Exception Holdings (in provisional liquidation) v Exception Finance [2005] NSWSC 690 | Case summary

3164/05 EXCEPTION HOLDINGS PTY LIMITED (IN PROVISIONAL LIQUIDATION) & ANOR v EXCEPTION FINANCE PTY LIMITED JUDGMENT - Ex Tempore (Re application for appointment of provisional liquidator to Exception Finance) (Revised 9 July 2005) 1 HIS HONOUR: This is an application for the appointment of a provisional liquidator to Exception Finance Pty Ltd. The application is brought by Exception Holdings Pty Ltd. Exception Holdings is in liquidation, in circumstances which I will outline in due course. 2 Exception Holdings Pty Ltd (which I will call "Holdings") is a company the shares in which are owned by the family trusts of three men, Mr Pomfret, Mr Highland and Mr Labraga. Mr Highland died in March of 2003, and Mr Pomfret and Mr Labraga were appointed as executors of his estate. 3 Holdings has four subsidiaries. Exception Advertising Pty Ltd ("Advertising"), Exception Commercial Pty Ltd ("Commercial"), Exception Developing Pty Ltd ("Developing"), and Exception Finance Pty Ltd ("Finance"). Of these, Mr Pomfret was the sole director of Advertising, Mr Labraga was the sole director of Commercial, and Mr Pomfret was the sole director of Developing. It is common ground that Developing is now dormant. Mr Pomfret and Mr Labraga are both directors of Finance. 4 Advertising is now in administration, and Mr Albarran and Mr McDonald, of Hall Chadwick, have been appointed as its administrators. 5 Finance and Commercial both carried on a business of mortgage origination concerning residential mortgages. These businesses involved the obtaining of mortgages for customers who were referred to the company by accountants and financial advisors. The company paid a commission for such referrals. Commercial carried on a business whereby it placed mortgages with a variety of financial institutions, including HSBC, and Challenger. Finance carries on business under the terms of an Originater Deed which was entered on 9 February 2005 with AFIG Wholesale Pty Ltd ("AFIG"). Under it, Finance agreed to originate mortgages on behalf of AFIG in return for payment of a commission by AFIG. 6 That commission is a trailer commission, and is an amount which is paid to Finance on any mortgage each month while the mortgage remains on foot. Finance's book of mortgages thus results in it receiving an ongoing stream of trailer commissions each month. The trailer commission was said by the liquidator of Holdings to be of the order of $55,000 per month although bank statements which have been tendered in evidence suggest that it is more like $60,000 per month. As well, Finance earns up-front fees from its retail customers. 7 As well as these subsidiaries of Holdings, there is another company, Exception Pty Ltd, which is not a subsidiary, and of which Mr Pomfret and Mr Labraga are directors. 8 The modus operandi which was adopted for the group was that Holdings acted as the treasury for the entire group. All revenues of subsidiaries were accounted for through the profit and loss statements of Holdings. 9 Finance continues to write new mortgage business. Its business is operated on a day-to-day basis by three particular employees. Those employees are subject to some managerial direction. 10 There was only one bank account for the entire group, which was maintained in the name of Holdings. The practice which was adopted was that all the income of the group was paid into that bank account, and all expenses of the group were paid from that bank account. One consequence of this is that the three employees who carry out the day-to-day business of Finance are employees of Holdings. 11 The business of the various companies in the group is operated from leased premises, which are leased by Exception Pty Ltd. 12 There has been a serious falling out between Mr Pomfret and Mr Labraga. The cause of it has not been gone into in the hearing before me, but the reality of it is manifest. They seem to be incapable of agreeing on anything, or almost anything, concerning the operation of the business of, in particular, Finance. 13 On 19 May 2005 Mr Ryan was appointed as a provisional liquidator of Holdings by Barrett J. Mr Pomfret has appealed to the Court of Appeal against that decision, and the appeal is due to be heard on 15 August 2005. However, there is no stay pending the appeal. 14 On 25 May 2005 Holdings, by its provisional liquidator, passed a special resolution that Finance be wound up by the Court, and that Mr Ryan be appointed as its provisional liquidator. 15 The next day, 26 May 2005, Holdings and Mr Ryan filed an originating process seeking the winding up of Finance. There were two grounds for the application - that the company had by special resolution resolved to be wound up, and that it was just and equitable that it be wound up. 16 Also on 26 May 2005 Nicholas J, as Duty Judge, made an order appointing Mr Ryan as liquidator of Holdings. This order is one which was made on an ex parte application. Application was made to set aside that order, under Part 40 Rule 9 of the Supreme Court Rules 1970. That application has been heard by his Honour McDougall J, who delivered judgment in it this morning, setting aside the order for appointment of a liquidator made on 26 May 2005, but staying the operation of his order for 28 days, until 5 pm 4 August 2005. 17 I mention here that on 30 May 2005 Barrett J made an additional order under the slip rule, that Holdings be wound up by the Court. Justice McDougall has also ordered that that order be set aside, and also stayed his own order until 4 August 2005. 18 On 26 May 2005 Holdings and Mr Ryan made application to the Court for appointment of a provisional liquidator to each of Finance, Commercial, and Developing. That application was heard by his Honour Barrett J on 30 May 2005 and decided that day. None of the appointments which had been sought was made. 19 On 30 May 2005 Mr Pomfret, acting as one of the two executors of the estate of Mr Highland, purported to appoint Mr Albarran as the receiver and manager of Holdings. The appointment was one which purported to be based upon a charge given by Holdings to the executors of Mr Highland's estate. That charge is evidenced by a document executed on 27 January 2005, which is said to have been granted pursuant to an oral agreement entered in October 2004. I do not go beyond stating the contention that the receiver was appointed, and its basis, because other litigation is on foot, and has not yet been completely disposed of, relating to the validity of the appointment of the receiver. On 30 May 2005 the receiver assumed practical control of the operations of Holdings, so far as he could. 20 On 3 June 2005 Holdings began proceedings to challenge the validity of the appointment of Mr Albarran as the receiver and manager of Holdings. Those proceedings were expedited, and heard by his Honour the Chief Judge on 30 June 2005. The proceedings have not yet been finally disposed of, and no transcript of his Honour's reasons for judgment was provided to me. However, counsel before me are in agreement that in substance his Honour has decided that the appointment of the receiver was not vitiated by reason of it being an appointment made by only one of the two executors. There are also issues, the precise status of which is not clear on the evidence, about whether the charge was rendered void by section 267 Corporations Act 2001 (Cth), and whether any such voidness might be cured by application being made for leave to enforce the charge pursuant to section 267(3) Corporations Act 2001 (Cth). The matter has been stood over to next week before his Honour, on 13 and 14 July. 21 On that day, there are also listed for hearing before his Honour applications for removal of one (or it might be both) of the executors of Mr Highland's estate, and for the identity of the trustee of the Highland Family Trust to be altered. Also on those days, I am informed by counsel, his Honour will be asked to deal with what is left of the winding-up proceedings of Holdings, which concerns whether Mr Labraga has a charge as well. 22 Mr Burton of Senior Counsel for Mr Pomfret, tells me that it may be necessary for the ambit of the proceedings before his Honour to be broadened, given today's decision by McDougall J. The broadened ambit of the proceedings may involve a question of the validity of the charge under which Mr Albarran was purportedly appointed, by reference to whether Holdings was solvent as at the time of two dates which are relevant to the purported granting of that charge, October 2004 and 27 January 2005. Mr Burton tells me that evidence concerning solvency as at those dates has not yet been filed, though it is expected to be filed on Monday. It is not at present clear whether anyone would wish to file evidence going to the topic of solvency which differs from that which Mr Burton's client proposes to file. 23 The present application for appointment of a provisional liquidator of Finance is made on an interlocutory process filed by Holdings on 28 June 2005. It raises the same issue as was decided by his Honour Barrett J on 30 May 2005. Barrett J's decision is an interlocutory decision, and hence does not create any issue estoppel. However, for a single judge of the Division to revisit a question which is the same as one already decided on an interlocutory basis by another judge of the Division, involves a demonstration that, at the time of the second application, a substantially different basis is available to that on which the application has already been dealt with, either because of a material change in circumstances since the original application was heard, or the discovery of new material that could not reasonably have been put before the Court on the original application: Wentworth v Rogers (Sperling J, 28 April 1995, unreported); Collier v Howard (McLelland CJ in Eq, 23 April 1996, unreported). Mr Robertson, for the applicant, contends that such a substantially different basis exists, now. 24 At the time Barrett J made his decision on 30 May 2005 the provisional liquidation was still in its infancy. The evidence before his Honour, which has also been tendered before me, did not go into anything like the detail of the evidence which I have heard. 25 The basis upon which the appointment of a provisional liquidator to Finance was refused was stated by his Honour as follows: "In the case of Finance, where the two of them are the directors, the break-down of relationships between them is a factor, but the company is one which owns a valuable asset governed by an agreement under which adverse consequences could very well follow if a provisional liquidator were appointed. In addition to that, it is not clear to me that in the short term this company, Finance, needs to operate in any particularly active way. It has its income stream, but it is said it has no creditors and the survival of the income stream is something that must be regarded as sensitive." 26 As well, his Honour made some reference to the undertaking as to damages, as follows: "The other matter to which I refer is that of the undertaking as to damages. Mr Robertson's instruction from the provisional liquidator of Exception Holdings is to proffer to the court an undertaking as to damages given by the provisional liquidator for Exception Holdings. That is to say, the undertaking of Exception Holdings itself, the financial position of which was a subject of some examination in my judgment of 19 May." 27 The financial position of Holdings is, it has been assumed on both sides for the purposes of the present application, such that one cannot be confident that its undertaking will be one of value, although it is not clear that it is worthless. 28 Mr Robertson seeks to demonstrate that there is an active ongoing business of Finance, which is in need of management, and is not receiving it from the directors of Finance. He seeks to demonstrate that the consequence of that lack of effective management is to significantly impede the ongoing business of Finance, and to place at risk the value of its mortgage book and its general undertaking and assets. Further, he seeks to demonstrate that it is, now, clear that it is unlikely that there would be adverse consequences from the appointment of a provisional liquidator. I will deal with those submissions concerning the undertaking as to damages at a later stage. 29 One basis upon which the liquidator seeks the appointment is that there had been some problem with the payment of wages to the employees who were carrying out the day-to-day operations of Finance. Some wages fell due on 15 June 2005, apparently wages which were payment for work done two weeks in advance and two weeks in arrears. A partial payment of those wages was made on 17 June 2005, from an ANZ Bank account which I will later mention, with the assent of Mr Pomfret and Mr Labraga. The wages due on 15 June 2005 were paid in full on 21 June 2005. Wages which have fallen due since then have been paid, although the way in which they have been paid has involved the liquidator of Holdings requiring the consent of Mr Pomfret and Mr Labraga to the payment of those wages be given. So far, it has been given. 30 At the time that the liquidator was appointed as liquidator, a sum in the order of $281,000 stood to the credit of Holdings in an account with the ANZ Bank. That account fell to a balance to $240,999.47 on 23 May 2005. By a bank debit which was entered in the bank's records on 27 May 2005 an amount of $240,999.47 was withdrawn by the liquidator from that account, and placed into a separate account with the National Australia Bank. The thinking behind this was that the sum withdrawn was the amount of the pre-liquidation asset of Holdings, which needed to be segregated from income which arose after the appointment. 31 Apart from one very minor expense, nothing has been withdrawn by the liquidator from the National Australia Bank account. The liquidator claims to be entitled to a lien over the amount in the National Australia Bank account for his fees and expenses of the liquidation. 32 Before the liquidation occurred, it was the ANZ Bank account into which AFIG paid ongoing trailer commissions. Mr Labraga, on 9 June 2005, purported to open a new bank account for Finance at Westpac. He sought to have AFIG pay ongoing commissions accruing to Finance into that account. However, Mr Pomfret did not agree to that course. AFIG is not willing to change the way in which payment is made for commissions becoming due to Finance without both directors of Finance concurring in a direction to it to make that change. That will not happen. Thus, commissions from AFIG continue to be credited to the ANZ Bank account. AFIG transferred an amount of a little over $60,000 to it on 10 June 2005. In the ordinary course of things, AFIG will transfer an additional amount of commission to the account on 10 or 11 July 2005. As the amount of trailer commission is dependent upon the value of the mortgages still on foot in the entire book, it is not significantly affected by any falloff in current business being written, at least in the very short term. Thus, it can be expected that, in the ordinary course of things, it will be an amount of some tens of thousands of dollars which will be paid into the account on 10 or 11 July 2005. 33 The liquidator recognises that it is likely that Finance has rights in relation to the money which is accruing in the ANZ Bank account. The receiver is quite willing for ongoing expenses of Finance to be met from that ANZ Bank account. However, particularly in circumstances where there is a possible cloud over the validity of the receiver's appointment, the liquidator is not prepared to treat the receiver's say so as binding on Finance. The liquidator is prepared to agree to the ongoing expenses of Finance being paid from the ANZ Bank account if both Mr Labraga and Mr Pomfret, as the ongoing directors of Finance, agree. It was, as I have said, by Mr Pomfret and Mr Labraga agreeing to the ANZ Bank account being debited that the payments have been made to the employees for wages. However, in circumstances I will mention in more detail later, agreement has not been possible in relation to certain other ongoing expenses. 34 There are some external creditors of Finance who have not been paid. Kemp Strang, solicitors, have acted for Finance. That firm is owed an amount of $4,180. On 6 July 2005 they emailed Mr Pomfret and Mr Labraga confirming some telephone conversations saying that the firm would undertake no more work for Finance "… including settlement of current matters" until those outstanding accounts had been paid. 35 RCR Valuations Pty Ltd is a valuer, which conducts valuations in connection with mortgages arranged through Finance. On 7 July 2005 that firm e-mailed Mr Labraga, referring to outstanding fees totalling $5,060 which had not been paid. A schedule showed that that amount was composed of 23 items, stretching, at fairly even intervals of time, over the period 28 February 2005 to 17 May 2005. The e-mail said, "We hold in the office all the original Valuations which have not been paid and will not release them until such time as the account is settled. I also note that my company cannot complete any further valuations for Exception Finance until that time." 36 As well, there is some somewhat imprecise evidence relating to a company called Baycorp Advantage which provides a credit reference service. Mr Olde, the man with practical control of the liquidation, understood, as at 29 June 2005, that Baycorp Advantage had not been paid for their services, and were intending to cease providing credit reference checks for Finance. If they ceased providing those checks Finance would be unable to originate any new mortgages. Mr Pomfret gives evidence that he understands that Baycorp has been paid, but the question of whether they have been paid or not has not been decisively demonstrated one way or the other. In one way or another Finance is continuing to write business. 37 The referral fees which are paid to accountants and financial advisors who refer work to Finance have, it seems, not been paid since December 2004. Mr Olde, in his affidavit of 29 June 2005, gave evidence in categorical terms that "Referral fees have not been paid since December 2004. The effect of the non-payment of referral fees is that a number of referrers have ceased referring business to Finance, or have threatened to do so". 38 Mr Pomfret, in response to that allegation, was not able to definitively state that referrers had been paid. Rather, his evidence was to the effect that Mr Labraga had been responsible for the referral fees being paid "late" since January 2004, and that, "The payment for referrers was late since the appointment of liquidators on 19 May 2005." I infer from this that he is not able to demonstrate the referrers have been paid. I accept that it is likely that they have not been paid since December 2004. This is a very serious matter, so far as preservation of the business is concerned. 39 The person administering Finances' account at AFIG is Ms Meade. She has told Mr Olde that there has been a 50 percent fall-off in the new loans written by Finance in June, by comparison with those written in May. Cross-examination of Mr Olde, which shows that the amount of trailer commissions coming into the account from AFIG has not materially dropped, does not detract from this evidence, as the quantum of a monthly trailer commission is nothing like directly proportional to the volume of new business being written, and the 10 June 2005 payment of commission is likely to have been for an amount of commission which accrued before that date - and it is not clear during what precise period it accrued. 40 It is clear that new business continues to be written, and evidence has been provided of the identity of the borrowers under new contracts which are being written. That fact, however, does not detract, either, from the evidence of there being a fall-off in the amount of new loans being written. 41 The three employees with day-to-day running of the business continue to work, but have some dissatisfaction with the current situation. Mr Olde has spoken to each of them. He spoke to Mr Baker on 21 June 2005, and was told: "I am sick of all of this confusion and fighting. Without agreement between the directors of Finance the business cannot be run effectively anymore. I definitely would be supportive of someone independent coming in to run the business. In my opinion I'd prefer someone independent, like the liquidator, to run the business - to make sure we get paid and decisions are made. Look, I'd support the application if you were to make it. The mess needs to get sorted out or the whole business will be destroyed." 42 He spoke to Mr Seymour on 21 June 2005, and told him that consideration was being given to an application to appoint the liquidator for Holdings to act as provisional liquidator of Finance. He asked for Mr Seymour's reaction, and was told: "Look, at this stage, I'd support anything productive. It's a complete joke. I am professionally embarrassed about what is going on here and it's been a huge hassle even getting paid. I'm concerned I'm not going to get paid for further work. I've asked Hall Chadwick about this, but am not comfortable, as they keep letting me down with promises they have made. I'd definitely support a provisional liquidator coming in. You guys are the only ones that I see as independent in this whole thing because you were appointed by the Court and aren't on any side. I would not have a problem working for you or a provisional liquidator. Look, I'll work with Labraga, but not Pomfret. I'm disappointed that Hall Chadwick have not been more helpful to resolve the issues." 43 On 23 June 2005 Mr Katsilious, the other employee, involved in the day-to-day work, was asked a similar question, to which he said: "It's unworkable at the moment that's for sure. This whole thing is having a huge emotional toll on the staff. If you want to salvage the business, someone independent needs to get in quickly to take control. Neither Labraga or Pomfret care about the business anymore, it is just a personal dispute between them now. I would support you being involved as provisional liquidator but only if you could guarantee we will get paid our salary and entitlements." 44 Ordinarily, before the liquidator was appointed, the rent for the premises was paid from the ANZ Bank account. The rental is now not paid from that source, as unanimous consent of the two directors for it to be paid from there is not forthcoming. The landlord has been showing potential new tenants through the premises. Indeed, on 23 June 2005, Mr Labraga contacted the landlord and purported to terminate the lease of the premises. On the same day, Mr Pomfret also contacted the landlord, and made it clear that he did not agree with that course. 45 There are also problems concerning non-payments of telecommunication and electricity charges relating to the group, although it is not clear from the evidence, precisely whose liability those payments are. Whose liability those payments are does not suffice to decide whether it would be for Finance's benefit to make the payments from its assets, so that it retains the necessary facilities for a business of the kind it conducts. No-one is in a position to decide that question and carry through the decision, at the moment. The situation is the same concerning the various other unpaid bills I have mentioned. 46 The office contents insurance expired on 29 June 2005, and has not, it seems, been renewed. 47 The professional indemnity insurance expired on 8 June 2005. It appears that notification of the impending expiry was sent by the broker to Mr Labraga, who did nothing about it and did not return the broker's calls. This extraordinary situation is one which Mr Labraga chooses to not clarify, as he has declined to give an affidavit for the present application. The receiver has in hand an application for new professional indemnity insurance, but it is not yet in place. He gives evidence that there are extra difficulties as it is more difficult to obtain a new insurance when a policy was not renewed prior to expiry, and the appointment of the liquidator to Holdings is something which causes insurance companies to be more reluctant than they otherwise would be to provide the insurance. The absence of professional indemnity insurance is a matter of concern to the staff, although they are continuing to work. 48 Mr Albarran, from his position as receiver, gives evidence that the failure of the liquidator to release the funds from the ANZ Bank account has had a detrimental effect on the ongoing trading of Holdings and its subsidiaries. 49 There is some evidence about the attitude which AFIG would take to the appointment of a provisional liquidator. On 23 May 2005 Mr Olde met with Ms Meade. He told her that he was contemplating making an application to appoint a provisional liquidator over Finance. Her response was: "Subject to legal advice, we would probably support that application because we are concerned with the way the dispute between the directors has been impacting on the business of Finance. In addition to employees leaving, there have been other substantial breaches under the agreement, including a failure to make minimum monthly intakes and not servicing clients. Our position at this stage is that the book should be sold to another originator." 50 Mr Pomfret met Ms Meade for the first time on 14 June. Up to April 2005, the contact person at Finance for AFIG was a man who left in April 2005. Mr Pomfret has endeavoured to fill the role of that man since then, and appears to have been responsible for communications with AFIG since then on Finance's behalf. At the meeting on 14 June he records Ms Meade as telling him that, "AFIG's position is that we will take a sit back and see approach to this situation. We are comfortable that you have the staff to manage the mortgage book." He says she went on to say: "An appointment over Finance would be a default under the agreement and we would review the entire situation. Of the options available, we could assign the book to another mortgage manager, manage the book in-house, or sell the book. Given that it's a substantial asset from Exception Finance's and AFIG's point of view, any decision to be made would not be made lightly and without consultation with the directors." 51 More recently, on 28 June 2005, the National Sales Manager of AFIG wrote a letter to the liquidator of Holdings, in the following terms: "We understand that it is your intention to make an application to the Supreme Court of New South Wales for the appointment of a provisional liquidator to Exception Finance Pty Limited ( Finance ). We are aware that there has been a breakdown in the relationship between the two directors of Finance, and as such it appears to us that there is a risk that the debts of Finance are not being paid as and when they fall due. Under the terms of the Correspondent Deed between Australian Mortgage Securities Ltd ( AMS ) and Finance ( the Deed ), inability to pay debts as and when they fall due is an Event of Insolvency, entitling AFIG Wholesale Pty Limited, as agent of AMS ( AFIG ), to terminate the Deed. We understand that you have formed the view that, given the valuable nature of the mortgage book owned by Finance, this asset needs to be protected urgently and this is best accomplished through the appointment of a provisional liquidator to Finance to trade the business and protect its assets. In this regard, AFIG confirms that, if you are successful in appointing a provisional liquidator to Finance, AFIG will not use that event, in and of itself, as a ground for terminating the Deed. AFIG reserves its rights however if there were to be a further change in the status of Finance or any other event entitling AFIG to terminate the Deed." 52 The documentation under which Finance carries on business of originating mortgages for AFIG is one which contains various events of default which entitle AFIG to terminate the agreement. However, appointment of a provisional liquidator is not one of them. There is some suggestion that there might be other events of default which have been committed, but the evidence does not enable me to make a decision about whether that is so. 53 In my view, the likelihood is that, if a provisional liquidator were to be appointed, the intractable disagreement between Mr Labraga and Mr Pomfret would stop being an obstacle to the ordinary day-to-day expenses of the company being paid. Mr Burton SC has submitted to me that the liquidator ought be taking a more robust attitude concerning his entitlement to spend money in the ANZ Bank account. The account is in the name of Holdings, so legal title to the debt owed by the bank is in Holdings. It is submitted that the payment of the ongoing expenses of Finance are clearly payments which it is in the interests of Finance to make, and in the interests of Holdings to make, as a way of preserving the value of Holdings' investment in Finance. All the evidence suggests that the ongoing business of Finance is a profitable one. In those circumstances, he submits, and I accept, it is indisputable that payment of the ongoing expenses is for the benefit of both Finance and Holdings. 54 However, in circumstances where the liquidator has, in the ANZ Bank account, control of money which, in the circumstances in which it came to be there, may well be money in which Finance has an equitable interest, it is not open to him to simply ignore that proprietary right and go and spend the money. Even if it is clearly for Finance's benefit that the payment be made, a liquidator of Holdings is, in my view, entitled to know that he is acting in a way which involves proper legal authorisation. If he were to simply help himself to the money, in circumstances where he knew that one or both of the directors of Finance did not consent, he would not have a valid authority to deal with the money. It matters not that Finance might not be able to demonstrate that it suffered a loss in consequence of his unauthorised action. The liquidator is entitled to have confidence that he is acting within the law. A means needs to be found, given the threats to the ongoing viability of the business which now exist by reason of the non-payment of bills of comparatively small amounts, to require a way to be found in which the liquidator is able legitimately to access a fund which is large enough to pay those bills, as the ANZ Bank account is. 55 It is put, by Mr Burton, that it would be premature to appoint a provisional liquidator at this stage, and that the litigation before the Chief Judge next week will clarify matters, so that it is better known whether the receiver is validly appointed, and therefore who really has power to deal with the assets of Holdings on a day-to-day basis. Given the nature of the issues which may now be agitated before the Chief Judge next week, I cannot be confident that the questions which remain for determination by him are ones which will be able to be determined in the two days which have been set aside next week. Further, even determination of those issues will not resolve the problem of whoever it is that has entitlement to the money in the ANZ Bank account probably needing authority of the directors of Finance. The receiver appears to be content to act and to spend that money without unanimous consent of Mr Pomfret and Mr Labraga, but, as I say, it is far from clear that, by next week, it will be clear whether or not the receiver is the one who is entitled to the assets of Holdings. Further, the ANZ Bank account contains money which, as I have said, may not all belong beneficially to Holdings - some of it may beneficially belong to Finance. Even if it were clear that the receiver was the only person entitled to administer the day-to-day affairs of Holdings, it does not follow that the liquidator would be content to hand over to him the entire contents of the ANZ Bank account without the approval of Mr Pomfret and Mr Labraga. Events to date suggest that the liquidator would not be prepared to do that. For these reasons, I do not think it is an appropriate course to defer making a decision until the Chief Judge has decided the matters committed to him next week. 56 Another factor which is put against the appointment of a provisional liquidator is that it will involve unnecessary cost. It is true that it will involve some cost, but the expenses involved in ensuring that the day-to-day business of Finance continues to be run are not likely to be great by comparison with the potential loss in value which might arise if the existing business is not preserved. 57 So far as the undertaking as to damages is concerned, Mr Burton refers me to the decision of Young J in Clemada Pty Ltd v Hire It Pty Ltd (No.2) (1990) 3 ACSR 202, where at 205 his Honour confirmed that a matter taken into account is the ability of the plaintiff to give an undertaking, and the worth of such undertaking, as to damages. 58 Mr Robertson refers me to the decision of Barrett J in EPP National Buying Group Pty Ltd v Levy [2001] NSWSC 482. While that is an interlocutory injunction case, the undertaking as to damages is intended to perform the same function when a provisional liquidator is appointed as it performs concerning interlocutory injunctions. At [31], his Honour quoted the judgment of Hodgson J in Wentworth v Wentworth (12 June 1997, unreported): "As regards the undertaking as to damages question, it is clear in my opinion that the inability of a plaintiff to give a valuable undertaking as to damages does not necessarily preclude the granting of relief. However, where one is balancing monetary disadvantages as between a plaintiff and a defendant, the inability of a plaintiff to give a valuable undertaking as to damages is a factor which can be taken into account in assessing the balance of convenience and may even be decisive." 59 In the present case, given that Finance is a wholly owned subsidiary of Holdings, it is Holdings itself which would be the first candidate for ones suffering loss, if the undertaking as to damages needed to be called on. Mr Burton says that, as well, the estate of Mr Highland could suffer loss. Mr Highland's estate has, in commercial terms, an interest in the outcome of the successful realisation of Finance's business, through its shareholding in Holdings and also, if it eventuates that the charge is valid, through the charge it has over Holdings. Its potential to suffer loss is in this way is, however, parasitic upon any loss which Holdings suffers. 60 At present, I do not regard there as being a substantial risk that any undertaking as to damages would need to be called upon. As it is now, Finance is in a state of near intractable deadlock. The appointment of a provisional liquidator is likely, in my view, only to make matters better, not worse, so far as the value of Holdings' shares in Finance is concerned. I do not see a way, at present, in which there is a substantial risk that any external creditors of Finance could suffer loss from the appointment of a provisional liquidator either. I also recognise that the undertaking as to damages is to some extent an insurance against the unpredicted, and so my present view about the likelihood of its being called on is far from a decisive conclusion. However in all the circumstances, while the worth of the undertaking as to damages cannot be regarded as assured, I would regard it as sufficient. 61 It is well established that the appointment of a provisional liquidator is an extraordinary remedy, and is not one which is availed of if any other practical means of solving a problem in the administration of a corporation is available. I recognise that it involves an extremely serious intrusion into the affairs of a company, which a court thinks very carefully about before adopting. 62 While the circumstances for appointment of a provisional liquidator cannot be stated exhaustively, I adopt the statement of Hely J in Natural Extracts Pty Ltd v Stotter (18 December 1998, unreported), also adopted by Barrett J in Triulcio v Chase Properties Investments Pty Ltd [2003] NSWSC 861 at [23], that usually it is at least necessary to establish that the assets of the company are in some degree of jeopardy and that there are good prospects of a winding-up order ultimately being made. 63 In the present case, the winding up order which is being sought against Finance is based upon the two grounds I have earlier mentioned. The passing of a special resolution that the company be wound up provides the Court with jurisdiction to effect the winding-up. However, a discretion remains to be exercised about whether the winding-up order is actually made, which is exercised in the light of circumstances as they appear at the time that the application comes to be considered. There is, in the present case, some possibility that there may be some change in circumstances arising from better clarification of the way in which the interests of the Highland estate are exercised both concerning its shareholding in Holdings and concerning its charge, if the charge is valid. However, just what those possibilities are, and whether they will be enough to provide a discretionary basis for refusal of an order, is at present purely a matter of speculation. Further, at present the deadlock in Finance, likely to be the basis on which winding up on the just and equitable ground is sought, is manifest. Sometimes, a court will decline to wind up even a deadlocked company, for instance if one of those in the deadlock has refused a reasonable offer of settlement, but again it is speculation whether any such event will arise in the present case to provide a discretionary reason for making or refusing to make the order. Assessing the matter today, as I must, it seems there are good prospects that a winding-up order will ultimately be made. As well, for reasons already given, I am satisfied that the assets of the company are in significant jeopardy. 64 There remains to consider whether there is anything short of the appointment of a provisional liquidator which would be adequate to deal with the situation. One possibility which I considered is whether the appointment of a receiver of Finance, or of its bank account, would suffice. I am not satisfied that it would. The agreement with AFIG, which is the commercial linchpin of this company, includes as an event of insolvency that a receiver, receiver and manager, or administrator is appointed in respect of the company or any of its assets. The attitude of AFIG to the appointment of a provisional liquidator is known, and such an appointment is in any event not an event of default. I regard its letter of 28 June 2005 as the best indication of AFIG's attitude, because it is in writing, recent, signed by a senior person, and obviously the type of letter which is intended by the writer to be taken seriously. It would be, in my view, a more risky course to appoint a receiver and manager, either of the entire undertaking and assets, or of the bank account. 65 Another alternative which has been urged is that the liquidator of Holdings could exercise his undoubted powers as shareholder of Finance to remove the existing directors and replace them with ones who can co-operate. This is something which has been considered by the receiver. His solicitor has stated to the solicitors for the liquidator, on 20 June 2005: "… In particular, our client has considered whether Exception Holdings should remove the current directors. The difficulty as we have discussed lies in finding an alternative director to act. In this regard, we attach for your information a copy of a letter we have sent to The Argyle Partnership, solicitors of Ms Hyland [sic]. If Ms Hyland [sic] is prepared to act, then our client believes both directors should be removed and Ms Hyland [sic] appointed in their place. If Ms Hyland [sic] is not prepared to act, our client is not aware of any other person who could act and in no circumstances believes that the only alternative is to remove Mr Labraga, as he is the one causing the current difficulties with the release whole funds to enable the business to operate. …" 66 Today, in the course of addresses, an attempt was made to tender some consents of Mrs Highland, and a person who appears to be her daughter, to act as directors on the basis that they would do what they were told by either the receiver or the liquidator, as might be appropriate. I rejected the tender because of its lateness, but as well, for reasons I then gave, that proposal is not viable. 67 Mr Pomfret remains willing to act as sole director. However, the liquidator lacks confidence in him. Mr Pomfret has failed to provide the liquidator with a report as to affairs concerning Holdings. That report is required, under section 475(5) Corporations Act 2001 (Cth) within 14 days of the appointment. It is true that Mr Pomfret has been endeavouring to arrange a meeting with the liquidator, without success, but no extension has been granted to him, and he is in breach of his statutory obligation. As well, at least some of the staff have their doubts about working with Mr Pomfret, as indicated earlier in this judgment. Further, there are some debts relating to Finance's business which Mr Pomfret has declined to consent to pay, despite being asked. The total of bills that he declines to consent to paying are of the order of $56,000. He says that he has not been provided with any supporting documentation for those payments. It is not at all clear what efforts he has made to find out whether that supporting documentation is with the liquidator or with the receiver. In all these circumstances, I would not regard the possibility of a liquidator appointing Mr Pomfret as sole director of Finance as a reason why the appointment of a provisional liquidator should not be made. 68 As well, it is submitted that the liquidator could approach the court for advice on whether he would be justified in using the money in the ANZ Bank account to pay the ongoing expenses. While it is undoubtedly true that he could approach the Court for such advice, the outcome of that application is far from a foregone conclusion. I myself would have serious doubts about the propriety of advising a liquidator that he was entitled to simply help himself to the property of a company which did not consent to it being used in the way in which the liquidator proposed to use it. In all these circumstances, I do not see any practical alternative to the appointment of a provisional liquidator. 69 I should also say that I have taken into account that Mr Pomfret opposes the appointment, that the receiver of Holdings opposes the appointment, and I would infer that Mrs Highland also opposes the appointment. While it is appropriate to take into account the wishes of people concerned, I do not see their opposition as providing a sufficient reason why the appointment should not be made, when there is real risk to the assets, and no viable alternative. 70 There remains a question of who should be appointed liquidator. There are two candidates, Mr Ryan and Mr Paul Weston. Mr Weston has the advantage of neutrality. He also has, with all respect to him, the disadvantage of complete ignorance, as at today of the affairs of these companies. It would inevitably be much more expensive to appoint such a person than to appoint Mr Ryan, particularly when the additional tasks which need to be carried out seem to me to be comparatively small. 71 It would not be appropriate, however, to appoint Mr Ryan if there was a likelihood of there being a conflict of interest between Finance and Holdings. One matter which I have considered is whether there would be a conflict arising from Mr Ryan's claim for a lien over the National Australia Bank account in connection with his fees. That bank account, as I have said, is in substance the money which was in the ANZ Bank account at the time of Mr Ryan's appointment. 72 I thought at one stage that there might be a possibility that there could be a proprietary claim by Finance to part of that money, but as things appear on the admittedly incomplete evidence, now, it seems more likely that when monies earned by Finance were paid into the joint account while the various companies in the group were all under the control of their directors they were treated in the affairs of the group as a loan by Finance to Holdings, rather than being treated as still belonging in equity to Finance. That is what one would ordinarily expect to happen in the running of a group of companies, and the accounts (unreliable though they may be) seem consistent with that. It may be that further examination shows that my initial impression is incorrect, and that there is in fact a conflict, but the matter should be decided today on the basis of whether it appears likely there is going to be a conflict. If it emerges there is a conflict, that is a problem which can be dealt with at that time. No other source of potential conflict of interest was identified. For those reasons I will appoint Mr Ryan as provisional liquidator of Finance. 73 As these reasons have made clear as they unfold, the situation as presented to me reveals a significantly different picture to the situation as presented to his Honour Justice Barrett on 30 May 2005, and a significant part of the difference arises from events occurring after 30 May 2005. 74 There remains a question of the powers which should be conferred upon the provisional liquidator. One of the matters upon which Mr Robertson relied, and which I have not mentioned so far, is that the accounts of Holdings and the various subsidiaries are intermixed, and possibly unreliable. He puts that a provisional liquidator would be able to sort that out, so far as the whole group was concerned. 75 I did not rely upon that as a reason for appointment of the provisional liquidator, because I am not persuaded that there is a necessity that it be sorted out, at least in its entirety, for enough to be known about the financial affairs of the group to enable Finance's business to be preserved. I would propose to restrict the powers of the provisional liquidator, so that rewriting of books and investigation of the books in their entirety took place only to the extent necessary for preservation of the business. The process of recreation, over months, or possibly years, of the books of groups of companies is expensive, and I am not persuaded that there is an immediate necessity for that expenditure to be incurred, necessary as it might be to incur it eventually. 76 As well, I see no reason, at present, why the provisional liquidator should have, or will need to exercise, the full range of powers which ordinarily flow from an appointment. Section 472(4) Corporations Act 2001 (Cth) gives rise to the powers of the provisional liquidator, including, unless the court otherwise orders, the powers contained in subsection 477(2) except 477(2)(m). That would include the power under section 477(2)(c) to sell or otherwise dispose of in any manner all or part of the property of the company. I do not see why his powers need, at this stage, to be conferred in so ample a fashion. The appropriate course to take is, in my view, to adjourn this matter until a convenient time, possibly tomorrow if that is convenient to counsel, so that specific consideration can be given to whether any other restriction on the powers is warranted, to ensure that the provisional liquidator has those powers which are really necessary for him to preserve the particular business, but not any more extensive powers. I adjourn the matter to noon tomorrow. **********

Exception Holdings (in provisional liquidation) v Exception Finance

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