Emerton Pty Ltd v Referral Marketing Services Pty Ltd & ors

LEGISLATION CITED : (CTH) Corporations Act 2001 s 473(7), s 499, s499(5), s 502, s 503

Adam Eyton Ltd; Ex parte Charlesworth (1887) 36 Ch D 299 Citrix Systems Inc v Telesystems Learning (in liq) (1998) 28 ACSR 529 City & Suburban Pty Ltd v Michael John Morris Smith (1998) 28 ACSR 328 Glenwood Village Pty Ltd v Glen Alpine Constructions Pty Ltd [2009] NSWSC 526 CASES CITED : Leveraged Capital Pty Ltd v Modena Imports Pty Ltd [2009] NSWSC 509 McAuliffe v Lidia Perin Memorial Hospital Pty Ltd (2006) 58 ACSR 666 Parkinson v Morkaya [2008] NSWSC 1183 Re McGrath [2005] NSWSC 506, (2005) 54 ACSR 55 Re Vouris [2004] NSWSC 384, (2004) 49 ACSR 543 Re Wily [2003] NSWSC 1260, (2003) 49 ACSR 94

Emerton Pty Ltd (plaintiff) Referral Marketing Services Pty Ltd (first defendant) PARTIES : Kari Lea Allen (second defendant) Andrew Hugh Jenner Wily (third defendant) David Anthony Hurst (fourth defendant)

COUNSEL : Mr C Harris SC (plaintiff) Mr M Ashhurst SC (second defendant)

S & P Lawyers (plaintiff) SOLICITORS : MBP Legal (second defendant) Blake Dawson Waldron (first, third & fourth defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

5523/07 Emerton Pty Ltd v Referral Marketing Services Pty Ltd and 3 Ors JUDGMENT (ex tempore) 1 HIS HONOUR: Pursuant to interlocutory process filed on 26 May 2009, the plaintiff Emerton Pty Ltd claims an order pursuant to (CTH) Corporations Act 2001, s 502, appointing Jamieson Louttit as liquidator of the first defendant Referral Marketing Services Pty Limited (RMS), in place of the third and fourth defendants Andrew Hugh Jenner Wily and David Anthony Hurst, who have indicated an intention to resign upon the appointment of a replacement liquidator or liquidators. 2 Emerton holds 25 percent of the shares and about 75 percent of the debt in RMS. The second defendant Kari Allen holds 75 percent of the shares and about 20 percent of the debt. The remaining creditor appears to be associated with Kari Allen, at least to the extent that Kari Allen held a proxy for that other creditor at a recent creditor's meeting. 3 Emerton commenced proceedings against RMS and Ms Allen, seeking that RMS be wound up for oppression and on the just and equitable ground. Shortly before those proceedings were to come before the Court on 4 February 2008, Emerton alleges that Ms Allen caused RMS to sell its assets to another company owned by Ms Allen, to pay out its trade creditors (but not Emerton's loan account), and to go into voluntary administration on 1 February. On 7 March, the administration progressed to a creditors' voluntary winding up, with the third and fourth defendants being appointed liquidators. 4 Emerton has been desirous of having the liquidators investigate complaints about various actions said to have been taken by Ms Allen, which Emerton believes to have involved breaches by her of her statutory and fiduciary duties as a director of RMS. For the purposes of this application, I accept - and it was not seriously disputed - that there are matters calling for investigation. Emerton has complained that the liquidators have not diligently investigated its complaints. The liquidators do not have funds to make an extensive investigation. Emerton is not prepared to fund the present liquidators to do so; instead it wishes to have Jamieson Louttit, who it is prepared to fund, appointed as liquidator and to conduct the relevant investigations. The present liquidators also rejected Emerton's proof of debt. 5 Emerton has, indeed for some time, been seeking the appointment of Jamieson Louttit as liquidator. Indeed, its initial originating process filed on 14 November 2007 sought the appointment of Jamieson Louttit; his appointment was again proposed in May 2008, and again now. There is no doubt that Jamieson Louttit is qualified. It is clear that his fees are significantly less than those of the current liquidators; there is no objective reason to doubt his impartiality. 6 Emerton brought proceedings against the present liquidators for contempt, alleging that they had failed to produce documents on subpoena. Emerton also joined them as defendants in the substantive proceedings, alleging that they had been invalidly appointed, and that they had failed to act independently and impartially or in the best interests of the creditors as a whole, and sought their removal. Emerton also appealed against the rejection of its proof of debt. The liquidators denied all the allegations against them. 7 On 3 April 2009, Emerton and the liquidators entered into a deed of release, whereby the liquidators agreed to convene a meeting of creditors to consider a resolution for the appointment of a replacement liquidator, to revoke the rejection of Emerton Group's proof of debt and have it admitted at the creditor's meeting, to not object to their replacement, to resign in the event of Emerton's nominee being appointed liquidator, and to consent to a discontinuance of the proceedings as against them, without costs. Emerton agreed that, upon satisfaction of those conditions, it would release all claims against the liquidators. No doubt pursuant to that deed, and on the same day, 3 April 2009, a creditor's meeting was convened, at which meeting Emerton proposed a motion that the liquidators resign and that Jamieson Louttit be appointed in their place. That resolution was defeated on the voices, Ms Allen exercising a proxy vote as well as her own against it. Perhaps surprisingly, no poll was demanded. 8 When these proceedings were before the Court on 20 April, the liquidators informed the Court that they wished to resign upon the appointment of a replacement. However, they have not delivered any formal notice of resignation, but merely indicated a wish to do so upon a future event that may or may not happen. (Indeed, it did not happen at the creditors' meeting). On the other hand, there is no reason to doubt that they do wish to resign, and it is likely that they will in any event resign, as they are entitled to, under Corporations Act, s 499. The present procedure has been adopted, no doubt, in order to ensure continuity of administration and avoid a lacuna between their resignation and the appointment of their replacement. 9 Corporations Act, s 502 - which is in Division 4 of Part 5.5, headed Members Voluntary Winding Up - relevantly provides as follows: If from any cause there is no liquidator acting, the Court may appoint a liquidator. 10 In Re Vouris [2004] NSWSC 384, (2004) 49 ACSR 543, Barrett J (at [10]), observed that this power should be regarded as in the nature of an overarching power exercisable by the Court in any circumstance of vacancy in the office of liquidator in any voluntary winding up - even though a power leading to the same result might also be exercisable by a general meeting or a meeting of creditors. His Honour considered the overarching power to be exercisable by the Court in both types of voluntary winding up, despite the existence of a concurrent or separate power in each of Divisions 2 and 3. In the same case (at [5]), his Honour dealt with the relevant provision in the context of a court-ordered winding up, namely s 473(7), which is in the following terms: A vacancy in the office of a liquidator appointed by the Court must be filled by the Court. 11 His Honour said (emphasis added): On one reading, it might be thought that the Court should not make an order under s 473(7) until the vacancy has actually arisen by the resignation taking effect. For my own part, I am satisfied that the Court may make an order under s 437(7) by reference to a vacancy that will arise at a particular future time by force of a resignation that has already been signed and is before the Court as Mr Vouris' several resignations are in this case. 12 In the present case, there is no resignation that has already been signed, or delivered, or before the Court; and there is no specific date upon which any such resignation will, as a matter of certainty, take effect. Indeed, there is no certainty that there will be a resignation, only that there may be a resignation, if the Court appoints a replacement liquidator. There is no more than an expression of a wish to resign, if a future event happens.

13 In those circumstances, I do not think that Barrett J's practical construction of s 473(7) can be extended to permit the application of s 502 to a situation in which, far from there being no liquidator acting, there are and remain liquidators acting, who have merely expressed a wish to retire in certain events in the future. In this respect, there is at least some significance in the different wording of s 473(7) - which speaks of "a vacancy in the office of a liquidator", and at least arguably admits of a prospective appointment to fill a vacancy which the Court is satisfied will occur - whereas s 502 conditions the power of appointment on the circumstance that there "is no liquidator acting". 14 Counsel have referred me to two further cases overnight. In Re McGrath [2005] NSWSC 506, (2005) 54 ACSR 55, the power exercised was under s 473(7), so it takes the matter no further than Re Vouris. In Re Wily [2003] NSWSC 1260, (2003) 49 ACSR 94, however, the power was exercised in some cases under 437(7), but in other cases, at least apparently, under s 502. Palmer J said (at [7]): Mr Andrew Wily has been appointed liquidator pursuant to creditors' meetings of the companies listed in Schedule 2 of the Originating Process. Section 502 of the Corporations Act empowers the Court to appoint a liquidator, if there then be no liquidator. Mr Andrew Wily intends to resign as liquidator of the corporations listed in Schedule 2 in accordance with s.495(3) of the Corporations Act effective from 23 January 2004. Accordingly, pursuant to s.502 of the Corporations Act , I order that Hugh Jenner Wily be appointed liquidator of each of the companies in voluntary liquidation listed in Schedule 2 of the Originating Process, effective on and from 23 January 2004.

15 As Mr Ashhurst submits, the application in Re Wily was unopposed. In that case, in any event, there was an expressed intention to resign with effect from a specified date - namely, 23 January 2004 - not simply a wish to resign if an event happened in the future. Assuming that s 502 does extend to the circumstances in which it was applied in Re Wily - which I do not need to decide - I do not think that I should extend it further, so as to apply in circumstances where there is no more than a conditional expression of a wish to resign. 16 In my view, the condition for exercise of power under s 502 is not satisfied. There is a liquidator acting. The Court does not in the circumstances, have the power given by s 502 to appoint a liquidator. 17 It is necessary, then, to turn to s 503. In City & Suburban Pty Ltd v Michael John Morris Smith (1998) 28 ACSR 328, Merkel J described the principles under which a liquidator will be removed, as follows (at 336): Section 503 of the Law provides that the court may "on cause shown" remove a liquidator and appoint another liquidator. It has long been accepted that the section and its predecessors were not confined to situations where it is established that there is personal unfitness, impropriety or breach of duty on the part of the liquidator. Cause is shown for removal whenever the court is satisfied that it is for the better conduct of the liquidation or, put another way, it is for the general advantage of those interested in the assets of the company that a liquidator be removed: see Re Adam Eyton Ltd; Ex parte Charlesworth (1887) 36 Ch D 299 at 306; Re Mutual Live Stock Financial and Agency Co Ltd (1886) 12 VLR 777; Re George A Bond and Co Ltd (1932) 32 SR (NSW) 301 at 310; Re Giant Resources Ltd [1991] 1 Qd R 107 at 115 per Ryan J; Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 13 ACSR 544 at 550 per Hayne J; Re Biposo Pty Ltd; Condon v Rogers (1995) 17 ACSR 730 at 734 per Young J and Dallinger v Halcha Holdings Pty Ltd (in admin) (1995) 134 ALR 178 at 183-4 ; 18 ACSR 835 per Sundberg J. As was said by Bowen LJ in Re Adam Eyton at 306: "Of course fair play to the liquidator himself is not to be left out of sight, but the measure of due cause is the substantial and real interest of the liquidation." 18 That passage was cited with approval by Weinberg J in McAuliffe v Lidia Perin Memorial Hospital Pty Ltd (2006) 58 ACSR 666 (at 671-72). 19 Is the wish of the present liquidators to resign, in the light of the contents of the Deed of Release, sufficient "cause shown" for the purposes of s 503? In my view, it must be taken into account that the liquidators could resign in any event - as s 499(5) plainly contemplates - in which case there would be a lacuna in the administration until a replacement liquidator was appointed, whether under s 502, or by a creditor's meeting under 499(5). In those circumstances, the argument that the investment made so far in the current liquidators, and the knowledge of the corporation they have acquired, will be lost, is of little practical significance - since that investment and knowledge can be lost by their unilateral resignation in any event. If a liquidator wishes to resign and can do so out of court, but instead approaches the Court as in the present case, in order to avoid a gap in the administration, it is in the interests of the administration that the liquidator be removed under s 503, in order that he or she might be replaced without delay and interruption to the administration. 20 This conclusion is fortified by the apparent hostility between the majority creditor Emerton and the liquidators, by the desirability of giving effect to the settlement of the disputes between them as reflected in the Deed of Release, and by the fact that that Deed of Release is itself the compromise of litigation in which Emerton seeks the removal of the liquidators. I am, therefore, satisfied that it is for the better conduct of the liquidation that these liquidators be removed, so that they can be replaced by another liquidator without interruption of the administration. 21 The next issue is whether Jamieson Louttit should be appointed, or whether the second defendant's nominee should be appointed, or whether some other course should be taken. The second defendant has tendered the consent of Brian Hugh Allen, who (though not in precisely the appropriate form) says that he is not aware of any conflict of interest or duty, and whose charges on an hourly basis for the liquidator and partners are slightly less than those of Jamieson Louttit. He attaches to his consent a "Declaration of Independence, Relationships and Indemnity", in which he declares that he has not had within the last two years any relationships with the first defendant, or any associate of it or any insolvency practitioner appointed to it. There is no reason to doubt Mr Allen's qualifications, impartiality, independence or fitness, and nothing has been said against him. 22 In a number of cases in recent months I have repeatedly said in this and similar contexts that, in the usual case, all else being equal, and nothing being advanced contrary to the fitness of either nominee, the plaintiff's nominee will ordinarily be appointed [Parkinson v Morkaya [2008] NSWSC 1183; Glenwood Village Pty Ltd v Glen Alpine Constructions Pty Ltd [2009] NSWSC 526; Leveraged Capital Pty Ltd v Modena Imports Pty Ltd [2009] NSWSC 509]. In Parkinson v Morkaya I applied that principle where the plaintiff's original nominee was ultimately shown not to be qualified, and a question then arose whether that nominee should be replaced by the plaintiff's next nominee, or the defendant's nominee. 23 As I have said, objectively there has been nothing advanced adverse to Jamieson Louttit, and although Mr Allen's charges are slightly less, it seems that there will be practically no difference overall, as Mr Allen does all the work personally and does not delegate to employees. 24 However, in Citrix Systems Inc v Telesystems Learning (in liq) (1998) 28 ACSR 529, Moore J, referring to a suggestion that the liquidator nominated by Citrix should not be appointed and that the next available liquidator from the list of official liquidators maintained at the Registry should be, observed (at 538): I accept this may become an appropriate approach. However there is nothing to suggest that the nominated liquidator would not carry out his duties as liquidator diligently and independently. Proceedings such as these should not become a vehicle for disgruntled creditors to endeavour to secure the appointment of a preferred liquidator when a company is in voluntary liquidation. Appointing the nominated liquidator may tend to encourage such an approach. If it emerges that other applications are made for that purpose then it may be appropriate to appoint a liquidator who is not the nominated person. However it is not necessary in the present case.

25 It is said that all that really remains to be done in the present liquidation is the investigation of Emerton's complaints pertaining to Ms Allen. However, I should accept that any duly qualified and official liquidator, in the absence of evidence to the contrary, will make appropriate inquiries and perform his or her duties diligently, at least if funded to do so. Even if the only remaining function of the liquidator were to make the relevant inquiries, the purpose of appointing a liquidator is that there be an independent and impartial person to make those inquiries, primarily in the interests of the creditors (and to some extent also in the interests of the contributories, although in the context of a creditors' winding up, those of the creditors will prevail). However, a liquidator making such inquiries does not do so as the agent of an aggrieved creditor. 26 I have referred already to the circumstance that Emerton has been seeking now for 18 months to have Jamieson Louttit appointed as liquidator. It obtained, in the Deed of Release, the agreement of the present liquidators to resign, not if a replacement liquidator were appointed, but if Emerton's nominee - no doubt Mr Louttit - were appointed. Emerton says that it is not prepared to fund the current liquidators, but is only prepared to fund Mr Louttit, to make the relevant investigations. 27 The Court should not be forced to accede to a party's selection of a liquidator by a statement that a creditor is prepared to fund only a particular liquidator. In my view, having regard to the course of the proceedings to this point, if the Court were to accede to Emerton's application in this respect, there would be an appearance of acceding to Emerton's sustained attempts to have the liquidator of its choice appointed. This would do precisely what Moore J said should be discouraged, namely, to allow the proceedings to become a vehicle for the plaintiff to secure the appointment, not of an appropriate liquidator, but of the plaintiff's preferred liquidator. That circumstance, I think, takes the case out of the usual class to which I have referred. In those circumstances, I am not prepared to appoint Jamieson Louttit. To do so would have too much the appearance of acceding to the plaintiff's choice of a preferred liquidator, rather than appointment of an impartial or an appropriate liquidator. 28 The plaintiff has not, at least on this application, made any alternative submission about a course which was previously contemplated, namely that Mr Louttit might be appointed as a special purpose administrator to investigate Emerton's complaints. As nothing adverse to Mr Allen has been advanced, it seems to me appropriate that I should, therefore, appoint Mr Allen. 29 I order pursuant to Corporations Act, s 503, that David Hurst and Andrew Hugh Jenner Wily be removed as liquidators of the first defendant Referral Marketing Services Pty Ltd (in liq), and that Brian Hugh Allen be appointed liquidator in their place. To the extent necessary, I dispense with the rules insofar as they would have the effect that Mr Allen's consent is inadequate. The form attached to it covers, in substance if not in form, all relevant matters that the prescribed form is required to cover. 30 Both parties have had a measure of success and a measure of failure on this application. I do not think it realistic to say that one issue was predominant; I simply do not know what would have been the position had the unsuccessful party on either of those issues not agitated it. In those circumstances, each party having had approximately equal measures of success, there will be no order as to costs, to the intent that each bear its own costs. 31 I adjourn the proceedings to Monday 20 July 2009, before the Registrar in the Registrar's Corporations List.

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