Grace v Grace

Judgment (ex tempore) 1HIS HONOUR: On 28 March 2013 I dealt with the question of costs and dismissed the defendants' application for an inquiry as to damages pursuant to the usual undertaking given by the plaintiff in connection with his interlocutory application for the appointment of a provisional liquidator. I adjourned the proceedings to 23 April 2013 for directions "and any application by or in respect of the provisional liquidator" and directed that notice of any application to be made on 23 April be served on all other parties not later than 16 April. As a result, three applications were advanced before the Court on 23 April. The first was an interlocutory process filed by the first and second defendants on 15 April for an order that the provisional liquidator produce for inspection books and records kept by him pursuant to (Cth) Corporations Act 2001, s 531. The second was an interlocutory process filed by the plaintiff on 16 April 2013 for an order terminating the appointment of the provisional liquidator. The third was an interlocutory process, leave to file which in Court, was sought by the provisional liquidator, for advice pursuant to Corporations Act s 477(2B) to the effect that he would be justified in entering into loan transactions and giving security over assets of the Nevilda companies in order to raise funds to pay his fees and remuneration. 2It is convenient to deal first with the defendants' s 531 application. Corporations Act s 531 provides as follows: A liquidator or provisional liquidator must keep proper books in which he or she must cause to be made entries or minutes of proceedings at meetings and of such other matters as are prescribed, and any creditor or contributory may, unless the Court otherwise orders, personally or by an agent inspect them. 3The prescribed matters referred to in that section are prescribed by Corporations Regulations, Reg 5.6.01: For section 531 of the Act, the prescribed matters are those that are required to give a complete and correct record of the liquidator's or provisional liquidator's administration of the company's affairs. 4In addition Reg 5.6.02 provides as follows: The liquidator or provisional liquidator must ensure that the books kept under section 531 of the Act are available at his or her office for inspection in accordance with that section. 5On 20 March 2013, the defendants' solicitors wrote to the provisional liquidator's solicitors requesting inspection of the provisional liquidator's books and records pursuant to s 531 on 3 April 2013, and advising that a legal representative would be in attendance with their clients as their agent. The provisional liquidator's solicitors replied on 28 March that the provisional liquidator's file was "significant" and that it was not practical to make the books and records available by 3 April, but that upon receiving a response they would respond as soon as possible. They acknowledged that as a result of the terms of Reg 5.6.1 at least on one view the scope of the books and records covered by s 531 was fairly wide, and asked whether the nature of the request could be narrowed by identifying particular documents or categories of documents access to which was sought. 6The defendants' solicitors replied on 2 April 2013, stating: Our clients have requested to see all the books and records relating to entries or meetings of proceedings at meetings with anyone connected with the administration of the affairs of Nevilda Investments and Nevilda Holdings including but not limited to David Grace, David Grace's representatives, Deborah Grace, Julie-Anne Grace, Westpac, Stacks Finance, real estate agents and valuers. We would assume that the provisional liquidator would keep these records in an appropriate manner and therefore it should not be difficult to make them available. 7The letter concluded by repeating the request that access be provided to the books and records of the provisional liquidator under s 531, this time in seven days time on 10 April 2013. An application to the court was foreshadowed. 8On 4 April, by email, the defendants' solicitors sought advice as to whether their clients may inspect the books and records from 1pm on 10 April. On 9 April, the provisional liquidator's solicitors responded to the effect that the provisional liquidator was of the view that s 531, "does not extend to the types of meetings referred to in your letter" and, "We note you have not sought to impose any time limit to your request for books and records. In addition the wording of your request is very wide. We submit that the scope of your request is arguably oppressive and a fishing expedition". As s 531 provides a right of access to the documents of the class it describes, not dependant on their relevance to any issue, this approach was, in my view, entirely misconceived. 9On 10 April, the defendants' solicitors wrote again, setting out the terms of the relevant legislation and the history of their requests for access. the response, and their failure to understand why the provisional liquidator had not complied with the statutory obligations: "Our clients' request is simple and is based on the statutory entitlements set out above and our clients will no longer tolerate your client's prevarication. Our clients' request inspection of the books and records at 12noon on Friday 12 April", and foreshadowed an application to the court if that was not agreed. 10On 11 April, the provisional liquidator's solicitors responded, that having given the matter full consideration: Our client is of the view that the handwritten notes taken contemporaneously during the course of the meetings referred to above do not fall within the scope of s 531 or reg 5.6.01. Accordingly our client will not allow inspection of those documents under s 531. If we are incorrect in that regard and your clients take the matter further, we intend to seek an order from the Court that our client be excused from producing those documents for inspection. 11There was no proffer of access to the other documents specifically addressed in the provisional liquidator's response. 12In my view, absolutely no reason has been shown by the provisional liquidator why the documents that he is required to keep pursuant to s 531 have not been produced for inspection by the defendants. I have not been asked on the present application to resolve the apparent dispute as to whether the notes of certain meetings between the provisional liquidator and Mr Grace fall within s 531 or Reg 5.6.01, and I shall not finally do so, but I would observe, in the hope that it might avoid further disputation, that those notes would seem to be of meetings which formed part of the provisional liquidator's administration of the company in question and prima facie it is difficult to see why they would not therefore be necessary to give a complete and correct account of that administration within the meaning of Reg 5.6.01. 13I order: (1)That on 1 May 2013 the provisional liquidator produce for inspection by the first and second defendants, by themselves and/or their agents, all books kept by the provisional liquidator in respect of the Nevilda Holdings Pty Ltd and Nevilda Investments Pty Ltd within Corporations Act s 531 (including Corporations Regulation 5.6.01). (2)That the provisional liquidator pay the first and second defendants' costs of their interlocutory process filed 15 April 2013 on the indemnity basis. 14I turn now to the plaintiff's application to terminate the appointment of the provisional liquidator. 15In interlocutory proceedings I appointed a provisional liquidator to Nevilda Holdings and Nevilda Investments in January 2007, see Grace v Grace [2007] NSWSC 6. The rationale for that appointment was described inter alia in paragraph 63 of that judgment, as follows: [63] In my opinion, therefore, the strength of Mr Grace's case that he is entitled to control Holdings and Investments, the consent of the defendants to those companies being wound up, the probability that they will either pass to Mr Grace's control or be wound up, the inappropriateness of Ms Grace and Dr Grace retaining control in those circumstance, the risk that (if they do retain control) company resources may be used to fund the majority's defence (notwithstanding the consent to these two companies being wound up), the minimal detriment involved in the appointment of a provisional liquidator where Mr Grace seeks it and Ms Grace and Dr Grace consent to a winding up order, and the insignificance of the interference with management involved in appointing a provisional liquidator in those circumstances, justify the appointment of a provisional liquidator to Holdings and Investments. However, the improbability of a winding up order ultimately being made in respect of Sharander, the prima facie entitlement of Ms Grace and Dr Grace to retain its control, the serious interference with their rights and management of Sharander that would be involved in appointment of a provisional liquidator, and the absence of jeopardy to the assets (other than through expenditure of resources on the defence of the majority, which can be taken into account in valuing any buy-out order) tell against appointing a provisional liquidator to Sharander. 16In the course of that judgment, and again in the judgment on costs delivered on 28 March 2013 [Grace v Grace (No 4) [2013] NSWSC 385 ("the No 4 judgment")] I explained that, although it was necessary as a pre-condition of the appointment of a provisional liquidator that winding up proceedings had been validly instituted, where a winding up order was sought under Corporations Act s 233 or on the just and equitable ground, it was sufficient that there was a reasonable prospect that some form of relief under s 233 would ultimately be granted, even if that relief did not include a winding up order, so long as the assets were in some degree of jeopardy. 17Nonetheless, nothing said in either of those judgments changes the position that a pending application for the winding up of the company was an essential precondition to the appointment of a provisional liquidator. As was also recorded in the No 4 judgment, the plaintiff did not in the substantive proceedings press for a winding up order, and while the defendants on their cross-claim did, their case in that respect was rejected. No winding up order was made, and none will or can now be made in substantive proceedings. No appeal has been brought from those parts of my decision in the substantive proceedings. 18In the No 4 judgment I refused an inquiry as to damages because in substance it was the plaintiff, not the defendants, who, as things eventuated with the benefit of hindsight, was being kept out of his rights at the time when the provisional liquidator was appointed. Indeed it can be said that the continued appointment of a provisional liquidator continues to keep the plaintiff out of the rights which were vindicated by the outcome of the proceedings. 19In Garden Mews-St Leonards Pty Ltd v Butler-Pollnow Pty Ltd (No 4) (1984) 2 ACLC 682 McLelland J (as the later Chief Judge then was), while not setting out to give any comprehensive statement of the relevant principles, took into account that in circumstances where the provisional liquidator's administration was not active and there were no assets in its possession other than the company's books and records, it was appropriate to terminate the appointment on the basis that the provisional liquidator would then be required to retain custody of the financial records of the company until the final determination of the proceedings. His Honour observed that the purposes for which the provisional liquidator was originally appointed had been exhausted, bearing in mind that the primary function of a provisional liquidator is to preserve the assets of the company for the benefit of those who may ultimately be found entitled to them In Re United Medical Protection [2003] NSWSC 1031, [28], Austin J recognised that the principles applicable to termination of a winding up and (to a lesser extent) those applicable to the termination of appointment of a receiver and manager were not directly applicable to the termination of the appointment of the provisional liquidator. His Honour acknowledged that in the Butler-Pollnow case, McLelland J observed that whether there should be a provisional liquidator in control of the company was quite a different question from whether a winding up ought to continue or be stayed after an order for winding up had been made. His Honour identified (at [33]) a number of factors that were relevant to the exercise of the court's discretion on an application to terminate the appointment of a provisional liquidator. The first was whether the purposes for which the appointment was made had been exhausted and whether there was a reasonable prospect that matters may arise in the future with which the provisional liquidator should deal. The second was, whether the termination might put at risk the interests of creditors, contributories or the provisional liquidator. And the third was whether it is in the public interest that the appointment be terminated. 20It needs to be borne in mind that the United Medical Protection case, unlike the present, involved corporations which were engaged in the insurance of medical practitioners in which questions of solvency had arisen and in respect of which significant public interest issues also arose. Those factors are absent from the present case. 21The defendants sought an adjournment in order to enable them to inspect the documents that they had sought from the provisional liquidator and which I have now ordered be produced for inspection, and to develop further argument in particular in respect of whether termination of the appointment might affect their interests as creditors and whether the companies were solvent applying the cash flow test (as distinct from their obvious solvency applying the balance sheet test). Mr Moses SC argued powerfully for an adjournment to permit this as a matter of natural justice, especially given the failure of the provisional liquidator to produce documents when requested pursuant to s 531. In addition, the defendants wished to call on a notice to produce addressed to the plaintiff, undertake investigations and cross-examine the plaintiff in order to ascertain whether steps that he might take upon removal of the provisional liquidator would put at risk their interests as creditors. 22The position was thus one in which the plaintiff, at whose instance the provisional liquidator had been appointed, no longer desired the provisional liquidator to remain in office, which the defendants wished, at least for the time being, to maintain the appointment pending further investigation and hearing. 23As it seems to me, the crucial facts, most of which at least could not be changed by further evidence, are first, that no winding up order has been made, will be made or could be made in these proceedings, and no application for a winding up order remains on foot. Secondly, the appointment of the provisional liquidator has served its purpose. It was made in effect to secure and protect the assets of the corporation from the jeopardy in which they might have been while they remained in the control of the defendants during the pendency of the present litigation. 24Thirdly, applying the balance sheet test, the corporations are manifestly solvent, to the extent that the subsidiary has a surplus of assets over liabilities of about $6 million and the holding company a surplus of assets over liabilities of about $12 million. That represents no small margin in the circumstances; those surpluses represent about 50 percent of the gross asset value of the corporations in question. 25Fourthly, it may be, although it has not been established, that in respect of the cash flow the companies or at least one of them is in a marginal position, but this must be seen in the context that these are private companies; that their primary activities are the holding of land and the generation of rental income from the landholdings; and that the surplus of assets over liabilities is such that it cannot be conceived that their assets could not be rearranged in such a way as to enable them to discharge their debts within a reasonable time. 26Fifthly, in view of the ultimate outcome of the proceedings, the continued appointment of the provisional liquidator keeps the successful plaintiff out of his rights which have been vindicated by the outcome of the proceedings and in respect of which there is not any relevant appeal. 27Sixthly, the plaintiff has proffered an undertaking that he will ensure that the companies pay the provisional liquidator's fees and, in any event, the provisional liquidator has a lien over the assets and undertaking of the companies to secure those fees. 28Seventhly, the defendants' rights as creditors will not be detrimentally effected in any relevant way by the removal or by the termination of the appointment of the provisional liquidator. I say "in any relevant way" because it may well be - and indeed the plaintiff has openly stated as much - that they will be removed as directors of the company of which they remain directors, and it may well be that the plaintiff will proceed to have the companies borrow funds on the security of some of its corporate assets in order inter alia to pay out the provisional liquidator. But it seems to me that is not a relevant effect on their interests as creditors. What Austin J was referring to in that respect was the possibility that the position of creditors would be adversely affected if a provisional liquidator were removed, further trading took place, and the company turned out to be insolvent after that further period. He was not concerned, in my view, with the ongoing management of the company and the potential effect that that might have on creditors save in the context of pending potential insolvency. 29To sum up then, the basis for appointment of a provisional liquidator - namely, pendency of a suit for a winding up order - has gone; the purpose of appointment of a provisional liquidator has been achieved and served and is at an end; and solvency is not, in the context of these companies, their role and the margin of assets over liabilities, a contrary reason. Taken together, all of these matters demonstrated to my mind a very strong prima facie case that the appointment ought to be terminated. The only argument advanced to the contrary was that inspection of the documents to be produced by the provisional liquidator, and further examination of the plaintiff's intentions, might show that the companies were not cash flow solvent, or that the termination of the appointment might result in an adverse impact on the rights of the defendants as creditors. 30For the reasons I have given, neither of these arguments seems to me to have much promise. Nonetheless, Mr Moses' powerful advocacy persuaded me that the defendants ought to be afforded the opportunity they sought - particularly given that the provisional liquidator had failed to comply with their s 531 requests in a timely manner - so long as it was, in effect, at their risk. I therefore invited Mr Moses to obtain instructions from the defendants to give the usual undertaking as to damages in respect of the continued appointment of the provisional liquidator from this date, as it was they who are now seeking to maintain the appointment. Having been given such opportunity the Court was informed that the defendants declined to give any such undertaking. 31Had they done so, I would, notwithstanding the strength of the contrary case to which I have referred, have afforded them the opportunity they sought; but, in the absence of any such undertaking, it seems to me that the strength of the considerations to which I have referred is overwhelming, and there is no proper basis upon which the provisional liquidator should remain in office. 32The provisional liquidator did not expressly oppose termination of his appointment, but sought time to take further steps to bring the provisional liquidation to an end and also, I think, preferred to remain in office to pursue the third interlocutory process that was before the Court so as to remain in control of such re-financing steps as might be necessary to fund payment of his own fees. 33As to the first, I do not accept that it should take the four to six weeks sought by the provisional liquidator to take the requisite steps to bring the provisional liquidation to an end, but propose to allow seven days for that purpose. As to the second, that in effect brings me to the third interlocutory process, being the liquidator's application for judicial advice. 34In this application the provisional liquidator seeks the advice of the Court that he would be justified in entering into two loan transactions, one in respect of each company in order to raise the requisite funds to enable those companies to pay his remuneration which has, in substance, already been determined by the Court. 35It seems to me that where a provisional liquidator has been appointed in the circumstances in which it occurred in this case - which is quite different from an appointment pending a winding up in insolvency where the assets were in jeopardy - that it is properly a matter for the directors to consider how the corporation's funds or assets should be arranged in order to pay the provisional liquidator, provided that it is done in a timely manner. The plaintiff has given an undertaking to ensure that that will occur. In those circumstances, it seems to me that there is no need for the advice sought, and that the liquidator's application should be dismissed. 36It follows that it does not afford any basis for extending the appointment or for deferring the termination of the provisional liquidator's appointment. (3)I order that the appointment of Mr Geoffrey Reidy as provisional liquidator of the third defendant Nevilda Holdings Pty Ltd and the fourth defendant Nevilda Investments Pty Ltd be terminated with effect from 3 May 2013. (4)I order that the second and third defendants pay the plaintiff's costs of the plaintiff's interlocutory process filed 16 April 2013. 37I note that the provisional liquidator's interlocutory process though foreshadowed has not been filed, and in those circumstances there is no necessity to make any order in respect of it. 38The defendants have, in addition, sought that an arrangement be put in place to enable them to inspect the books and records of the third and fourth defendants (as distinct from those of the provisional liquidator) in order to inform themselves as to those of which they would wish to seek copies pursuant to Order 33 made on 9 November 2012. That seems to me to be a reasonable request. (5)I order that the provisional liquidator produce for inspection by the first and second defendants at the offices of Rodgers Reidy on and from 9am on Wednesday 1 May 2013, the books and records of the third and fourth defendants for the purposes of them and/or their agents in fact the provisional liquidator of what copies they seek pursuant to Order 33 made on 9 November 2012. 39The provisional liquidator now applies for an adjournment to adduce evidence to oppose its indemnity cost order. I am not going to grant an adjournment because in my view, accepting that evidence could be adduced which would show that access to the financial books of account of the administration have been provided on an ongoing basis, that would be no answer to the complaint that, in response to a specific request for production of the books kept under s 531 made in March of this year, there was not production but, to use a word used in the correspondence, "prevarication". That was in a context where there was a very clear statutory right to inspection of the documents yet the responses raised, at least on occasion, false issues about oppression and a fishing expedition, which had no place in connection with the s 531. 40The defendants have been put to costs which they ought not to have been put to vindicate their statutory right of inspection and a provisional liquidator, having regard to the provisions of the regulations to which I have referred, ought to have been in a position to produce all the documents requested expeditiously. I do not accept that the effect of the correspondence was to limit the scope of the request. The order I have made will stand. 41The plaintiff seeks an order limiting the provisional liquidator's recourse to the corporate assets in respect of costs of the present applications. It seems to me that on an application for termination of a winding up order of a provisional liquidator the Court would normally expect the provisional liquidator to appear and at least inform the Court of its attitude, and I do not think it was unreasonable that the provisional liquidator do so. In circumstances where it was a potential outcome, having regard to the defendants' stance, that the provisional liquidation might not be terminated and that work had already been done to find potential sources of finance, it was not unreasonable for the provisional liquidator to have prepared and be ready to prosecute his interlocutory process of 19 April 2013. However, he should not be entitled to recoup his costs of opposing the s 531 application. (6)I order that the costs and remuneration claimable by the provisional liquidator are not to include costs and remuneration of, in connection with, associated with or incidental to the defendants interlocutory process filed 15 April 2013. 42The defendants submit that they should not have to pay the plaintiff's costs of the termination application. The plaintiff filed an application for termination of the appointment of a provisional liquidator, in accordance with directions previously made, returnable yesterday. The defendants did not consent to that application, and while not at the outset categorically opposing it, they sought an adjournment in order to enable them to explore issues which might have supported opposition to it. At least at the time when the order was made, they opposed the order being made at that time. 43As I have sought to demonstrate in the reasons already given today, the application for termination was, it seems to me, a practically irresistible one in circumstances where there were no longer proceedings for winding up of the company on foot. While I have considered the alternative of making costs of the termination application costs in the proceedings, its discrete nature and its irresistibility supports the order I have already foreshadowed, namely, that the first and second defendants pay the plaintiff's costs of the interlocutory process filed 16 April. So the order will stand. (7)Adjourn the proceedings for directions on 29 May 2013 at 9.45 am.