Earth Loop Pty Ltd v AIAN Investments Pty Ltd

Background facts 2The hospital operated by PPH is a private healthcare facility within the meaning of the Private Health Facilities Act 2007 (NSW). It operates under that Act pursuant to a licence which was most recently issued on 11 March 2011. Under the licence, the hospital is permitted to treat up to 45 patients in 30 wards. 3Although PPH is not part of the MHC group, PPH shares services with hospitals in the group and purchases supplies in combination with those hospitals. MHS and MHC invoice PPH for its share of the services and supplies provided to it. The services include some IT services, about which I will say more shortly. 4Until recently, the hospital was managed by a full time hospital director ( HD ), who, according to Dr Landa, is normally a registered nurse. The most recent HD was Mr Shane Booth (who was a registered nurse). Mr Booth resigned from his position on 3 September 2010. Since that time, Mr Dillon and Dr Pannu have been involved in the management of the hospital. It appears that Mr Dillon is a consultant or employee of the MHC group. He was previously a partner of KPMG. Dr Pannu has acted as the chief medical officer of PPH for approximately the past 6 years. The evidence suggests that he also acts as chief medical officer at Holroyd Private Hospital, which is another hospital in which MHS has an interest. 5Section 37 of the Private Health Facilities Act 2007 provides that the licensee of a private health facility must ensure that a registered nurse is appointed as a director of nursing of the facility. Mr Ben Goldsbrough currently holds that position. Section 39 of the Act also requires the licensee to appoint a medical advisory committee consisting of at least 5 medical practitioners and such other health practitioners as the licensee considers appropriate. PPH has a medical advisory committee which meets quarterly. 6PPH also has a financial controller. That position is occupied by Mr Alisten Joseph who has been in that position for approximately 2 years. The hospital also obviously employs a number of other staff including Ms Cathy Donnelly, who is a senior nurse who has, on occasions, filled the role of acting HD. 7There is a question of how Mr Dillon became involved in the management of the hospital. According to Mr Dillon, he attended a meeting with Dr Landa, Dr Pannu and Mr Booth in September 2010 at which Dr Landa said words to him to the effect that following Mr Booth's resignation he (Mr Dillon) and Dr Pannu would be in charge of the hospital. Since that time they both have sometimes been described as "acting HD". 8Whatever Dr Landa's initial position, he now objects to the involvement of Mr Dillon in the management of the hospital. In an affidavit, he describes the appointment of Mr Dillon and Dr Pannu as MHC unilaterally taking over the management control of PPH; and, although the evidence is not clear, it appears that this, in part at least, is the cause of the breakdown in the relationship between Dr Landa and Dr Wenkart. In addition, Dr Landa says that, over a period of time, he has been seeking a replacement HD but that each of his suggestions has been rejected by Dr Wenkart. One of those suggestions was Ms Donnelly. 9A dispute has also arisen concerning the provision of IT services to the hospital. MHS engaged a company known as Meditech Australia Pty Ltd to provide a suite of computer based software programs to a number of hospitals in which MHS has an interest including the hospital operated by Drummoyne. In addition, as I have said, MHS arranges for the supply of some IT services to PPH and other hospitals in which it has an interest. 10Dr Landa has queried a number of invoices relating to services provided by Meditech and has refused to authorise their payment. He says that PPH has received no benefit from Meditech, that the Meditech system is not operational and that it has been abandoned by PPH and that Dr Wenkart has failed to provide any explanation for why PPH is obliged to pay a proportion of those invoices. Dr Landa has also queried a number of other invoices, including those relating to the services provided by Mr Dillon. MHS, on the other hand, points to the minutes of a directors meeting of MHS on 11 June 2010, at which Dr Landa attended, which record the following: Meditech contract signed on the 14 April 2010 with $670k. This cost will be shared by 5 hospitals equally ... 11In response to Dr Landa's refusal to authorise the payment of a number of MHS and MHC invoices, services provided to PPH which were essential for the functioning of its IT systems were cut off at 12.00 pm on 8 November 2011. As a result, PPH had very limited access to its IT services. Although the hospital was able to continue to function, what happened no doubt caused a great deal of inconvenience. Precisely how the services came to be cut off is a matter of dispute, although, on the evidence before me, there is at least a reasonable basis for inferring that it was the result of a decision taken by MHS. The services were restored 10 days later following the commencement of these proceedings and a letter from the Ministry of Health expressing concerns that the reduced IT services may impact adversely on patient safety at the hospital. 12It also appears that Dr Wenkart has refused to authorise the payment of Mr Joseph's invoices. 13On 11 July 2011, Mr Flick, Dr Landa's solicitor, wrote to Dr Wenkart proposing that there be a formal board meeting of both Nugisi and PPH to deal with various outstanding issues, including the appointment of the HD and to deal with various other staffing issues. Dr Wenkart replied to that email stating that it was a very good idea, but that he was extremely busy and that the meeting should be scheduled "for my return after the 10 August". 14There was various other correspondence concerning the meeting which Dr Landa, in an affidavit sworn by him, seeks to characterise as a refusal by Dr Wenkart to attend the meeting. In any event, the meeting was held on 18 October 2011. The day before the meeting, MHS and companies associated with it sent letters of demand to PPH and Nugisi demanding the payment of money said to be owed by them. The amounts claimed were: MHS (from PPH) $653,436.75 MHS (from Nugisi) $303,672.20 MHC (from PPH) $44,717.39 Manly Waters Private Hospital (from PPH) $2,000.00 Hapday Holdings (from PPH) $5,498.05

15Immediately before the meeting, Dr Wenkart provided Dr Landa with written "resolutions to put to the meeting". The resolutions included resolutions that PPH and Nugisi pay the amounts claimed by MHS and associated companies, that Mr Dillon and Dr Pannu "continue in their joint management roles as acting Hospital Director with Mr Dillon being primarily responsible for non clinical matters and Dr Pannu for clinical matters", that the "acting HDs ... continue to take steps to recruit a full time, appropriately qualified Hospital Director, whose appointment is to be authorised by the Board." A large number of other resolutions were proposed relating to the management of the hospital and other matters that had been the subject of dispute. 16Nothing was agreed at the meeting. Immediately after it, Dr Wenkart wrote to Dr Landa. In that letter, Dr Wenkart made the following proposals:

1. We press ahead with the recruitment and appointment of a replacement full time Hospital Director with the appropriate credentials and experience. This should be dealt with directly by the Directors and not involve staff or resources at PPH nor Ben Dillon and Dr Pannu. This should be our priority action as the appointment of the new Hospital Director will likely resolve or lead to the resolution of the majority of the outstanding matters brought to the Board. I hope so.
2. The current management team to continue operating the business together, pending the appointment of the new Hospital Director. Our differences here as to Ben Dillon, Cathy Donnelly and Dr Pannu will have to continue until we appoint the new Hospital Director. Our directions to the management team will continue to be minuted in the SMMs and they are to perform their allocated tasks as documented. Their day to day tasks will continue as per their existing job descriptions and roles.
3. The outstanding invoices for services (related party and independent) be confirmed by Alisten Joseph as real costs to PPH as booked in the PPH accounts, and so payment can be made upon Alisten Joseph's confirmation. This must be ongoing.
4. Tidy up the nursing arrangements regarding pay and conditions as per the February 2011 IFA plans. Both of us to agree on the final arrangements to be offered.
5. We, as Directors acting for the benefit of PPH as a whole, to support timely payment of legitimate services provided to the hospital for the continuance of its operations so as to ensure the safety of our patients, and compliance with our obligations as a licensed private healthcare facility irrespective of their source.
6. The Company Secretary to be directed to arrange for the signoff by the Directors of the annual accounts for 2010 and 2011 years and the recovery of the missing company records for safe storage at the registered office, to be accessible by both Directors. Dr Wenkart went on to say that "I will support a combined package of remedies only and I am not prepared to have only some of the proposals cherry picked." 17Mr Flick replied to that letter in an undated letter that appears to have been sent in early November. The reply principally took issue with the first two matters raised in Dr Wenkart's letter. Mr Flick indicated that Dr Landa agreed that it was essential to press ahead with the recruitment of a new HD. However, Dr Landa objected to the fact that PPH resources could not be used for that purpose and Dr Wenkart would not agree to the use of external recruiters. Dr Landa also objected to the continuation of the existing management pending the appointment of a new HD.

Should a provisional liquidator be appointed? 18The principles that apply to the appointment of a provisional liquidator are similar to those that apply to the granting of other interlocutory relief. The plaintiff must establish that there is a serious question to be tried and that the balance of convenience favours the granting of the relief sought. However, the appointment of a provisional liquidator is a "drastic" step which should only be taken with caution: Earth Loop Pty Ltd v AIAN Investments Pty Ltd [2008] NSWSC 1042 at [22] per Barrett J. As Brereton J explained in Grace v Grace [2007] NSWSC 6 at [29]: Thus, while the circumstances in which a provisional liquidator will be appointed are infinite and there is a wide discretion, such an appointment involves the taking of a serious step and requires the exercise of very great care, and the decision whether the court should take the serious step of awarding a judicial remedy of a wholly extraordinary nature by way of drastic intrusion into the affairs of the defendants, is usually approached - in a manner broadly analogous to that applicable to other forms of interim preservation, such as an application for the appointment of an interim receiver or an interlocutory injunction - by reference to two main questions: first, whether there are good prospects of the plaintiff obtaining a winding up order; and, secondly, whether, having regard to the whole of the circumstances and in particular the measures already in place, the assets of the company are in jeopardy such that they need to be put under the protection of a provisional liquidator pending trial ... 19There is a real question whether Drummoyne is entitled to any relief under s 233 of the Act. Drummoyne is not a shareholder in PPH. Under s 234 relevantly only a member of the company can make an application for relief under s 233. Consequently, Drummoyne is not entitled to any relief against PPH. 20Drummoyne is a member of Nugisi. However, Nugisi, which is owned equally by Drummoyne and MHS, is only a holding company and does not trade. It is difficult in those circumstances to see how its affairs have been conducted contrary to the interests of the members as a whole or oppressively within the meaning of s 232 of the Act so as to attract the remedies set out in s 233. There are difficulties in saying that the affairs of a company have been conducted oppressively or contrary to the interests of members as a whole when there are only two shareholders of equal strength: see Tomanovic v Global Mortgage Equity Corporation Pty Ltd [2011] NSWCA 104 at [321] per Young JA. Those difficulties are compounded when the company itself does not do anything other than hold shares in another company. 21Section 461 of the Act permits the court to order the winding up of a company if, among other things, "the court is of opinion that it is just and equitable that the company be wound up". Section 462(2) provides that the following may apply for an order to wind up a company under s 461: (a) the company; or (b) a creditor (including a contingent or prospective creditor) of the company; or (c) contributory; or (d) the liquidator of the company; or (e) ... 22Again, it is far from clear that Drummoyne has standing to apply for an order under s 461 in relation to PPH. On the other hand, it is at least arguable that Drummoyne has standing to make an application to wind up Nugisi on the basis that Nugisi is a quasi partnership between Drummoyne and MHS through which they own PPH and that the relationship has broken down between them to the point where it is appropriate that Nugisi be wound up. 23However, in my opinion, this is not an appropriate case for the appointment of a provisional liquidator. The evidence does not establish that the assets of Nugisi are under threat. Nugisi's only asset is the shares it holds in PPH. Mr George, who appeared for Drummoyne, equated that asset with the assets of PPH. But even if that is permissible, I do not think that it could be said that the assets of PPH are under threat. The hospital is trading profitably and, indeed, the evidence suggests that its profits have increased in recent years. There is no imminent threat to the continued operation of the hospital. The dispute between its directors has led to the position where its IT services were compromised for a period of time. However, those services have been restored and there is no evidence to suggest that the difficulties affected the continued operation of the hospital or the safety of patients. Mr George points to the letter from the Ministry of Health. But that letter simply raises a concern. It does not suggest, for example, that the hospital was at risk of losing its licence. The fact that the IT services were restored suggests that MHS would not let the dispute escalate to that point. 24Mr George also submitted that Nugisi's assets were under threat because the hospital has no proper management. Mr George pointed to the fact that Nugisi's own board and the PPH board are dysfunctional because of the breakdown of the relations between Dr Landa and Dr Wenkart. He also pointed to the fact that the hospital does not have a permanent HD. However, the hospital has in place the management required by ss 37 and 39 of the Private Health Facilities Act. In addition, Mr Dillon and Dr Pannu perform many of the functions that would be performed by an HD and there are obviously other staff engaged in running the hospital. Mr Dillon may not be a registered nurse, but he has considerable administrative experience and Dr Pannu has considerable medical experience. It may be that the current state of affairs cannot continue indefinitely. However, I do not see how it can be said that the assets of PPH are under such serious threat as would justify the appointment of a provisional liquidator. The hospital continues to function, albeit in a way that does not meet Dr Landa's approval. 25Dr Landa has taken issue with some of the expenses incurred by the hospital. His principal complaint appears to relate to the Meditech system. However, the evidence suggests that Dr Landa gave his initial approval to the installation of that system at the hospital and the fact, if it is a fact, that the hospital has incurred significant costs in relation to a system which has proved to be worthless does not establish that there is an imminent threat to PPH's or Nugisi's assets. There is, for example, no suggestion that MHS is improperly siphoning off income that belongs to PPH or that it is charging PPH for services that have not been provided. Rather, the position is that there appears to be a genuine dispute about how the hospital should be run. 26Mr George also suggested that there was a risk of staff losses which could have serious consequences for the hospital. There is some evidence that the staff, not surprisingly, are dissatisfied with what is happening. As I have said, it appears that Dr Wenkart, with no apparent basis, has refused to authorise the payment of Mr Joseph's invoices. But, again, there is no evidence that there is an imminent threat that Mr Joseph or any of the other staff will resign.

Orders 27The plaintiff's amended interlocutory process should be dismissed with costs. 28During the course of the hearing I indicated to the parties that I thought that it was appropriate to make an order under s 26 of the Civil Procedure Act 2005 (NSW) referring this matter to mediation. Neither party raised an objection to that course. 29In addition, it seems to me appropriate that the parties file points of claim and points of defence. There are a substantial number of factual issues in the case and it is not clear precisely how Drummoyne puts its case at present. It is appropriate in those circumstances that the parties file and serve points of claim and points of defence. 30The parties should bring in short minutes of order which provide for a mediation in accordance with s 26 of the Civil Procedure Act and for directions for the filing of points of claim and points of defence. If those orders can be agreed, I will make them in chambers. If not, the matter should be re-listed by contacting my Associate.

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. Decision last updated: 10 December 2011