David Hill & 1 Ors v David Hill Electrical Discounts P/L

Supreme Court of NSW|2001-04-09|Before: Electrical Discounts P, Santow J

INTRODUCTION 1 Can a liquidator investigate potential, unadmitted claims against himself as a deed administrator, under a recently terminated deed of company administration? In what circumstances may such a former deed administrator be liable for insolvent trading in that capacity? These are among the questions posed by the present application. It is brought by a director of the company previously under administration, for substitution of another liquidator. 2 The Plaintiffs have sought the removal of Mr de Vries as Liquidator of the First Defendant and to have the Court appoint another liquidator, doing so pursuant to ss445D, 447A and 503 of the Corporations Law. The circumstances are in broad terms that, following termination of a Deed of Company Arrangement of which Mr de Vries was Deed Administrator on 26 February 2001, itself pursuant to a meeting of creditors called by Mr de Vries, the Company went into liquidation pursuant to s445E of the Corporations Law. Pursuant to s446A(4) of the Corporations Law Mr de Vries automatically became Liquidator. 3 By a Second Amending Originating Process and on the facts alleged in the supporting affidavits, the Plaintiffs claimed "1. Declaration that the meeting purportedly convened by the second defendant on 26 February 2001 in relation to the affairs of the first defendant, was not duly convened under s445F of the Corporations Law having regard to: (a) failure to give notice to creditors as required by s445F(2)(a); (b) failure to publish notice of the meeting in accordance with s445F(2)(b); (c) failure to give appropriate notice of resolutions as required by s445F(3)(a) of the Corporations Law ; (d) the second defendant's failure to furnish creditors with any sufficient and appropriate information to enable the creditors to make an informed choice in relation to the subject matter of the meeting; (e) the misleading nature of the notice given to creditors; and (f) the provisions of clauses 12, 13 and 14 of the deed of company arrangement dated 21 April 1999. 2. An order under s445D of the Corporations Law terminating the deed of company arrangement dated 21 April 1999 between the first defendant and the second defendant. 3. An order that the first defendant be wound up in insolvency and that James Shaw or some other liquidator, be appointed liquidator of the first defendant. 4. Alternatively, orders to the same effect as those set out above under s447A of the Corporations Law . 5. An order under s503 of the Corporations Law that the second defendant be removed as liquidator of the first defendant. 6. An order under s503 of the Corporations Law that James Shaw or some other fit and proper person be appointed liquidator of the first defendant. 7. An order that the second defendant account to the first defendant for all assets property and funds of the first defendant which have come into the second defendant's control or custody since 25 February 2001. 7A. An order that the Second Defendant repay to the First Defendant, all amounts paid to himself from the First Defendant's funds on or after 26 February 2001. 8. An order that the second defendant pay the plaintiffs' and the first defendant's costs of these proceedings personally and without recourse to any assets of the first defendant. 9. Such further or other orders as to the court seems fit."

I should note that order 2 is only sought on the basis that the earlier termination of the Deed was invalid. But it is a conclusion that I have not reached on the material before me. 4 The matter returned to the Corporations List on 2 April 2001 when, by consent and without admissions, Mr James Shaw a liquidator was appointed under Pt 39 r7 Supreme Court Rules to report to the Court "on the conduct of Mr Antony de Vries in relation to the deed of company arrangement entered into by the first defendant dated 21 April 1999 and the subsequent winding up of the first defendant."

5 Paragraph 2 of those orders left it to Mr Shaw to examine matters he considered appropriate including but not limited to "(a) any failure by Mr de Vries to investigate the prospects for sale of the business of the company as a going concern resulting in loss to the company and creditors; (b) any failure by Mr de Vries to competently call the meeting of creditors and failure to discharge his duty to inform creditors of their options, causing the creditors to loose the opportunity to receive the benefit of the proposal being developed by Mr Hill; (c) any insolvent trading and/or fraudulent trading for which Mr de Vries may be liable; (d) any misappropriation of the company's funds by de Vries, contrary to the priorities set out in s556 of the Corporations Law."

6 Mr Shaw prepared a report with considerable expedition and which neither party in any way criticised dated 6 April 2001 (PX2). That report, in the short time allowed, did what the parties and the Court sought, namely dealt specifically with the matters in paragraphs (a) to (d) above. I deal with each in turn under the relevant headings.

Alleged failure to investigate prospects of sale 7 The report as to the matter in (a) above, while acknowledging that Mr Shaw had not obtained independent confirmation of Mr de Vries' explanation concluded (at 4): "We believe that Mr de Vries explanation not to offer the business for sale as a going concern is explainable." He gives reasons for that conclusion which run counter to what was put by the Plaintiffs. I have no reason to doubt what is said in the Report. 8 Thus in that respect there is no apparent basis for criticism of Mr de Vries. This is save insofar as it could be said that the failure to give sufficient notice of the meeting of creditors ((b) above), if avoided, would have led to a different outcome in terms of earlier opportunity to sell and the variation sought to the Deed by the Plaintiffs to facilitate this. There is, however, no sufficient basis for me to reach that conclusion, though in the nature of the present proceedings that matter could not be investigated fully.

Alleged failure to call the meeting of creditors competently 9 On the matter in (b) above, Mr Shaw concludes that Mr de Vries did in fact give inadequate notice of the meeting to creditors, foreshortening the notice required by some four days. The Plaintiffs complain that had the full notice been given there would have been opportunity to propose to creditors a variation to the Deed of Company Arrangement which would have permitted the liquidation to have been deferred and a better outcome for creditors achieved; see Mr Hill's affidavit of 17 March 2001, para 33, and Mr Head's affidavit of 18 March 2001, para 12. 10 That the company is insolvent to the extent identified by Mr Shaw makes that last proposition doubtful. But as I have said, no concluded view can be reached on the present state of the material nor do I need to. 11 Mr Shaw in relation to (b) above does conclude that Mr de Vries failed to discharge his duty to inform creditors of the consequences of liquidation. Thus he failed to inform creditors of their options, though he did not go on to conclude adversely to Mr de Vries that this caused creditors to lose any opportunity to receive the benefit of the proposal being developed by Mr Hill. That, as I have said, is not a matter that can be resolved nor need be. Nor is it the most serious criticism or one which warrants great concern.

Alleged potential liability of Mr de Vries for insolvent or fraudulent trading 12 The matter in paragraph (c) is the most serious criticism of Mr de Vries. The finding of Mr Shaw left open the question whether Mr de Vries as Deed Administrator was a "shadow director" by reason of his powers as Deed Administrator, within s9 of the Corporations Law. There "director" is defined to include someone "if they act in the position of a director" or "the directors of the company … are accustomed to act in accordance with the person's instructions or wishes". It is subject to the caveat that this extension does not apply "merely because the directors act on advice given by the persons business relationship with the directors of the company …" . 13 His powers as Deed Administrator are indeed considerable and are set out in clause 4 of the Deed of Company Arrangement of 21 April 1999. I quote the relevant provisions below: "4.1 During the term of this Deed the management of the business and affairs of the Company remain with the Directors but subject to the provisions of this Deed and the supervision of the Administrator. 4.2 In particular and until such time as these requirements are waived by the Administrator or the Committee: 4.2.1 the Company is to report on a daily basis to the Administrator as to its sales, receipts and bankings; 4.2.2 the Company is not to place any order for the purchase of stock without the written approval of the Administrator; 4.2.3 the Company is not to open any bank or deposit account with any financial institution nor make any withdrawals from any such account without the Administrators prior approval. 4.3 The Administrator is authorised to impose any other procedures as he considers necessary for the proper supervision of the Company's trading activities and the Company must comply with those procedures."

14 Clearly those powers are not ones contemplating mere advice. They require actual supervision of the management of the business of the company and also require decision making by the Deed Administrator in the most crucial areas of the company's business; that is, purchasing stock, opening any bank accounts and withdrawing from it. Prima facie that may well make Mr de Vries a shadow director assuming those powers were exercised. Indeed if they were not, Mr de Vries could well be delinquent in his duties as Deed Administrator. 15 Mr Shaw (at page 9 of his report) deals with the fact that insolvent trading appears to have occurred during the period that Mr de Vries was Deed Administrator. This had the outcome that, as at 26 February 2001, "the assets of the company are insufficient to pay all claims of creditors and that a deficiency of approximately $450,000 may arise." 16 Moreover, at page 10 and following he concludes "We also requested from Mr de Vries his estimate of the Company's financial position as at 26 February 2001. The estimate provided by Mr de Vries indicates that unpaid trade creditors as at that date relating to the Deed of Company Arrangement period total approximately $421,000. This amount is net of retention of title recoveries. The estimated position as at 26 February 2001 indicates that there will be no surplus funds available in the liquidation to pay these creditors and in fact there is a deficiency as at 26 February 2001 after allowing for payment of employees and deed administrators' fees. We are unsure as to the aging of the outstanding post Deed trade creditors and their terms of trade. We have not had sufficient time to prepare a detailed assessment of the Company's recent trading with a view to determining whether the Company has traded whilst insolvent. We believe that it is fair to say, however, that to have a deficiency of assets over liabilities as at 26 February 2001 of approximately $450,000 of which $421,000 is represented by post Deed trade creditors suggests that the Company has been allowed to trade whilst insolvent to the detriment of these post Deed trade creditors. We refer to our comments, above, that in our opinion Mr de Vries is not a Director of the Company and as such not liable for insolvent trading under Section 588G of the Corporations Law and in addition that he was entitled to be indemnified out of the assets of the Company pursuant to the Deed of Company Arrangement. We are concerned, however, that Mr de Vries may have been aware that the Company was having difficulty in paying trade creditors within terms as evidenced by the stop credit notices and as such we are of the view that Mr de Vries should have taken steps to quantify the Company's financial position and trading viability well before 19 February 2001 being the day on which his staff attended the Company's trading premises. If a review had been undertaken in October/November 2000 it is likely that the balance owing to post Deed trade creditors would have been substantially less. We believe that this is a matter to be taken up directly by the creditors with Mr de Vries. In the event that our assessment of the Law as it relates to Company Directors and Insolvent Trading above is incorrect and Mr de Vries is found to be subject to the insolvent trading provisions of the Corporations Law , we believe that Mr de Vries would have a conflict of interest in that he would be required as liquidator of the Company to investigate his own actions as Deed Administrator. In our opinion the Company has been allowed to trade whilst insolvent and the assessment of whether Mr de Vries as Deed Administrator may be liable for this insolvent trading is a question of law on which we do not propose to speculate further."

17 It will be apparent that Mr Shaw does not deal with the question of whether Mr de Vries was a shadow director, understandably in view of the complexity of matters he had to deal with in so short a time. 18 But important is the fact that during his watch as Deed Administrator and with the powers of supervision that he had, this state of affairs occurred. That is a serious matter. True it is that Mr Shaw states earlier that "the general direction and management of the business was the responsibility of Mr David Hill as director" (page 9), so that Mr David Hill may thus himself also be the subject of investigation in relation to insolvent trading. But that does not alter the fact that, according to Mr Shaw, Mr de Vries "authorised purchase orders, signed cheques and reviewed trading performance". 19 Clearly and one would have thought self-evidently, there is sufficient in the findings of Mr Shaw for there to be an urgent need for an impartial liquidator with no interest in the outcome to investigate whether action should be brought against Mr de Vries for insolvent trading. This would be either as a shadow director in relation to the claim alleged for insolvent trading, or as to the possibility of his breaching his fiduciary duty as administrator. Thus Butterworths Australian Corporations Law: Principles and Practice, para 5.3A.0330 conclude, correctly: "there can be no doubt that in combination with the statutory duties imposed on an administrator, the nature of the administrator's position is fiduciary in character"; see also recent unpublished paper of Austin J with Robert Brown "Tending to Sick Companies: the Role and Responsibilities of Voluntary Administrators", University of Melbourne seminar 16 March 2001. Finally, there is need to investigate whether liability would follow in circumstances where, by s9 of the Corporations Law, Mr de Vries is deemed "an officer" of the corporation and therefore subject to the duty of care and diligence in s180 of the Corporations Law. 20 In so concluding I do not express any view as to the outcome of such investigation. Nor as to the position of Mr David Hill as a director. What is sufficient in the context of Mr de Vries having to step aside as liquidator is that there would be an irreconcilable conflict between interest and duty for Mr de Vries in purporting to carry out that investigative function, whether or not prosecution follows. This would be as clear a case as one could find of a real, not just theoretical possibility of conflict; Advance Housing Pty Ltd (in liq) v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230 at 232-4 and even stronger than the circumstances which led Young J to order the removal of the liquidator in NAB Ltd & Ors v Market Holdings Pty Ltd (in liq) & Ors ([2001] NSWSC 253, 9 April 2001, unreported). Indeed it should have been apparent to Mr de Vries that such an irreconcilable conflict had arisen, if not before Mr Shaw's report then certainly after. He should then have retired from office without further contest. He could, if he so chose, have made crystal clear that it was without admissions and recording any statement that might be justified as to his own position.

Alleged misappropriation of company funds for Deed Administrator's remuneration 21 Finally, I deal with the matter in (d) above. Here Mr Shaw deals with the withdrawal by Mr de Vries of his remuneration on 26 March 2001 in the amount of $210,000. Mr Shaw deals with the matter in broad terms concluding that this is a legal issue about which he expresses no final view. "In summary, we believe that Mr de Vries has drawn his remuneration in accordance with the priorities set down in the Deed of Company Arrangement as well as the priorities set down by Section 556 of the Corporations Law in the event that they supersede the priorities of the Deed. This would not be the case, however, in the event that unpaid Deed trade creditors have priority over the remuneration of the Deed Administrator or Section 556(1)(dd) applies. In the event that these creditors were found to have priority, the Deed Administrator would have to refund the remuneration drawn for distribution on a pari passu basis to the unpaid Deed trade creditors. As outlined above, this is a legal issue."

22 Again, this is a matter for a liquidator with no interest in the outcome to investigate. There is again sufficient in Mr Shaw's analysis to have put Mr de Vries on notice that the matter warranted investigation by a non-conflicted liquidator, so that he should have retired without further contest. Again, in saying this I express no view as to the outcome of such investigation beyond that it warranted being carried out. Reference to misappropriation should in particular be understood as an allegation yet to be substantiated, though his entitlement to withdraw his remuneration in the circumstances should be investigated.

CONCLUSION 23 There is no basis whereby the replacement of Mr de Vries by Mr Shaw as liquidator could be resisted. That leads to the question of costs. 24 The Plaintiffs rely upon a letter dated 12 March 2001 (tab K of Exhibit A) and in particular the matter stated in paragraph 4. It is fair to say that some only of such matters have risen to the level where it can be said at this point that investigation is warranted; see in particular insolvent trading and breach of fiduciary duty as well as the subsequently ascertained payment of $210,000. 25 The letter from the Plaintiffs' solicitors states, "on any reading of the matter there will be the necessity for someone independent to consider priority issues and whether the company should commence legal proceedings against your client." At para 6 of that letter the Plaintiffs state "In the event your client indicates an intention to oppose the application we give you notice that our client will seek costs against your client on an indemnity basis, our client will make an urgent application tot he Court pursuant to section 503 of the Corporations Law and in the alternative seek an inquiry pursuant to section 536 of the Corporations Law. Furthermore our client will request that the Australian Securities and Investments commission also intervene in this matter."

26 Whilst the matter is close to the line I am satisfied that the exceptional exercise of the discretion to award indemnity costs should not be exercised where the Plaintiffs have not successfully established all of the causes of action requiring further investigation. Accordingly, I would award party and party costs.

ORDERS 27 (1) I make orders in terms of paragraphs 3, 5 and 6 of the Plaintiffs' Second Amending Originating Process on the basis that Mr James Shaw be appointed liquidator of the First Defendant such to take effect from the time that Mr de Vries resigns as liquidator and I note that he has conveyed his intention to resign through his counsel to-day at approximately 5 pm.

(2) I further order that the Second Defendant pay the Plaintiffs' and the First Defendant's costs of these proceedings personally and without recourse to any assets of the First Defendant.

(3) I further order that monies paid into court by the Plaintiffs' solicitors in the sum of $15,000 be released to the Plaintiff's solicitors.

Last Modified: 05/01/2001 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

CITATION : David Hill & 1 Ors v David Hill Electrical Discounts P/L (in Liq) & 1 Ors [2001] NSWSC 271 revised - 30/04/2001 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 1851/01 HEARING DATE(S) : 9 April 2001 JUDGMENT DATE : 9 April 2001

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