According to Mr Donovan, he told Mr Carpenter that "the ATO and Thomas would like to hear that", and at that point he could hear Mr Fordyce calling out to Mr Carpenter over the phone, saying "Cliff, Cliff".
24 Mr Donovan was cross-examined and I saw no reason for doubting his truthfulness or his recollection of what was said that the meeting. For reasons I shall explain, I prefer his evidence to the evidence of Mr Carpenter.
25 After the discussion ended, the motions were put to the meeting and each of them was defeated, with eight votes against and for votes in favour.
26 As I have said, Mr Carpenter's application, currently before the Court, was filed on 5 December 2002. By March 2003 Mr Thomas had received an offer in principle from the Bank to fund the conduct of proceedings against Mr Carpenter and related entities, as contemplated in the s 588FF(3) application. As a creditor of the Company, the Bank would be entitled to make an application under s 564 in respect of any property recovered in proceedings funded under indemnity arrangements between the Bank and the liquidator. Mr Thomas decided that the other creditors should be given the opportunity to participate in the funding arrangements so as to place themselves in the position of being able to join in an application under s 564. He therefore issued a circular to all known creditors inviting them to join in any funding proposal on a pro-rata basis. To date four other creditors have signed and returned the "Indication Statement" attached to Mr Thomas's circular.
27 Mr Thomas gave evidence, which I accept, that the initial draft funding agreement prepared on behalf of the Bank was rejected by him, and there was a period of negotiation as to the terms of the proposed funding. He has provided evidence of his negotiations which appear to me to raise reasonable issues, on most of which Mr Thomas was successful.
28 By 30 May 2003 Mr Thomas had finalised the details of the funding agreement between himself as liquidator, and the Bank and other participating creditors. He had signed the agreement and therefore had access to funds to pursue proceedings against Mr Carpenter and his related entities. Mr Thomas commenced two proceedings in the District Court by statements of liquidated claim, Nos 1842 and 1843 of 2003. Mr Thomas candidly admitted to the Court that he conducted no investigations of the claims (apart from the examinations some time ago) before commencing the proceedings, pointing out that until very recently he had no funds and the claims had been under consideration since the time when the former liquidators were in office.
29 In the first proceeding the Company and Mr Thomas as co-plaintiffs claim $580,989 against Domino Hire and Mr Carpenter as defendants, alleging that in May 1999 the Company transferred various items of mining equipment to Domino Hire without consideration at a time when the Company was insolvent. The statement of claim alleges that the transaction constituted an uncommercial transaction or an unfair preference voidable under Part 5.7B. The claim against Mr Carpenter is that as a director of the Company at the time of the transaction, he breached his fiduciary duties by preferring his own interest and failing to act in the interests of the Company in respect of the transaction.
30 In the second proceeding the Company and Mr Thomas as co-plaintiffs claim $115,657.26 against Merlo Wholesale Pty Ltd and Mr Carpenter as defendants, alleging that in May 1999 the Company agreed to buy equipment from Merlo Wholesale at an over-value for on-sale to the Australian Army, and subsequently made payment under that agreement. It appears that this is an uncommercial transaction claim under s 588FB, although the pleading is quite abbreviated. The claim against Mr Carpenter is that, while a director of the Company, he acted in breach of his fiduciary duties to avoid conflict of interest and not to prefer his own interests to the interests of the Company.
31 The funding agreement with the Bank makes provision for advances to be made under drawdown arrangements up to a facility limit defined in the agreement, to fund four legal proceedings against Mr Carpenter and his related entities, including the two that have already been commenced. Interest will accrue on each advance on a daily basis from the relevant drawdown date at the Bank's reference rate plus 2 percent per annum. The proceeds of recovery are to be dispersed in an order of priority set out in clause 6.2 of the agreement. The liquidator has first priority in respect of outstanding costs and expenses, then the Bank and any other funder of the proceedings have priority to repayment of funds advanced, pari passu. The Bank's claim to payment of interest is deferred to the claims of priority creditors under Part 5.6 of the Corporations Act. Clause 6.6 of the agreement provides that nothing in it prevents the Bank from making an application under s 564. There are provisions which give the Bank the opportunity to review the progress of legal proceedings, and for the Bank to approve any change of the solicitors acting in the proceedings. One of the events of default under the agreement is for the liquidator to cease to act as liquidator and be replaced by someone not acceptable to the Bank (clause 14.1 (b)). The agreement also provides for the Bank to pay the outstanding legal costs of Mr Thomas, and $8000 to him on account of his accrued remuneration.
32 The funding agreement is quite different from the litigation funding agreements often encountered in proceedings in the Corporations List of this Court. Typically those agreements make provision for the litigation funder to take a substantial percentage share of any recoveries in the litigation. But this is quite a different commercial situation. This is a case of a creditor, having an interest in recovering the balance of its existing debt, and having various entitlements including an entitlement under s 564. This is not funding agreement with a third party. In his submissions Mr Fordyce described the agreement as extraordinary, while counsel for Mr Thomas said that it was normal in circumstances such as these. The truth is that there is no evidence before me of any practice from which I could conclude that this agreement is or is not usual. On its face and on the evidence, it appears to be a commercial agreement negotiated on an arms' length basis between parties separately represented. It is not necessary or even relevant for me to say whether it is or is not usual.
33 In his evidence Mr Thomas pointed out that at his insistence, the terms of the funding agreement allow him to continue to investigate, and to instigate, any claim that the Company may have against the Bank, although of course another source of funding would have to be found.
34 Mr Thomas gave evidence that after his appointment, his then solicitors had a number of meetings and telephone conversations with Mr Carpenter and Mr Fordyce concerning the claim against the Bank. Mr Fordyce said that he had received "oral advice" from unidentified counsel to the effect that the company had a good claim against the Bank. Since that time Mr Thomas has repeatedly requested in correspondence that the oral advice be committed to writing and a copy supplied to his office. That has never happened. Mr Carpenter gave evidence that he could not afford to do so. However, Mr Thomas has received a copy of a brief to counsel and advice by Mr N. Perram of counsel, supplied to Mr Fordyce. Mr Perram's written advice dated 13 March 2002 is in evidence. It is advice on the measure of damages recoverable by the Company in proceedings against the Bank and in particular, whether a claim for reinstatement of the Company's business is available.
35 In paragraph 6 of the advice, Mr Perram says:
"I have been asked to assume that there were no events of default by Pioneer under any of the loan and security documentation and that, in particular, the Bank acted wrongly in appointing the administrators in the first place."
36 Of course, that assumption makes Mr Perram's advice, learned and valuable though it is, of no use whatever to a liquidator wishing to assess the prospects of success of the Company's claim against the Bank.
37 Mr Thomas's evidence is that, after taking advice from his solicitors, he is not satisfied that reasonable grounds exist for making any claim against the Bank. However, he is willing to institute action against the Bank if he is satisfied that a reasonable claim can be made, and if he is provided with adequate sources of funding for any such action. As he points out, the source of funds could be from one or more creditors, or from a litigation funder. It was submitted to me, plausibly, that if positive and encouraging written advice were provided by experienced counsel who had been properly briefed, litigation funding would not be difficult to procure.
38 Although the deed proposal has evolved and taken shape over time, the current draft is in evidence. The parties are the Company, Mr Palmer and Mr Thomas. Under the terms of the draft deed:
· Mr Palmer would be the administrator until termination of the deed, or resignation;
· Mr Thomas as liquidator would give his written approval to the administrator to exercise the powers, duties and functions allocated to the administrator under the deed;
· Mr Thomas would agree that he would not take any further step in the winding up of the Company while the deed remained operative, and would support any application by the administrator to terminate the winding up of the Company;
· the administrator would undertake examinations under s 596B to enable him to advance his consideration of whether there are causes of action available to the Company against the Bank or PricewaterhouseCoopers;
· the control of the Company would revert to its directors upon execution of the deed, subject to the administrator's function in conducting examinations;
· a fund would be constituted, comprising an amount not specified in the draft (but according to other evidence, $85,000) plus 5 percent of any net recovery from the litigation against the Bank and/or PricewaterhouseCoopers, subject to the limit that no Participating Creditor or Employee would receive more than 100 cents in the dollar in respect of their admitted claims;
· provisions of the deed would have the effect that Mr Fordyce, or such other legal representative as would be agreed by Mr Carpenter, would be the solicitor in any proceedings against the Bank or PricewaterhouseCoopers;
· the fund would be distributed to pay "Employee Entitlements" (restricted by the definition to annual leave and long service leave entitlements) as the first priority, and then the claims of "Participating Creditors" (defined to exclude Employee Entitlements, the Bank and the Non-Participating Creditors, namely Mr Carpenter, Retreat and Domino Hire);
· claims against the Company would be extinguished upon termination of the deed by performance;
· the Bank would receive a dividend of $4000;
· the costs of Mr Thomas as liquidator, capped at $16,800, would be paid within 14 days of execution of the deed.
39 Mr Fordyce informed me from the bar table that his firm holds $85,000 in trust for Retreat. He said that Retreat had provided that money to constitute the fund under the deed, if the deed is propounded and supported by creditors. As far as I can see, the draft deed does not in terms limit the Employee Entitlements, as regards the initial fund of $85,000, to 50 cents in the dollar; nor does it limit the entitlement of unsecured creditors as regards that fund to 10 cents in the dollar. However, Mr Carpenter has given evidence, as the person wanting to put forward the proposal, that this would be the case.
40 Mr Thomas has not indicated that he is willing to execute the draft deed or carry out the functions it purports to allocate to him. Mr Fordyce has taken the view that there is a legal problem in binding Mr Thomas to the terms of the proposed deed, having regard to ss 82A and 444G of the Corporations Act. Under the latter provision, a deed of company arrangement binds the officers of the company. However, the definition of "officer" in s 82A excludes a liquidator appointed by a court. As I have said, this is a voluntary winding up after a period of administration, in which the Court has made an order removing the initial liquidators and appointing Mr Thomas under s 503. If, in those circumstances, Mr Thomas is a "liquidator appointed by a court" for the purposes of s 82A, although not a liquidator appointed in a winding up by a court, there may be some difficulty (according to Mr Fordyce) in binding him to the proposed deed, even if he executed it. In the view that I take of the case, it is not necessary for me to express an opinion upon Mr Fordyce's analysis, and I would prefer not to do so because this part of the case has not been contested in submissions.
41 It is because of Mr Fordyce's analysis of these sections that the application seeks orders replacing Mr Thomas with Mr Palmer, and then empowering Mr Palmer to appoint himself as administrator. It appears to be contemplated that Mr Palmer, in his capacity as liquidator, would commit himself to the matters contemplated as obligations of a liquidator under the deed, and in particular, he would not continue to prosecute the claims against Mr Carpenter and his related entities in the District Court while the deed was in operation.
42 Mr Thomas gave evidence of his present attitude to the deed proposal. He said that until late last year, he was not in a position to initiate proceedings against Mr Carpenter and his related entities, although it was his view that reasonable claims existed. Prior to obtaining funding support from the Bank, his opinion was that it was probably in the interests of the creditors to allow the proposed deed of company arrangement to be submitted to them, because in the absence of funding for the legal actions, the offer of payment to creditors pursuant to the deed proposal (50 cents in the dollar to employees in respect of their holiday and long service leave claims, and 10 cents in the dollar for other unsecured creditors, excluding the Bank and related parties) would be likely to produce a better return than if the company were to remain in liquidation without funds. However, now that he has secured funding with the Bank and other creditors, his opinion is that the interests of creditors are better served by the institution and prosecution of the legal proceedings against Mr Carpenter and his related entities, rather than by the deed proposal. He has reached this conclusion on the basis that if the deed proposal were implemented, none of the actions against Mr Carpenter and his related companies would be taken.
43 In reaching his opinion, Mr Thomas has considered an assertion by Mr Fordyce that the commencement of proceedings against Mr Carpenter and his related entities cannot be in the interests of creditors because Mr Carpenter does not have assets against which any judgment could be enforced, and the companies' assets are subject to secured claims. He said this in response:
"In my experience as an Official Liquidator and Bankruptcy Trustee, persons against whom claims are foreshadowed do not always voluntarily disclose their true financial position."
44 Mr Thomas was cross-examined. He made a favourable impression on me in the witness box. His evidence seemed to me to be considered, frank and pertinent. I regard him as a witness of truth. His own counsel described him as "flinty", with a great deal of practical experience. That accords with my assessment of him.
45 Mr Carpenter provided three affidavits and was cross-examined. He said that he has had one brief meeting with Mr Palmer, whom he had never previously met, but having met him, the proposed deed would be conditional on Mr Palmer being the liquidator and administrator of the Company. He explained that on the basis of his experience with Mr Thomas, he lacked confidence in the impartiality of Mr Thomas where the Bank was concerned, and therefore no deed of company arrangement would be put forward by him if Mr Thomas remained as liquidator. He added that, according to his perception, Mr Thomas's former solicitors were not keen to bring any action against the Bank, because they had the National Australia Bank as one of their principal clients, and would be reluctant to be seen to be taking legal proceedings against another Bank in matters such as this. He said that the effect of not appointing Mr Palmer as liquidator, with power to appoint himself as administrator, would be to deny the creditors the opportunity to consider the deed and thwart any prospect of the proposed examination of officers of the Bank and any subsequent litigation against the Bank. Mr Carpenter said he believed that the Bank, in offering to fund Mr Thomas to bring proceedings against him and his related entities, was aiming to stifle the proposed deed of company arrangement and the contemplated proceedings against the Bank. I accept this evidence as an account of Mr Carpenter's state of mind, but for reasons I shall give, I find that there is no basis for Mr Carpenter to question the impartiality of Mr Thomas. The evidence does not enable me to make any finding about the motivation of the Bank, but it is unnecessary for me to do so since, in the circumstances, there is no reason why the Bank should not pursue what it perceives to be its commercial interests.
46 Mr Carpenter gave evidence of his financial circumstances. He said he had no assets of any significant other than life insurance policies. In 1996 he had disclosed to the Bank that he had an interest in a vacant block of land, but that land was disposed of in about March 1999. He had also disclosed to the Bank at that time that he had a superannuation fund, but in his evidence to the Court he said that the superannuation fund had been cashed in and he was living off the proceeds. Nevertheless he said that the funds for the proposed deed were being provided through Retreat and he added:
"I will provide whatever further monies are required for the purposes of the deed …".
Mr Carpenter said that Mr Thomas had not asked him for any evidence about his financial circumstances, or the financial circumstances of Domino Hire.
47 Mr Carpenter has given evidence which is designed to explain the transactions in respect of which Mr Thomas has taken District Court proceedings or contemplated commencement of proceedings. Mr Carpenter's assertions are for the most part uncorroborated, and Mr Thomas has not replied to them. I am not in a position to take even a prima facie position as to whether the explanations offered by Mr Carpenter will provide defences or cross claims in the liquidator's proceedings. That being so, it is unnecessary for me to set out his evidence on these matters.
48 Mr Carpenter was cross-examined. Counsel for Mr Thomas invited me to find that Mr Carpenter was a witness not to be believed, except the extent that his evidence was externally corroborated. It is unnecessary for me to make a finding adverse to Mr Carpenter's credibility on a general basis. However, I have decided not to believe certain parts of this evidence, which I shall specify.
49 Mr Carpenter said in one of his affidavits that he had no assets other than insurance policies and was living off the proceeds of superannuation. His income tax return for the year to 30 June 2002 showed an income of $5000. To the extent that this evidence was given in order to create the impression that Mr Carpenter would have no access to any funds to meet any judgment against him, it was misleading evidence, in my opinion.
50 It emerged in cross-examination that Mr Carpenter controlled companies in which there were assets to which he had access (by, for example, deciding whether these companies would pay dividends or directors' fees). He said that the proceeds of the superannuation fund, an amount of $162,000, which he received in December 2002 were paid to the Carpenter Family Trust, to which he was indebted. He said that he lived from day to day by drawing upon his MasterCard account which was paid by the trust company, which debited the payment to his loan account. This information was not disclosed in his affidavits and yet it is, in my view, relevant to the practical prospects of recovery under any judgment against him.
51 Mr Carpenter provided a "position statement" to the Bank dated 1 December 1995, apparently in connection with his giving a guarantee to support the liability of the Company to the Bank. In that document he said he had no assets apart from superannuation and life policies. He also made the following statement:
"However, I do have effective control over Retreat Pty Ltd and I do have management control over the Domino group. Further, as a Chartered Accountant and former State Chairman and also as a person who at earlier times in my career acted as a director of numerous public companies, was a Registered Trustee in Bankruptcy and Court Liquidator, I submit that I would go a long way to protect and preserve my financial integrity and that of the group of companies owned, controlled and managed by myself and my family."
52 After prolonged questioning in cross-examination, Mr Carpenter said this passage meant that he would use his "influence" to protect his good name if and when the occasion should arise, and that he controlled entities that would enable him to pay his debts if he could.
53 This leads to the conclusion that, although Mr Carpenter's evidence was not internally consistent, Mr Thomas's pragmatic assessment that there was some prospect of recovery of any judgment obtained against Mr Carpenter is in fact supported by Mr Carpenter's own evidence. In my opinion that conclusion is supported by other evidence, including the fact that Mr Carpenter has procured Retreat to pay $85,000 into Mr Fordyce's trust account, and the statements Mr Carpenter made at the meeting of 6 November 2002, deposed to by Mr Donovan. I have decided to prefer the evidence of Mr Donovan to the evidence of Mr Carpenter as to what was said at the meeting, because Mr Donovan's evidence is more disinterested and accords with other evidence, (including the contents of the "position statement", and Mr Carpenter's evidence that he controlled Retreat and the companies in the Domino group).
54 In cross-examination Mr Carpenter was pressed as to why he did not arrange for counsel's oral advice on the company's prospects of success against the Bank to be committed to writing. He said at first that counsel was a busy man, who was going to give some notes after the meeting, but they were not forthcoming and were never pursued. Later he said that counsel was not asked to put his views in writing because Mr Carpenter could not afford to do so, and he added "I have to watch how I spend my money". That evidence may be literally true, but it is nevertheless misleading because it implies that there were no funds available to engage counsel to produce written advice.
55 I find it implausible that Mr Carpenter, though able to procure $85,000 for the purposes of the proposed deed, in circumstances where the deed contemplated that he would procure additional very substantial funding for major proceedings against the Bank, was not able to find the money to engage counsel to convert an advice in conference to a written advice. If counsel had been properly briefed to advise in conference, the additional cost of procuring a written advice should not have been extensive. If there were to be a major cost involved in procuring written advice, the obvious implication would be that counsel had not been properly briefed for the advice in conference, which would therefore have been rendered of little or no utility.
56 I turn now to consider whether, in light of these findings of fact, the applicant Mr Carpenter is entitled to the relief that he seeks.