Crimmins v. Glenview Home Units Pty Ltd and Anor [2001] NSWSC 699

1 On 7 June 2001 the plaintiff ("Mrs Crimmins") filed an Originating Process seeking leave to continue District Court proceedings against the first defendant ("the Company") which was then under administration. On 27 June 2001 the Company was placed in liquidation and the second defendant ("Mr Holzman") was appointed liquidator. On 23 July 2001 Mrs Crimmins filed an Amended Originating Process in which she sought orders that the winding up of the Company be stayed, that Mr Holzman be removed as liquidator, a declaration that Mr Holzman had not been properly appointed as administrator of the Company, and orders for ancillary relief. 2 The matter came on for hearing before me on 13 August. On that day Mr Aitken, who appears for Mrs Crimmins, sought and was granted leave to file in Court a Further Amended Originating Process in which Mrs Crimmins sought an interlocutory and final order restraining the Company from selling the home unit building which it owns. The property is listed for sale by auction on 22 August. The hearing then proceeded as a hearing of the interlocutory application to restrain the sale. Further substantial evidence was filed in Court by the defendants and the deponents on both sides were cross examined. On the third day of the hearing, the parties agreed that the hearing would be treated as a final hearing of the plaintiff's Originating Process. 3 Accordingly, the issues before the Court are: whether the Company was properly placed in administration and is now properly in liquidation; if the answer to that question is no, whether in the present circumstances the winding up of the Company should be stayed and whether a permanent injunction should go restraining the proposed auction. 4 Because the auction is to be held within a few days, I have had to give judgment urgently and without as much time as I would have wished to reflect upon the important questions of law which have been raised in the course of the trial. 5 It will be necessary to set out some of the background to the matter and the facts and circumstances which have brought about the present proceedings. None of these facts are in dispute. 6 On 8 May 1958 the Company was incorporated to acquire and hold a home unit building at 696 Pacific Highway, Killara. There are nine units in the building. The right to exclusive use and occupation of a particular unit is conferred by the holding of a particular group of shares in the Company. The Company's Articles of Association are in the familiar form for a company title residential building. 7 In September 1991, Mrs Crimmins acquired Unit 6 in the building and she has lived there since then apart from a period of one year some time ago. Mrs Crimmins is a solicitor and is employed part-time by a city firm of solicitors. 8 In 1996 Mrs Crimmins commenced proceedings against the Company claiming certain rights over property of the Company. The proceedings were ultimately settled but the Court ordered that Mrs Crimmins pay 90% of the Company's costs of about $38,000. These costs were assessed but Mrs Crimmins paid only part of the amount so assessed. The Company commenced bankruptcy proceedings against her. Those proceedings were also compromised and Mrs Crimmins was required to pay the Company's costs. She has paid some of those costs but an amount of $10,000 remains outstanding. 9 In 1998 Mrs Crimmins commenced proceedings against the Company in the District Court claiming damages for personal injury which she alleges she suffered from a fall in her unit. She alleges that the Company was negligent in permitting water to enter her unit, as a result of which she slipped and fell. She claims, in addition, damages for diminution in the value of her unit, property damage, damages for use of what she claims to be her own car space, and exemplary damages. The Company's possible liability for personal injury and property damage is covered by an insurance policy, but liability for the other heads of damage is not within the policy. 10 Mrs Crimmins has refused to pay the balance of the Company's costs of the bankruptcy proceedings on the ground that she is entitled to set off against that debt the Company's liability to her as claimed in the District Court proceedings. The Company has incurred considerable expense in the continuing litigation with Mrs Crimmins. 11 It is now necessary to say something of the building owned by the Company and the other shareholders of the Company. As I have noted, the building was erected in 1958. It has fallen into major disrepair and substantial expenditure is required in order to rectify defects. I will return shortly to that matter in more detail. 12 All but three of the units in the building are occupied by the shareholders, who are mostly elderly ladies. The shareholders are: Mrs Mensch, a widow of about 75, in poor health; Mrs Simpson, a widow, who is retired; Mrs van Warmelo, a widow of 60, who works part-time as a teacher; Mrs Elsey, a widow, who is a pensioner; Mrs Freml, a widow in her 70s, who is a pensioner; Mrs Crimmins, who is 58; Mrs Graney, Ms Bright, Van Warm & Co., and Ms Wong. There is no evidence concerning the circumstances of the last three named shareholders. 13 The directors of the Company at all relevant times were Mrs Mensch, Mrs Simpson, Mrs Freml, Mrs Elsey, Mrs Graney, Ms Bright, Mrs van Warmelo, Mr Cox and Ms Chan. The last two named directors were nominees of shareholders. The Company secretary was Mr Vumbaca, who appears to have been active in managing the Company's affairs although not himself an owner and occupier of a unit in the building. Mr Vumbaca holds only a nominal shareholding. Mrs Crimmins resigned as a director some years ago. 14 In about 1995 the directors became aware that substantial defects in the building required rectification and major maintenance work was also required. Several reports were commissioned from builders and engineers. Mr Aitken does not dispute that major rectification work to the building was then necessary and remains necessary nor does he dispute the amounts already expended on such works and the amounts which have been estimated as necessary to expend on remaining work. I am therefore able to treat these matters in a fairly summary fashion. 15 In the years 1997 to 1999 the Company expended almost $92,000 on building work. This amount was raised from the shareholders by way of special levies in addition to the quarterly levies, totalling $20,000 per annum, which provided for ordinary ongoing outgoings and expenses. 16 An engineer's report dated 14 March 2000 detailed further work to be done on the building. None of that work has yet been done. It is apparent from a perusal of the reports that the building is in a very poor state. Amongst other problems, "concrete cancer" is extensive and spreading. It is obvious that if the repairs are not undertaken the building could well become unsafe for continued occupation. 17 The rectification work is divided into "urgent work" and "non-urgent work". The cost of doing "urgent work" which, it is said, should be done within twelve months, is approximately $45,000. Non-urgent but necessary work is estimated at approximately $61,000. The total cost of repairs which need to be done in the next two years is, accordingly, in the order of $100,000, calculated at present prices. The cost of the work will rise the longer it is left undone. These costs are, of course, in addition to the normal outgoings and expenses of the building which are presently paid by means of the quarterly levies. There is no "sinking fund" set aside for these repairs. 18 The undisputed evidence is that most of the shareholders are of very limited means and some are in straightened circumstances. Mrs Mensch, who was unable to give evidence due to ill health, is said to be in difficult financial circumstances and has to borrow money from her daughter-in-law for living expenses. Mrs Freml is a pensioner who has savings of only about $10,000. Mrs Elsey is a pensioner receiving a War Widow's Pension. She says that after the special levies totalling about $92,000 for 1997 to 1999 she cannot afford any more special levies. Mrs Simpson, who is retired, lives on income from her savings, which are about $20,000, a small annuity and some income from a trust. Since her savings produce her only income she cannot use them to pay any further special levies. Mrs van Warmelo works part-time as a teacher, earning about $10,000 per annum (before tax) and receiving a further $5,000 approximately from investments. She cannot afford to pay any further special levies. 19 Mrs Crimmins has been receiving a disability support pension since 1975, adjusted for fluctuations in income. Her nett weekly salary from part-time employment as a solicitor is $563. 20 Mrs Crimmins and Mrs Freml, who both wish to continue living in the building, say that despite their very limited means and income they are prepared to pay special levies to carry out the necessary work to the building. They have not given any particulars as to how they might be able to afford to do that. 21 The position which has been confronting the directors over the past three or four years and which confronted them when they resolved to appoint an administrator on 31 May 2000 may be summarised thus. 22 First, the building required very substantial repairs. Work done to date had exhausted or severely depleted the available funds of several of the shareholders. Most of the shareholders could not pay or were unwilling to pay further special levies to complete the work which needed to be done. The then estimate of the work was approximately $100,000. The remaining work, some of which was urgent, had to be done if the building was to continue to be habitable in the foreseeable future. If it was not done at all, the building would fall into dilapidation and would become unsafe. It is worthy of note that in her Statement of Claim in the District Court proceedings Mrs Crimmins herself claims that she suffered injury due to the negligence of the Company in failing to make her premises safe by carrying out "reasonable and timely maintenance of its building" and that she is claiming damage to her property by reason of the Company failing to carry out rectification work recommended in engineers' reports. 23 Second, in addition to the cost of repairs which had to be done, the Company had existing extraordinary liabilities which could not be discharged out of the normal quarterly levies. The Company was indebted to its solicitor, Ms Andrews, in a sum of $23,459, substantially in respect of legal costs incurred in the litigation with Mrs Crimmins. There were also outstanding an account for about $2,000 for plumbing work and claims against the Company for fencing work, totalling almost $3,000. 24 Third, the Company was facing the legal costs of the continuing litigation with Mrs Crimmins. Although some of the claims were covered by insurance, the remainder was not. The Company was therefore required to contribute to the cost of the litigation and was at risk of incurring an uninsured liability if Mrs Crimmins was successful. The further costs of the Company which would be payable in respect of its defence were estimated to be $50,000. If Mrs Crimmins were successful and the Company were ordered to pay her costs, an estimated further $60,000 would be payable. That evidence was not challenged. Those costs could not be paid out of ordinary levies. 25 Fourth, it would be impracticable, if not impossible, for the directors to discharge the Company's then existing liabilities and its anticipated liabilities by imposing special levies and, upon default in payment by any shareholder, exercising the Company's rights of lien and forfeiture over the shares of the defaulting shareholder pursuant to Articles 23 to 27, and then re-selling the defaulting shareholder's unit. There would be a dim prospect indeed of finding probably at least four and possibly as many as six purchasers for units in a dilapidated building, with substantial levies still to pay, and under the cloud of ongoing costly litigation with a shareholder. It would be highly likely that the special levy so imposed would remain unpaid. 26 Fifth, it was impossible for the Company to pay its existing liabilities, the costs of repairs and the further costs of litigation by means of a loan upon the security of the building. Enquiries had been made of Westpac to see if such a loan could be obtained. The directors had been informed that the principal and interest repayments for such a loan would double the existing outgoing ordinary levies. They came to the conclusion that it would be irresponsible to commit the Company to such a loan when many of its shareholders were unable to afford their contribution to the repayments. 27 All of these matters were frequently and anxiously discussed amongst the directors over some two years prior to May 2000. The discussions occurred not only in directors' meetings but in conversations between the directors in their day-to-day encounters as residents of the building. The directors sought professional advice about what to do. 28 The evidence shows that, at least from November 1999 onwards, the directors were receiving advice from Ms Andrews, their solicitor, and through her from experienced equity counsel. On 9 December 1999 the directors had a meeting with Mr Holzman, an accountant and experienced insolvency practitioner, and with Mr Fordyce, also a highly experienced insolvency solicitor. On 3 February 2000 Mr Holzman wrote to the board explaining that a company may be placed in voluntary administration "pursuant to a resolution by directors that the company is insolvent or likely to become insolvent in the near future" . The letter went on to explain at some length the effect of placing the Company in administration. 29 Ms Andrews' memorandum of fees dated 17 May 2000 reveals that between December 1999 and May 2000 she, Counsel, Mr Holzman and Mr Fordyce had frequent discussions with Mrs Simpson, who was acting on behalf of the directors, concerning the insolvency of the Company and possible administration. 30 Further, there is evidence that at various times in 1999 developers had expressed interest to the directors in acquiring the whole site for a price in the region of $2M, which would have returned to shareholders far more than they would have received from sales of their individual units. 31 On 31 May 2000 a meeting of directors was held at which were present Mrs Mensch, Mrs Simpson, Mrs Freml, Mrs Elsey, Mrs Graney, Ms Bright, Mrs van Warmelo, Mr Cox and Ms Chan. Mr Vambuca was appointed chairman. The minutes of the meeting record: "There were discussions concerning the present financial position of the company. Resolved that, in the opinion of the directors, the company is likely to become insolvent in the foreseeable future."

There is no vote recorded against that resolution. The directors then resolved to appoint Mr Holzman as administrator of the Company. Mrs Freml is recorded as having voted against that resolution. 32 On the same day the Company, by Deed, appointed Mr Holzman as administrator of the Company pursuant to s.436A of the Corporations Law . All directors other than Mrs Freml executed the Deed. 33 On 19 June 2000 Mr Holzman delivered his report to creditors pursuant to s.439A of the Law. In the report he advised that the assets of the Company comprised the building ($650,000 at cost) and cash at the bank of $5,375, and that the Company's creditors totalled approximately $30,000. 34 On 27 June 2000 a meeting of creditors of the Company took place pursuant to s.439B. Mr Holzman, who chaired the meeting, advised that the Company was unable to pay its debts as and when they fell due and recommended that the Company be placed in liquidation. The creditors so resolved. 35 Mrs Crimmins' case is that the appointment of Mr Holzman as administrator pursuant to s.436A was invalid, so that his appointment as liquidator pursuant to a resolution of creditors under s.439C(c) and in accordance with s.446A(4) is likewise invalid. Mr Aitken submits that the appointment of the administrator was invalid for a number of reasons. 36 In his opening, Mr Aitken foreshadowed a case that the directors had resolved to place the Company in administration for an improper purpose, namely, in order to circumvent the provisions of the Company's Articles relating to winding up so that they could effect a quick sale of the building to a developer. Mr Aitken in his final submissions conceded that, on the evidence, he could not make any suggestion of mala fides on the part of the directors in resolving as they did. That concession was, in my view, very properly and fairly made. 37 Mr Aitken's attack on the validity of the directors' resolution is that they did not in fact form an opinion, nor could they bona fide have formed an opinion, that the Company was likely to become insolvent at some future time. 38 First, he says that the directors, on 31 May 2000, had no idea of what insolvency meant and had no idea of what they were doing. Accordingly, in truth they held no opinion at all, he says, as to whether the Company was likely to become insolvent at some future time. 39 I cannot accept that submission. The directors who gave evidence, though elderly ladies of no demonstrated commercial experience, were all intelligent, educated people who, with respect, displayed a great deal of common sense and practical experience. Each of them said with great conviction that she believed that the Company's shareholders simply could not afford to pay further substantial special levies to discharge the Company's present debts to Ms Andrews and other small creditors, the further costs of litigation against Mrs Crimmins and the costs of repairing the building. 40 The directors all said, and I accept, that in those circumstances they did not see how the Company could pay its present debts and the liabilities which it had to incur. In addition to their own common sense views as to what solvency and insolvency entailed, they had the professional advice of insolvency experts from December 1999 to May 2000. 41 I am left in no doubt on the evidence that as at 31 May 2000 all directors of the Company properly appreciated that the test of the Company's solvency was its ability to pay its debts as they became payable. 42 Second, Mr Aitken submits that an administrator was appointed to the Company as a means of frustrating the litigation being prosecuted by Mrs Crimmins. In view of his earlier concession that there was no mala fides on the part of the directors, I was somewhat puzzled by this submission. However, such a suggestion was never put to any of the directors in cross examination and I cannot accept it. In any event, it is highly improbable. Proceedings against a company in administration may be continued with the leave of the Court, as the professional advisers of the company would have been well aware. 43 Third, Mr Aitken submits that the directors could not have formed a genuine view as to whether the Company would meet present and expected liabilities because they had not investigated as at 31 May 2000 the value of the building, the possibility of the Company being able to borrow on the security of the building, or the possibility of paying for present and expected liabilities by regular special levies of relatively small amounts. I assume that that submission was founded upon the principle that the test of insolvency is a company's ability to pay its debts as they become due out of the resources available to it: see Sandell v. Porter (1966) 115 CLR 666. 44 I cannot accept that submission. I am satisfied on the evidence that the directors were aware prior to May 2000 that the building had a market value in the region of $2M and that they did investigate a loan from Westpac on the security of the building. They came to the conclusion that the loan simply was not supportable by the Company, having regard to the inability of its shareholders to make the repayments. 45 As to imposing frequent small special levies, that would not have provided the Company with the immediate ability to pay existing creditors' debts totalling some $30,000, which were already payable, while undertaking liability for further rectification work in a substantial sum. The imposition of small levies presupposes that existing and future creditors would agree, in effect, to payments by instalments, in itself the hallmark of inability to pay debts as they fall due. If Mrs Crimmins had succeeded in her claim in the District Court against the Company, the directors must have had good reason to doubt that she would agree to an "easy terms" payment plan for the Company to satisfy the judgment debt. 46 Fourth, Mr Aitken submits that, for the purpose of forming an opinion under s.436A, it is not permissible for directors to take into account debts or liabilities which are neither actual nor contingent. He says that the cost of further repairs to the building was neither an actual debt nor a contingent debt. The directors could simply have resolved never to embark upon any of the repairs at all, for the reason that if they did so the Company would be unable to pay the debts thereby incurred. Because the directors clearly took into account liabilities which the Company was free never to incur, it follows, says Mr Aitken, that their opinion as to likely insolvency was fundamentally flawed and cannot stand. 47 There is no test prescribed in s.436A which assists a director as to what matters are to be taken into account in forming the opinion that a company is likely to become insolvent, nor as to how imminent insolvency should be before a director is justified in invoking the drastic remedy of administration. This is hardly surprising. The circumstances in which companies find themselves in difficulty and their prospects of financial survival or extinction are infinitely various. 48 Actual insolvency, as defined in s.95A of the Corporations Law , is a question of fact determined in all of the circumstances of the case, taking into account the commercial realities of the company's particular position: Sandell v. Porter (supra) at 670; Taylor v. ANZ Banking Group Ltd (1988) 6 ACLC 808, at 811; Re Newark Pty Ltd (In liq); Taylor v. Carroll (1991) 6 ACSR 255. 49 Likely insolvency is much more a matter of opinion upon which minds may differ. Some directors, more cautious and apprehensive than others, might conclude that insolvency is likely where other more robust colleagues may see no cause for alarm. It is for this reason that the only criterion for judging whether an opinion as to likely insolvency has properly been formed for the purposes of s.436A is whether that opinion has been formed genuinely and in good faith: see e.g. Kazar v. Duus 29 ACSR 321, at 333. 50 Clearly, determining whether an opinion as to likely insolvency has been genuinely formed involves both subjective and objective elements. The subjective element requires that the Court be satisfied that the requisite opinion is actually held by the director. The objective element requires that the Court be satisfied that a competent director in the position of the director concerned could reasonably have formed the opinion on the facts known to that director. These are familiar concepts, particularly in that area of the law concerned with insolvent trading and the question whether a director ought to have had a reasonable expectation that the company would be unable to pay its debts: see e.g. Shapowloff v. Dunn (1981) 148 CLR 72, at 85; 3M Australia Pty Ltd v. Kemish (1986) 10 ACLR 371, at 378; R e New World Alliance Pty Ltd; Sycotex v. Baseler (1994) 51 FCR 425. 51 However, it must be borne in mind that forming an opinion whether insolvency is "likely" for the purposes of s.436A does not involve the same test as determining whether reasonable grounds exist for suspecting that a company is insolvent or will become insolvent for the purposes of s.588G. The scope for forming an opinion of likely insolvency is very broad under s.436A. For example, a director may legitimately form the view that insolvency is likely ten years hence because the company's business is founded upon a particular technology which will be completely obsolete by that time and the company's business is already dwindling at such a rate that continuing liabilities will inevitably outstrip the company's ability to pay. Such a view would not, in itself, render the director liable under s.588G for a debt incurred by the company the day after that view was formed, but it may well justify the director in immediately invoking the aid of s.436A. 52 Because the realities as well as the legalities of a company's particular position must be taken into account in assessing likely insolvency, the liabilities which a director is entitled to consider include not only its actual or contingent debts but also those debts or liabilities which are actually foreseen as likely to be incurred. The degree of likelihood will, obviously, vary according to the circumstances. It would be inconsistent with the formation of a genuine opinion of likely insolvency if a director were to consider as likely a liability which reasonable and competent directors would consider fanciful. The likelihood of incurring a particular foreseen liability must be such that competent and reasonable directors would say that it will probably be incurred or that there is a real, not remote, chance of it being incurred, rather than that it is merely possible that it will be incurred: cf. ASC v. McLeod 34 ACSR 135, at 147. 53 In the present case, I have no doubt on the evidence that the directors were well justified in concluding that it was probable that the Company would be compelled to undertake substantial rectification work on the building in the fairly short term future and that substantial liabilities would thereby be incurred. The building simply could not be left to fall down about the ears of the shareholders. Whether the Council issued orders for rectification work to remedy unsafe premises or whether Ms Crimmins and other residents brought claims for personal injury suffered by reason of the state of the building, one way or another a substantial amount of work would have to be done. 54 I am satisfied that the chance that substantial liabilities would be incurred by the Company for rectification work was real, not remote, and that the chance that the Company would be unable to meet those liabilities was, likewise, real, not remote - even to the point of being highly probable. 55 In those circumstances, I am of the opinion that the directors properly took into account the cost of rectification work to the building in forming their opinion that the Company was likely to become insolvent at a future time. 56 Mr Aitken's final attack on the directors' resolution was that the directors failed to have regard to the object of a company administration as enunciated in s.435A. He says that the directors did not invoke the remedy of administration with a view to maximising the chances of the Company continuing in existence, and that because they failed to have regard to that object - indeed, because they were determined that the life of the Company be terminated - the formation of their resolution miscarried. 57 I do not think that s.435A, in expressing the object of Pt 5.3A, is intended to circumscribe the purposes for which administration of a company may properly be invoked. It is more of a guideline as to the circumstances in which that Part may be used. Section 435A does not limit an administrator's appointment to a case in which there is some prospect of the company being saved from liquidation. It may properly be called in aid where directors are of the view that it is not possible for a company to continue in existence but that a better return to creditors and members might result from administration rather than liquidation: Dallinger v. Halcha Holdings Pty Ltd (Administrator Appointed) (1995) 60 FCR 594, at 601. 58 The evidence shows that the directors were of the opinion that although the Company's continuing existence was doomed, there was a prospect that more would be realised for the shareholders from the sale of the building as a whole than by means of a piecemeal sale of units. The directors considered that the immediate appointment of an administrator was the best means of investigating whether that prospect could be turned into reality. The directors' purpose was therefore in accordance with the object expressed in s.435A(b), namely: "If it is not possible for the company or its business to continue in existence - [to procure a] better return for the company's creditors and members than would result from an immediate winding up of the company." 59 The plaintiff's attack on the validity of the directors' resolution to place the Company in administration therefore fails. I hold that the second defendant was validly appointed as administrator of the Company and that the liquidation of the Company should not be stayed. 60 The orders of the Court are: (1) The plaintiff's claims in paragraphs 1A to 4 of the Further Amended Originating Process are dismissed.

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