Bankruptcy and insolvency - Administrators - Whether order should be made under Corporations Act s 447A - Whether administration should be terminated - Whether company solvent - Whether administrators lack independence - Conduct of administrators - Whether administrators should be replaced

Corporations Act 2001 (Cth) s 447A

(These reasons are an edited version of reasons delivered extemporaneously on 6 November 2008.)

1 The defendants (the administrators) were appointed as administrators of Kitchens Ucan Fit Pty Ltd (the Company) on 6 October 2008. The plaintiff, Mrs Pamela Flynn, is the sole director of the Company. She applies for an order under s 447A of the Corporations Act 2001 (Cth) that the administration be terminated on the grounds that:

(b) the administrators are in a position of conflict of interest; and

(c) the provisions of pt 5.3A of the Corporations Act are being abused.

2 Alternatively, the plaintiff seeks an order that the defendants be removed as administrators.

3 For the reasons that follow, I am of the opinion that:

(a) the evidence does not establish that the Company is solvent;

(b) the plaintiff has not demonstrated that the administrators lack independence or that their conduct warrants the administrators being replaced; and

4 I will begin with an overview of the facts. I will then outline the legal principles relevant to the application, before turning to the questions of solvency, the administrators' independence, and the administrators' conduct.

5 The Company has been in business since 2006. Its business is the design and installation of kitchens. It does not itself manufacture the kitchens. When a customer places an order with the Company, the Company orders the materials, generally from China. The materials are shipped from China in containers which arrive at the port of Fremantle. After the materials arrive the Company arranges for the kitchens to be installed.

6 When a customer places an order, the customer pays a 50% deposit to the Company, with the balance to be paid after the installation and completion of the kitchen.

7 There is no direct evidence as to the terms of trade with the Company's suppliers.

8 Since about November 2007, the Company has had banking facilities with the National Australia Bank (NAB). The facilities include the following:

(a) a portfolio facility agreement dated 8 November 2007 in the amount of $225,000;

(b) an overdraft facility dated 12 February 2008 with a limit of $60,000;

(c) an instalment loan agreement dated 12 February 2008 with a limit of $100,000;

(d) a trade finance loan initially in the sum of $100,000, subsequently increased to $200,000; and

(e) a credit card facility in the amount of $20,000.

9 The overdraft facility is secured by a registered mortgage debenture granted by the Company over the whole of its assets and undertakings, and by a guarantee by the plaintiff and her husband, Mr Robert Flynn, in an amount limited to $380,000.

10 The guarantee is in turn secured by a registered mortgage over property at 7 Oakmont Turn, Connolly (the Connolly Property) granted by the owner of that property, Mr Robert Flynn.

11 The plaintiff says that the Company experienced no financial problems prior to May 2008. On 12 May 2008 there was, she says, an earthquake in China which disrupted the supply by the Company's Chinese suppliers of the necessary materials. That is said to have led to liquidity problems.

12 In a meeting with NAB in about early August 2008 the prospect that Mr Robert Flynn's brother, Mr Peter Flynn, would clear the Company's debt to the bank was discussed. Mr Robert Flynn subsequently advised NAB by email that Mr Peter Flynn would not pay out the bank, but that he would put the Connolly Property up for sale. By email dated 5 August 2008, the bank responded that that proposal was not acceptable to it.

13 Later in August 2008 the bank issued a number of demands. These included the following:

(a) a demand of a sum of $255,597.77 under the overdraft facility;

(b) notice of default pursuant to the instalment loan in respect of which the sum of $98,824.54 was outstanding;

(c) notice of cancellation pursuant to the trade facility agreement;

(d) notice of demand pursuant to the debenture in the sum of $354,422 (being the total of $255,597.77 and $98,824.54);

(e) notice of demand pursuant to the guarantee in the sum of $354,422.31; and

(f) notice of default pursuant to the mortgage in the sum of $354,422.21.

14 There was also reference in the demands to the amount of $223,862.27 under the portfolio facility, liability for which was triggered by the defaults, giving rise to a total owing to the bank of about $578,284.58.

15 On 13 August 2008 the bank appointed the first named defendant, Mr Simon Theobald, to prepare a report on the financial position of the Company. A copy of that report is attachment PEF3 to the plaintiff's affidavit of 17 October 2008.

16 The report was apparently completed on about 26 August 2008. It concludes that there are reasonable grounds to suspect insolvency on the part of the Company. The content of the report has no evidentiary value as to its truth, being hearsay.

17 In September 2008 there was correspondence between solicitors for the Company and solicitors for NAB. Various proposals and counter proposals were made but no agreement by way of forbearance or otherwise was reached.

18 On 1 October 2008 Mr Peter Flynn and the plaintiff, Mrs Pamela Flynn, entered into a contract to purchase from Mr Robert Flynn the Connolly Property for a price of $570,000. The contract was expressed to be subject to finance approval from BankWest in the sum of $570,000.00, that is the full purchase price.

19 On 6 October 2008, the bank appointed the administrators.

20 The plaintiff says that, that having occurred, finance approval for the contract was not forthcoming.

21 Mr Peter Flynn says, in his affidavit of 17 October 2008, that he still intends to proceed with the purchase of the Connolly Property. He says that BankWest has said that it would finance the purchase subject to a credit check. Mr Robert Flynn says in his affidavit of 17 October 2008 that the proceeds of sale of the Connolly Property will be used in discharge of the Company's debt to NAB.

22 I will return to this evidence later in these reasons.

23 As I have said, on 6 October 2008 the administrators were appointed.

24 On 7 October 2008 the administrators sent a letter to creditors (not including customers) giving notice of the first meeting of creditors on 16 October 2008. The letter also stated that the second meeting of creditors would be held on 10 November 2008.

25 On 9 October 2008 the administrator was denied access by the Company to the Company's premises. Later that day a meeting was held between the parties and their solicitors. The Company's representative or solicitor said that the Company did not accept that the administrators were entitled to access.

26 On 10 October 2008 the administrators applied for and obtained orders from the Supreme Court (Templeman J) in COR 148 of 2008 requiring the plaintiff to permit the administrators access to the premises.

27 It is, I think, regrettable that the plaintiff's evidence in support of her initial ex parte application for an interlocutory injunction made no mention of the denial of access or of the orders of Templeman J.

28 Also on 10 October 2008, the administrators terminated the contracts of employment of employees of the Company. Any attempt by the plaintiff to criticise the administrators for taking that step as impeding the recovery of debts of the Company has to be viewed in the context that, the day before, the administrators had been locked out of the premises and refused access.

29 On 14 October 2008 the administrators sent letters to customers of the Company. The letter advised of the fact of the appointment and that it vested control of the Company's business and assets in the administrators. The letter stated that the administrators were conducting an urgent assessment of the viability of the Company's business including its ability to complete customers' orders.

30 On 16 October 2008 the first meeting of creditors occurred. There is no evidence of the content of the meeting. To the extent that it is necessary, I infer that the subject matter of the meeting was the question of appointment of a committee of creditors, that being prescribed by s 436E of the Corporations Act.

31 On 20 October 2008 the administrators sent a letter to customers of the Company who had paid deposits and whose material had not been ordered from a supplier. The letter stated that the deposit paid by the customer constitutes an unsecured claim against the Company and invited the customer to complete the enclosed proof of debt. The letter stated that while the investigation into the Company's financial position was continuing, it appeared unlikely that there would be any return to the Company's unsecured creditors.

32 On 20 October 2008 the plaintiff commenced these proceedings, and also applied for an interlocutory injunction in circumstances that made the application in substance ex parte. On 21 October 2008 I dismissed the injunction application and made programming orders for the hearing of the present application on 6 November 2008.

33 The second meeting of creditors is scheduled for next Monday, 10 November 2008.

34 I turn to the legal principles relevant to this application.

35 In order to put the application in its legal context, I begin with an outline of pt 5.3A of the Corporations Act, which creates the legal regime for the appointment of an administrator to a company.

Overview of Part 5.3A

36 Part 5.3A was introduced into the Corporations Act (then the Corporations Law) by the Corporate Law Reform Act 1992 (Cth). Part 5.3A is headed 'Administration of a company's affairs with a view to executing a deed of company arrangement'. The object of pt 5.3A is said by s 435A to be to:

...provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or

(b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company.

37 There are three ways in which an administrator may be appointed: by the company; by a liquidator; or by the holder of a charge.

38 A company may appoint an administrator if the board has resolved that, in the opinion of the directors, the company is insolvent or is likely to become insolvent at a future time and an administrator of the company should be appointed: s 436A(1).

39 A liquidator or provisional liquidator of a company may appoint an administrator of the company if he or she thinks that the company is insolvent, or is likely to become insolvent at some future time: s 436B(1).

40 By s 436C(1) a person who is entitled to enforce a charge on the whole, or substantially the whole, of a company's property may appoint an administrator if the charge has become, and is still, enforceable. In this case the administrators were appointed under that section.

41 The provision empowering the holder over a charge that has become enforceable to appoint an administrator was inserted in accordance with a recommendation of the Australian Law Reform Commission in its General Insolvency Inquiry, Report No 45 (1988). At 36 - 37 the Commission stated as follows:

66. Appointment by chargeholder. The holder of a charge over all the property of a company should be entitled to appoint an administrator if default has been made in the payment of money secured by the charge. Such default tends to indicate that the company is unable to pay its debts and might thus avail itself of the procedure. Appointment of an administrator by a chargeholder may seem to detract from the voluntary nature of the procedure. However, the Commission's recommendation relates only to a charge which extends over all the property of a company and entitles its holder to appoint a receiver to take control of the property and business of the company. It is logical that the chargeholder, in an appropriate case, should be able to appoint an administrator who will take control of the affairs of the company as an alternative to appointing a receiver who, under the present law, will be principally concerned with the chargeholder's position. It may encourage the use of this form of administration by chargeholders rather than receivers. If so, the interests of unsecured creditors should be better protected.

67. Effect on secured creditors. The Commission has reconsidered the position of secured creditors in the procedure. The Commission received many submissions opposing the restrictions which might be placed on secured creditors by the initial moratorium period and the execution of a deed of company arrangement. One submission suggested that a secured creditor should be notified of the appointment of an administrator and then be limited to a period of, for example, 7 days to decide whether to appoint a receiver. Although the Commission is not persuaded to retreat from its view that secured creditors generally should be bound by the initial moratorium, it accepts that there is a case for a creditor having security over all the property of the company to have a limited period to appoint a receiver. Such a creditor, in enforcing its charge, is in a position to take possession of the whole of the property of the company and thus provide an ordered administration of the company's affairs, albeit one conducted for the benefit of a secured creditor rather than all creditors.

68. Recommendation. Accordingly, the Commission recommends that a creditor holding a registered charge over all the property of a company be given notice of the appointment of an administrator and have a right to enforce its charge against all the property of the company within 7 days of the appointment but not afterwards. If the chargeholder elects to enforce the charge, the administrator will continue in office, although the administrator's powers will be subject to those of the chargeholder, receiver or other agent of the chargeholder under the charge.

42 In O'Donovan, Lawbook, Company Receivers & Administrators, vol 2 [41.350] the following observations are made to explain or justify the power of appointment of an administrator given by s 436C to a chargeholder entitled to enforce a charge over all of the Company's property:

It could be argued that conferring a power to appoint an administrator on a substantial chargee is unjustified because it serves no purpose as the chargee is invariably entitled to appoint a receiver and manager upon the company's default under the mortgage debenture. But it must be remembered that an administrator, even one appointed by a substantial chargee, is subject to a host of fiduciary and statutory duties which do not apply to a receiver, and the administration must be conducted in the interests of all relevant parties, particularly the unsecured creditors. Moreover, to the extent that the statutory moratorium makes it possible for the administrator to carry on the business without interference from owners and lessors and without the distraction and expense of defending court proceedings, there is likely to be a better return for the chargee and, therefore, a better chance that there may be a surplus available to the unsecured creditors. For these reasons, the power of substantial chargees to appoint administrators should be retained for those relatively rare cases where the directors have not already appointed an administrator. (footnotes omitted)

43 Part 5.3A contains detailed provisions about how and when the administration of a company begins and ends, the consequences of administration, how and when a company may pass from administration to the making of a deed of company arrangement, or into liquidation, or back into the hands of its directors. I will give no more than an overview of the effect of those provisions.

44 Upon appointment, the administrator has control of the company's business affairs and assets: s 437A. The administrator may carry on or terminate or dispose of the company's property. Only the administrator can deal with the company's property: s 437D.

45 The administrator must investigate the affairs of the company and form an opinion as to (s 439A):

(a) whether it would be in the interests of the company's creditors for the company to execute a deed of company arrangement;

(b) whether it would be in the creditors' interests for the administration to end; and

(c) whether it would be in the creditors' interests for the company to be wound up.

46 The administrator must convene two meetings. The business of the first meeting is to determine whether to appoint a committee of creditors and if so who are to be the members of the committee: s 436E(1). At the second meeting the creditors can resolve that the company execute a deed of company arrangement specified in the resolution, or that the administration should end, or that the company be wound up: s 439C.

47 When convening the meeting, the administrator must send material as required by s 439A(4) including a statement setting out the administrator's opinion as to whether it would be in the creditors' interests for:

(a) the company to execute a deed of company arrangement;

48 Reasons for such opinions must also be given. If a deed of company arrangement is proposed, a statement setting out details for the proposed deed is to be included in the notice of meeting.

49 The second meeting is required to be convened within 20 business days of the day after the administration begins. The meeting must be held within five business days before, or within five business days after, the end of the convening period: s 439A.

50 The company's property is protected from creditors during the period of the administration: div 6 of pt 5.43A. During the period of the administration, the rights of persons who have claims against the company at the time of appointment of the administrator are suspended to give the company breathing space to enable the future of the company to be determined.

51 Part 5.3A preserves or creates special rights in favour of the holder of 'a charge on the whole, or substantially the whole, of a company's property'. In addition to the right to appoint an administrator (s 436C), such a charge holder has the following rights:

(a) the right to receive notice of the appointment of an administrator: s 450A(3);

(b) where the charge holder has enforced the charge in relation to all property of the company subject to the charge before or during 'the decision period' (as defined), all rights of the charge holder to enforce the charge are preserved: s 441A;

(c) such charge holder will not be bound by the deed of company arrangement unless that creditor has consented to be bound by the deed: s 444D(2)(b), s 444F(2) and s 441A(3).

52 If the creditors resolve that the company execute a deed of company arrangement, the company continues under administration until that deed is executed: s 435C(1)(b) and s 435C(2)(a). Where the creditors of the company resolve that the company be wound up the company's affairs can be continued to be conducted by the administrator, but as the company's liquidator, under the regime prescribed for a creditor's voluntary liquidation: s 446A. A transition to a creditor's voluntary liquidation will also occur where the company fails to execute a deed of company arrangement within the time permitted, the company's creditors resolve that the deed of company arrangement be terminated, or where the company be wound up on certain other circumstances.

53 The normal outcome of the administration of a company is that a deed of company arrangement is executed, and the creditors resolve that the administration should end or that the company be wound up: s 435C(2). Other ways that the administration may end are set out in s 435C(3) as follows:

(a) if the court orders, under s 447A or otherwise, that the administration is to end, for example, because the court is satisfied that the company is solvent;

(b) the meeting of creditors which is required to be convened to consider the company's future is not held within the permitted time;

(c) the meeting convened to consider the company's future is concluded without the creditors passing a resolution in respect of its future; or

(d) the company does not execute a deed of company arrangement within the time permitted.

54 Upon termination of the administration, the powers of management of the company are returned to the directors of the company.

55 The plaintiff applies for orders under s 447A. That section is in the following terms:

(1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.

(2) For example, if the Court is satisfied that the administration of a company should end:

(a) because the company is solvent; or

(b) because provisions of this Part are being abused; or

(c) for some other reason;

the Court may order under subsection (1) that the administration is to end.

(3) An order may be made subject to conditions.

(4) An order may be made on the application of:

(a) the company; or

(b) a creditor of the company; or

(c) in the case of a company under administration - the administrator of the company; or

(d) in the case of a company that has executed a deed of company arrangement - the deed's administrator; or

(e) ASIC; or

(f) any other interested person.

56 The width of the power under s 447A was emphasised in Australasian Memory Pty Ltd v Brien [2000] HCA 30; (2000) 200 CLR 270; Cawthorn v Keira Constructions Pty Ltd (1994) 33 NSWLR 607, and in Re Brashs Pty Ltd (1994) 13 ACLC 110, 114.

57 Of course, that does not meant that the power is at large. Any order under s 447A must be consistent with and, I would add, conducive to achievement of the objects of pt 5.4A as stated in s 435A: Re Ricon Constructions Pty Ltd; Ex parte McDonald (1997) 43 NSWLR 174, 178; Re Ansett Australia Ltd (No 1) [2001] FCA 1806; (2002) 115 FCR 376 [52].

58 For a recent example of the use of s 447A see Re View Gold Pty Ltd; Ex parte Saker [2008] WASC 241.

59 Counsel referred to only one case in which s 447A was invoked to terminate the administration of a company because the company was solvent: Re Unique Doors Pty Ltd [2002] VSC 331. That case demonstrates the need for direct non-hearsay evidence to prove solvency: [5].

60 One of the grounds relied upon by the plaintiff for an exercise of the power under s 447A is that provided in subsection 2(a), that 'the company is solvent'. That ground invites attention to the legal principles as to when a company is solvent.

61 Before turning to those principles, I deal with a submission made in written submissions by the administrators, although not pressed in oral submissions. The administrators submitted that:

(a) in making an appointment under s 436C a secured creditor did not need to form an opinion as to the insolvency or likely insolvency of the company;

(b) in that respect, the position under s 436C differs from the position when an administrator is appointed under s 436A or s 436B; and

(c) it follows that, when an administrator is appointed under s 436C, the solvency of the company is not a ground to exercise the power under s 447A to terminate the administration.

62 I accept the first two propositions, but not the third.

63 Continuing default by a company in payment for a debt secured against all or substantially all of the company's property tends to indicate insolvency. That was recognised in the ALRC Report [66] (referred to earlier in these reasons) in explaining the power of appointment under s 436C.

64 In an application for an order under s 447A, in a case where the administrators were appointed under s 436C, the ability of the company to pay the secured debt which has triggered the right of appointment will be of central significance to an assessment of the company's solvency. However, if, taking that ability into account, the company is solvent, the solvency of the company would, in my opinion, be a circumstance enlivening the discretionary power under s 447A.

65 The meaning of solvent is controlled by s 95A(1). By that section a person is solvent if, and only if, the person is able to pay all the person's debts as and when they become due and payable.

66 Whether a company is able to pay its debt as and when they become due and payable is a question of fact to be determined in the light of all the circumstances, including the nature of the company's assets and business: Rees v Bank of New South Wales [1964] HCA 47; (1964) 111 CLR 210; Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666.

67 Insolvency is a question of fact to be ascertained from a consideration of the company's financial position taken as a whole. In considering the company's financial position as a whole, the court must have regard to commercial reality. Commercial realities will be relevant in considering what resources are available to the company to meet its liabilities as they fall due, whether resources other than cash are realisable by sale or borrowing upon security, and when such realisations are achievable: see Lewis v Doran [2004] NSWSC 608; (2004) 208 ALR 385 [106] and cases there cited.

68 Prior to the insertion in 1992 of the definition of insolvency in s 95A, it was accepted that insolvency directed attention to whether the company could pay creditors due for payment from its presently available assets. It was not enough that upon realisation the assets would ultimately be sufficient to pay all debtors: Re Bond Corporation Holdings Ltd (1990) 1 WAR 465, 473 - 474.

69 In substance, s 95A is to the same effect. It involves a 'cash flow' test rather than a 'balance sheet' test of insolvency, although the extent of the company's assets is relevant: Melbase Corp Pty Ltd v Segenhoe Ltd [1995] FCA 1225; (1995) 17 ACSR 187, 198; Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459, 465; The Bell Group Ltd v Westpac Banking Corporation (No 9) [2008] WASC 239 [1065] - [1075].

70 The company's available assets to pay debts that are due are not restricted to cash resources immediately available; they extend to moneys procurable by realisation or mortgage or pledge of assets within a relatively short time: Sandell v Porter (670); Re Adnot Ltd (1982) 7 ACLR 212, 216.

71 The words 'from his or her own moneys' do not appear in the definition of solvency and insolvency in s 95A. The effect of that was explained by Giles JA in Lewis v Doran [2005] NSWCA 243; (2005) 219 ALR 555 [110] - [112]. Funds which can be gained from borrowings, secured or unsecured, are to be taken into account. Attention must be given to the terms of the borrowing. If and only if the borrowing is on payment terms or otherwise such that the lender is not a creditor whose debt cannot be repaid as and when it becomes due and payable, the borrowing will assist in a conclusion of solvency. Whether that is so is a question of fact.

72 The approach of Giles JA in the Court of Appeal in Lewis v Doran (2005) is consistent with the approach taken by Palmer J at first instance in Lewis v Doran (2004) [109] - [113]. Palmer J's analysis was approved by Owen J in Bell v Westpac [1089].

73 Consistently with that analysis, loans for a very short term or loans payable on demand will not enhance solvency: Australian Securities and Investments Commission v Edwards [2005] NSWSC 831; (2005) 220 ALR 148 [99], [210].

74 A temporary lack of liquidity does not necessarily constitute insolvency: Sandell v Porter (670); Hymix Concrete Pty Ltd v Garrity (1977) 13 ALR 321, 328; Duncan v Commissioner of Taxation; Re Trader Systems International Pty Ltd [2006] FCA 885; Bell v Westpac [1090]. Temporary lack of liquidity is to be distinguished from insurmountable endemic illiquidity: Bell v Westpac [1139], [1140].

75 Section 447A invites attention to whether the company is insolvent. That is to be assessed as at the date of the hearing, not at some earlier point in time, such as when the company went into administration. Thus the analysis of insolvency invited by s 447A(2)(a) is prospective, not retrospective. Prospective and retrospective assessments of solvency present a contextual difference that should be borne in mind in considering the statements made in the cases: Lewis v Doran (2004) [107] - [110]; Bell v Westpac [1076] - [1079].

76 Insofar as the plaintiff invokes s 447A(2)(a), the plaintiff bears the onus of establishing that the Company is solvent.

77 In the context of an application to wind up a company which is presumed insolvent as a consequence of failure to comply with the statutory demand, it has been said that in order to discharge the onus of proving solvency the company should present the 'fullest and best evidence of the financial position of the company': Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163; (2003) 45 ACSR 711 [16]. Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts even if made by qualified accountants who have detailed knowledge of how those accounts were prepared: Expile [16]; Lesley v Howship (463).

78 As to the need for cogent evidence in order to prove solvency, see also Evans & Tate Premium Wines Pty Ltd v Australian Beverage Distributors Pty Ltd [2005] NSWSC 186 [28] and following.

79 That brings me to the evidence on solvency. I begin with the evidence on the proposed purchase by Mr Peter Flynn of the Connolly Property, and the effect that might have on the solvency of the company.

80 In his affidavit of 17 October 2008 Mr Peter Flynn says that, notwithstanding the failure of the finance condition of the offer and acceptance dated 1 October 2008, he intends to proceed to purchase the Connolly Property on his own. His affidavit says that on 17 October 2008 he had been advised by BankWest that it would provide him with finance approval subject to a credit check being carried out.

81 Mr Peter Flynn's affidavit says that the total balance owed to the bank is approximately $583,000, so that after receipt of the proceeds of sale of $570,000 there would be a shortfall of about $13,000 owing to the bank. He says that he will pay any shortfall between what is owed to the bank and the proceeds of sale. He says that settlement will take place 21 days after he receives finance approval, which he expected to receive within a few days of 17 October 2008. Thus he estimates, in his affidavit, that the settlement date will be on or about 10 November 2008.

82 There are a number of salient matters which are not the subject of evidence from Mr Robert Flynn or Mr Peter Flynn.

83 First, no further evidence is provided of events subsequent to 17 October 2008. There is no evidence of a contract of sale being entered into between Mr Peter Flynn and Mr Robert Flynn, or any evidence as to its terms. Thus there is no further evidence as to the likely or required settlement date for any contract of sale. Nor is there evidence of the fact of, or terms of, any finance approval granted to Mr Peter Flynn by BankWest. In this last respect, counsel for the plaintiff said from the bar table that such evidence was available in the form of a letter dated 4 November 2008. If that evidence, standing alone, had been critical I would have been inclined to grant leave to allow a further affidavit to be filed. But that evidence alone, on my analysis, would not alter the position.

84 Further, Mr Robert Flynn says in his affidavit that he will use the proceeds of sale of the Connolly Property in partial discharge of the Company's indebtedness to the bank. There is no evidence as to the terms between Mr Robert Flynn and the Company upon which that will occur. Assuming that it would occur by way of loan, rather than gift, what would be the terms of the loan, including the terms as to repayment?

85 The authorities to which I have already referred demonstrate that the terms of any loan by Mr Robert Flynn to the Company would bear directly upon whether, and to what extent, the use by Mr Robert Flynn of the proceeds of sale of the Connolly Property to discharge the Company's indebtedness would alter the solvency of the Company. The absence of such evidence prevents the prospect of the sale of the Connolly Property from being of significant assistance to a conclusion of solvency. In any event, as will appear, there are additional reasons why the plaintiff's evidence falls well short of proving solvency. I turn to the other evidence as to solvency.

The financial position of the Company; is the Company solvent?

86 Whether the plaintiff has discharged her onus to prove solvency is to be considered against the undisputed fact that for some months, the Company's debts to the NAB in the sum of not less than $580,000 have been due and payable but have not been paid by the Company. The evidence demonstrates that the failure to pay NAB was on account of the Company's inability to do so.

87 On the question of solvency, the plaintiff relies primarily on the affidavit of Mr Mark Power dated 20 October 2008 and paragraphs 33 to 40 of the plaintiff's affidavit of 17 October 2008. The plaintiff also refers to the affidavit of Mr Aaron Chapple sworn 24 October 2008.

88 Mr Power is a chartered accountant who has acted as a corporate and business adviser to the Company since about September 2007.

89 He refers to a balance sheet said to be produced by the Company's MYOB accounting system as at 9 October 2008. That balance sheet is not in evidence. Mr Power has not annexed any of the financial records of the Company to his affidavit.

90 The balance sheet reveals, Mr Power says, total assets of about $768,000 and liabilities of about $657,000. (In summarising his evidence I will use round figures of thousands of dollars.)

91 Mr Power says that the current assets and current liabilities of the Company may be summarised as follows:

Trade debtors $756,000; inventory $171,000; sundries $11,000. Total $938,000.

NAB $381,000; ANZ cheque account $36,000; trade creditors $400,000; GST liabilities $72,000. Total $889,000.

92 Thus Mr Power says there is an excess of current assets over current liabilities of about $49,000.

93 The figure for NAB in Mr Power's figures is incorrect, in that he understates the debt by about $200,000. Moreover, there would be additional interest and the costs of the administration to add further to the Company's debt to NAB. However, that is not the full extent of the Company's financial problems. Further analysis of the figures in Mr Power's affidavit reveals a parlous financial situation for the Company.

94 When Mr Power's evidence is read with the plaintiff's evidence the position appears to be as follows. Of the current asset of $756,000 referred to as 'trade debtors', $513,000 relates to projects to be carried out from materials supplied by overseas suppliers. In those cases, the trade debtor is to pay the relevant sum on delivery. Thus these 'debtors' do not presently owe any debt to the Company. A debt will be owed only when (and if) materials are obtained and a kitchen then installed.

95 The balance of debtors, namely about $242,000, relates to contract materials supplied by local suppliers. The local suppliers are currently owed $144,000. It is said that it will cost the Company an estimated $43,000 to complete the installation contracts. Thus it is said that completion of those contracts would give rise to a net cash surplus for the Company of about $55,000.

96 Consequently only a small proportion, at best, of the $756,000 said to be owed by trade debtors is presently due. Substantially all or at least most of the monies owing will become due only after the supplier has supplied materials to the Company and the Company has installed the kitchen and invoiced the customer.

97 The plaintiff's assertion, in par 34 of her affidavit of 17 October 2008, that the trade debtors 'will be realised over the next 120 days' is not based on stated grounds, much less any primary evidentiary material. It appears to involve an assumption that the Company will undertake installation and other work in order that such debts become due.

98 Mr Power says that the Company presently has sufficient contracts or orders in place to fill seven containers. He says one of the containers is fully paid for (although apparently $14,000 is still owing). He and the plaintiff say that two container loads are in the course of being manufactured and have been paid for up to 30% of their value.

99 The plaintiff says at par 39 that the total amount required to pay for the seven containers now in China is about $330,000. As Mr Theobald states in his affidavit sworn 4 November 2008, that suggests a shortage of working capital. It is far from apparent where the Company will obtain those funds from to enable it to install the kitchens.

100 Annexed to Mr Chapple's affidavit is a spreadsheet said to have been presented by Mr Palandri, an employee of the administrators, to employees of the Company. The spreadsheet states that amounts totalling $664,000 were due. Mr Chapple says, without reference to any documents or other primary material, that some of the debtors listed in that spreadsheet have had their kitchens installed and the Company is awaiting payment while others require minor completion prior to payment being made. The generality of Mr Chapple's evidence and the absence of primary financial material to support it means that it is, in my opinion, of little weight in relation to the solvency issue.

101 The evidence relied upon by the plaintiff seems to me to fall well short of proving that the Company is solvent. The evidence is not supported by primary financial information. Further, on the evidence, the Company is (and has for some time been) unable to pay its substantial debts to NAB. Further, the Company appears to suffer from a substantial shortage of working capital. It requires hundreds of thousands of dollars to pay for the shipments from China and then to install the kitchens so as to be entitled to invoice customers for work not yet done, but recorded as trade debtors.

102 By definition, on a winding up substantially all of the $756,000 trade debtors will not be due and so does not reflect an asset. Thus on the figures deposed to by Mr Power, adjusted as explained above, there is a very substantial deficiency of assets to satisfy the Company's debts.

103 That brings me to the other grounds advanced by the plaintiff for removal of the administrators. The plaintiff submits that a number of facts and circumstances support the conclusion that the administrators should be removed for lack of independence or by reason of the way in which they have carried out their duties.

104 I commence by outlining relevant legal principles.

The independence of the administrators and related complaints

105 The guiding principle in relation to the qualification and removal of liquidators is that they must be both independent and seen to be independent of any matter that the duties as liquidator require, including matters requiring investigation: Re National Safety Council of Australia [1990] VicRp 2; [1990] VR 29, 34 - 35. The same approach is to be taken in an assessment of whether a person is qualified or should be removed as administrator; see, for example, Nambucca Investments Pty Ltd v Star (1995) 13 ACLC 1814 and Re St George Builders Hardware Pty Ltd (1995) 18 ACSR 451.

106 The principles in relation to the removal of a liquidator on the ground of actual or perceived conflict of interest include the following:

(1) there must be a real and not merely theoretical possibility of conflict;

(2) those who assert that a liquidator should be removed are under a duty to establish at least a prima facie case that removal is for the general advantage of the persons interested in the winding up, and the onus of proof will not be easy to discharge if the liquidator has become well acquainted with the business and affairs of the company; and

(3) a liquidator may act as a liquidator of a company even if there is a prior involvement with the company in liquidation, provided that that involvement is not likely to impede or inhibit the liquidator from acting impartially in the interests of all creditors or give rise to a reasonable apprehension that the liquidator might be so impeded.

107 These principles were applied by Santow J in the Nambucca and Re St George Builders cases. In Re St George Builders, Santow J granted leave under s 448C for a person to be appointed as administrator of St George notwithstanding that he was also administrator of another company which held a charge over the assets of St George. The secured debt to the other company was not in dispute and the circumstances did not give rise to a real possibility of conflict at that stage. The inherent potential conflict in representing one creditor and a group of creditors of which that creditor was a member was, his Honour held, permitted by the provisions of s 448C(1)(b) and s 448C(1)(c). Leave was granted on the undertaking of the administrator that in the event of a conflict of interest arising that might impede or inhibit the administrator from acting impartially in the interest of all creditors or giving rise to a reasonable apprehension to that effect, the administrator would approach the court with a view to submitting to the administrator's removal and substitution by another administrator.

108 It is trite, but nonetheless fundamental, that the duty of an administrator is to act in the interests of all creditors of the company. That duty led Byrne J to observe in obiter dicta, in Re Smarter Way (Aust) Pty Ltd [2000] VSC 408; (2000) 35 ACSR 595 [26], that the engagement by administrators of a company of the solicitors retained by the appointing charge-holder is in general undesirable. His Honour said as follows:

Before I leave this proceeding, it is desirable that I express my view upon an aspect of this administration which I have mentioned in [14] above and which provoked some factual controversy. This was the engagement by the administrators of the solicitors retained by the appointing chargee. Let me say immediately and shortly that such a course is, in general, undesirable. An administrator has powers and functions which are conferred and imposed by Part 5.3A of the Law for the purposes set out in s 435A. It will often occur that the interests of the appointor, whether this be the board of directors of the company or a chargee, are or may be in conflict with the interests of the company's creditors or its members. The often burdensome duty of the administrator is to stand firmly and independently between these competing interests: see Re Central Spring Works Australia Pty Ltd [2000] VSC 144; (2000) 34 ACSR 164 at [13] - [14], per Warren J. In particular, it is important that the administrator not act and not appear to act merely at the bidding of the appointor to whom, it may be thought, they owe their employment as such. This may be of particular importance where the appointment is made by the directors who may wish to present a deed of company arrangement to the creditors with the support of the administrator's opinion in the s 439A(4) report. In such a case, the creditors are entitled to the independent opinion of the administrator as well as a full and accurate report of the matters specified in that section and in the regulations made under it: see McVeigh v Linen House Pty Ltd [2000] VSCA 4 at [39] - [43]. In principle, the creditors and members of the company are entitled to the same professional independence from an administrator appointed by a chargee.

109 In some cases, the appointment by an administrator of solicitors who act for and have acted for the appointor may be an indication of a lack of independence. However, whether that is so will depend upon all of the circumstances. In my opinion appointment by an administrator of solicitors who act for the appointing holder of a charge does not, of itself, in all circumstances, give rise to a ground for removal of the administrator on the ground of a lack of independence. Counsel for the plaintiff accepted that if an administrator had appointed the charge-holder's solicitors, and that circumstance stood alone, the appropriate response would be to invite the administrator to retain new solicitors, rather than to replace the administrator.

110 In Re Paradise Constructors Pty Ltd [2004] VSC 92; (2004) 182 FLR 135; (2004) 8 VR 171, the appointment by the administrator of solicitors who were themselves creditors of the company and who had from time to time acted for the director who made the appointment was one of a number of matters which led Mandie J to terminate the administrator's appointment. There were, in that case, a number of circumstances that, in combination, led the court to the conclusion that the administrator had shown a lack of independence. They are summarised in [65] - [67] of the reasons. The court also concluded that the administrator had failed to properly carry out his duties. The circumstances leading to that conclusion are summarised in [68] - [70].

111 The matters relied on by the plaintiff in support of her application for removal of the administrators (summarised under headings B and C of the plaintiff's supplementary submissions) are to be considered in the light of these principles.

112 The fact that in August 2008 Mr Theobald prepared the report on the financial position of the company does not, to my mind, impede him from acting impartially in the interests of all creditors or give rise to a reasonable apprehension that he would be so impeded. The statements made by Mr Theobald in the August report were expressed to be based on the information then available to him. As administrator, significantly more information is available to him. There is no sufficient basis to conclude that he would fail to take all information now available into account, or to conclude that he would resist altering any conclusions that he had reached in his August report.

113 That Mr Theobald acted as proxy for the bank (as well as for certain other unsecured creditors) does not, in my opinion, provide any basis to conclude that he does not act independently of the bank.

114 The plaintiff also points to the fact that the administrators have appointed the solicitors who act for the bank in relation to this matter as their solicitors. In my opinion, that is undesirable for the reasons I have given at [108].

115 The administrators' position in that respect, articulated by counsel, was that while the interests of the secured creditor and of general creditors are admittedly different, no real conflict exists between them, at least until circumstances give rise to a more specific prospect of conflict. Counsel for the administrators went on to say that if the court were to express a different view on that point, the administrators would instruct new solicitors.

116 It seems to me to be appropriate that the administrators take that course because, as I have said, it seems to me to be undesirable and inappropriate for the same solicitors to act both for the administrators and for the appointing charge-holder.

117 However, I am not satisfied that the use by the administrators of the same solicitors is a sufficient indication of a lack of independence to justify a conclusion that the appointment of these administrators should be terminated. In short, the position seems to me to fall into the category that the circumstance stands alone. I am not satisfied that there are any other substantial indications of a lack of independence on the part of the administrators. Thus the proper response is for the administrators to appoint new solicitors.

118 I turn to the various matters said in the plaintiff's submissions to justify a conclusion that the administrators should be replaced on the ground that they have failed to properly carry out their duties.

119 As I have said, the termination by the administrators of the contracts of employment of Company employees has to be seen in the context that the administrators had been locked out of the premises from which the Company conducted its business.

120 The evidence in Mr Robert Flynn's affidavit of 24 October 2008 as to conversations said to have occurred between the customers of the Company and the administrators or their representatives is inadmissible hearsay.

121 The plaintiff's evidence falls well short of satisfying me that Mr Theobald has, as the plaintiff invites me to conclude, approached his task from the beginning with the object of leading the Company into liquidation.

122 The plaintiff criticised the conduct of the administrators in failing to give notice of the first creditors' meeting to customers. Customers of the company were not given notice of the first creditors' meeting. The reasons for that are explained by Mr Theobald in his affidavit at par 19.

123 The plaintiff responds to that explanation by submitting that the explanation is unsatisfactory, saying, in substance, that given his prior involvement with the Company Mr Theobald should have formed a clear view that customers were creditors at an earlier point in time.

124 Arguably, the conclusion might have been reached that customers were creditors at an earlier point in time but, in my opinion, any criticism of Mr Theobald in that respect is not of a character or magnitude that approaches being something that would justify an order that his appointment be terminated and that he be replaced.

125 The plaintiff also submitted that criticism could be made of the conduct of the administrators in respect of the second meeting and the giving of notice of the second meeting to customers. I do not accept that submission.

126 At the hearing, I granted leave for Mr Theobald to give oral evidence on this topic. He was cross-examined on that evidence.

127 The unchallenged evidence of Mr Theobald is that he gave instructions that all creditors would be given notice of the second meeting, including all customers. The plaintiff says that that falls short of being conclusive proof that each and every customer has received notice of the meeting. As far as it goes, that submission may be accepted. However, with respect, in my opinion the submission misses the point. The plaintiff has the onus of establishing a ground for an exercise of power under s 447A. In my opinion, on the evidence there is no ground to conclude that Mr Theobald has failed to give notice to customers of the second meeting in such a way and in such circumstances as would justify an order that he be replaced.

128 Next, the plaintiff's written submissions suggest that it might be inferred that overseas creditors had not been properly notified. The limited material referred to by the plaintiff in support of that seems to me to fall well short of justifying any such inference.

129 There is also reference to what is said to be an error on the part of the administrators in a spreadsheet, which is annexed to Mr Chapple's affidavit. Any error of that kind is not, in my opinion, something which would call for an order of the kind sought by the plaintiff.

130 Finally, the plaintiff refers to par 31 of her affidavit and the comments said to have been made by Mr Theobald on 8 October 2008 to the effect that he could make the company look insolvent. In his affidavit, Mr Theobald denies making any such comment. Mr Theobald not having been cross-examined in respect of his evidence in this regard and Mrs Flynn not having been cross-examined, I am, as counsel for the plaintiff accepted, in no position to resolve the conflict in their evidence. In those circumstances, the disputed evidence in par 31 of Mrs Flynn's affidavit affords no basis for me to act under s 447A.

131 For these reasons I would dismiss the application.