction was implemented without notice to his brothers and sisters. Specifically, he says that prior to the transaction, his mother told him that she had told David and Marilyn of the proposed sale. He says his mother told him that when David expressed unhappiness, she said to him: "David, you had the opportunity to work for Dad in the business and you weren't interested". 13 It is unnecessary for me to adjudicate upon these contentions in the present proceeding. Indeed, it is undesirable for me to do so, because there is a separate proceeding about them, as I shall explain. The facts and contentions regarding the 1979 transaction are relevant only as part of the factual substratum of the present case. 14 Jean Cadwallader died on 8 May 1985. One of her two shares in Cadwallader Engineering (NSW) was transferred to Alan and the other was transferred to Bruce. Thereafter, Alan and Bruce each held three shares in Cadwallader Engineering (NSW) until February 2000, when Bruce sold and transferred his shares to Alan's wife, Roberta Cadwallader. 15 After the death of Jean Cadwallader, all of the shares in Bajco were held by the brothers and sisters. The shareholdings in Bajco were as follows: · Alan Cadwallader 266 shares; · Bruce Cadwallader 266 shares; · Jeanine Hatton 100 shares; · David Cadwallader 100 shares; · Marilyn Wintzloff 100 shares; · Glynn Cadwallader 100 shares.

Shareholdings, directorships and business management, 1985-2000 16 In September 1987 Jeanine Hatton sold her shares in Bajco to Alan Cadwallader, and the transfer to give effect to the sale was registered by Bajco. I can see nothing in the evidence to indicate any restriction on the transferability of Jeanine's shares. The constitution of Bajco is in evidence. It adopts Table A of the Fourth Schedule to the Companies Act 1961 (NSW), with some modifications, but does not purport to create any pre-emption rights or rights of first refusal over the issued shares in the company or otherwise restrict their transfer, except by conferring an absolute discretion in the directors to refuse registration. The children of Eric and Jean Cadwallader received their shares by will and there is no indication of any contractual restriction on transfer. 17 The circumstances of the transfer were explained by Jeanine in a letter she wrote to David on 28 March 1996 (later confirmed in her letter to the administrators dated 13 January 1998, and corroborated by Alan's letter to Mr Cardwell dated 22 January 1998). She needed money for the purchase of a property, and she approached Alan to offer her shares to him. He had helped her with financial matters previously and she felt he was the best person with whom to discuss the matter. Alan had the shares valued and found that they were worth $2,000. According to Jeanine, Alan was reluctant to buy the shares and offered to "pretend" to buy them and give her the money she needed. However, she said she wanted to be honest and fair and to relinquish her ownership. According to her letter, Alan reluctantly had the relevant documentation drawn up and she consequently transferred to her shares to him. 18 By his letter to Jeanine dated 26 May 1995, Alan said that as far as he was concerned the shares were still Jeanine's shares, and that he had left them to her in his will. He said there was a possibility of dividends in the future which he would fully pass on to her, and that he would give her a written proxy so that she would have full voting rights at a forthcoming shareholders' meeting. It is evident from her letters of 28 March 1996 and 13 January 1998 that Jeanine believed at those times that the arrangements set out in Alan's letter continued to apply. There is nothing in the evidence to indicate to the contrary. 19 Alan says that since the time of the transfer, he has regarded himself as holding the 100 shares in question on trust for Jeanine. Bajco and its administrators, the second defendants, say that they have not been put on notice of any such trust at any relevant time. 20 Subject to any beneficial interest Jeanine might have, the shareholdings in Bajco at the time of commencement of this proceeding were: · Alan Cadwallader 366 shares; · Bruce Cadwallader 266 shares; · David Cadwallader 100 shares; · Marilyn Wintzloff 100 shares; · Glynn Cadwallader 100 shares. 21 In February 2000 Bruce Cadwallader sold his 266 shares to Alan's wife Roberta. However, the transfer to give effect to that sale has not been registered by Bajco and there is a dispute between Alan, on the one hand, and David and Marilyn on the other, as to whether any transfer should be registered. 22 From the time Jean Cadwallader died until 10 April 1996, Alan and Bruce Cadwallader were the directors of Bajco. On that day Alan was replaced as a director by David, and on 10 March 1997 Marilyn replaced Bruce as a director. I shall return to the circumstances in which these replacements occurred. 23 Alan continued as the manager of the Concord West business until 1994. Following the acquisition by Cadwallader Engineering (NSW) of a business at Gosford, Alan took control of the Gosford operation and Bruce took over as manager of the business at Concord West.

The dispute between Alan and Bruce 24 At that time Alan was in dispute with Bruce. Bruce was complaining that Alan (assisted by his wife, Roberta, who had taken charge of the bookkeeping in 1983) had acted oppressively in the conduct of the business of Cadwallader Engineering (NSW), by not asking him to sign company accounts for many years, and by paying himself consulting fees of $24,689 without Bruce's consent. Bruce has given evidence that he felt powerless to do anything about the situation as Alan and Roberta had total control over company accounts, which they maintained on a computer at their home, and that he felt no longer able to trust Alan. 25 From early 1994 Alan and Roberta commuted to Gosford and ran the Gosford business, while Bruce and his wife Sharon ran the business at Concord West. According to the evidence of Bruce, there was a deterioration in their relationship due to past grievances, different styles of management and disagreements regarding expenditures. He claims that Alan and Roberta were in a position to oversee Bruce's activities at Concord West because they had control of the company's books and would debit his loan account if they disagreed with any expenditure he made, but Bruce had no control over their operations at Gosford. It is unnecessary for me to decide, in this case, the truth or falsity of Bruce's claims. 26 After Bruce proposed a system of the dual signatures on cheques and Alan refused, and there was a disagreement about the approval of company accounts, Bruce engaged solicitors in May 1995. He also engaged an accountant who, according to his evidence, discovered anomalies in the calculation of interest on loan accounts, and a "tangled web of transactions" between Cadwallader Engineering (NSW) and Bajco. This led to the commissioning of Horwath Services to conduct an investigation of the financial records of Bajco. 27 By letter dated 29 March 1996 Alan informed Bruce that he had repaid loan accounts in the sum of $105,416.98 owing to his service company and his wife Roberta out of moneys held on call deposit on behalf of Cadwallader Engineering (NSW). The letter is not entirely clear, but it appears that the debtor to Alan's service company and Roberta was treated as being Bajco. Prior to repayment of the loan accounts Cadwallader Engineering (NSW) owed Bajco $77,140.82, according to Alan's letter. Perhaps this debt, if it existed, arose out of the purchase of the business by Cadwallader Engineering (NSW) from Bajco. It appears that by the transaction implemented by Alan in March 1996, Cadwallader Engineering (NSW) was treated as repaying this amount and lending Bajco an additional $29,276.16 (although there seems to be a discrepancy of $1000 in the arithmetic), thereby providing Bajco with the funds to repay the loan accounts of Alan's service company and Roberta. Alan asserted that implementation of this transaction did not prejudice the operation of the business or Bruce's prospect of repayment of his and his company's loan account balances. 28 The evidence does not indicate Bruce's specific response to this transaction, but as I have said, Bruce generally objected to Alan's control of the financial affairs of the business. It is unnecessary for me to decide whether the transaction was implemented in the manner outlined in Alan's letter, and if it was, whether it was valid and effective. 29 David replaced Alan as a director of Bajco by virtue of resolutions passed at a meeting of members held on 10 April 1996, and from that time until March 1997 the directors were David and Bruce. Alan did not attend the meeting. Bruce wrote to Alan later on that day informing him that he had been removed as a director, and that the new directors had resolved to change all signatories on the company's bank accounts. The letter demanded that Alan and Roberta hand over all cheque books and other bank records and documents of the company. 30 The minutes of the meeting of members on 10 April 1996 indicate that Bruce stated he was not prepared to sign the company's accounts as a true and accurate record, and that he claimed that the 1995 accounting records were missing. According to Bruce, figures were given to the company's accountant, Mr Smyth, by Alan and Roberta, and Mr Smyth prepared a set of accounts on the basis of that information. The minutes assert that the company's computer containing its business records was held at Alan's residence. The minutes of the meeting of directors of Bajco on the same day indicate that, as well as resolving to change the signatories on bank accounts, the directors took steps to engage Horwath Services to investigate the company's accounts, and to appoint a valuer to assess the market rental value of the Property. 31 On 15 April 1996 Alan wrote a registered letter to Bruce enclosing a cheque for $3123 in favour of Bajco. The letter said "this sum represents repairs and maintenance claimed in the company accounts for the years ended 30 June 1990 and 30 June 1992 which I believe may have been my own personal expenses."

The Horwath Report 32 The financial report from Horwath Services was received (perhaps as a draft, for the final report was dated 1 July 1996) prior to the meeting of the directors of Bajco held on 28 June 1996. The directors decided to seek legal advice about the report before distributing it to the shareholders. They also resolved at that meeting that the rent for the Property would be increased to $3850, the value recommended by the real estate agents, Richardson & Wrench, in a facsimile dated 28 May 1996. 33 The Horwath Report is in evidence as part of Exhibit D2-13. It reviewed the balance sheets and accounts, and the general ledger reports, of Bajco for the 10 years ended 30 June 1995. The purpose of the review was to establish whether the company's income and expenses (particularly, the interest received and interest paid) for the 10 years were reasonable. The Report contained recommendations as to how appropriate adjustments should be brought into account in the books of the company. 34 The Report recommended adjustments to increase the company's profits before taxation for the 10 years from $29,448 to $198,381. The adjustments included an adjustment to increase rent based on Richardson & Wrench's recommendation, and an adjustment to increase the annual interest received from Cadwallader Engineering (NSW) to a fair rate based upon a published bank business indicator rate. The Report recommended adjustments to increase the interest charged on directors' and other loan accounts to the same rate. 35 The Report expressed the view that it was inappropriate for a company in the position of Bajco, whose entire premises were rented by a closely associated company with no external borrowings, to pay directors' or consultants' fees, because the duties of those responsible for managing the company were minimal. In fact, according to financial statements prepared by Mr Smyth, Bajco's accountant for the years ended 30 June 1994 to 30 June 1997, no provision was made for directors' fees until the financial year ending 30 June 1996. In that year directors' fees were $2,496. In the year ending 30 June 1997, directors' fees were $4,500. 36 The Report recommended that the increased interest payments on loan accounts be implemented by adjusting the loan accounts with the agreement of all relevant parties. The adjustment would debit Alan's loan account in the sum of $113,714, and Bruce's loan account by $150. All other loan accounts would be credited. David and Marilyn's loan accounts would each be credited by $18,126. By virtue of credits to other members of Alan's family and his service company, the net effect on Alan and his family would be a debit of $73,376. On 9 July 1996 David and Marilyn wrote to Alan enclosing a copy of the Horwath Report, saying that they would be available for joint discussion as to the means by which Alan would pay the net amount of $73,376, and asking for Alan's response within 14 days.

David's and Marilyn's attempt to increase the rent for the Property, after the Horwath Report 37 The dispute between Alan and Bruce was not the only one disturbing the Cadwallader family. By 1996 David and Marilyn had several grievances with Alan and Bruce. One was their belief that the 1979 transaction for the transfer of the business had operated unfairly to the Cadwallader children other than Alan and Bruce. Another was their concern that Alan had increased his shareholding in Bajco by taking the transfer of Jeanine's shares, in circumstances regarded by them as open to challenge. Both of these matters were discussed above. 38 They were also concerned that the rent of $3,000 per month paid by Cadwallader Engineering (NSW) to Bajco was too low, and that Bajco should protect its interests by negotiating a formal lease. There has never been a written lease for the Property. 39 As I have said, Richardson & Wrench recommended a rental value for the Property of $3,850, on 28 May 1996. The Horwath Report recommended an adjustment to the accounts of the two companies to increase the rent consistently with Richardson & Wrench's advice. David endeavoured to implement the Horwath recommendation on rental. In mid-1996 he reached an agreement in principle with Bruce that a lease be executed for an increased rent. A draft lease was prepared, to commence on 1 July 1996 for rental of $3,400 per month. A letter dated 28 June 1996 from the directors of Bajco (by that time David and Bruce) to the directors of Cadwallader Engineering (NSW) (Alan and Bruce) proposed a rental increase. 40 Alan replied by letter to Bruce dated 10 July 1996, saying that he regarded the existing rent as fair, and that he would not agree to an increase in rent unless he was approached correctly. Alan's letter said that if Bruce had purported to agree to an increase in rent on behalf of Cadwallader Engineering (NSW) without Alan's consent, then Bruce had acted improperly and Alan would regard Bruce as personally responsible for the increase. 41 At about the same time Bajco made a demand against Cadwallader Engineering (NSW) for additional rent and interest, and against Alan for adjustment of interest on loan accounts and repayment of fees paid to him as a director and consultant. 42 In July 1996 David sought legal advice on behalf of Bajco as to whether Bajco had the right to insist upon a rental increase, and as to whether the increase could be forced upon Cadwallader Engineering (NSW) if Bruce agreed to it but Alan did not, in view of their equal shareholdings. It is not clear what advice David received, but it appears that the negotiations for an increased rent were stalled for some months. 43 Alan met with David and Marilyn on 27 September 1996 to discuss the Horwath recommendations. Alan says that at this meeting he agreed that the monthly rent for the Property be increased to $3,400 as from 1 October 1996, but did not agree to any backdating of the rent. Alan wrote to David on 6 November 1996, enclosing a proxy for a meeting (evidently a meeting of members) to be held on 8 November 1996, and saying he could not vote in favour of any of the proposed resolutions. The evidence does not indicate what those resolutions were or whether the meeting was held. However, Alan said that he was not in a position to agree to the increase of rent until he was informed of the attitude of Bruce. He objected to Bajco using the office facilities and equipment of Cadwallader Engineering (NSW) to send him a facsimile on the previous day. 44 A meeting of the members of Bajco was held on 9 or 10 December 1996. David, Marilyn and Bruce were in attendance. Alan did not attend but lodged a proxy. According to the minutes, the meeting resolved · to agree to a proposal by Alan to pay the shareholders of Bajco money owing by him according to the Horwath Report; · that the directors should offer the Property for sale; · that Alan should give back to Jeanine the shares she had transferred to him; · that legal action should be instituted regarding certain anomalies (presumably of a financial kind) about which Bajco had complained to Alan; · that the directors were unable to accept accounts previously kept by Alan and Roberta as a true and accurate record and should await legal advice. 45 In letters to David and Bruce dated 16 December 1996, Alan was highly critical of these minutes. Apart from technical points, he claimed that he had never agreed that he personally owed Bajco the money claimed to be owing by him in the Horwath Report, and consequently the first resolution was misconceived. He claimed in his letter to David that Bruce would not have voted for the sale of the Property because that would be acting against the better interests of Cadwallader Engineering (NSW), and therefore (since his own proxy vote was against the sale proposal) the proposed resolution cannot have been carried. He claimed in his letter to Bruce that as a shareholder and director of Cadwallader Engineering (NSW), it would be necessary for Bruce to vote against, or abstain from the vote on, the proposal that the Property be put up for sale. He said that as the minutes stated that the resolution was carried, Bruce must have voted in its favour in obvious dereliction of his duty as a director of Cadwallader Engineering (NSW). 46 In his letter to Bruce, Alan also raised the question of the proposed lease. It appears that a draft lease was pushed into Alan's letter box at some time shortly before 16 December 1996. Alan was not happy with the draft lease, his main concern being that there was no option to renew. He wrote separately to David on 16 December to say so. In his letter to Bruce he demanded to be told why Bruce had not insisted on an option to renew, and whether Bruce intended to continue the business in some other premises after the expiry of the lease, or otherwise to exclude Alan from his rightful position in the business. 47 On 18 February 1997 Alan wrote to David (with a copy to Bruce) saying that before he would sign a new lease, he required current information about Bajco's financial position, details of all actions sought against the company, and information as to the sale of the Property. As to the Horwath Report, he said he had no argument with the interest adjustments, although a debt owed by Marilyn should bear the same interest rate, but he disagreed with the proposal that directors' and consultants' fees paid to himself and Bruce and their family companies, totalling $15,800 over the ten-year period, be repaid. He also disagreed with the proposal that increased rent be charged to Cadwallader Engineering (NSW) over the ten-year period. He said that his attempts to settle the matter had been unsuccessful. He claimed that he had agreed with David and Marilyn for an additional payment of $82,482 to Bajco to settle the claim, but he asserted that this agreement was later reneged upon by David and Marilyn, and Bruce had not attempted to join in any such settlement. 48 In about March 1997 David sought advice on his concerns about the predicament of Bajco, from Madgwick Partners. They arranged a conference with Mr Garth Blake of counsel, which was held on 12 March 1997. Mr Blake advised on the commencement of proceedings by Bajco to assert that it was the beneficial owner of the business transferred to Cadwallader Engineering (NSW) in 1979, and that Alan and Bruce had breached their fiduciary duties in resolving as directors that Bajco should enter into that transaction. 49 The prospect of Bajco taking legal action placed Bruce in a difficult position. He was in a bitter dispute with Alan but as Alan's co-director in Cadwallader Engineering (NSW) he was likely to be a defendant. He says that when he was informed that Bajco would be commencing action against Cadwallader Engineering (NSW), of which he was a director, he realised that his remaining as a director of Bajco would have resulted in a conflict of interest, and so he resigned. Marilyn replaced him as a director of Bajco on 10 March 1997. 50 A meeting of the directors of Bajco was held on 10 March 1997. David and Marilyn were in attendance, and the resignation of Bruce was "read". The directors resolved to pay legal expenses to Madgwick Partners, and to retain that firm to deal with the dispute between Bajco and Cadwallader Engineering (NSW) up to "Stage I", and then to review the situation, including the financial position of Bajco. The minutes of the meeting record the following further decision: "Seek appointment of a 'Receiver' for Cadwallader Engineering (NSW) Pty Ltd on Tuesday 11 March 1979 [presumably intended to mean 1997] to protect the assets of Bajco Pty Ltd, as Alan Cadwallader and Bruce Cadwallader, as directors of Cadwallader Engineering (NSW) Pty Ltd are in the process of having an 'Administrator' installed through the court on Wednesday 12 March 1997." 51 It is hard to give any precise meaning to this resolution, but it provides some evidence that as early as March 1997 David and Marilyn had become acquainted rather imperfectly, with concepts relevant to the external administration of the affairs of a company. It also shows that as early as March 1997, the dispute between Bajco (represented by David and Marilyn) and Cadwallader Engineering (NSW) (represented by Alan, and perhaps Bruce) had escalated to the point that litigation was seriously in contemplation.

David and Marilyn seek Mr Cardwell's advice 52 Shortly after Marilyn replaced Bruce as a director of Bajco, David and Marilyn decided that they needed some financial advice on the company's situation. Bruce's wife Sharon contacted them, inviting them to lunch to discuss the Bajco situation. During the lunch Sharon mentioned that she and Bruce had a friend who could give advice about the company's situation. She identified the friend as Ronald Cardwell, a senior insolvency manager of Deloitte Touche Tohmatsu. David and Marilyn's evidence was that there was specific discussion about voluntary administration, but it seems to me that this is unlikely. Other evidence, in particular the minutes of their meeting of 10 March 1997, suggests that at the time, David and Marilyn did not have any clear understanding of what was involved in voluntary administration, as opposed to other external administrations such as receivership. 53 David and Marilyn subsequently discussed the matter and agreed that they should obtain Mr Cardwell's advice. On about 26 March 1997 David made contact with Mr Cardwell and arranged a meeting. The meeting took place on 2 April 1997. It was attended by David and Alan, Tracey Case (Marilyn's daughter) and Annette Cadwallader (David's wife). Tracey Case made notes. 54 The notes recorded that several "choices" were identified at the meeting, including an application to appoint receivers of both companies, the liquidation of both companies, and voluntary administration of both companies. According to the notes, voluntary administration would lead to a deed of company arrangement in which "you are able to realise assets and money taken - end result may be a pot of money". The notes do not specify who said these things, but David has given evidence that the speaker was Mr Cardwell, and I accept that was so. 55 After the meeting David and Marilyn did not directly pursue any of the three choices outlined by Mr Cardwell. However, they decided that Bajco should commence proceedings against Alan, Bruce and Cadwallader Engineering (NSW). 56 On 2 April 1997 David and Marilyn on behalf of Bajco wrote to Alan as a director of Cadwallader Engineering (NSW) informing him that they proposed to auction the Property on 3 May 1997. They asked him for "confirmation" whether the lease signing would vary in any way. Alan responded by letter to David dated 3 April 1997, saying that if David could arrange for the lease document to be delivered to Alan's home, he would arrange to have it signed before a witness and returned forthwith. On about 7 April 1997 David telephoned Alan and said that he had received advice that if the lease was signed, the sale price of the Property would be devalued by up to 90% at the proposed auction, and therefore David did not want the lease to be signed. Again, therefore, negotiations for an increased rent stalled. It seems that the auction proposed for 3 May 1997 did not take place.

The 1997 proceeding by Bajco 57 On 29 April 1997 (after a resolution to do so was passed by David and Marilyn as its directors on 8 April 1997), Bajco commenced a proceeding by summons in the Equity Division of this Court, No 2230 of 1997, naming Alan and Bruce Cadwallader and Cadwallader Engineering (NSW) as defendants. Bajco contends in that proceeding that the 1979 transfer of the business from Bajco to Cadwallader Engineering (NSW) was made in breach of the fiduciary duties of Alan and Bruce. On about 25 September 1997 an order was made that the proceeding continue on pleadings. The 1997 proceeding has been stood over pending the outcome of the present proceeding. 58 Settlement negotiations instigated by Alan's solicitor were conducted during May 1997, but they were stalled on about 27 May when it appeared to Madgwicks (acting for Bajco) that Bruce no longer wished to participate. Alan's solicitor then advised Madgwicks that Alan would support a move to appoint a receiver to the business of Cadwallader Engineering (NSW), on the ground that the business was deadlocked to the detriment of its operation and profitability. A few days later, however, Madgwicks became aware that the solicitors for Alan and Bruce were negotiating and that Alan no longer intended to apply for the appointment of a receiver. Alan's solicitor said that his client would make a settlement offer, but by mid-July 1997 no offer had been made, and Madgwicks recommended that the directors of Bajco instruct them to continue with the 1997 proceeding. At a meeting on 17 July 1997 David and Marilyn as directors of Bajco resolved to continue the litigation. They also resolved to offer the Property for sale and approach real estate agents for advice.

Negotiations for settlement of the dispute between Alan and Bruce; the requisitioned meeting 59 The dispute between Alan and Bruce with respect to management of the business continued during 1997. However, they had a common interest in defending themselves in the 1997 proceeding. It appears that they took the view that David and Marilyn, in prosecuting the 1997 proceeding as the directors of Bajco, were representing a minority interest in the company. They were advised that because they together held a majority of the shares in Bajco, they could requisition a meeting of the members of Bajco to replace the board, and then, as the new directors of Bajco, take advice as to whether the 1997 proceeding should be continued. 60 On 21 May 1997 Alan's solicitor submitted a draft Deed of Agreement to Bruce's solicitor. The draft is not in evidence but, according to Alan's solicitor's covering letter of that day, it dealt with the sale of the assets of the business and the appointment of an agent to do so. There was a meeting between Alan and his solicitor, and Bruce and his solicitor, on 29 May 1997. According to a letter written by Bruce's solicitor on 2 June 1997, arrangements were agreed for the appointment of a reviewing accountant and for settlement of disputes between Alan and Bruce on the basis of that accountant's review, the appointment of a bookkeeper pending sale of the business, and for Alan's solicitor to approach Madgwicks to attempt to negotiate a settlement with Bajco. Under the proposed settlement, the six siblings would receive equal 1/6 shares of the proceeds of sale of the Property, control and ownership of Bajco would be given to Alan and Bruce, and the other siblings would have no claims against Alan, Bruce, Bajco or Cadwallader Engineering (NSW). One infers that the approach (if any) to Madgwicks was unsuccessful. 61 By 1 September 1997, it appeared to Alan's solicitor, according to a letter he wrote to Bruce's solicitor on that day, that neither Alan nor Bruce was in a position to buy the business, and therefore the business should be sold to an outsider. Alan believed that the Gosford operation should be sold separately from the Concord West operation, though he was prepared to take expert advice. The letter of 1 September 1997 sets out other aspects of the proposed settlement of all disputes, including some tentative ideas for sale of the Property and distribution of the proceeds in equal 1/6 shares to each sibling. 62 According to a letter dated 4 September 1997 from Bruce's solicitor to Alan's solicitor, there was another meeting of Alan and Bruce and their solicitors on 28 August 1997, in which it was agreed that Alan's solicitor would make an offer of settlement to Madgwicks, and that each sibling would receive a 1/6 share of the Property as per a valuation. It was agreed that if Madgwicks did not accept the offer, an extraordinary general meeting of the shareholders of Bajco would be called and Bruce and Alan would be appointed as directors; Madgwicks' instructions would be withdrawn; and a demand would be made on David and Marilyn to refund to Bajco the money it spent on the 1997 proceeding. It was also agreed that an agent be instructed to value and sell the business, and that the business would be sold as a whole unit rather than as separate operations. Again, one infers that the approach (if any) to Madgwicks was unsuccessful. 63 On 18 September 1997 Alan's solicitor wrote to Madgwicks communicating a request by Alan and Bruce that the current board of Bajco call a general meeting of shareholders for the removal of the current directors and their replacement by Alan and Bruce. The letter said: "we also advise that it is the intention of the new Board, if elected, to consider at its first meeting discontinuance of the action of the Plaintiff". A draft of this letter, submitted by Alan's solicitor to Bruce's solicitor on the previous day, had contained a different version of this sentence, thus: "we also advise you that it is the intent of the new Board to dismiss your firm as solicitors for the Plaintiff [in the 1997 proceeding] and to discontinue the action of the Plaintiff". The letter noted that the minority shareholders could commence a proceeding in their own names. 64 At about this time David and Marilyn changed Bajco's solicitors from Madgwicks to McCabes. According to David's evidence, Madgwicks informed him that they could no longer act because they had given advice to Bruce in his capacity as a director of Bajco some years earlier. 65 On 18 September 1997 the new solicitors for Bajco, McCabes, wrote to Alan's solicitor asking as a matter of urgency whether Alan's intention was to discontinue the 1997 proceeding if he was appointed a director at the meeting of members scheduled for 11 December 1997. Alan's solicitor replied on 25 November, saying that Alan's intention, if he were to be appointed to the board of Bajco, was to seek legal advice regarding the 1997 proceeding and his duty to administer the company, and to act in accordance with that advice. 66 By 20 October 1997 David and Marilyn knew it was likely that they would receive a requisition to convene a meeting of the members of Bajco, to vote on a proposal to remove them from office. At their board meeting on that day, they resolved to pay themselves directors' fees of $2,000 per quarter (equivalent to $153 per week for each director), backdated to July 1997, on the advice of McCabes. The directors' fees were substantially in excess of the amounts paid as directors' fees for the years ended 30 June 1996 and 30 June 1997. Apart from activities associated with the 1997 proceeding, the directorships of Bajco involved very little work, as only about 10 cheques per annum were drawn and the only business of the company was to receive rental income and some interest. In my view, the new fees were excessive, even allowing for the work involved in conducting the 1997 proceeding. 67 The minutes of the meeting of 20 October 1997 also record a resolution to accept a loan from Marilyn of $10,000, to be paid back with interest at the current rate plus 2%, as soon as possible. 68 In October 1997 Bruce obtained a valuation of the business. He wrote to his solicitor on 13 October 1997 setting out a strategy under which he would offer to buy the business, and he said "while I do not particularly want to stay on in the business, it would be a good commercial decision and would stop Alan in his tracks". Clearly there was still bad blood between Alan and Bruce, though they were co-operating to an extent vis-a-vis Bajco. 69 On 14 October 1997 Alan's solicitor submitted a further draft Deed of Agreement to Bruce's solicitor. The parties to the Deed of Agreement were to be Alan and Bruce and Cadwallader Engineering (NSW). The draft provided for the sale of the business, to be conducted by an agent. It also provided (in clause 6) for Alan and Bruce to serve a requisition on the directors of Bajco under s 246 of the Corporations Law for the convening of a meeting of members to remove David and Marilyn as directors and replace them with Alan and Bruce. According to the draft, in the event that Alan and Bruce were appointed directors, they would consider discontinuance of the 1997 proceeding, on the strict basis of what was fair and proper for all the shareholders of Bajco, including the minority shareholders. The draft also provided for the sale of the Property after Alan and Bruce became directors of Bajco, and for the distribution of the net proceeds of sale (apparently sale of the Property was intended, although the draft refers to sale of the business) in equal 1/6 shares amongst the six siblings. 70 The draft Deed of Agreement was returned by Bruce's solicitor to Alan's solicitor, unsigned, by facsimile of 22 October 1997, with some handwritten amendments not material for present purposes. It was accompanied by a form of notice of requisition for a meeting of members, dated 15 October 1997 and signed by Bruce's solicitor on his behalf. 71 Later a further copy of the notice of requisition was signed personally by Alan and Bruce. Although the notice was dated 15 October 1997, it was served on Bajco on about 24 October 1997. David and Marilyn sought advice from McCabes, who briefed Mr Gullotta of counsel. On 29 October 1997 Mr Gullotta advised that the directors of Bajco were required to convene the requisitioned meeting, and that if Alan and Bruce succeeded in obtaining control of Bajco and having it discontinue the 1997 proceeding, David and Marilyn would be given leave to continue the suit in the company's name. 72 On 31 October 1997 David, as a director and the secretary of Bajco, gave notice of an extraordinary general meeting of Bajco to be held in Goulburn at 9:30am on 11 December 1997, to consider, and if thought fit, pass resolutions as to the matters in the notice of requisition. The decision to hold the meeting in Goulburn was extraordinary and unjustifiable, in my opinion. The only connection with Goulburn was the fact that Marilyn lived there. Every other consideration pointed to holding the meeting in Sydney. 73 Although arrangements for the meeting of members had been made, Alan and Bruce still had not finalised their proposed Deed of Agreement. On 11 November 1997 Bruce wrote to his solicitor setting out some amendments he wanted to make to the draft Deed. One amendment was to delete clause 6. He said that since David and Marilyn as directors of Bajco had convened a meeting for 11 December 1997, "this (i.e. Bruce & Alan being appointed Directors) cannot happen", and he added that "this also means that subsequent clauses of this deed become invalid until after the 11th December meeting". He concluded by saying it would be in his best interests if the appointment of Ronald Cardwell as administrator for both Cadwallader Engineering (NSW) and Bajco formed an essential part of the final negotiations at the proposed round table meeting. This letter is not easy to interpret. David, Marilyn and Mr Cardwell have given some controverted evidence that Bruce changed his mind about replacing David and Marilyn as the directors of Bajco, and told David he would vote against the resolutions. I shall consider this question in detail later. 74 Early in November 1997 there were some negotiations between the solicitors for David and Marilyn, and Bruce's solicitor, with a view to settling their dispute. On 7 November 1997 David and Marilyn's solicitor wrote to Bruce's solicitor proposing a meeting of the family members to discuss settlement. The proposed meeting was arranged for 18 November 1997 at the offices of Deloittes. However, on 8 November 1997, David and Marilyn as directors of Bajco resolved to engage an estate agent and place the Property on the market, and to inform Alan and Bruce that they were doing so. According to David, he and Marilyn decided to place the property on the market again because finance was needed to fund the day-to-day operations of Bajco and also to fund the ongoing litigation. I shall deal with this evidence of intention later. 75 On 12 November David and Marilyn's solicitor wrote to Bruce's solicitor informing him of their decision to sell the Property. It appears that Bruce was upset by this decision. On 17 November 1997 his solicitor wrote to David and Marilyn's solicitor saying that the intention to sell "the business" (presumably meaning to refer to the Property) was "highly inflammatory", and threatening an application for injunctions unless action to sell the Property immediately ceased. Although the evidence is not entirely clear, it appears that the round table meeting proposed for the following day was cancelled. 76 Bruce's solicitor wrote to David and Marilyn's solicitor again on 18 November 1997, objecting to the proposed sale and asserting that David and Marilyn, being minority shareholders of Bajco, would be replaced as directors at the meeting to be held on 11 December 1997. The letter claimed that it would cost a minimum of $50,000 to move equipment out of the Property, and the sale would diminish the value of the goodwill of the business, which was at that time being valued for sale. The letter sought an undertaking not to proceed with the sale and threatened an application for injunctions. On 19 November David and Marilyn's solicitor replied, saying that Bajco would continue to market the Property. 77 Alan Cadwallader says he first became aware of the proposal to sell the Property on 17 November 1997. His solicitor wrote to Bajco's solicitor on 25 November 2001. Alan says that on 28 November 1997 he found out that signs advertising the sale had been erected on the building. 78 Progress in the negotiations between Alan and Bruce seems to have been inversely proportional to progress in the negotiations between Bruce and the directors of Bajco. On 17 November 1997 Bruce's solicitor wrote to Alan's solicitor proposing amendments to the draft Deed of Agreement, in accordance with Bruce's written instructions on 11 November. The letter required, without explanation, that clause 6 be deleted. 79 On 21 November 1997 David and Marilyn as directors of Bajco terminated the retainer of McCabes. David's notes say this was because "Bajco directors had agreed to enter into voluntary administration", although this explanation is questionable because the decision to appoint administrators was taken later, on 27 November, and David wrongly dates the decision to terminate McCabes' services as 29 November 1997. No solicitor appears to have been appointed in their place. 80 Alan contends that David and Marilyn terminated the retainer of McCabes with the intention and effect that there would be no legal practitioner representing Bajco to answer any requests for information as to Bajco's status made by him during the period leading up to the appointment of the administrators. I shall return to this contention later. 81 On the same date, Bruce's solicitor informed Mr Blake of counsel that all negotiations between Alan and Bruce had broken down, and instructed him to prepare the documents necessary to place Cadwallader Engineering (NSW) into the hands of an administrator or receiver. Referring to the proposed meeting of 11 December 1997, the letter anticipated that the current directors of Bajco would be replaced by Alan and Bruce, who would terminate the retainer of McCabes and place Bajco into administration. 82 On 25 November 1997 Alan's solicitor wrote to McCabes querying why the meeting of members had been convened to be held in Goulburn, given the inconvenience of that venue. The letter also questioned why the directors of Bajco had resolved to sell the Property, how the property would be sold, and whether a contract had been issued. The letter recorded that Alan's solicitor had been informed (prematurely, as it turned out) that the directors had resolved on the previous day to appoint an administrator, and queried how the directors could reach the view that the company was insolvent or likely to become so, given that the principal asset of the company was the Property which was worth about $400,000 and was unencumbered. McCabes replied simply by saying that their retainer had been terminated.

The appointment of voluntary administrators, and the first meeting of creditors 83 David's evidence is that until October 1997 Bajco had been able to pay its day-to-day running costs as well as the legal costs for the conduct of the 1997 proceeding. He says that during October 1997 he noticed that the cash in the bank was diminishing at a rapid rate. In November 1997, quarterly bills for rates and other outgoings arrived. He says that in about mid-November, he had a telephone conversation with Marilyn in which she expressed the opinion that the time had arrived to place the company into administration, because the company's income from rent was not enough to pay the incoming bills. David says he agreed and undertook to contact Mr Cardwell. 84 In the week commencing 17 November 1997 he telephoned Mr Cardwell, saying that the company would not be able to fund the ongoing litigation after the present week and that he and Marilyn wanted to discuss whether they should place the company into administration. Mr Cardwell told him that it would be necessary to have a meeting of directors to pass a resolution that the company was insolvent or likely to become insolvent and that an administrator should be appointed. David and Mr Cardwell arranged to meet on 27 November at the offices of Deloittes in Parramatta. 85 David had two discussions with Mr Cardwell on 27 November 1997. The first was at 9:15 am, to review the current position. According to Mr Cardwell's notes, they considered the dispute about the business and noted that Alan was not talking to Bruce and David. They reviewed the financial position of Bajco, noting its current creditors. David says he had assembled some documents relating to Bajco's financial viability (including various bank statements and his handwritten list which summarised the company's assets and liabilities), but that Mr Cardwell did not take the documentation. Instead, they discussed the company's position orally. 86 David said to Mr Cardwell: "We are not able to meet our current debts as the current bank balance is $2,870. The major debts of the company are Madgwicks in the sum of $10,852, expenses incurred by myself and Marilyn for work done on the litigation, counsel's fees, a disputed debt in the sum of $29,276 to Cadwallader Engineering and costs involved with the sale of 3 King Street, Concord West. We are unable to fund the company's ongoing litigation. There has been a meeting called of Bajco shareholders requisitioned by Alan to be held on 11 December 1997." 87 Mr Cardwell explained the legal meaning of insolvency. David says Mr Cardwell expressed the opinion that the company was insolvent or likely to become insolvent in the near future. He explained the procedure for voluntary administration and for the appointment of a receiver by the Court, recommending voluntary administration as the quicker and cheaper alternative. He said two of the partners in Deloittes could act as administrators, and he would prepare an appointment document. He said the auction sale of the Property could go ahead as planned, depending upon the vote of the creditors, and the administrators would seek legal advice as to whether to proceed with the litigation. 88 At about 11 am David rang Marilyn, in Mr Cardwell's presence. David and Marilyn conducted a meeting of the directors of Bajco on the telephone. Subsequently some rather full minutes of the meeting were produced by Mr Cardwell. According to the minutes, which have about them the air of self-justification, the directors noted that there was only $2,700 in the company's bank account and expressed concern about the difficulty of funding the 1997 proceeding. Both directors said they did not have funds to lend to the company. The minutes say that "the issue of raising funds against the company's real estate was also considered, but it was felt that it would be unwise for the directors to do this as they should not be committing the company to any further liabilities," and they expressed some doubt as to whether Cadwallader Engineering (NSW) would remain as a tenant. David reported that he had discussed the financial position with Mr Cardwell, and said that it seemed that the company was insolvent or likely to become insolvent at some time in the future. 89 According to David's evidence, Mr Cardwell gave advice to him and Marilyn as follows: "A company going into administration is a company that cannot afford to pay its ongoing costs. On the information that David has provided me about the outstanding debts of the company, the company is insolvent or likely to become insolvent in the very near future as it cannot meet the debts owing by it. Should the company continue to incur debts while it is insolvent, both David and yourself as directors may incur personal liability for those debts. It is therefore my opinion that an administrator should be put in place." 90 Marilyn gave evidence substantially to the same effect. She says she told Mr Cardwell she did not want to incur any further debts as a director of the company, because she believed that the company would not be able to meet those debts. She says she also wanted to protect the rights of the minority shareholders by taking steps that would, she hoped, ensure that the litigation would be pursued. 91 David's evidence is that he asked Mr Cardwell how entering into voluntary administration would affect the requisitioned meeting of 11 December 1997. He says Mr Cardwell replied: "After the administrators have been appointed I will contact all of the Bajco shareholders to notify them that the meeting of 11 December 1997 would not be held as the company had been placed into voluntary administration on 28 November 1997." Marilyn's evidence is substantially the same on this point. 92 Mr Cardwell gives a different version of this part of the conversation. He says the conversation took place between him and David before they contacted Marilyn, and was as follows: David Cadwallader: "… There is something else I need to tell you. There is a meeting of members to be held in Goulburn in about two weeks time." Ronald Cardwell: "How can you honestly get involved when the company is insolvent." David Cadwallader: "I agree." Ronald Cardwell: "What do they wish to achieve?" David Cadwallader: "To stop further action by Bajco in relation to the Court proceedings." Ronald Cardwell: "We need to do things as soon as possible. We can only run with what we've got." 93 It seems to me probable that Mr Cardwell replied to David's question in the way David and Marilyn say he did. There is other evidence (which I shall discuss shortly) that Mr Cardwell shared Mr Hilliard's view that once administrators were appointed, the meeting could not take place, and that he communicated that opinion to Alan's solicitor on 10 December 1997. It is probable that he also said it was necessary to act as soon as possible, and that they could only run with what they had, as this is consistent with Mr Cardwell's handwritten notes of the meeting. 94 David and Marilyn say they relied on Mr Cardwell's advice in resolving in favour of voluntary administration. They say that they believed the company had outstanding debts which it could not pay and was unlikely to be able to pay in the future, and that an administration would enable the company to pursue the 1997 proceeding which it otherwise could not afford to continue. 95 The directors of Bajco resolved that: "(a) in the opinion of the directors voting for the resolution, the company was insolvent, or was likely to become insolvent at some future time; and (b) an administrator of the company should be appointed." They also resolved that "the company execute under seal of the company notice that it desires to appoint an administrator of the company as soon as possible". It was agreed, according to the minutes, that David would attend to "the necessary execution of documents appointing the appropriate people" from Deloittes. 96 Marilyn made some notes of the telephone discussion. She recorded that Mr Cardwell went through all the reasons why and when a company should enter into voluntary administration, when the directors considered that the company might be insolvent or could become insolvent in the future. She referred to the company's assets and liabilities and said that she and David wished "to be seen as acting responsibly". 97 Marilyn wrote to Mr Cardwell on 29 March 1998, setting out what she called "a detailed diagram of what went on" in the two companies from 1979 to 1996. She did so, she explained, because she had formed the impression that Mr Cardwell and his lawyers did not understand the true picture of what had been done to the company over those years. Her letter also enclosed a statement of what she described as "the main events which also led David and I to reach the decision to put the company into administration". 98 The statement enclosed with the letter was headed "Reasons for Putting Bajco Pty Ltd into Administration". The statement is a catalogue of her complaints about Alan's conduct across a range of matters comprising the family dispute about the affairs of the two companies. Her list of reasons includes allegations as follows: · Alan's refusal to the buy out the shares of other shareholders or settle on any agreement or proposal; · illegal purchase of Jeanine Hatton's shares; · Alan's refusal to allow an independent audit of Cadwallader Engineering (NSW)'s books to determine transfers of funds from Bajco; · Alan's refusal to settle on an outcome in light of the Horwath Report; · misappropriation by Alan due to lost income arising from the absence of a formal lease agreement; · devaluation of shares in Bajco in the period from 1979 to 1998, from $3,000 to $20 per share; · continuous oppression of minority shareholders by Alan preventing resolutions being put forward; · unresolved conflict between Alan and Bruce as majority shareholders, and David and Marilyn as directors representing the minority shareholders; · transfer of business assets in 1979 without proper and fair consideration being paid to Bajco, and without the informed consent of the shareholders; · "morally and ethically incorrect" disclosure of information about the affairs of Bajco by its accountant, Mr Smyth, to Alan. 99 She reinforced and elaborated on these matters in cross-examination. Of course, when the question for the directors is whether the company should move into voluntary administration, considerations of these kinds are irrelevant considerations except to the extent that they bear on the question of solvency. At the end of the statement she asserts, relevantly, that the company was by November 1997 "no longer a viable concern", and had not been so for the previous three years. She briefly reviews the creditors of the company and notes that there was only about $2,000 in the bank. The statement concludes by urging Mr Cardwell and the administrators and their lawyers to take the matter very seriously because "we intend to win - losing isn't in the picture". 100 Alan attaches some significance to this evidence by Marilyn. He says that if David and Marilyn decided to appoint the administrators for the reasons given by Marilyn, they necessarily failed to exercise their power under s 436A of the Corporations Law in good faith for the purpose for which it was conferred, and in the interests of the shareholders as a whole. I shall return to this contention later. 101 Mr Skinner and Mr Lombe have given evidence that they would not have consented to be appointed as administrators, if they had been informed by David and Marilyn that they were motivated in appointing administrators by reasons other than belief on their part that Bajco was insolvent - for example, if David and Marilyn had told them that their intention (or one of their intentions) in appointing administrators was to stop their replacement as directors at the meeting scheduled for 11 December 1997. Mr Cardwell has given evidence that he would not have used the consents by Mr Skinner and Mr Lombe if he had been informed by David and Marilyn of such things. 102 On 28 November 1997 David and Marilyn, located in different places, signed a document and the common seal of Bajco was affixed to it. The document stated that it was agreed pursuant to s 436A of the Corporations Law that an administrator be appointed, and that any two of Mr Skinner, Mr Campbell and Mr Lombe, partners of Deloittes, were to be appointed as administrators provided they consented. A more formal document bearing the same date purported to appoint Mr Skinner and Mr Lombe to be the administrators of Bajco, and noted their consent. The common seal of Bajco was affixed to this document and David signed it. His signature was witnessed by Mr Cardwell. 103 Late in November 1997 Bruce changed his solicitor. The new solicitors, Hunt & Hunt, wrote to Alan's solicitor on 1 December 1997 re-stating Bruce's requirements for amendments to the draft Deed of Agreement. The letter reiterated that clause 6 should be deleted. The other changes to the draft would have given Deloittes the function of selling the business and valuing it. 104 The first meeting of creditors of Bajco was held on 3 December 1997. David and Marilyn both lodged claims for $15,000 each for services rendered. The meeting was attended by David and Bruce, and Marilyn appointed David her proxy. Alan did not attend, and says he was unaware of the meeting. He says the first time he or his solicitor became aware that administrators had been appointed to Bajco was on the morning of 10 December 1997, the day before the requisitioned meeting of members was due to take place. 105 The meeting resolved not to form a committee of creditors, and to confirm Mr Skinner and Mr Lombe as administrators.

Cancellation of the requisitioned meeting 106 The newly appointed administrators were advised by Derrick Hilliard of Tress Cocks & Maddox. Both Mr Cardwell and Mr Hilliard told Alan's solicitor that the meeting convened for 11 December 1997 could not go ahead, in view of the appointment of voluntary administrators. Alan nevertheless attended at the appointed time and place, but no one else appeared. The meeting did not proceed. 107 In my opinion Mr Hilliard and Mr Cardwell were wrong to advise that the meeting should not go ahead. In his letter to Alan's solicitors dated 10 December 1997, Mr Hilliard referred to ss 437C, 437D, 437F and 438B of the Corporations Law. Sections 437D and 437F are, however, strictly irrelevant, since the business of the meeting did not include any proposal to deal with the property of the company or the status of the members. Section 438B, which imposes an obligation on the directors to assist the administrator in various ways, assumes (as does s 437C (2)) that the office of director continues after the administrator has been appointed. The central provision is s 437C (1). This says that while a company is under administration, a person (other than the administrator) cannot perform or exercise, and must not purport to perform or exercise, a function or power as an officer of the company, except with the administrator's written approval. 108 Mr Hilliard's reasoning was that a meeting of members of a company is organised by the secretary and presided over by the chairman of directors, and as the powers of both the secretary and the chairman of directors had been suspended under s 437C, there was in effect no power to conduct the meeting. He was mistaken with respect to both the secretary and the chairman. 109 The meeting had already been validly convened by the notice despatched by David on 31 October 1997. What remained to "organise" the meeting was not a special function of the secretary or any other officer. Anyone entitled to attend the meeting could gain access to the premises. Upon proof that an instrument of proxy had properly been submitted to the company in accordance with its constitution, a proxyholder would be entitled to vote, regardless of the presence or absence of the secretary. 110 There is some room for argument as to whether, in exercising the functions of a chairman of a meeting of members, a director is performing or purporting to perform a function as an officer of the company, given that the definition of "officer" in s 9 does not include a chairman as such. It is unnecessary to resolve that question here, because it is plain under the constitution of Bajco (which adopts in this respect article 49 of Table A of the Fourth Schedule to the Companies Act 1961 (NSW)) that the chairman of the meeting need not be a director, if the chairman of directors is unwilling to act (as may occur, for example, if he were advised that he may be prevented from doing so by s 437C (1)). 111 I see no reason of principle for holding that a properly requisitioned meeting of members to replace the board of a company should be abandoned if the incumbent board appoints an administrator after the meeting has been convened but before it has been held. Indeed, one can imagine circumstances where the policy underlying Part 5.3A would not be served unless the meeting could take place - for example, where the incumbent board has become unco-operative or the majority directors are driven by an unacceptable conflict of interest. My conclusion, therefore, is that if a meeting to consider motions to replace the directors has been validly convened before an administrator is appointed, the intervening administration does not require that the meeting be abandoned or adjourned. 112 Mr Cardwell communicated his view about the proposed meeting in a telephone conversation that he had with Alan's solicitor on 10 December 1997. Mr Cardwell began the conversation by saying that his call was "off the record", but it is clear that Alan's solicitor did not accept that condition of the call, whatever "off the record" might mean in this context. Mr Cardwell proceeded to say that he had been appointed administrator by the directors of Bajco and that the purpose of his call was to say that the shareholders' meeting was not proceeding. According to a letter by Alan's solicitor to Mr Cardwell on 10 December 1997, Mr Cardwell said in the telephone conversation that he was not aware that the proceeding instituted by Bajco was currently before the Court and had been adjourned until after the shareholders' meeting, that he had not seen the agenda for the shareholders' meeting, that he was not aware of the purpose of the meeting, and that he had not seen the letter from Alan's solicitor to McCabes dated 25 November 1997, to which no response had been received. It seems to me likely that Mr Cardwell said all of these things to the solicitor. I find the claims made in these statements about his state of mind to be implausible, except for the last one.

The notice of the second creditors' meeting, and the administrators' report 113 By written notice dated 19 December 1997, the administrators gave notice convening a meeting of the creditors of Bajco on 29 December 1997. The notice attached their Report to Creditors. The evidence indicates that the Report was in fact prepared by Mr Cardwell. 114 The Report made, inter alia, the following points: · for a considerable period of time the directors had been concerned about the failure of Cadwallader Engineering (NSW) to account to Bajco for money claimed to be due, and about the legal costs and expenses in proceeding No 2230 of 1997, and about the inability of Bajco to conclude a formal lease with the directors of Cadwallader Engineering (NSW); · the net assets of the company, according to the Report as to Affairs signed and lodged by David on 11 December 1997, had an estimated realisable value of $375,129, plus a contingent asset of $500,000 claimed to be owing to Bajco by Cadwallader Engineering (NSW); · the company's creditors comprised Madgwick Partners ($10,852), counsel ($1,250), the directors ($30,000) and another creditor ($5,000), and the Report noted that Alan's solicitors had informed the administrators that Cadwallader Engineering (NSW) was a creditor for $29,136; · the administrators' initial investigation indicated that the company did not trade whilst insolvent, and it was clear that further investigation was not required on this point; · a preliminary review of the books and records of the company indicated that there were no remittances to creditors which might be recoverable by a liquidator under Part 5.7B of the Corporations Law. 115 Except as noted above, the Report to Creditors does not address the question of solvency of the company. The figures presented, however, make it clear that the company was not insolvent on a balance sheet test. It would be possible, consistently with the figures presented in the Report, for the company to be insolvent on a cash flow test, but the Report does not go into the question of cash flow insolvency. 116 Having presented the company's circumstances in the manner outlined above, the Report turned to the question whether a deed of company arrangement should be entered into, or the administration should be terminated, or the company should proceed into liquidation. The relevant part of the Report, which I now set out in full, is strikingly brief: "At the present time the property owned by the company has been listed with real estate agents Gilmour Real Estate, 819 Victoria Road, Ryde, NSW for sale by way of auction. This arrangement had been entered into prior to the administrators being appointed and at this point of time the administrators can see no valid reason why that sale should not proceed.

"Accordingly the sale will continue with the auction taking place in mid February 1998. It is proposed that, as this is the major asset, the proceeds be distributed amongst those creditors who prove their debts and that any surpluses that arise be distributed to those shareholders of the company who are legally entitled to receive a distribution in accordance with the shareholdings that they maintain.

"The other significant issues that needs [sic] to be explored are the proceedings that have been commenced in the Supreme Court of New South Wales Equity Division between Bajco Pty Ltd against Alan Norman Cadwallader, Bruce Eric Cadwallader and Cadwallader Engineering (NSW) Pty Ltd. The allegations set out in the Statement of Claim are significant to the extent that should they be proven significant funds would be available to the administrators for distribution to the shareholders of the company.

"It is not possible at this point of time to indicate to creditors and shareholders the likelihood of success until further enquiries have been made and an opinion sought from Counsel.

"We believe that the sale of the company's assets in this manner is best dealt with by a Deed of Company Arrangement as it will expedite a distribution to creditors and shareholders. We are also of the opinion that there have not been any transactions which would benefit the creditors should the company be placed into liquidation.

"If for any reason the Deed of Company Arrangement fails it would be appropriate for the company to be placed into liquidation."

The second meeting of creditors 117 By the time of the second creditors' meeting, claims had been made by creditors as follows: · Madgwick Law Offices $11,472.95 · David Cadwallader $15,000 · Marilyn Wintzloff $15,000 · Bruce Cadwallader $4,000 · Cadwallader Engineering (NSW) $29,136 118 I should note that in the witness box, Marilyn admitted that her claim for $15,000 was false and she was not entitled to make it. She said that in doing so, she followed a suggestion by Mr Cardwell. Her admission casts doubt not only on her own claim, but on David's claim for the same amount. 119 The meeting of creditors was held on 29 December 1997. Present were Mr Skinner (as chairman), Mr Cardwell, David and Bruce claiming as creditors (David holding a proxy from Marilyn, who also claimed as a creditor), Alan (as proxy for Cadwallader Engineering (NSW)), and Alan's solicitor Mr Christopher Price. Although the meeting was formally chaired by Mr Skinner, he had a sore throat and effectively relinquished the conduct of the meeting to Mr Cardwell. 120 The minutes of the meeting are in evidence, and Mr Price has given an account of the meeting. There was discussion about whether the transfer of shares from Jeanine Hatton to Alan had been properly carried out in accordance with the constitution of Bajco, Mr Cardwell contending that the transfer did not comply with the constitution. There was also discussion about whether Bajco was insolvent at the time of the appointment of the administrators, or likely to become insolvent at a future time. Mr Cardwell said that the proceeding by Bajco against Cadwallader Engineering (NSW) was of concern to the directors, that the company had run out of money, and that the resources of the directors were not sufficient to continue the litigation. There was also discussion about whether Bajco owed Cadwallader Engineering (NSW) the debt of $29,136 that had been alleged, and Mr Price asked for further information about debts said to be owed to Bruce, and to David and Marilyn. There was discussion about the proposal to sell the Property, and Alan said Cadwallader Engineering (NSW) would need three to four months to relocate the business. There was also discussion about the costs of the administration, especially if Bajco in administration were to pursue the Supreme Court litigation. 121 Mr Cardwell handed out a document which comprised the recitals but not the substantive part of a draft deed of company arrangement. The recitals asserted that the company got into financial difficulties when Cadwallader Engineering (NSW) failed to account for rent due to Bajco and Bajco became unable to meet the legal costs associated with the proceeding in the Supreme Court. Obviously that statement is controversial and is disputed by Alan, who says that Cadwallader Engineering (NSW) has not defaulted in payment of rent, which (he says) has remained at $3000 per month at all relevant times. They recited that the administrators had decided to proceed with the sale of Property and that creditors would be paid in full from the deed fund established upon sale of the property. They recited that the balance of the deed fund would be retained and invested by the administrators pending resolution of the Supreme Court proceeding and would then be distributed to the members of Bajco, subject in the case of Alan and Bruce to a set-off of any amounts found to be due and owing by them in the proceeding. Mr Cardwell said that the claim by Cadwallader Engineering (NSW) would be marked under Corporations Regulation 5.6.26, so that the company could vote as a creditor but its vote might be discounted. 122 The meeting was adjourned at the request of Mr Price, and he then had a conversation with Alan and Bruce. Bruce informed Mr Price that he wanted Cadwallader Engineering (NSW) to vote in favour of the deed of company arrangement. Mr Price then asked Alan what he wanted to do, and Alan said "I want to proceed with the administration". 123 When the meeting was resumed, it was unanimously resolved that Bajco should enter into a deed of company arrangement and that the administrators should be appointed administrators of the deed. Alan's attitude to the resolution appears, on its face, to be odd. His evidence is that he agreed to vote in favour of the administration because he thought there was no other option. He thought that nothing would be achieved if he opposed the administration, given that it was supported by David, Marilyn and Bruce. He believed that he could not vote against the administration as the proxyholder for Cadwallader Engineering (NSW) if its other director, Bruce, took a different view. He also thought that if Cadwallader Engineering (NSW) voted against the administration, its vote would be ignored because its claim had been marked by Mr Cardwell.

The deed of company arrangement 124 On 12 January 1998 a deed of company arrangement was executed under the seal of the company by David (on behalf of Bajco) and by the two administrators. David's signature was witnessed by Mr Cardwell. The other director, Marilyn, did not sign. 125 The deed provides for the administrators to proceed with the sale of the Property and place the net proceeds of sale into a Deed Fund. The administrators are given various standard powers, including (in paragraph (j) of Schedule 1 to the deed) the power to bring, prosecute and defend in the name of and on behalf of the company or in the name of the administrators any actions, suits or proceedings (including, though it is not expressly identified, proceeding No 2230 of 1997). There is a procedure to establish a list of Admitted Creditors. After the payment of Exempt Creditors (being preferential creditors and employees), the Admitted Creditors are to be paid in full out of the Deed Fund. The balance of the Deed Fund is to be retained by the administrators and invested in an approved trustee investment, pending resolution of proceeding No 2230 of 1997, and thereafter the balance is to be distributed to the members of the company, subject in the case of Alan and Bruce to the deduction of any amount found to be due by them to the company in proceeding No 2230 of 1997. 126 An important component of the scheme contained in the deed of company arrangement was the sale of the Property. As I have explained, David and Marilyn had commenced the process of sale in November 1997. The administrators decided to continue the process. An auction was scheduled for 11 February 1998. On behalf of the administrators, Mr Cardwell retained a valuer late in January 1998. On 6 February 1998, before the valuer reported, David wrote to Mr Cardwell reviewing the estate agent's summary of inspections of the Property and saying that he had become "a little less optimistic" about obtaining bids up to the previously contemplated reserve price of $365,000. The valuer reported on 10 February 1998, expressing the opinion that a fair and reasonable market value, for sale purposes, was $325,000 and recommending that the reserve price be set at or around that figure. 127 At one stage in the present proceeding it was alleged that the deed had been ineffectively executed, and that Bajco had therefore not executed a deed of company arrangement within the 21 day period stipulated by s 444B of the Corporations Law as then in force, and consequently that the company was in liquidation under s 446A. However, in light of the High Court's subsequent decision in MYT Engineering Pty Ltd v Mulcon Pty Ltd (1999) 195 CLR 636, that contention is no longer pressed. Nevertheless, the administrators formed the view (prior to the Mulcon decision) that the deed of company arrangement had not been properly executed within the 21 day period, and on 18 February 1998 they published an advertisement giving notice that by virtue of s 446A (2) and the contravention of s 444B (2), they had become liquidators of the company as from 20 January 1998. But evidently the legal advisers had some doubts as to the true position. On 23 February 1998 David and Marilyn met as directors of Bajco and resolved that if Bajco was not presently in liquidation, Mr Skinner and Mr Lombe be indemnified out of the assets of Bajco for their costs and expenses in purporting to act as voluntary administrators since 28 November 1997 and as liquidators since 20 January 1998. Subsequently David and Marilyn have contended that the resolution should be set aside because it was procured by pressure, and because they were not given the opportunity to obtain independent legal advice.

The attitude of the siblings to the future of the two companies and the business 128 If Alan is successful in the present proceeding, there will be no valid deed of company arrangement and the affairs of Bajco will be returned to its directors, David and Marilyn. Therefore success by Alan in this proceeding will not resolve the family feud. 129 It is clear enough that David and Marilyn want to dispose of the Property and distribute the proceeds of sale to the shareholders of Bajco, deducting from the shares of Alan and Bruce amounts for which (in the view of David and Marilyn) they are liable for breach of duty and otherwise. There is evidence that Glyn wants the Property sold, and that he also wants the 1997 proceeding to be continued. He says that if Bajco is removed from any form of administration and is returned into the hands of its directors, the ongoing dispute between his brothers and sister will continue without satisfactory resolution. He wants to see the company remain under some form of administration so that decisions are made by a third party in the interests of the company as a whole. 130 As far as one can tell from the limited evidence of her attitude, Jeanine appears to be a supporter of Alan. In any event, strictly the legal right to vote in respect of the 100 shares previously registered in the name of Jeanine belongs to Alan. 131 Bruce's attitude is far from clear, on the evidence before me. As appears from my account of the facts, he has changed his mind on important questions on more than one occasion. In my view, the most accurate statement about him was made by Marilyn, who gave evidence that she reminded David that "Bruce will say one thing right up to the last moment and then change his mind".

Commencement of the present proceeding and interlocutory relief 132 On 10 February 1998 Windeyer J heard a motion brought by Alan in which he sought to restrain the administrators from taking any further steps in the administration of Bajco and from taking any further steps to sell the Property. The motion was originally brought in proceeding No 2230 of 1997, but at the suggestion of his Honour the present proceeding was commenced as a separate suit. The grounds upon which Alan moved the Court were essentially those contained in the present statement of claim. Windeyer J made injunctive orders preventing the further administration of Bajco and the sale of the Property. The orders have remained in place since that time.

The pleadings 133 Alan's case is now contained in his further amended statement of claim, filed pursuant to leave on 7 June 2001. Essentially he seeks relief on the grounds that the instrument of appointment of the administrators was not properly executed, that David and Marilyn were motivated by improper purposes in resolving to appoint the administrators (paragraphs 21 and 21A give extensive particulars of this claim), that there were various deficiencies of time and content with respect to the notice of the second creditors' meeting and the administrators' report, and that the appointment of the administrators and the adoption of the deed of company arrangement constitute an abuse of Part 5.3A of the Corporations Act. Alan seeks a wide variety of relief including declarations with respect to the invalidity of the appointment of the administrators and the deed of company arrangement, injunctions to restrain the sale of the Property and the implementation of the deed of company arrangement, an order that the administrators or David and Marilyn pay damages or equitable compensation to Bajco to compensate it for the loss suffered when it became liable to pay the fees, costs and expenses of the administrators and liquidators, and orders for an accounting by the administrators. 134 By their further amended defences, the administrators and David and Marilyn raise the contention that Alan requisitioned the meeting of members to be held on 11 December 1997 with the intention that the new board would dismiss Bajco's solicitors and cause the 1997 proceeding to be discontinued, and therefore his object in requisitioning the meeting was self-interested and improper, and so he is not entitled to relief because he does not have clean hands. They also contend that Alan is not entitled to relief because, with full knowledge and legal advice, he joined in the resolution of 29 December 1997 that Bajco should execute the deed of company arrangement. 135 By their amended cross-claim, the administrators seek to invoke s 1322 (4) to validate their acts and conduct in the event that the Court finds there is a defect in the execution of the instrument appointing them, and to invoke either s 1322 (3) or s 1322 (4) to cure any procedural irregularities in the convening of the second meeting of creditors. They seek declarations under s 446A (2) (b) and s 446QA (4) establishing that Bajco is taken to have passed a special resolution for voluntary winding up on 20 January 1998 and that they became its liquidators at that time. 136 If the Court is not prepared to make such orders, then they seek a declaration that they have a lien over the assets of Bajco for debts incurred in purported performance of their function as administrators, a declaration that they are entitled to be indemnified out of the property of Bajco for such debts and for their remuneration, a declaration of their entitlement to remuneration as liquidators, and orders for payment of their remuneration and expenses as liquidators out of the assets of Bajco. Finally, they seek an order under s 1318 (2) that they be excused from any liability that they may be found to have. 137 The second cross-claim is brought by David and Marilyn against all of the partners of Deloitte Touche Tohmatsu. David and Marilyn say that if, contrary to their assertions, Bajco was solvent on 28 November 1997 and/or they ought not to have resolved to appoint the administrators in view of the fact that a meeting of members of Bajco had been convened for their removal, then they make a claim against Deloittes. They say that they retained Deloittes to advise them whether or not Bajco was solvent and whether they should appoint an administrator, and that Mr Cardwell on behalf of Deloittes gave them advice on these matters, upon which they relied. They contend that Deloittes owed them a contractual or tortious duty of care which Mr Cardwell failed to discharge. They seek damages by way of indemnity from Deloittes, to the extent that there is an award of damages, compensation or costs against them and in favour of Alan. By their defence, Deloittes deny that they were retained as alleged or that they owed any duty of care. 138 The third cross-claim in this proceeding has been brought by the administrators against David and Marilyn. The administrators allege that David and Marilyn owed them duties of care not to appoint them as administrators of Bajco if their true purpose in doing so was to stop the members from replacing them at the requisitioned meeting, or to give effect to the matters set out in Marilyn's letter to Mr Cardwell dated 29 March 1998, or if they were otherwise not acting in good faith in the interests of the members as a whole, and to disclose to them any such improper purpose. In the alternative, they say that David and Marilyn owed them equitable and statutory duties of a similar kind. The administrators say that if Alan's allegations are upheld by the Court, it will follow that David and Marilyn breached the duties they owed to them. They seek to recover their remuneration and expenses in connection with the administration and liquidation of Bajco, and their legal costs.

The issues 139 In response to pre-trial directions made by Santow J, counsel for Alan produced a document entitled "Plaintiff's Statement of Issues". During the course of the hearing, I handed out to the parties an analysis of the main categories of issues in light of the plaintiff's statement of issues. The remainder of the hearing placed a somewhat different complexion on some of the issues, and now it seems to me that the following matters must be decided:

A. As to the validity of the appointment of administrators: · Was Bajco insolvent or likely to become insolvent at some future time, as at 27 November 1997, when David and Marilyn passed resolutions as directors for the appointment of administrators? · Did David and Marilyn know, on 27 November 1997, that Bajco was not insolvent or likely to become so, and that it was likely or possible that they would be removed as directors and replaced by Alan and Bruce at the requisitioned meeting due to be held on 11 December 1997? · Were the resolutions of 27 November 1997 passed for the purpose of preventing David and Marilyn from being replaced as directors, consequently ensuring that the sale of the Property would go ahead and funds would be derived for prosecution of proceeding No 2230 of 1997? · In light of my findings on these three factual issues, or alternately in view of the contents of Marilyn's letter to Mr Cardwell dated 29 March 1998 and her oral evidence, did David and Marilyn pass the resolutions of 27 November 1997 in bad faith or for an improper purpose? · If so, are the resolutions of 27 November 1997 voidable at the instance of Alan in the present proceeding? · Was there a valid appointment of the administrators, in the absence of a resolution of the directors of Bajco that the common seal of the company be affixed to an instrument of appointment, and in view of the absence of signature by Marilyn to the form of instrument of appointment dated 28 November 1997?

B. As to the validity of the procedures followed for convening the second meeting of creditors: · Did the administrators comply with s 439A (3) of the Corporations Law then in force with respect to the time of convening the second meeting of creditors, the requisite period of notice of the meeting, and the required contents of the notice of meeting? · If they failed to do so, did the administration of Bajco end prior to the execution of the deed of company arrangement, and if so, what is the consequence as to validity of the deed of company arrangement?

C. As to the adequacy of the disclosure in the administrators' report to creditors: · Did the administrators' report enclosed with the notice of the second meeting of creditors contain information as to the business, property, affairs or financial circumstances of Bajco that was false or misleading in ways material to the decision of creditors whether to vote in favour of the deed of company arrangement, for the purposes of s 445D (1) (a)? · If so, should the Court make an order terminating the deed of company arrangement under s 445D, or a declaration under s 445G (2) that the deed of company arrangement is void, on Alan's application?

D. As to the availability of the relief under s 447A of the Corporations Law as then in force: · Should any of the above circumstances lead to the Court terminating the administration of Bajco under s 447A on the ground that the circumstances amount to an abuse of the provisions of Part 5.3A and an attempt, in substance, to effect a winding up of Bajco without complying with the winding-up provisions of the Corporations Law as then in force?

E. As to the question of remedies in respect of the issues raised above: · Should the defendants be restrained from selling the Property? · Has Bajco suffered loss and damage by reason of the defendants' actions and if so, should damages be awarded to it and in what amount? · Should Alan be denied relief on the ground of lack of clean hands, or on the ground that he joined in the resolution of 29 December 1997 that Bajco should execute the deed of company arrangement? · Should the administrators be relieved from liability under s 1318? · Should any non-compliance by the administrators with the Corporations Law or the constitution of Bajco be the subject of orders under s 1322 (3) or (4) of the Corporations Law as then in force? · Are the administrators entitled to a lien over the assets of Bajco for debts incurred by them from 28 November 1997 to date? · Are the administrators entitled to be indemnified out of Bajco's assets for debts incurred by them and for remuneration under s 443D (a)-(b)? · Are the administrators entitled to be remunerated and if so, at what rate?

F. As to the second cross-claim: · Were Deloittes retained by David and Marilyn on 27 November 1997 to advise them as to whether Bajco was insolvent or likely to become insolvent, and as to whether they should as directors of Bajco appoint administrators? · If there was a retainer, was it an implied term that Deloittes would act with reasonable care and skill and with due diligence, so as to owe David and Marilyn a duty of care in relation to the retainer? · Did Deloittes, by their employee Mr Cardwell, advise David and Marilyn that on 27 November 1997 Bajco was insolvent or likely to become insolvent at some future time, and that they could properly resolve to appoint administrators notwithstanding that a general meeting had been convened to remove them as directors, and that they should resolve to appoint administrators? · Did David and Marilyn rely on such advice (if given), as directors of Bajco, in resolving to appoint administrators to Bajco? · Was the advice given by Deloittes (if they gave it) wrong and in breach of the implied term of the retainer and their duty of care? · Are David and Marilyn entitled to recover from Deloittes, as damages, the compensation and costs (if any) they are required to pay in the event that I find against them and in favour of Alan?

G. As to the third cross-claim: · Did David and Marilyn owe Deloittes any duty of care or other duty that prevented them from appointing the administrators if they were motivated by an improper purpose? · If so, did David and Marilyn breach their duty, and with what remedial consequences?

140 One of the extensively agitated issues in this case has been whether there was any adequate basis for David and Marilyn to form the view, on 27 November 1997, that Bajco was insolvent or likely to become insolvent at some future time. A conclusion that there was no adequate basis for that view might lead the Court to decide that David and Marilyn did not hold the view that they purported to record in their resolution, or that they were acting in bad faith. It might also lead to the conclusion that the advice given by Mr Cardwell was given in breach of duty. Therefore the question whether there were grounds for regarding Bajco as insolvent on 27 November 1997 has been regarded as having considerable significance. The admissibility of the experts' reports 141 Alan has sought to tender an expert's report and accompanying affidavit by David Watson, and the administrators have sought to tender two expert's reports by Andrew Love. The admissibility of these reports was contested, in submissions which raised some issues of general principle. I decided at the hearing to reserve my decision on the admissibility of the reports, and I shall now deal with that issue.

142 Both of the experts are chartered accountants, official liquidators and specialised insolvency practitioners. Mr Watson has been an insolvency and litigation support partner in the firm, Walter & Turnbull, since 1997, and has had over 33 years experience in the public and private sectors, with a particular focus on the investigation of financial fraud. Mr Love has been a partner in the firm, Ferrier Hodgson & Co, since 1978, and has had over 25 years' experience in the insolvency industry, specialising in the mining and media industries, and has been involved in many major external administrations of failed corporate groups.

143 Both reports consider whether, as at the date when its directors resolved to appoint administrators (the date given by Mr Watson is 28 rather than 27 November, but nothing turns on that), Bajco was insolvent or likely to become insolvent at some future time. Mr Watson concludes that the company was solvent and not likely to become insolvent, while Mr Love concludes that the company was insolvent and likely to remain so. In each case, they analyse the company's assets and each individual debt.

144 The admissibility of expert opinion evidence in this Court is governed principally by ss 76 and 79 of the Evidence Act 1995 (NSW). By s 76, evidence of an opinion is not admissible to prove the existence of the fact about the existence of which the opinion was expressed. However, s 79 says that if the person has specialised knowledge based on the person's training, study or experience, the opinion rule [that is, the rule stated in s 76] does not apply to evidence of an opinion of that person that is wholly or substantially based on that knowledge. This raises the question whether the opinion of an expert accountant and insolvency practitioner about the solvency of a company is wholly or substantially based on that person's specialised knowledge.

145 That issue was considered by the Full Federal Court in Quick v Stoland Pty Ltd (1998) 29 ACSR 130. In that case Branson J (at 134) raised the question whether the statement that a company was insolvent at a particular time is a statement of opinion or a statement of fact. Her Honour held that "in other than obvious cases, a statement of a qualified accountant and insolvency practitioner, made on the basis of an examination of financial accounts and other company records, that a particular company is, or is not, insolvent is an expression of opinion". She drew attention to the complexity of corporate accounts and accounting practices. Noting that the opinions of the expert (Mr Madden) concerning the company's insolvency were heavily based on matters of fact and, in some cases, arguably unsubstantiated factual inferences, she nevertheless concluded (at 134) that "Mr Madden's specialised knowledge does qualify him to form views and make judgments as to insolvency based on financial statements and other material of the kind to which he refers in his report", and therefore that his opinion evidence was admissible under s 79 of the equivalent Commonwealth Act.

146 Emmett J took a somewhat narrower view. Having drawn attention to what is involved in deciding whether a company is solvent at a particular time, he said (138): "It may be that, in carrying out such an exercise, a person having Mr Madden's qualifications would be able to give admissible opinion evidence. For example, such an expert could bring his or her specialised knowledge to bear on the analysis of accounting records, expected cash flows, liquid and realisable assets such as debtors and the like." Later he added (at 139-140): "It may be that Mr Madden's specialised knowledge would enable him to say that where a company has a deficiency of current liabilities over current assets and a deficiency of total liabilities over total assets, the company will normally be insolvent. Such an opinion would be admissible if based on his specialised knowledge. For example, it may be that, in the absence of primary accounting records and other secondary documentation, working capital and net assets are the best indicators available. … [T]he excess of current liabilities over current assets and the excess of total liabilities over total assets would need to be proven as facts. If there is a question of accounting practice involved in the determination of any of those amounts, the opinion of Mr Madden on such a question, based on his specialised knowledge, would be relevant and admissible. However, absent any such questions, there would normally be no need for expert opinion to determine whether one figure is greater than another. Where the amounts are derived from balance sheets, that can be determined by the Court upon examination of the balance sheets in evidence."

147 Finkelstein J noted (at 141) that it was not unusual for an accountant to give evidence about the financial condition of a company based on its books and records. He continued (at 141-2): "However, if the accountant seeks to do no more than state what is otherwise obvious from such records his evidence is not receivable. The position is different where some analysis of the books and records is required in order to draw the inferences that are sought to be made or if an analysis of those books and records might prove to be a difficult task for the judge or jury. It may be doubted whether Mr Madden did give the evidence of an expert. Much of what he said would have been apparent to the trial judge from his own examination of the books of account. However, the reasons for decision showed that the trial judge did receive some assistance from the opinions expressed by Mr Madden and this is a sufficient basis for holding that his evidence was admissible."

148 The present case is a very unusual one, quite different from the complex financial circumstances that their Honours had in mind in Quick v Stoland. Here the question is solvency depends upon a factual analysis in a very narrow compass. The principal questions relate to the realisability of the company's land, the quantum and reliability of its rental income, and the status and currency of six alleged debts. The questions that I have to decide do not depend on any matters upon which the expertise of an accountant would be relevant or helpful. None of the kinds of circumstances identified by Emmett J as circumstances where expert accounting evidence would be admissible arise for consideration here. Therefore the opinions expressed by Mr Watson and Mr Love cannot be regarded as based on their specialised knowledge as accountants.

149 I have considered whether it might be said that the opinions of Mr Watson and Mr Love are based on their specialised knowledge as insolvency practitioners, which presumably encompasses knowledge based upon experience of realisability of assets and postponement of payment of debts. On balance, I have decided that none of the opinions expressed in their reports can be held admissible on this basis. As far as the six debts are concerned, the Court's task is to consider the legal terms of payment, and whether any indulgences or arrangements have been made to postpone payment. There is no room for expert opinion evidence on these matters, in the present circumstances. This is not case where it is necessary or helpful to have regard to evidence about usual terms of trade or usual practices with respect to the postponement of debts.

150 As regards Bajco's assets, the only questions to be considered about the rental income are whether Bajco had any entitlement or expectation to receive more than $3,000 per month, and whether its directors had any ground for reasonable apprehension that the rental would not be paid in view of the disputes that had arisen. Those are not matters on which the expertise of Mr Watson and Mr Love can shed any light. An important question about the Property is whether it could be used to produce funds for the payment of debts, in the reasonably short term. In my opinion that is a question upon which expert evidence might have been adduced, but (subject to one qualification) the requisite specialised knowledge is not the expertise of an accountant and insolvency practitioner, but rather the expertise of a mortgage broker or real estate agent. A mortgage broker could give evidence, within his or her expertise, as to the prospects of the directors, as at 27 November 1997, borrowing against the security of the Property without damaging cash flow or giving personal guarantees. A real estate agent could give evidence about the prospect of selling the Property within a reasonable time. Both Mr Watson and Mr Love expressed opinions on these matters, but in my view neither of them had the requisite specialised knowledge of the availability of finance and the real estate market, and so their opinions on these matters were not wholly or substantially based on their specialised knowledge of the purposes of s 79.

151 The qualification to which I have referred is that an insolvency practitioner might nowadays be expected to have specialised knowledge, based on experience, of the availability of a special kind of funding, namely litigation funding, where the security includes the chose in action which is the subject of the litigation, and it may be permissible to take that security because the law of maintenance and champerty does not apply in certain circumstances when a company is under external administration: see, for example, Re Movitor Pty Ltd (1996) 14 ACLC 587; Re Tosich Constructions Pty Ltd (1997) 143 ALR 18; Re William Felton & Co Pty Ltd (1998) 16 ACLC 1294. However, neither Mr Watson nor Mr Love addresses the question of the availability of litigation funding to Bajco, and so neither of them invokes this area of special expertise.

152 My conclusion, therefore, is that Mr Watson's report, and both of Mr Love's reports, are inadmissible to the extent that they express opinions going to the solvency of Bajco, including all of their analysis of the status and currency of Bajco's debts and the status and realisability of its assets. I emphasise that my conclusion depends upon the limited nature of the Court's task in the present case, and I acknowledge that expert evidence by an insolvency practitioner as to solvency may have a role to play in other cases, as explained in Quick v Stoland.

153 The reports by the experts did not stop at the question of insolvency. Mr Watson gave opinions on the following additional issues: · whether there was sufficient evidence available to the directors to allow them to form, reasonably, an opinion as to Bajco's insolvency or likely future insolvency, at the relevant time; · whether the advice provided to the directors by Mr Cardwell with respect to insolvency was sufficient to allow them to form the requisite opinions; · whether the procedures and investigations carried out by Mr Cardwell on behalf of the administrators before their appointment and at the time when he was providing advice to the directors were adequate.

154 I have decided that the evidence on these points is also inadmissible. The assessment of whether there is sufficient evidence to support the directors' opinion on insolvency may in some cases involve interpretation of evidence as to which expert evidence would be relevant and of assistance (for example, where the accounting treatment of particular items or categories of items needs explanation). In the present case, however, there seems to me to be no need and no room for expert opinion evidence on this question. Essentially the same point is to be made as to whether Mr Cardwell's advice was sufficient to allow the directors to form their opinion. On the facts of this case, applying in such a narrow compass, expert evidence is inappropriate on that issue.

155 As to the question whether the procedures and investigations adopted by Mr Cardwell were adequate, expert evidence could shed light on industry practice in complex administrations, but in the present case the administration was anything but complex, and the Court is in a position to make its assessment of Mr Cardwell's conduct without needing to consider issues about general industry practice or the like.

156 Mr Love also considered whether the opinion of the directors that Bajco was insolvent or likely to become insolvent at some future time, was reasonably held, based on the objective evidence available to them. Substantially the same issue was considered by Mr Watson. I have held Mr Watson's opinion on that point to be inadmissible, and I find that Mr Love's opinion is also an inadmissible, for the same reasons.

157 Mr Love also considered whether, in forming their opinion, the directors addressed the questions formulated by s 436A of the Corporations Law and applied the legal test of insolvency under s 95A of Corporations Law. To the extent that this is an issue of fact as to the matters considered by the directors, Mr Love's opinion cannot be based on his specialised knowledge. To the extent that the issue formulated by Mr Love requires a determination of the correct legal test of solvency and the meaning of s 436A, it is a matter of law for the Court to decide. Therefore, Mr Love's evidence on this issue is inadmissible.

158 Mr Love also commented on the circumstances surrounding the sale of the Property, and the unwillingness of the directors to borrow against the company's assets. For the reasons I have given, these issues are outside Mr Love's field of expertise, and his evidence is made inadmissible by the general opinion rule in s 76.

159 It follows, in my view, that Mr Watson's report, and the two reports by Mr Love, are wholly inadmissible. Was Bajco solvent on 27 November 1997? 160 Section 436A (1) required the directors of Bajco to form an opinion as to whether the company was insolvent, or was likely to become insolvent at some future time. According to s 95A (1) 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. Subsection (2) says that a person who is not solvent is insolvent. The general approach of the courts to assessing questions of solvency was explained, in another context, in Sandell v Porter (1966) 115 CLR 666, where the distinction between temporary lack of liquidity and insolvency was noted (at 670). The Court must ascertain the company's present debts and debts likely to arise in the near future, the date each will be due for payment, the company's present and expected cash resources and the date each of them will be received then available to be used: see Ford's Principles of Corporations Law (Butterworths, loose leaf), paragraph [20.100].

161 The overall approach taken by the courts under s 95A was summarised by Prior J in Powell & Duncan v Fryer, Tonkin & Perry (2000) 18 ACLC 480, 482, where his Honour observed: "Insolvency is a question of fact falling to be decided as a matter of commercial reality in the light of all the circumstances with things being viewed as it would be by someone operating in a practical business environment."

162 To the same effect, it has been said that "the basic question is whether the company's business is viable": Ford's Principles of Corporations Law, paragraph [20.100].

163 Counsel for the administrators submitted that the question whether a debt is due and payable has nothing to do with whether the creditor is pressing for payment. He points out that a debt may be due and payable notwithstanding the absence of service of a demand, citing Toskas Investments Pty Ltd v Thomas Toskas (Supreme Court of New South Wales, Master Macready, unreported, 9 June 2000). Those propositions are correct but incomplete. In assessing solvency, the Court may take into account normal or likely indulgences granted to the company by its creditors, to the extent that evidence of that kind goes to what is reasonable to expect in a given set of circumstances, by someone in a practical business environment: Sycotex Pty Ltd v Baseler (1994) 13 ACSR 766, 775 per Gummow J. His Honour added that "the possibility that some companies could insist on payment strictly according to their stated terms is merely something to be taken into account in assessing whether it could be expected the company could not pay its debts". One must also bear in mind the overall approach of the courts, directed to assessing the company's viability.

164 The Directors' Report as to Affairs listed six debts. One of them, in the sum of $1,000 said to be owing to Mr Smyth, can be dismissed immediately, since Mr Smyth gave evidence that there was no amount outstanding and that evidence was not significantly challenged.

165 The Directors' Report did not list the debt of $29,136 said to be owing to Cadwallader Engineering (NSW). The existence of this debt was disputed by David and Marilyn, but it appeared as a current liability in Bajco's accounts for the financial years ending 30 June 1996 and (subsequently) 30 June 1997. As I have indicated, the debt may have related to the loan account which appears to have been established by virtue of the transfer of business in 1979, and it appears may have been affected by the transaction outlined in Alan's letter to Bruce dated 29 March 1996, though the evidence does not make clear whether and how that transaction was implemented. The evidence does not enable me to determine whether the dispute about the debt was genuine.

166 However, assuming that the debt existed, the evidence at the hearing indicated that the creditor had never pressed for payment. While evidence does not positively establish that any arrangement or indulgence was made, it seems to me plain from the relationship between the companies and between Alan and Bruce, on one hand, and David and Marilyn on the other, that it was expected by both sides that the debt would not be required to be paid if such a requirement would raise the potential risk that the property would have to be sold to cover the debt. It was in the interests of Cadwallader Engineering (NSW) and Alan and Bruce that the property be retained so that the business could be continued at Concord West. This would explain why David did not include the debt in the Report as to Affairs, and why there was evidence that neither he nor Marilyn regarded the debt as a true debt and Cadwallader Engineering (NSW) as a true creditor. While the evidence falls short of positively establishing an arrangement for deferral of payment, it is relevant for me to take these matters into account, in assessing the overall viability of the company.

167 The other debts listed in the Report as to affairs were as follows: · Madgwick Partners $10,852 · S Gullotta $1,250 · David Cadwallader $15,000 · Marilyn Wintzloff $15,000 · Bruce Cadwallader $4,000 168 It was submitted that the debt due to Madgwick Partners may not have been due and payable because their invoice, which is in evidence, would not have enabled them to have their costs assessed or to sue for recovery. However, David gave evidence that the debt was due and payable, and nothing to the contrary was put to him. However, there is also evidence of an arrangement or indulgence with respect to this debt. Marilyn said she approached Madgwicks to ask whether they would be prepared to wait for payment until the Property was sold, and they said they were. In answer to the question, "When did the creditors begin pressing the company for payment?" in a "Questionnaire of the Directors and Officers", David said "They are prepared to wait until the company is wound up". He was probably not using the words "wound up" in a precise sense, referring instead to the winding up of the company's affairs by the sale of the Property. I regard this evidence as sufficient to establish an indulgence relevant to be taken into account in my assessment of the viability of the company.

169 The debt to Mr Gullotta, of counsel, is undisputed, but it is less than the cash available to the company in its bank account.

170 The debts owed by David and Marilyn appeared to be in broadly the same category as one another, although there is a singular lack of particularity about them. They appear not to be claims for the directors' fees approved by them in the board resolution of 20 October 1997, because the evidence indicates that those directors' fees were paid to them. In cross-examination Marilyn admitted that her claim to be owed $15,000 was dishonest. She said that she discussed the claim with her brother David over the telephone, and when she told him the claim for $15,000 was exorbitant he said not to worry. This evidence was given against her interest and I accept it. It implies that David participated in Marilyn's conduct in putting forward a false claim.

171 David gave evidence that his claim was only an estimate, and in cross-examination he could not recall how he came to that estimate. Given his participation in his sister's false claim, the lack of particularity of his evidence, and his unconvincing response to questions on the subject in cross-examination, it seems to me probable that his claim, like his sister's, was false.

172 Even if the claims by David and Marilyn were not false, but rather unsubstantiated in circumstances raising a suspicion of exaggeration, my view is that those claims against the company would not, in the circumstances of their creation and assertion, support the inference that the company was not viable and was therefore insolvent.

173 Counsel for the administrators submitted that the debts claimed by David and Marilyn should be viewed from Mr Cardwell's perspective. There is a question as to whether Mr Cardwell was entitled to treat the debts as immediately due and payable and of direct significance to the company's solvency, but the present question is simply whether Bajco was in fact solvent. That requires the Court to look at the external facts, rather than viewing them through the perspective of any individual.

174 The debt claimed by Bruce for $4,000 is also lacking in particularity. Neither Bruce nor David was convincing about the nature and existence of this debt, in cross-examination. Bruce claimed his entitlement to that amount pursuant to an agreement, but in cross-examination he could not remember when the agreement was reached, or who made the agreement on behalf of Bajco. There is no documentary evidence for it. The debt supposedly became due and payable for assistance given by Bruce to Bajco with respect to the 1997 proceeding, in which he was a defendant. In any event, if the debt of $4000 was owing by Bajco to Bruce, it would presumably be set off against the debt which (according to the Report as to Affairs) was owed by Bruce to the company in the sum of $5,746. My conclusion is, on balance, that the claimed debt did not exist.

175 It follows, in my view, that the only present debt that needed to be taken into account by the directors of Bajco in forming their opinion as to the insolvency of the company, was the debt owed to Mr Gullotta. As to the question of the likelihood of solvency at some future time, it was appropriate for the directors to take into account future outgoings with respect to the Property, such as rates and land tax, but it appears that those outgoings could be covered in the future, as they had been in the past, out of the rental income. There were also the likely future costs of the 1997 proceeding. However, those costs were not certain or even likely to be incurred, unless the directors decided to continue the 1997 proceeding. In making their decision on that question, it would be necessary for them to consider the company's resources, and all reasonably available means of funding of litigation. Until that exercise had been carried out, it would be premature for the directors to come to the immediate conclusion that the company was likely to become insolvent in the future, on the basis of the costs of litigation. And there is no evidence that a rigorous assessment of the amount of costs to be incurred and the availability of funds to meet those costs, was ever carried out by David and Marilyn.

176 That leads me to the company's assets. The evidence shows, in my opinion, that there was never any binding agreement between Cadwallader Engineering (NSW) and Bajco for an increase in rent. The increase was tied to the execution of a lease, and a lease was never executed. In the end, it was David who declined Alan's offer to sign the draft lease. Therefore the rent payable was $3,000 per month, under a periodic tenancy determinable on one month's notice under s 127 of the Conveyancing Act 1919 (NSW). The rental was paid up to date as at 27 November 1997, and in my view, there was no reasonable ground in the circumstances for David and Marilyn to apprehend that rental of $3,000 per month would not be received in the future. It is true that Alan and Bruce were in bitter dispute with David and Marilyn, but there was no reason for the latter to expect that Alan and Bruce would act in total disregard of their economic interests. It would be against the economic interests of Cadwallader Engineering (NSW), and hence Alan and Bruce, for the company to suspend payment of rent and provide a trigger for termination of the tenancy. Therefore, in considering whether Bajco was likely to become insolvent at some future time, the correct approach was to assume that the rent would continue to be paid at the current rate.

177 As at 27 November 1997, the Property was in course of sale. Difficulties had been experienced by David and Marilyn in the sale process. Bruce had refused access for inspections and both Alan and Bruce had objected to the display of signs. But in my view, difficulties at that level were no ground for David and Marilyn to conclude that they would be unable to realise the property by a process of sale by auction in a reasonably short period of time. At that stage, the option was scheduled for 11 February 1998.

178 Nor, in my view, was the fact that Bruce's solicitor had threatened an injunction to restrain the sale on an adequate ground of believing that the sale could not be effectuated in the short term. Proceedings had not been taken for that purpose, and (depending upon the nature of the grounds advanced for the injunction) a solution may have been to set aside some part of the proceeds of sale, in the exercise of the Court's discretion with respect to the balance of convenience. A defeatist attitude was not justified at that stage.

179 It was crucial for David and Marilyn to decide, as directors of Bajco, whether the Property would be sold as an investment property with a lease, or with vacant possession. The evidence indicates that this commercial issue was never firmly grasped and dealt with by them. At one stage they were insisting on a lease, and when it became possible for a lease to be executed, David decided that it would be better not to have one. That suggests inconsistent sales strategies. But the problem was of their own making. A valuation of the property had been received which did not suggest that the property could not be sold in the short-term. In all the circumstances, in my view, the realisability of the Property was a circumstance to be taken into account in assessing the solvency of Bajco as at 27 November 1997.

180 It was also relevant to take into account that, short of selling the Property, funding could be arranged through borrowing against the security of the Property. The property was unencumbered. Funding of that kind would have enabled David and Marilyn to continue with the 1997 proceeding. According to the minutes of the meeting of directors of 27 November 1997, David and Marilyn decided that they did not want to commit the company to any further liabilities. But if they wished to continue with the litigation, the only asset available to produce funding for that purpose was the Property, and it would do so either by sale or mortgage. Their responsibility, as directors, was to weigh up the desirability of pursuing the litigation against the cost of doing so and the effect of the cost on the company's assets. There is no evidence to suggest that a prospective lender would demand personal guarantees, especially given that the sale of the property was in contemplation, nor that a lender would insist upon regular short-term payments of interest or instalments of capital given the circumstances of the company. I have decided that Mr Love's evidence on the subject, and the evidence of Mr Watson, is inadmissible. I should say, however, that if I had regarded Mr Love's evidence as admissible, I would have found it unconvincing on this point, because it does not address adequately the range of possible funding arrangements that could have been designed to fit the circumstances.

181 My conclusion, therefore, is that the company was clearly viable, and was neither presently insolvent nor likely to become insolvent at some future time, as at 27 November 1997. David and Marilyn's knowledge, as at 27 November 1997, as to solvency and the likelihood of their removal

182 Alan contends (and the defendants all deny) that David and Marilyn knew that Bajco was not insolvent on 27 November 1997, and accordingly that they passed the resolutions in bad faith. Alan also contends (and the defendants all deny) that David and Marilyn knew it was likely (or in the alternative, possible) that they would be removed from their positions as directors at the meeting of the members of Bajco due to be held on 11 December 1997.

183 David and Marilyn say that they became concerned in November 1997 that Bajco could not pay its debts (particularly legal expenses associated with proceeding No 2230 of 1997) as they fell due. They say they sought advice from Mr Cardwell who advised them that Bajco was insolvent. They say they accepted that advice and believed it to be true (whether Bajco was or was not insolvent in fact), and passed the resolutions for the appointment of administrators in light of that belief.

184 They say they acted honestly in the interests of Bajco, and that they were not motivated by any apprehension as to what might happen at the general meeting on 11 December 1997. Indeed, they contended that they were confident that the resolutions for their removal would not be passed. This is because, in early November 1997, Bruce told David that he proposed to vote against the resolutions.

185 In my view, it is necessary to subdivide these submissions into two categories. The first category relates to whether the resolution by David and Marilyn that the company was insolvent or likely to become insolvent at some future time, was taken in bad faith, having regard to their state of knowledge and the advice they received from Mr Cardwell. The second category relates to whether they knew it was likely or possible that they would be removed from office if the requisitioned meeting was held, and that raises the question whether Bruce changed his voting intention and if he did, whether he told David as David claims. I shall consider these categories separately. David and Marilyn's knowledge regarding solvency 186 My reasoning for the view that Bajco was clearly solvent on 27 November 1997, and not likely to become insolvent at some future time, implies that at that date, David and Marilyn were aware of the company's solvency. All the facts that have led me to my conclusion on solvency were known to David and Marilyn at that time. Indeed, some of the facts were peculiarly within their own knowledge, such as the facts concerning the claims by themselves and Bruce, and the facts concerning their attitude to the debt claimed by Cadwallader Engineering (NSW). As to their assessment that the company was likely to become insolvent at some future time, it is striking that there is no evidence to indicate any rigorous exploration of the likely costs of the litigation, nor any convincing evidence that they properly balanced their view of the desirability of pursuing the litigation against the methodical and thorough assessment of funding available to the company that one would expect conscientious and prudent directors to make.

187 In making their decision on 27 November 1997, David and Marilyn acted on the advice of Mr Cardwell. But it is important to bear in mind that Mr Cardwell depended almost entirely on David and Marilyn for his information about the financial state of the company. He explained to them the meaning of the legal concept of solvency, and there is nothing to suggest that his explanation was deficient at a general level. He was informed by David about the company's debts, and he appears to have taken that information at its face value. It is true that he might have made further investigations. But decisions about the appointment of administrators are typically taken in circumstances of some considerable urgency, given (amongst other things) the potential liability of the directors if the company continues to trade in insolvent circumstances. Moreover, in this case the largest debts (those claimed by David and Marilyn, and the debt claimed by Cadwallader Engineering (NSW) but disputed by David and Marilyn) were not the kinds of debts that would be illuminated by external investigation. Therefore the advice given by Mr Cardwell was based squarely on information provided by David and Marilyn, and David and Marilyn must have known in the circumstances that this was the case.

188 These considerations lead me to the conclusion that, in resolving on 27 November 1997 that the company was insolvent or likely to become insolvent at some future time, David and Marilyn were adopting a resolution that they knew, on the basis of Mr Cardwell's advice as to the nature of solvency, was untrue. In my view, the only plausible explanation for their doing so was to provide the "jurisdictional" basis for administration intended to achieve some purpose other than to deal with the insolvency of the company. They were acting in bad faith.

189 However, Mr Cardwell had no basis for treating the information he was given about the company's financial circumstances as untrue, and therefore he did not participate in or assist their decision, to the extent that it was taken in bad faith. As I shall point out, he was aware that their decision would be used by them to stop the requisitioned general meeting of 11 December 1997. For reasons I shall give, he ought to have realised that the purpose of stopping the requisitioned meeting was the purpose but for which the decision would not have been taken on 27 November 1997, and therefore David and Marilyn took their decision for an improper purpose. But that does not implicate him in their bad faith, based upon their adopting a resolution that they knew to be false. David and Marilyn's knowledge regarding the likely outcome of the requisitioned meeting

190 In my opinion Alan's submissions on this category are correct. David and Marilyn knew from 18 September 1997 or shortly afterwards, that Alan and Bruce were contemplating the convening of a meeting of members to consider their removal as directors of Bajco. To their knowledge, Alan's solicitor had written to Madgwicks requesting that such a meeting be convened. By the time of their board meeting of 20 October 1997, they knew it was likely that since they had not voluntarily convened the proposed meeting, they would receive a requisition requiring them to do so. They became aware of the notice of requisition by Alan and Bruce on or shortly after 24 October 1997, and Marilyn was aware on or shortly after 31 October 1997 that David had convened a meeting to be held on 11 December 1997. In my opinion, in light of the written evidence and the oral evidence of David and Marilyn, they did not want to be removed from the board and regarded the avoidance of this consequence as part of their struggle against Alan.

191 Bruce and David have given evidence as to a conversation in which Bruce is alleged to have told David that he no longer intended to vote in favour of the proposed resolutions on 11 December 1997. Marilyn says David reported this conversation to her on 17 November 1997, and Mr Cardwell says that David told him of it on 27 November 1997. Alan submits that none of this evidence should be accepted, because it is inconsistent with contemporaneous documents (except David's notebook) and is inconsistent with affidavit evidence, and is not credible. On balance, I agree.

192 The following matters lead me to this conclusion. First, in his affidavit of 19 February 1998, Bruce said he decided it would be wrong to vote in favour of the proposed resolutions, but he did not say he had any conversation with David on the matter. He gave evidence of the conversation only at the hearing. He realised that evidence of the conversation would be important for David and was not able to give any satisfactory explanation for omitting the conversation from his affidavit.

193 Secondly, correspondence that is in evidence is inconsistent with Bruce having told David that he would vote against the proposed resolutions. The draft Deed of Agreement sent by Alan's solicitor to Bruce's solicitor on 14 October 1997 provided (in clause 6) for the requisitioning of a meeting of members to consider removal of the directors. Bruce's solicitor first replied to the draft on 22 October 1997 noting some proposed amendments but not commenting on clause 6. On 11 November 1997 Bruce wrote to his solicitor proposing the removal of clause 6 because "this (ie Bruce & Alan being appointed Directors) cannot happen" since the requisitioned meeting had been convened. Although the language of the letter is obscure, it probably means that Bruce and Alan could not be appointed as directors (that is, by board appointment) because a process was in train for their election by the members.

194 Bruce's solicitor made some notes on 14 November 1997, to the effect that the directors were to be dismissed. The solicitor wrote to Alan's solicitor on 17 November saying that clause 6 was to be deleted, but not seeking the removal of later clauses which dealt with what Alan and Bruce would do as directors if they were elected. Faced with this evidence, Bruce agreed that his solicitor and Alan's solicitor were still discussing the possibility that Alan and Bruce would become directors after the meeting on 11 December 1997, up to at least 17 November 1997.

195 Bruce's solicitor wrote to David and Marilyn's solicitor again on 18 November 1997, in a letter that expressly contemplated that David and Marilyn would be replaced by Alan and Bruce at the meeting to be held on 11 December 1997. Bruce said in his oral evidence that he thought his solicitor was taking licence in saying this. But the letter was copied to Bruce and there is no evidence that he took steps to ensure that any false impression was corrected. On 18 November 1997 Bruce's solicitor also sent a letter to the barrister, Garth Blake, in which he said that Alan and Bruce would vote to replace the minority directors. Bruce admitted in cross-examination that the views expressed in the letter were his.

196 Bruce's solicitor wrote to Mr Blake on 21 November 1997, again anticipating the replacement of the directors on 11 December 1997. Bruce's evidence was that he would probably have informed his solicitor of his change of mind soon after he had made his decision. Since it appears from the letter of 21 November that Bruce had not spoken to his solicitor by that time, it is likely that he did not change his mind about voting until around 21 November (assuming that he did at all) and consequently that his conversation with David (if it occurred) was no earlier than 21 November.

197 On 1 December 1997 Bruce's new solicitors, Hunt & Hunt, wrote to Alan's solicitor repeating the proposal that clause 6 should be deleted. But there was no suggestion that the subsequent clauses, dealing with what would happen after Alan and Bruce had become directors, should be removed. This letter was written only after Bruce gave instructions to Hunt and Hunt in conference. If by that time Bruce had decided to vote against the removal of the directors and therefore to cause the proposed resolutions to fail, one would have expected him to instruct Hunt & Hunt accordingly, and for Hunt & Hunt to seek further amendments to the draft Deed of Agreement rather than merely the deletion of clause 6. In my opinion it is likely, in light of this evidence, that any conversation between David and Bruce, and any change of mind on Bruce's part, did not occur until at least 1 December 1997. Of course, by that time David and Marilyn had purported to appoint administrators.

198 It follows that I reject Bruce's evidence that he told David on about 17 November that he did not intend to vote to remove the directors. Further, the cumulative effect of the correspondence, when compared with Bruce's evidence, is to suggest that Bruce never did change his mind and decide to vote against the proposed resolutions, and never informed David that he had changed his mind in this way.

199 David's evidence about his conversation with Bruce is also unsatisfactory. He did not mention any such conversation in his first affidavit in this case, notwithstanding the obvious importance of such evidence. In his second affidavit he gave evidence of the conversation but did not annex any supporting documentation. His notebook, said to corroborate his and Bruce's evidence of their conversation, was produced only at the hearing.

200 The question arises whether the entries in the notebook should be regarded as credible corroborative evidence. The notes of the phone conversations with Bruce and Bajco's solicitor on 17 November were added at a later time, according to David's evidence, and in a different pen. When he referred to the conversation with Bruce in his affidavit, he said that the conversation was in "early November", as did Marilyn. David appeared in the witness box as a meticulous person who made the notes of a great many conversations with estimates of the time taken in them, presumably to substantiate claims against Bajco for fees and disbursements. If he had a note of his conversation with Bruce in the notebook, one would have expected him to identify the date of the conversation with more precision in his affidavit. 17 November is not "early November". In cross-examination he was confused as to whether he mentioned his conversation with Bruce in the first or second conversation he had with his solicitor at that time, and he conceded that the note of his first telephone conversation with his solicitor might have been inserted outside the temporal sequence of the calls. He did not make a note of passing on to Marilyn the information about Bruce's intention when he spoke to her that day.

201 David denied that his entries in the notebook concerning his conversation with Bruce and with his solicitor were made well after 17 November. I have decided not to accept this denial. I found David to be an unsatisfactory witness in various ways. Overall, he seemed defensive and reluctant to concede obvious points, and he tended to prevaricate. In light of his oral evidence, his affidavit evidence to the effect that Alan would not sign the lease for the Property was misleading. He did not give a satisfactory explanation for terminating McCabes' retainer. He was not convincing when explaining why he had used the words "early November" in his affidavit, when his notebook recorded that the conversation with Bruce was on 17 November. My opinion, based on my assessment of David in the witness box and the matters going to the reliability of the notebook to which I have referred, is that, notwithstanding David's denial, the entries in the notebook concerning David's conversation with Bruce and with his solicitor on 17 November were made well after that date and are unreliable evidence.

202 Marilyn gave affidavit evidence that David told her of his conversation with Bruce, on 17 November 1997. This was admitted on the limited basis of proving the fact of the conversation rather than the truth of its contents. But her evidence was unsatisfactory, in my opinion. As I have mentioned, she admitted to making a false statement of claim to the administrators of Bajco for $15,000, knowing she was not entitled to make it. This cast a shadow over her credibility generally. In cross-examination she changed her evidence on the subject of Bruce's change of mind, saying she had just remembered in the witness box a conversation with Bruce in which he told her directly he would be voting in her favour at the meeting. But she was most unconvincing when cross-examined about this sudden recollection, in circumstances leading me to conclude that the direct conversation between her and Bruce, not deposed to by Bruce or referred to in any affidavits including her own, did not occur.

203 However, I accept her evidence, being in effect evidence against her interest, that at some time prior to 27 November she said to David that "Bruce will say one thing right up to the last moment and then change his mind". The history of the family disputes, recounted above, tends to reinforce that view.

204 Mr Cardwell gave oral evidence that David had told him he had a conversation in which Bruce said he would vote in favour of the directors at the meeting on 11 December. However, his contemporary notes do not bear this out. He gave implausible evidence in cross-examination in which he eventually suggested that his contemporary notes (Exhibit P11, p 164)) recorded the information about Bruce's change of mind in the two quotation marks that appear in his notes. He gave no satisfactory explanation for his failure to record his conversation with David about Bruce's change of mind in his affidavit evidence.

205 Moreover, Mr Cardwell's evidence of the conversation is that it concluded with him saying, "we need to do things as soon as possible", and "we can only run with what we've got". If he had been told that Bruce would vote against the proposed resolutions, it is hard to see why he would conclude a conversation about the forthcoming meeting with those words. In their context, the words were not directed to the need to commence administration for reasons to do with solvency.

206 In summary, the evidence relied on by the defendants to support the claim by David and Marilyn that Bruce had told David, on 17 November or at some other time before 27 November, that he would vote in favour of the existing directors at the proposed meeting on 11 December, is quite unconvincing. I find that no such conversation occurred.

207 In my opinion David and Marilyn were well aware, prior to 27 November, that if Bruce voted with Alan at the meeting of members, they would be removed from office. The fact that Bruce was one of the parties who requisitioned the meeting provided a basis for them to believe that he would vote for their removal, even though they both realised that Bruce was prone to change his mind. I find they regarded it as at least possible, and in fact likely, that they would be removed as directors if the meeting of members went ahead.

208 I also find that David and Marilyn were determined to prevent their removal from the Bajco board. The evidence as a whole strongly points to the view that they regarded the prosecution of the 1997 proceeding as a matter of great importance, to rectify what they saw as an injustice that they had deeply resented for a long time. In my opinion Marilyn's observation to Mr Cardwell, in her letter of 29 March 1998, that "we intend to win - losing isn't in the picture" was an accurate reflection of her state of mind and the state of mind of her brother some four months earlier, when the decision to appoint the administrators was taken.

209 I find that Mr Cardwell was aware that David and Marilyn regarded prosecution of the 1997 proceeding as a matter of great importance, and that they wished to avoid being removed as directors. His own advice to them led to their belief that if they resolved in favour of voluntary administration, the requisitioned meeting of 11 December 1997 would not be held. As to the evidence of Bruce's change of mind, I find for the reasons I have given that Mr Cardwell did not believe (notwithstanding his evidence to the contrary) that Bruce had decided to vote against the removal resolution. Findings as to the directors' purposes in passing the resolutions of 28 November 1997

210 Paragraph 21 of the further amended statement of claim invites the Court to find that David and Marilyn resolved in favour of the appointment of the administrators on 27 November 1997 "with the intention of stopping either of them being replaced as directors of Bajco at the extraordinary meeting of the company which had been convened to be held on 11 December 1997". Extensive particulars are given.

211 Alan's counsel accepts that a conclusion about the intention or purpose of David and Marilyn in resolving in favour of voluntary administration depends upon inferences from the surrounding circumstances. He refers to the test for the assessment of circumstantial evidence enunciated by the High Court in Luxton v Vines (1952) 85 CLR 352, 358 per Dixon, Fullagar and Kitto JJ. I respectfully accept their Honours' observations as to the correct approach.

212 In my opinion, the surrounding circumstances point strongly to the inference that Alan invites the Court to draw. Those surrounding circumstances include the following: · my finding, above, that Bajco was solvent as at 27 November 1997, and that there was no plausible basis for saying that it was likely to become insolvent at some future time; · my finding, above, that David and Marilyn believed on 27 November 1997 that it was likely, or at least possible, that they would be removed from office and replaced by Alan and Bruce if the meeting went ahead, and their determination to avoid that outcome; · my finding that before they made their decision on 27 November, Mr Cardwell advised them that the meeting would not go ahead if the administrators were appointed; · the convening of the requisition meeting for Goulburn, a location which was not justifiable in the circumstances; · the decision by David and Marilyn as directors of Bajco to pay themselves fees of $2,000 each per quarter, thus creating the appearance that a debt of about $8,000 had become due by 27 November, relevant to the question of solvency; · termination of the retainer of McCabes on 21 November 1997, a decision having the effect that there was no lawyer representing Bajco available to answer any requests for information as to the status of the company that Alan might subsequently make, in circumstances suggesting an intention to produce that effect. 213 I conclude, therefore, that at the time when they made their decision in favour of the appointment of administrators, David and Marilyn intended by that decision to prevent the requisition meeting from being held and consequently to prevent them being removed from office and replaced by Alan and Bruce.

214 David and Marilyn had other considerations in mind as well. Some of them were considerations which, if they had become the purposes for which a fiduciary power was exercised, would arguably be proper purposes. Thus, it was important to David and Marilyn to ensure that the 1997 proceeding moved forward, and they appear to have genuinely believed that the pursuit of the 1997 proceeding was in the interests of the shareholders of Bajco as a whole. They were aware that substantial funds would be needed for legal costs. They wanted to sell the Property to provide funds for the litigation, and their attempts to do so had been made difficult by the lack of co-operation by Alan and Bruce in the sale process. For reasons not made plain in the evidence, they seem to have believed, genuinely, that the sale process would be easier and less open to obstruction if it were conducted by administrators. At one stage Bruce seems to have had a similar view. David and Marilyn were concerned about cash flow and the difficulty they were experiencing in obtaining Alan's agreement to an increase in rent (although it seems that agreement would have been forthcoming if they had responded to Alan's eventual offer to sign the lease).

215 In my opinion, however, none of these considerations should be elevated to the status of an intention or purpose of the appointment of the administrators. Specifically, if David and Marilyn's purpose, or one of their purposes, was to provide funds for the litigation, one would have expected evidence of a reasonably businesslike investigation of alternative methods of funding, such as through borrowings. There is a suggestion in the evidence that David and Marilyn believed they would be required to give personal guarantees to support such a borrowing, but nothing to indicate that their fear was objectively based. The Property was, after all, entirely unsecured and there was a steady flow of rental income, and the prospect of increasing the rent.

216 Even if the other considerations could be described as intentions or purposes underlying the appointment of the administrators, they were not such as to supplant David and Marilyn's purpose of preserving themselves in office and so preventing the discontinuance of the litigation. In my opinion, weighing up the evidence as a whole, that purpose was their primary purpose, if they had more than one, and it was the purpose but for which they would not have made their decision to appoint the administrators on 27 November 1997.

217 It appears from Marilyn's letter to Mr Cardwell dated 29 March 1998 that she, at least, had at some stage taken into account considerations that the Court would regard as improper. I have given a fairly full summary of the contents of her letter. As I have said, most of the considerations set out in the "Reasons for Putting Bajco Pty Ltd into Administration" are strictly irrelevant considerations, given that the task of the directors in making such a decision is to assess the company's actual and likely insolvency.

218 However, the considerations set out in her list were improper as well as irrelevant to the directors' task. It would be improper, for example, to appoint administrators in response to Alan's refusal to buy out the shares of the others, or his so-called "illegal" purchase of Jeanine's shares, or because Bajco had transferred its business to Cadwallader Engineering (NSW) for an alleged inadequate consideration while Alan and Bruce were directors. If such considerations had been the dominant or driving purposes for the directors' decision to appoint administrators, the decision would be invalid and liable to be set aside.

219 David denied that the matters listed in Marilyn's letter of 29 March 1998 (other than matters relating to solvency) influenced his decision with respect to the appointment of administrators. However, there is some evidence to suggest that David and Marilyn, with the assistance of Mr Cardwell, developed plans for voluntary administration with a view to addressing all or some of the range of problems enumerated in Marilyn's letter. I refer to the meeting of 2 April 1997, of which Tracey Case took notes. Voluntary administration appears, according to those notes, to have been seen as a "choice" or solution to a number of problems of the kind identified in Marilyn's letter, not limited to the allegedly unlawful transfer of the business in 1979, which was shortly to become the subject of the 1997 proceeding.

220 In my view, however, the desire to address a wide range of problems beyond the scope of the 1997 proceeding became peripheral after Alan's solicitor proposed a meeting for the removal of David and Marilyn as directors on 18 September 1997, and later a notice of requisition was served. By then, the central issue for David and Marilyn seems to have been to respond to the threat to their positions and the 1997 proceeding posed by the requisitioned meeting. The central importance of this issue in their minds explains Mr Cardwell's observations that it was necessary "to do things as soon as possible" and that "we can only run with what we've got". I conclude that by far the dominant consideration, and the only one properly described as the purpose or motivation or intention of David and Marilyn when they made their decision on 27 November 1997, was their desire to preserve themselves in office and ensure the continuation of the 1997 proceeding. Was David and Marilyn's purpose an improper one? 221 A company has the statutory power to appoint an administrator under s 436A of the Corporations Act (the Corporations Law was not materially different). The appointment is made "by writing". This envisages a written instrument of appointment executed in a manner authorised by board resolution. The section imposes two conditions for a valid appointment to be made. One is that the company is not already being wound up: s 436A (2). The other, contained in s 436A (1), is that: "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." 222 It is not entirely clear whether s 436A (1) itself confers power on the board to pass such a resolution, or merely assumes that under its constitution, the board has (as it normally does) the power to manage the company and consequently the power to pass resolutions of this kind. Either way, however, the power to pass such a resolution is vested in the board of directors as such. Since the directors, when exercising their powers as a board, are acting in a fiduciary capacity, the power to pass the resolution envisaged by s 436A (1) is a fiduciary power.

223 In order to validly exercise that fiduciary power, the directors who vote in favour of the resolution must form their opinion about the solvency of the company and the desirability of appointment of an administrator genuinely and in good faith: Kazar v Duus (1998) 29 ACSR 321, 333. I have found that David and Marilyn acted in bad faith in forming their opinion about solvency, but that Mr Cardwell did not participate in their conduct to the extent that it was conduct in bad faith.

224 Additionally, the law requires that the purpose of the resolution, as an act of the board, be ascertained, and then characterised as proper or improper. The Court's task is to identify the actual purpose of the directors who voted in favour of the resolution, having regard to the character and operation of the resolution in relation to the facts in circumstances surrounding it, and not merely to the motives of individual directors (Arthur Yates & Co Pty Ltd v Vegetable Seeds Committee (1945) 72 CLR 37, 82 per Dixon J), although statements about the motives or subjective intentions of individual directors are relevant (Advance Bank Australia Ltd v FAI Insurances Ltd (1987) 9 NSWLR 464, 485 per Kirby P; and generally, Darvall v North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR 260). Where several purposes are identified, some of which are proper while others are improper, the Court must determine whether, but for the improper purpose, the directors would have passed the impugned resolution: see Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, 293-4 per Mason, Deane and Dawson JJ.

225 The application of these principles to the present case does not require me to resolve any uncertain points of law, in view of my findings of fact. David and Marilyn's actual purpose in resolving in favour of the appointment of administrators - probably their sole real purpose, at least their dominant one, and the one but for which they would not have acted on 27 November 1997 - was to preserve themselves in office and thereby ensure the continuation of the 1997 proceeding. A decision made for that purpose is a misuse of the fiduciary power of directors under s 436A. Directors cannot use a fiduciary power to take steps which are designed to prevent the body of shareholders from considering a resolution to remove them, even if they believe that by retaining office they will be able to advance the interests of shareholders; just as directors cannot issue shares in a manner which dilutes or destroys an existing control alliance, even if by doing so they enhance the prospect of the body of shareholders receiving a fully valued bid for their shares: Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821.

226 It follows that the resolutions for the appointment of administrators and consequential matters were voidable and liable to be set aside in properly constituted proceedings: Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, 294-5 per Mason, Deane and Dawson JJ, unless a third party (such as an allottee, in some of the cases) has acquired rights without notice of the impropriety.

227 In the present case, the administrators acquired rights, namely the rights of their statutory office, in consequence of David and Marilyn's decision of 27 November 1997. However, my findings as to Mr Cardwell's state of knowledge with respect to the requisitioned meeting, its likely impact on David's and Marilyn's positions as directors of Bajco, their belief that voluntary administration would stop the meeting, and the importance to them of achieving that outcome so that they could continue with the 1997 proceeding, imply that he was aware, or ought to have been aware, that their dominant purpose in resolving in favour of voluntary administration, and the purpose but for which they would not have taken the decision they did on 27 November 1997, was to stop the requisitioned meeting so that they could ensure the continuation of the 1997 proceeding. Those facts were sufficient to put him on notice of the impropriety of their purpose.

228 It is true that in cross-examination the matter was not put to him squarely in the fashion just described. However, in my view what was put to him in cross-examination gave him ample opportunity to deny his awareness of the facts in circumstances constituting the impropriety of David and Marilyn's primary purpose. It is open to me to find, and I do find, that he was on notice of the impropriety. Therefore the resolution is voidable as against his employers, the administrators.

229 In my view, however, s 447A is available to be used to override the general law consequences of a decision under s 436A taken for an improper purpose, in order to ensure that the consequences of the defective decision are the consequences envisaged by Part 5.3A. I shall return to this point later.

230 I turn now to the question whether Alan has the standing to complain of these matters. Alan's standing to complain of breach of directors' duties 231 In raising his contention that the resolutions passed by the board of Bajco on 27 November 1997 were in bad faith and for improper purposes and are therefore invalid, Alan faces a problem of standing. He is a member of Bajco (indeed, the member holding the largest number of shares). His purchase of Bruce's shares would give him a majority shareholding if the transfer were to be registered. He has a substantial economic interest in establishing the invalidity of the resolutions, both because he is one of the two shareholders of Cadwallader Engineering (NSW), whose business will be disrupted if Bajco sells the Property, and because he is a defendant in the 1997 proceeding which is likely to be pursued under the terms of the deed of company arrangement.

232 However, the law regards a complaint about the improper exercise of a fiduciary power of directors as a complaint of breach of a duty owed to the company rather than to any individual shareholder or interested person (Ford's Principles of Corporations Law (Butterworths, loose leaf) paragraph [8.250]), at any rate where the directors' conduct does not directly affect the rights or interests of individual shareholders: as to which, see Residues Treatment & Trading Co Ltd v Southern Resources Ltd (No 4) (1988) 14 ACLR 569. At the time of commencement of this proceeding, the standing of an individual shareholder or interested person to complain about a breach of a duty owed to the company was governed by the common law rule in Foss v Harbottle (1843) 2 Hare 461 [67 ER 189].

233 Alan submits that his standing to complain of David and Marilyn's breach of duty falls within the so-called fifth exception (the exception "where justice so requires") to the rule in Foss v Harbottle, and says that the fifth exception has been accepted as part of the law of New South Wales in Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 39 NSWLR 128; 19 ACSR 483. I agree that, although the matter is still open to some doubt at an appellate level, Mesenberg's case is authority for the proposition that the fifth exception is part of the law of New South Wales, and I am happy to adopt his Honour's analysis of the cases at 19 ACSR 486-7. Moreover, assuming I am free to apply the general law as to standing in the present case, I hold that the fifth exception is applicable here. I have made findings of fact to the effect that David and Marilyn have misused their power as directors to retain themselves in office and thereby to ensure that the company continues with its proceeding against the majority shareholders and their company, without allowing the body of shareholders to vote on a proposal that David and Marilyn be removed from office.

234 I turn to the question whether the general law with respect to standing no longer applies, in light of Part 2F.1A of the Corporations Act, which began on 13 March 2000. Section 236 confers a statutory right on certain persons to bring proceedings on behalf of a company, or to intervene in proceedings in a certain way. Section 236 (3) says that "the right of a person at general law to bring, or intervene in, proceedings on behalf of a company is abolished". If s 236 (3) applies in the present case, then considerations concerning the rule in Foss v Harbottle and the fifth exception to it are irrelevant, and the only way a proceeding such as the present one can be properly constituted to raise the issue of misuse of fiduciary power by directors is by following the new statutory procedure.

235 Section 236 (1) says that a person may bring proceedings on behalf of a company, or intervene in any proceedings to which a company is a party for the purpose of taking responsibility on behalf of the company for those proceedings or for a particular step in those proceedings, if two conditions are satisfied. The first condition (in s 236 (1) (a) (i)) is satisfied in the present case because Alan is a member of Bajco. The second condition (in s 236 (1) (b) (ii)) is that the person is acting with leave granted under s 237. Such leave has not been granted in the present case. Another requirement of s 236, not satisfied here, is that a proceeding brought on behalf of a company must be brought in the company's name: s 236 (2). Here the proceeding has been brought in Alan's name, and Bajco has been joined as a defendant.

236 It is possible that the two unsatisfied requirements laid down by s 236 could be satisfied even at this late stage in the present proceeding. It is arguable that leave may be granted under s 237 nunc pro tunc, given that a superior court invested with a power to grant leave is able to do so on that basis unless there is some express or implied provision to the contrary. There is some evidence to justify my being satisfied of the matters set out in s 237 (2), although procedural fairness would require that I hear submissions before making a determination of those matters. The other requirement, that the proceeding be brought in the company's name, was dealt with by Santow J in Karam v Australia and New Zealand Banking Group Ltd (2000) 34 ACSR 545. His Honour found that appropriate amendments to the pleadings, to comply with s 236 (2), could be made under Part 20 rule 4 of the Supreme Court Rules (there was a limitation problem in that case, not present here).

237 While problems with the application of Part 2F.1A might be capable of being overcome (I do not firmly decide the matter), to overcome those problems would involve further hearing time and costs. Therefore, in the present case considerations of justice favour the application of the general law rather than the statutory regime, notwithstanding the generally remedial purpose and effect of the reform: see Karam at 553. The question is, does s 236 (3) prevent the Court from dealing with the matter under the general law?

238 In my opinion it does not. Section 236 (3) abolishes the right of the person at general law to bring, or intervene in, proceedings on behalf of a company. The abolition of the right took effect on 13 March 2000. By that time Alan had exercised his right to bring proceedings under the fifth exception to the rule in Foss v Harbottle by commencing the present proceeding. He did so in 1998. On and after 13 March 2000, it was unnecessary for him to rely upon any general law right to bring a proceeding on behalf of the company, and therefore s 236 (3) did not apply to constrain him. It was necessary for him to assert his entitlement to continue the proceeding that he had brought under the general law, but s 236 (3) has nothing to say about the continuation of proceedings properly brought at a previous time.

239 In Karam the proceeding had been commenced in 1997 against a third party, without joinder of the company at all. If the company were to be joined at the time of the hearing, its action against the third party would be statute-barred having regard to Part 8 rule 11 (3) of the Supreme Court Rules. Santow J avoided the limitation problem by holding that as from 13 March 2000, the proceeding was governed by Part 2F.1A, and that an amendment could be made to the constitution of the proceeding under Part 20, operating retrospectively (according to Part 20 rule 4A). The plaintiff argued that s 236 (3) did not have a retrospective effect to take away his existing general law right, because the general law right to bring derivative proceedings was substantive rather than procedural, and a statute should not be construed as taking away accrued rights retrospectively. Santow J pointed out that the statutory reforms were seen as remedial and ameliorative, providing better rights than the general law allowed. He said (at 553): "To deny its remedial effect to those whose rights had accrued prior to the introduction of the legislation would be to frustrate its remedial purpose".

240 It seems to me that Santow J's observations are directed to a case different from the present one. The proceeding before him had not been constituted properly as a derivative action under the general law, since the company was not a party to it. In effect, the plaintiff was asking him, after 13 March 2000, to constitute the proceeding as a derivative action for the first time. He granted the plaintiff relief, but in a manner that treated the derivative action as a statutory action, the legislation having commenced by that time. Here, the proceeding was properly constituted under the general law rules when it was commenced in 1998, in the sense that Bajco had been joined as a defendant and would be bound by the orders made by the Court. The question for me is whether s 236 (3) takes away the existing rights flowing from proper constitution of the proceeding under the general law, and substitutes a new regime which imposes additional hurdles for the plaintiff. To answer that question affirmatively would be to countermand the remedial and ameliorative legislative purpose. As a matter of plain construction, s 236 (3) does not lead to that result.

241 I do not regard s 1472 of the Corporations Law as of any particular assistance in solving the problem that confronts me. It permitted a person to apply for leave to intervene, and to intervene, in proceedings started before the commencement of the new Part. The section seems to have its own problems of construction, which (fortunately) I do not need to resolve: see Karam at 553; Advent Investors Pty Ltd v Goldhirsch (2001) 37 ACSR 529.

242 My conclusion is that the present proceeding has properly been brought, and is before me for determination, as a general law action relying on the fifth exception to the rule in Foss v Harbottle, notwithstanding the introduction of Part 2F.1A on 13 March 2000. I should add that the replacement of the Corporations Law by the Corporations Act in July 2001, in substantially the same terms, does not affect my analysis: see s 1401. Validity of the deed of appointment of administrators 243 Article 96 of Table A of the Fourth Schedule to the Companies Act 1961 (NSW), adopted as part of the constitution of Bajco, provided (so far as relevant) that the common seal of the company was to be used only by the authority of the directors, and every instrument to which the seal was affixed was to be signed by a director and countersigned by a second director.

244 The purported appointment of the administrators in the present case was based upon a rather amateurish combination, as follows: (a) David and Marilyn passed a resolution in terms of s 436A (1), and they also resolved that "the company execute under seal of the company notice that it desires to appoint an administrator of the company as soon as possible", and that David would attend to "the necessary execution of documents appointing the appropriate people" from Deloittes; (b) an informal instrument to which the common seal was affixed was signed by David and Marilyn, stating that it was agreed pursuant to s 436A of the Corporations Law that an administrator be appointed, and any two of three named partners of Deloittes were to be appointed provided they consented; and (c) a formal instrument appointing Mr Skinner and Mr Lombe to be the administrators of Bajco and noting their consent was signed by David, whose signature was witnessed by Mr Cardwell, and the common seal was affixed. 245 Alan submits that these steps, considered together or in isolation, did not achieve what s 436A and the constitution of Bajco required for a valid corporate act. I regard this submission as unduly technical, and I disagree with it.

246 In my opinion the resolution that the company execute a notice under seal that it desired to appoint an administrator was intended, by the lay persons who adopted it, to express their intention that the seal be affixed to an instrument of appointment. That was sufficient to comply with the requirement of article 96 that the use of the seal must be authorised by the directors: cf JW Broomhead (Vic) Pty Ltd (in liq) v JW Broomhead Pty Ltd (1985) 9 ACSR 593, 616.

247 The seal was then affixed to the informal document, drafted in similar "lay" terms. If the informal instrument were to be construed strictly and in isolation, it would be regarded as no more than a memorandum of an agreement that administrators be appointed in future, setting out the means by which the appointees were to be identified, but not itself making the appointment. But in my view a strict construction of the words of the instrument in isolation is inappropriate, given the "lay" drafting and the context in which it was executed. David and Marilyn having passed the resolutions that they did on the previous day, what could the informal instrument be other than the appointment that they had resolved to make? The fact that it was executed by both of them under seal implies that they regarded it as an operative instrument, rather than merely a record of an intention to do something later. The instrument did not identify in terms which two of the three partners of Deloittes that it named were to be the administrators. But it provided a mechanism for answering that question. The administrators were to be the two partners who consented. The more formal instrument, though not properly executed in accordance with the corporate constitution, is confirmatory of the intention expressed in the operative informal instrument, by identifying two of the three partners who had been named and noting their consent.

248 Section 436A requires that the appointment be in writing. The informal instrument satisfied that requirement. Article 96 required that if the seal be affixed to an instrument, there must be authority to do so (present here, in the case of the informal instrument), and the instrument must be signed and countersigned by two directors, as the informal instrument was. There is therefore no formal defect in the appointment of the administrators. The defect in their appointment arises out of the improper purpose motivating David and Marilyn's resolution of 27 November 1997. Validity of the convening of the second meeting of creditors 249 Alan has three criticisms of the procedure adopted for the convening of this meeting.

250 First, Alan contends that the time for convening the meeting expired on 18 December 1997 and therefore the notice was given at least one day late. Under ss 439A (1) and (5) (b), the administrators were required to convene the second meeting of creditors within the convening period of 21 days commencing on the day when the administrators were appointed, 28 November 1997. That day is counted for the purpose of calculating the 21 days: Cawthorne v Kiera Constructions Pty Ltd (1994) 13 ACSR 337, 338. It follows, according to Alan's submission, that the administration of Bajco came to an end on the expiration of the convening period, under s 435C (3) (b). In my opinion this contention is correct, subject to the curative effect of s 1322.

251 Secondly, Alan contends that the notice did not allow five business days between the date when the meeting was convened and the date when it was to be held, as required by s 439A (3) of the Corporations Law as then in force. According to the evidence, the only business days in the period from 19 to 29 December 1997, a holiday period, apart from 19 December, were 22, 23 and 24 December. Therefore, this contention is also correct, again subject to s 1322.

252 In my opinion these two deficiencies are cured by s 1322. The convening of the second meeting of creditors is a "proceeding under this Act" for the purposes of s 1322 (1) (a). The failure to comply with s 439A (1) by convening the second meeting of creditors within the 21 day period fixed by s 439A (5), and the failure to give the full five business days notice required by s 439A (3), are "procedural irregularities" under s 1322 (1) (b), because they are respectively a defect, irregularity or deficiency of time and a defect, irregularity or deficiency of notice.

253 Therefore under s 1322 (2) the convening of the second meeting of creditors is not invalidated by either of those irregularities unless the Court forms the opinion that they or either of them has caused or may cause substantial injustice that cannot be remedied by any order of the Court, and by order declares the proceeding to be invalid. Far from forming the view that either of the irregularities has caused or may cause substantial injustice, my view is that there is no evidence of any injustice or prejudice at all in this case by virtue of the irregularities. Giving notice on 19 December rather than 18 December can have had no prejudicial effect on any creditor, bearing in mind the small number of creditors concerned. Giving less than five business days notice can have had no prejudicial effect on any creditor, bearing in mind, in addition, that in fact the notice period was from 19 to 29 December and the problem arose only because of the unusually large number of holidays in the intervening period.

254 In my opinion s 1322 is available to cure irregularities of notice or time arising under s 439A, notwithstanding the presence in Part 5.3A of s 447A, although s 447A may also be used for this purpose: see Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 (High Court) and (1998) 29 ACSR 344 (Court of Appeal of New South Wales); see also the review of the case law in Deputy Commissioner of Taxation v Portinex Pty Ltd (1999) 156 FLR 453. It is unnecessary for the Court to make any order to cure irregularities of notice or time, since s 1322 (2) applies automatically unless the Court orders otherwise. That consideration makes it unnecessary in this case to choose between making an order under s 1322 (4) and an order under s 447A. However, it is appropriate for the Court to make a declaration as to the application of s 1322 (2), so that the relevant rights of the parties are addressed, and I shall make such a declaration in response to the amended cross-claim by the administrators.

255 Thirdly, Alan criticises the contents of the notice of meeting on the ground that it failed to set out matters required to be included under s 439A (4) (b) and (c). Those provisions required the notice to be accompanied by a copy of: "(b) a statement setting out the administrator's opinion about each of the following matters: (i) whether it would be in the creditors' interest for the company to execute a deed of company arrangement; (ii) whether it would be in the creditors' interests for the administration to end; (iii) whether it would be in the creditors' interests for the company to be wound up; and his or her reasons for those opinions; and (c) if a deed of company arrangement is proposed - a statement setting out details of the proposed deed."

256 In part, this is a formal and technical objection to the fact that the relevant part of the administrators' Report, which I have set out in full, did not separately consider ending the administration and winding up the company, with separate reasons for the administrators' opinions on those options. In my opinion the drafting of the Report was loose, even sloppy, and expressed in very general terms, but I do not accept that it failed to comply with the requirements of s 439A (4) (b). If one reads the extracted passage, one can readily gain an impression of the administrators' views on the three options set out by s 439A (4), and generally the reasons for those views. The section does not require that the administrators' reasoning be elaborated in detail. The three choices are identified by the Report and the reasons given for favouring a deed of company arrangement involve a comparison between that option and the other two, with the implication that the reasons for not favouring the other two options have to do with the absence in them of the advantages of a deed of company arrangement.

257 I have concluded, however, that Alan's complaint is correct, as regards s 439A (4) (c). Whereas subparagraph (b) requires only that the "reasons" are given, in contrast subparagraph (c) requires "details". This is an important requirement, since it is fundamental to the creditors' decision-making process that they know specifically what it is that they are being asked to approve.

258 The material extracted from the Report, which is the only relevant part of it, can by no stretch of the imagination be described as "details" of the deed of company arrangement which the Report proposed. Nor was the deficiency cured (if it could be cured ex post facto at the meeting) by handing out draft recitals without a draft of the operative part of the deed. Among the omitted details were the power of the administrators to continue the 1997 proceeding, the circumstances in which the deed of company arrangement would come to an end, and the set-off of the entitlement of Alan and Bruce to distributions from the deed fund against any obligation they may have as a result of the 1997 proceeding.

259 According to Alan's submission, the administrators' failure to comply with s 439A (4) (c) means that the resolutions purportedly passed at the meeting, and the deed of company arrangement purportedly entered into after the meeting, are invalid unless an appropriate order is made. Consequently, he says, the administration of Bajco came to an end at the expiration of the convening period, because there had been no meeting convened in accordance with s 439A: see s 435C (3) (b). In my opinion that may well be correct if the Court did not intervene. Where an administration comes to an end under that subsection, s 446A and Regulation 5.3A.07 have no application, and so the company is not taken to have passed a special resolution for voluntary winding up.

260 Assuming that a curative order could be made for non-compliance with s 439A (4) (c) under either s 447A or s 1322 (4), this is not an appropriate case for such an order to be made. I have real doubt, having reviewed the evidence as carefully as I can, that any of the creditors who voted at the second meeting of creditors (and particularly Alan and Bruce) had anything like a proper understanding of the contents of the proposed deed of company arrangement and its effects. Not only was there a failure to provide a statement giving "details" of the proposed deed, but the administrators' Report was in my view misleading, for the reasons I shall give.

261 While, however, it is not appropriate to make a curative order, there is a question (which I shall consider below) as to whether I should make an order under s 447A dealing with the consequences of the statutory non-compliance so as to bring those consequences in alignment with s 445D. Adequacy of disclosure in the administrators' report to creditors

262 Alan complains that the notice of meeting and the administrators' report are seriously and materially deficient in other ways, going to the heart of the matters that any meeting of creditors would objectively be required to consider. Alan contends that the Court should make an order terminating the deed of company arrangement under s 445D. He says that he has standing to invoke s 445D because he is an "other interested person" under s 445D (2) (c).

263 In my opinion the information given by the administrators in the notice of meeting and their Report was seriously deficient, both because the Report contained information about Bajco's financial circumstances that was false or misleading in a manner material to the creditors' decision, and because there were omissions from the Report of matters that were material to the creditors' decision. The most worrying part of the Report, in my view, was the extracted part in which a deed of company arrangement was recommended. A reasonably intelligent reader of the Report would conclude, in my opinion, that if the deed were entered into, there would be a very substantial distribution to creditors shortly after completion of the sale of the Property. The Report does not convey the idea that substantial funds would be retained for the purposes of the litigation and provides no guidance as to when the deed administration would be terminated. Indeed, it seems to imply that there was some real doubt about whether the litigation would proceed. Nor does the Report make clear why the deed administrators were needed if the principal purpose of the deed was to achieve the sale of the Property.

264 Additionally, the Report failed adequately to consider the question of Bajco's solvency. The financial figures presented in the Report implied clear solvency on a balance sheet test, but there is inadequate information to enable a reader to make any assessment of the company's cash flow position or the administrators' view of the cash flow position. There is no assessment of the claim by Cadwallader Engineering (NSW) to be a creditor for $29,136, although the Report implies that the administrators did not accept that this debt was owing. There is no critical assessment of the claims by Marilyn and David, although the circumstances would suggest to a reasonably intelligent person in the administrators' shoes that some investigation was required. No discount is applied to the estimated realisable value of the Property, suggesting the view that there would not be any problem with its realisation, and if that was so, it would be difficult to justify the view that the company was insolvent or likely to become so at some future time.

265 I concluded my discussion under the previous heading by saying that the administrators' failure to comply, in the serious way, with s 439A (4) (c) within the convening period meant that under s 435C (3) (b) the administration of the company came to an end at the end of the convening period (18 December 1997), and there was no basis for any curative order. My conclusions under the present heading have the consequence that, where it necessary to do so, I would make an order terminating the deed under s 445D, on the application of Alan as an interested person.

266 The position therefore is that there are grounds for making an order terminating the deed under s 445D, and also grounds for holding that the administration came to an end on 18 December 1997 because of contravention of s 439A (4) (c), and for holding that the resolution of the directors under s 436 A was voidable because of an improper purpose of David and Marilyn. The Court has a discretion to decide which is the most appropriate remedy, which it can exercise by using s 447A to remove invalidating consequences that might otherwise ensue. I shall return to this point shortly. The appropriateness of making orders under s 447A 267 Paragraph 39 of the further amended statement of claim asserts that Bajco has at all material times been solvent, and that the provisions of Part 5.3A have been abused by the appointment of the administrators and the adoption of the deed of company arrangement. Further, it is said that the purpose of the deed of company arrangement is, in part, to effect a winding up of Bajco without complying with the provisions of the Corporations Act. Therefore it is said that the Court should make an order under s 447A bringing the administration of Bajco to an end.

268 It is unnecessary to deal with this claim, since I have concluded that the administration of Bajco came to an end on 18 December 1997, and therefore no order under s 447A is needed to confirm that outcome. I should note, however, that I dealt with a similar submission, admittedly in quite different circumstances, in Young v Sherman [2001] NSWSC 1020.

269 In my opinion, if creditors are properly informed and there is no unfair prejudice to any creditor or class of creditors, it is open to them to use the voluntary administration procedure to put in place arrangements for the conduct of litigation, of the kind proposed in that case (see paragraphs [110] to [128]). The principal vices in the present case are not that the concept of the deed is necessarily a misuse of Part 5.3A, but rather that the directors have launched the process by misusing their fiduciary power and there has been inadequate disclosure of material facts to creditors.

270 The Court is faced with a dilemma in this case. I have found that the directors' resolution under s 436A, at the requisite level for the valid appointment of administrators, is voidable on general law grounds. I have also found that because of failure to comply with s 439A (4) (c), the administration came to an end on 18 December 1997 by virtue of s 435 C (3) (b) (or more precisely, that it came to an end subject to the possibility of an order made under s 447A). In either event, in the absence of judicial intervention those conclusions would mean that the administration of Bajco was invalid from the outset or near to it.

271 In my opinion, it would in principle be undesirable to produce an outcome of that kind, although in the present case the inconvenience of doing so may not be great, since the administrators have not been called upon to exercise significant powers in the course of administration. Although the remedies available to attack a deed of company arrangement under Part 5.3A may not strictly constitute an exclusive code, one can see lying behind them the policy that an administration which has commenced and operated for some time ought not to be treated as invalid except for the future: see, especially, s 445H. In my opinion the Court should exercise such discretion as it has to produce a result consistent with that policy.

272 Section 447A allows the Court to make such order as it thinks appropriate about how Part 5.3A is to operate in relation to a particular company, including that an administration should end because the company is solvent. I believe it would be appropriate for me, in the exercise of my discretion under that section, to order that, having regard to the solvency of the company and the directors' impropriety of purpose, the deed of company arrangement should come to an end. Section 447A does not permit an order to be made with retrospective effect (see the summary of the case law in Deputy Commissioner of Taxation v Portinex Pty Ltd (1999) 34 ACSR 371, 398-9). However, under s 445G (2) I am able to make an order, because of the doubt arising out of the impropriety of purpose as to whether the deed of company arrangement was validly entered into, declaring the deed of company arrangement to be void, in circumstances where the order does not affect the previous operation of the deed: s 445H. The general law remedy provided by an order setting aside a decision of directors vitiated by improper purpose, is a discretionary remedy. I believe it is appropriate for me to decline to make an order setting aside the resolution ab initio and thereby removing the jurisdictional pre-requisite for a valid administration, taking into account that the deed of company arrangement will come to an end now.

273 Under s 435C (3) (b) the administration of a company comes to an end if the convening period ends without a meeting being convened in accordance with s 439A. I have found that this occurred in the present case. It is striking, however, that this section does not prescribe that the company is taken to be in voluntary liquidation in such an event (compare s 446A and Regulation 5.3A .07). It would be undesirable for the law to achieve, ex post facto, a result which might put in peril the validity of transactions involving third parties, as would occur in many cases if the Court were to make orders having the effect contemplated by s 435C (3) (b). The solution, in my view, is that I should make an order under s 447A with future effect in respect of the past failure to comply with s 439A (4) (c), an outcome specifically contemplated by the High Court in Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270. The order will be to the effect that the deed of company arrangement will be treated as having come to an end at the time of making the order.

274 For the reasons given, I shall make an order terminating the deed of company arrangement under s 445D.

275 It follows that I shall not make the declaratory orders proposed in the further amended statement of claim, paragraphs 1 to 7. I shall make orders analogous to those in paragraphs 8 and 9. In the circumstances, I do not regard orders under paragraphs 12 and 13 as necessary.

276 As to the question of sale of the property, the effect of my order under s 445D will be that the company will be treated as having moved into voluntary winding up under Regulation 5.3A.07, and the administrators are the liquidators accordingly. I see no plausible ground for restraining them in that capacity from taking steps to sell the Property if that is an appropriate measure in the administration of the affairs of the company in liquidation.

277 Since I do not propose to make an order setting aside the directors' resolution on general law grounds, it seems to be inappropriate that I should make any order against the administrators or David and Marilyn for the payment of damages or equitable compensation, indemnity, or for an account of profits, of the kind sought in paragraphs 14, 15, 16, 17 and 19. I prefer to provide statutory remedies fitting within Part 5.3 A, and having done so, I see no occasion for accounting or compensation attributable to the outcome of the case.

278 In their amended cross-claim the administrators seek a declaration that they have a lien over the assets of Bajco for the debts incurred in the performance of their functions as administrators, and a declaration that they are entitled to be indemnified out of Bajco's property for the debts and remuneration. They also seek a declaration of their entitlement to remuneration as liquidators and orders for remuneration and expenses. In my opinion the administrators are entitled to their remuneration and expenses purportedly incurred in that capacity up to the distribution of their Report on 19 December 1997. However, the Report and notice of meeting which they distributed on that date failed to comply with s 439A (4) (c) in a serious manner, and the Report was false and misleading, as I have held.

279 Sections 443D and 443F assume regularity in the conduct of the administration, and may not be available in this case. The administrators seek to invoke equitable principles which coexist with the statute: Weston v Carling Constructions Pty Ltd (2000) 175 ALR 200. However, a person otherwise entitled to an equitable lien may lose that entitlement by conduct: see generally Shirlaw v Taylor (1991) 9 ACLC 1235; Cresvale Far East Ltd v Cresvale Securities Ltd (No 2) (2001) 39 ACSR 622. In my opinion, in view of the serious inadequacies of the Report, the Court ought not to make an order recognising an equitable lien for remuneration and expenses incurred after 19 December 1997. The fact that some of those expenses were incurred purportedly as liquidators is immaterial to the present point.

280 It follows that the prayers for relief with respect to indemnity, lien and remuneration in the amended cross-claim had been made out in respect of the period from 27 November to 19 December 1997, but not later.

281 The defendants contended that Alan requisitioned the meeting of members to be held on 11 December 1997 with the intention that the new board would dismiss Bajco's solicitors and cause the 1997 proceeding to be discontinued. In my opinion, that contention is not supported by the evidence. The correspondence indicates on its face that Alan was prepared to act in accordance with legal advice in the event that he became a director. The defendants made much of the decision by Alan at the second meeting of creditors to vote in favour of the deed of company arrangement. In my view, however, that decision did not give rise to any waiver or election, estoppel, lack of clean hands or other equitable ground for denial of relief, even if I were otherwise disposed to grant relief under the general law. The reason is that Alan's decision, as he explained it, was taken on behalf of Cadwallader Engineering (NSW) and not in his private capacity, on the ground that he regarded it as pointless to take any other view. It was not a decision which bound him personally or operated on his conscience. The second cross-claim

282 The second cross-claim applies because of my finding that Bajco was solvent on 27 November 1997 and that the directors acted for an improper purpose in resolving for the appointment of the administrators on that day. In my opinion it is established by the evidence that Deloittes were retained by David and Marilyn on behalf of Bajco to provide advice, through Mr Cardwell, as to whether Bajco was insolvent or likely to become insolvent at some future time, and as to whether they should appoint administrators. That is the role that Mr Cardwell in fact adopted, especially at the two meetings on 27 November 1997, which I have described in detail. He did so as an employee of Deloittes. Deloittes were subject to an implied contractual duty to exercise reasonable care and skill, and a duty of care in relation to their retainer.

283 In my view, however, Mr Cardwell did not fail to discharge those duties in the advice he gave to David and Marilyn on 27 November 1997. As I have explained, he relied very largely on information provided to him by them. If that information had been true, it would have been plausible to conclude that Bajco was insolvent in fact, on 27 November 1997. He was aware of the facts and circumstances constituting the impropriety, though he was not aware of David and Marilyn's bad faith. He did not advise them against passing the resolution on the ground of their improper purpose, but his retainer did not extend to providing legal advice as to the consequences of invoking s 436A for improper purposes.

284 My conclusion, therefore, is that there was no breach of duty by Deloittes and therefore no ground for recovery under the second cross-claim. I note that if there were a breach of duty, it is unlikely in view of the orders I propose to make that there would be any basis for a claim to damages. The third cross-claim

285 In my opinion, the third cross-claim must fail because I have found that Mr Cardwell was aware of the facts and circumstances constituting David and Marilyn's improper purpose. The fact that he was not aware that they were acting in bad faith is beside the point, because that very conclusion prevents any legal consequences from flowing to Deloittes by virtue of their bad faith. In those circumstances, it is unnecessary to give further consideration to the rather novel cause of action alleged in the third cross-claim. Conclusions

286 I have decided that it is appropriate to make orders having the effect that the deed of company arrangement is terminated, under ss 445D, 445G and 447A, with the consequence that upon the making of the orders, the company will move into voluntary liquidation with the administrators as the liquidators. I have decided not to make any order for compensation or accounting, or to restrain the administrators, in their new role as liquidators, from selling the Property. I shall make the orders sought in the amended cross-claim with respect to the administrators' indemnity, lien and remuneration for the period from 27 November to 19 December 1997 but not later.

287 To the extent that these orders are not reflected in the prayers for relief in the amended cross-claim, the amended cross-claim will be dismissed. The second and third cross-claims will also be dismissed.

288 I shall direct the plaintiff to prepare draft short minutes of orders and I shall stand the matter over to hear argument as to costs.

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