City & Suburban Pty Ltd v Michael John Morris Smith

The background in detail Citrix is a US corporation which manufactures and supplies computer software. In January 1997 it entered a distribution agreement with Omega to sell its products in Australia. This distribution agreement was not exclusive. Omega had been distributing software products of Citrix since October 1991. An administrator's report compiled by Vouris and dated 22 July 1998 provides an account of the history of the relationship between Citrix and Omega. The sequence of events set out in the report, which was not put in issue in these proceedings, is not entirely clear. However what does emerge from the report is that at some stage, probably in 1996, Citrix entered an agreement with Datapack Pty Ltd which enabled that company to distribute Citrix products in Australia in competition with Omega. Citrix appears to have acquired the business of Datapack in or about September 1997. In January 1998 Omega sold it business to MUA Pty Ltd with the knowledge and consent of Citrix. The majority of the proceeds of the sale of Omega's business to MUA was paid directly by MUA to Citrix. For each of the years 30 June 1996 and 30 June 1997 Citrix's trading resulted in no net profit though it did not trade at a loss. It traded profitably for the three months to September 1997, but from October 1997 to the sale of its business it traded with negative gross margins. Vouris noted in his report that the decline in Omega's financial position coincided with the direct entry of Citrix into the Australian market. By March 1998 Omega was indebted to Citrix in a sum in excess of US$120,000. Its precise quantification is not presently relevant. Of relevance is the proportion that debt bears to the moneys owing to creditors of Omega generally. Various figures appear in the material concerning the amount owing to Citrix and amounts owing to other creditors. I am satisfied that the Citrix debt is of the order of 90 per cent of all money owing to creditors by Omega. Probably shortly before 25 May 1998, Vouris was approached by a Mr Chris Milledge who was an external accountant acting for Omega. Milledge is an employee of, or a partner in, the firm of KNM Accountants. Milledge told Vouris that he had a client which was in trouble financially and was seeking his advice. On 25 May 1998 Vouris met with Milledge and Mr John Foxe who was then the sole director and secretary of Omega. That had been Foxe's status in relation to Omega since 6 December 1996. At that meeting Omega's position was discussed and Vouris was given some financial information about the company. After the meeting Vouris was given further financial information and advised Foxe that Omega was insolvent. He also told Foxe that he should not incur credit. Also discussed at the meeting on 25 May 1998 was that Citrix was seeking payment of the amount due to it and that the major asset of Omega was an amount owed by Telesystems Pty Ltd ("Telesystems") which was a company associated with Foxe. Foxe had been a director of that company since 20 June 1998 and its secretary since 3 July 1998. In evidence, Vouris described Milledge, in the context of a question concerning Milledge's relationship with Telesystems, as the external accountant of the group. I infer that he was an external accountant not only for Omega but Telesystems as well. On 10 June 1998 Foxe met with Mr Eric Felipe who is the financial controller of Citrix Systems Australia Pty Ltd ("CSA"), a wholly owned subsidiary of Citrix. At that meeting Foxe told Felipe that Citrix would not get its money until Telesystems repaid its loan to Omega. On 12 June 1998 Vouris wrote to Felipe. The letter read: I refer to your Eric Felipe's conversation with Mr John Foxe and confirm that I have been retained by the director's [sic] to act on their behalf. After discussing the company's financial position, the directors have three options: 1. Do nothing and wait for a creditor to take steps to wind up the company. 2. Appoint myself as either Administrator or Liquidator. 3. Offer your company a payment for the purpose of obtaining "breathing space" to extract movies [sic] from debtors in order to pay your debt. In option (1) and (2) your company would not recover any monies and in particular in the first option you would have to pay the costs of the winding up petition of say $5,000.00. Attached is a copy of the latest balance sheet which sets out the company's bleak financial position. In this regard the company's main asset is a debt due to it by it's [sic] associated company viz. Telesystems Pty Limited. Telesystems Pty Limited is presently undergoing a reconstruction program which will at the end of the day hopefully repay its liabilities. Clearly from a strictly commercial viewpoint the company seeks your acceptance of a stay of proceedings of say three months. The Company is also mindful that there must be a cost of the above and in this regard will have $Aus5,000, paid to your company as part payment of your debt. Should you accept this proposal or wish to discuss the matter, please contact me at the above address. Yours faithfully VOURIS & BELL It is not clear whether this letter was sent by mail but if it had been, it was not received by Felipe. Felipe was rung by Vouris on 23 June 1998 and was asked whether he had received the letter. When Felipe indicated he had not Vouris said he would fax a copy which he did. Vouris summarized the letter in the conversation with Felipe. Vouris rendered no account for fees for the professional services he provided to Foxe and Omega to this point. The appointment of Vouris as an administrator took place at what was styled a meeting of directors of Omega at 2.15 on 1 July 1998: see s 248A of the Law. As Foxe was the only director he effectively decided to appoint Vouris. Both Foxe and Vouris were then aware that Citrix had filed its application to wind up Omega and had applied to have a provisional liquidator appointed. Prior to this meeting but after service of both applications, Foxe and Vouris had spoken about what choices Foxe had including appointing Vouris as administrator. The same day Vouris sent a notice to creditors convening the first meeting of creditors on Wednesday, 8 July 1998. The notice was signed by Vouris. Somewhat curiously it commenced with the following: I was appointed Administrator of the abovenamed company on the 1st July 1998. Prior to my appointment, I have had no professional or personal dealings with the company or its directors. I presently do not see how Vouris could have made that statement concerning prior dealings in view of the advice that was sought at the meeting on 25 May 1998, the letter that was written on 12 June 1998 and the conversation with Felipe on 23 June 1998. However it must be said in fairness to Vouris that this statement was not put to him when he gave evidence. On 6 July 1998 solicitors acting for Citrix wrote to solicitors acting for Vouris in his capacity as administrator. The letter sought information on a number of topics by posing certain questions. The first two were: 1. What efforts is your client employing to secure the assets of the Company, particularly the loan made by the Company to Telesystems Pty Limited?; 2. What investigations has your client carried out in relation to uncovering any antecedant [sic] voidable transactions and whether the directors may have been involved in insolvent trading?; A request was also made for an "explanation" of Vouris' involvement with Omega prior to his appointment. Vouris replied through his solicitors on 7 July 1998. Under a heading "Possession of Assets" a number of steps taken were identified in the letter. They included: (c) A demand was issued to Telesystems Pty Limited with respect to a loan account of $56,103.43 on 1 July 1998. Of this amount $33,481 constitutes the book value of plant returned by MUA and taken up by Telesystems in May 1998. This plant would appear, having been rejected by MUA, to have a commercial value substantially less than its book value. Later in the letter there was a heading "Investigations". Under it the following appeared: (a) Investigations are to date preliminary. However the large transactions involving the sale of Omega and the payment to Citrix, payments to Boundless, Telesystems and Edenville will require further review. It is to be noted that no response was provided in relation to the enquiry concerning whether directors had been involved in insolvent trading. As to his involvement with Citrix, Vouris' solicitors said only "I met the director for the first time on 25 May 1998". The creditor's meeting took place on 8 July 1998 with Vouris chairing it. He outlined what he believed to be the assets of the company and described, according to the minutes, one asset as "an intercompany loan with Telesystems of $9,000". The minutes record that an employee of the firm of solicitors acting for Citrix raised with Vouris why the Telesystems' loan account was then $9,000. The minutes record: The Chairman advised that following receipt of the demand from the administrator, Telesystems had undertaken a full review of the account and had established that a journal error of approximately $41,000 had been made overstating the loan account as previously advised to Citrix. [The representative of Citrix] emphasised that previous correspondence to Citrix had represented the loan account at approximately $56,000. The Chairman tabled a letter from the company's external accountant Mr Chris Milledge, who he noted was present at the meeting, detailing the movement of the Telesystems' loan account and the revised balance. The minutes record that Milledge responded to this issue in the following way: Chris Milledge advised that the debtor reduction shown on the reconciliation prepared by him was with respect to a contra entry offsetting debit and credit balances within the balance sheet. He also advised that the $41,000 error had given rise to the overstatement of the loan account. The erroneous entry had been attempting to reconcile the bank balance. Mark Franklin enquired as to where the entry should have gone. Chris Milledge advised that the $41,000 was associated with purchases, which should have gone straight to the profit and loss. The minutes record that shortly after this explanation was given the representative of Citrix indicated he would like the Telesystems account to be fully investigated during the course of the following weeks. Vouris responded by saying that he would look into the transaction during his investigation. These minutes were signed by Vouris as a true and correct record of the meeting. On 14 July 1998 Citrix's solicitors sent a letter by facsimile to Vouris asking him to address certain matters in the report to creditors including: 1. Undertake full investigations into the loan to Telesystems Pty Limited. The explanation offered by KMN Accountants that the loan account was an incorrect journal entry is unacceptable and is not credible; 2. Undertake a full investigation into any insolvent trading by the directors; The report to creditors dated 22 July 1998 was forwarded to the solicitors for Citrix under cover of a letter dated 23 July 1998. The letter made clear that it was a response to the facsimile letter of 14 July 1998. In relation to the Telesystems debt the report said the following under the heading "Debtors": The remaining major debt is that owed by Telesystems of $9,002.33. The movement of this account has been subject to further investigation in order to verify the representations made by Chris Milledge, Omega's accountant, as to the value of this account at the date of my appointment. I have now received from Telesystems details of their financial records and balance sheet, which verify the value of this account. In addition, I have made a thorough review of the banking records of Omega and agreed each of the transactions detailed by Omega's accountant. I am therefore of the opinion that the balance of $9,002.33 represents the true balance of this account. (Emphasis added) Later in the report Vouris dealt with a proposal that had been submitted by Telesystems. He summarized his proposal in the report in these terms: 1. The Cash at Bank will be transferred to the Deed Administrator. 2. Telesystems will pay to the Deed Administrator $30,000 by weekly instalments of $1,000 being in settlement of the loan account and in consideration for all outstanding debts and stock of Omega. 3. Telesystems will assume responsibility for all creditors other than Citrix Inc, Citrix Australia Pty Limited, Ozemail and IPC/Boundless. This proposal involved the execution of a deed of company arrangement. In his report Vouris expressed the opinion that the creditors should accept the proposal and enter a deed of company arrangement. On 28 July 1998 Citrix applied to this Court seeking an order varying the return date for its application to wind up Omega to 3 pm that day or, in the alternative, an order under s 447B of the Law that the holding of the meeting scheduled for the following day be adjourned to after 31 July 1998. It is to be recalled that 31 July 1998 was the return date for Citrix's application to wind Omega up. That application was opposed by Omega and the application was dismissed. The second meeting of creditors took place on 29 July 1998. Vouris was again chairman and has signed the minutes as a true and correct record of the meeting. The minutes record the following exchange about the Telesystems debt. They commence with a part of the report by the chairman: … The only remaining asset was a loan due from Telesystems of approximately $9,000. [The representative of Citrix] requested that it be noted that Citrix does not believe that the investigation into the Telesystems loan account had been thorough enough. The Chairman asked [representative of Citrix] what further steps he would have done to satisfy himself. [The representative of Citrix] could not advise any specific steps that should have been taken. The Chairman advised that he had conducted an investigation sufficient to determine that the explanation received from the external accounts was reasonable. The meeting resolved to wind Omega up. The motion was moved by the representative of Citrix and was seconded by Milledge. The resolution was carried unanimously. In an affidavit sworn on 31 July 1998 Vouris referred to the amount owing by Telesystems. He said: I will be undertaking a more detailed investigation of the debt owing by TeleSystems to the Company and if I am able to establish that a greater amount than $9,002.33 is owing then the appropriate steps will be taken to recover the greater amount. He was cross-examined about this evidence and the earlier statement made in his report concerning this debt. The import of his evidence was that at the time he made the statement in his report he had been satisfied that the amount outstanding was $9,000. The basis of his satisfaction then was the letter from KMN Accountants. He said he looked at the letter and verified that the payments had been made. The following was his explanation why he now thought it was necessary to undertake further investigations. The answer arose from a suggestion made to him that the statement in his earlier report was an exaggeration: Now you agree from what you have told me, that statement was somewhat of an exaggeration? … No, it is not an exaggeration. I looked at the letter, and I verified the payments that were made. However, there are other transactions there regarding journal entries and other entries to and fro that need further investigation. He said that he had had access to the journals before writing his report. In the context of being asked why he did not qualify the statement he made in the report about the debt he said the following: And was the uncertainty attending that debt apparent to you from what you saw in the journals? … No, further investigation as to the make up of those journals is required, but the debts could either be paid, or stock transferred, or by journal entries, and there are journal entries which correspond to the advice or the explanation given by the external accountants. Now the make up of those journals need to be investigated further. Vouris later said that when he wrote his administrator's report he was aware of the stock transfers he adverted to in this passage from his evidence.

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