Hausmann v Smith

CATCHWORDS : CORPORATIONS - external administration - Part 5.3A administrators and liquidators - sale of company's business - alleged duty to "obtain the best possible price" - such duty allegedly owed to company, to creditors and to shareholders - alleged breach of such duty - whether serious question to be tried - balance of convenience considered

LEGISLATION CITED : Corporations Act 2001 (Cth), ss.180, 181, 420A, 447E, 1321,Part 5.3A

Kinsela v Russell Kinsela Pty Ltd [1983] 2 NSWLR 452 CASES CITED : Masters v Cameron (1954) 91 CLR 353 Naumoski v Parbery (2002) 171 FLR 332 Spies v The Queen (2000) 201 CLR 603

Judith Hausmann and Howard Studniberg as parners known as the "H & J Partnership" - First Plaintiff Ganeden Investments Pty Limited - Second Plaintiff PARTIES : Judith Hausmann and John Landerer - Third Plaintiffs Michael John Morris Smith as Liquidator of ACN 099 115 698 Pty Limited - First Defendant ACN 099 115 698 Pty Limited - Second Defendant

COUNSEL : Mr C.C. Branson QC/Mr G. Lucarelli - Plaintiffs Mr A.J. Fernon - Defendants

SOLICITORS : Landerer & Company - Plaintiffs McCabe Terrill - Defendants

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

3474/06 JUDITH HAUSMANN AND HOWARD STUNNIBERG AS PARTNERS KNOWN AS THE "H&J PARTNERSHIP" & ORS v MICHAEL JOHN MORRIS SMITH AS LIQUIDATOR OF ACN 099 225 698 PTY LTD

1 The plaintiffs' originating process seeks various relief intended to impugn decisions and actions of the defendants as administrators under Part 5.3A of the Corporations Act 2001 (Cth) (and, in more recent days, as liquidators) in and about the sale of the business of the company. The relief sought includes elements aimed at reversing what has been done or may be done in that direction. 2 As an interlocutory measure, the plaintiffs seek an order restraining the making or completing of any contract for the sale of the company's assets. I have heard the interlocutory application this afternoon. 3 The plaintiffs are shareholders and creditors of the company. It is in those capacities that they make their application. In a procedural sense, they rely on s.447E and s.1321. 4 Separately, but no less relevantly (at least in a commercial sense), however, the plaintiffs are also disappointed aspirants to purchase the assets. That, of course, gives them no standing to seek the relief they wish the court to grant; and it can only be by reference to any standing they have as members and creditors that they pursue their application. 5 I have been taken through the evidence about the correspondence and discussions involving calling for expressions of interest in the assets by advertisement published in a newspaper, the fact that 13 expressions of interest were received and the process of narrowing down contenders until there were only two in the running, namely, the plaintiffs and the Russian party with whom it appears the administrators intend to enter into a sale transaction. 6 The evidence shows that a form of contract is in the course of negotiation between the defendants' solicitors and Sydney solicitors acting for the Russian party and that a deposit of $20,000 has already been paid by the Russian party. It has been suggested that, even in the absence of a formal exchanged contract, there might be a contractual relationship between the company as seller and the Russian party as buyer under one of the heads in Masters v Cameron (1954) 91 CLR 353, but that is not something on which I am in any position to make findings. 7 The plaintiffs seek to make much of the fact that the defendants did not go back to the plaintiffs in their capacity as potential buyers and give them another chance to bid after indicating to the Russian party that its most recent offer would be accepted. They also seek to make much of the fact that the defendants did not take steps to investigate the substance of the Russian party and that Russia is on the other side of the world: when it is daytime here, it is night there. There were also numerous references in submissions to "undue haste" and "indecent haste". 8 The plaintiffs seek to say that the defendants might have obtained a better outcome had they given the plaintiffs a further opportunity to make an offer. But I must say that it is not clear to me why the plaintiffs did not go ahead and make a better offer, if minded to do so, rather than coming to court - or, indeed, in addition to coming to court. 9 It is alleged by the plaintiffs that the defendants, in acting as I have described, were in breach of a duty owed by them as administrators and, more latterly, as liquidators, being a duty owed, first, to the company, second, to the company's shareholders, and third, to the company's creditors, and being a duty to obtain "the best possible price" for the company's business. 10 Several things need to be said about this. First, there is no duty upon Part 5.3A administrators or liquidators to obtain "the best possible price" for assets they cause the company to sell. They, as fiduciaries and by statute, owe duties of care, diligence and good faith, among other duties. Administrators and liquidators are both "officers" within the s 9 definition and therefore not only subject to the duties arising under ss.180 and 181 but also entitled to the benefit of the business judgment rule in s.180(2). Proceeding in a prudent way in relation to sale of assets is an incident of those duties. But on no view of matters can the duties be said to include a duty to sell only at "the best possible price". Administrators and liquidators are entitled to take into account a wide range of considerations. 11 It was said on behalf of the plaintiffs that an analogy should be drawn with s.420A which imposes upon a "controller" a particular duty to be observed in exercising a power of sale in respect of property of a corporation. The provision does not apply directly because neither a Part 5.3A administrator nor a liquidator is a "controller" within the s.9 definition of that term. But any analogy breaks down in any event. A "controller" is not subjected by s.420A to a duty to obtain "the best possible price". He or she is constrained to "take all reasonable care" to sell for no less than the "market value" (if any) or "the best price that is reasonably obtainable having regard to the circumstances existing when the property is sold". 12 The second point is that the duties owed by administrators and liquidators are not duties owed to shareholders or to creditors. Reference was made to Kinsela v Russell Kinsela Pty Ltd [1983] 2 NSWLR 452. That case is part of a line of decisions the most recent authoritative element of which is, I think, Spies v The Queen (2000) 201 CLR 603 in which it is recognised that directors' duties are owed to the company, even though due performance of those duties may require directors to pay attention to the interests of creditors. There is a difference between the beneficiary of a duty and the delineation of the interests to be taken account of in performing the duty. In my opinion, the same analysis holds good in relation to the duties of administrators and liquidators. 13 If one looks at s.447E, being one of the provisions upon which the plaintiffs rely, it is found that standing is afforded to a creditor or a member. If one looks at s.1321, which is the other procedure utilised, standing is afforded to a person aggrieved by the act, omission or decision of the administrator or liquidator. A creditor, and at least in the case of a solvent company, a member, would potentially be within that description. But in either case, the relevant delinquency, if any, would entail a right to redress that would be, as it were, an asset of the estate under administration, not of any individual creditor or member or the creditors or members as a whole. 14 When the matter is looked at in these ways, the case law about the standards of conduct expected of liquidators comes into play. It is, I think, generally applicable also to administrators. That case law adds a further dimension. I quote from the judgment of Young CJ in Eq in Naumoski v Parbery (2002) 171 FLR 332 at [13] to [15]: "[13] (2) There is a considerable amount of learning to the effect that under the modern system of company liquidation, the Court rarely interferes with the exercise by liquidators of their statutory powers, and in particular, it does not interfere where the liquidator's decision is really one of commercial judgment. [14] In Leon v York-O-Matic Ltd [1966] 1 WLR 1450; [1966] 3 All ER 277, Plowman J considered it appropriate to apply the principles of bankruptcy law to company liquidations and held that the Court would not interfere with the sale by a liquidator unless he was acting in a manner in which no reasonable liquidator could act. His Lordship quoted the words of C E Harman J in Re A Debtor (No 400 of 1940) [1949] Ch 236, 241, that: 'Administration in bankruptcy would be impossible if the trustee must answer at every step to the bankrupt for the exercise of his powers and discretions in the management and realisation of the property.'

He also quoted the words of Sir George Jessel MR in Re Peters; Ex parte Lloyd (1882) 47 LT 64, 65, where his Lordship said in a bankruptcy case: 'The court will not interfere unless the trustee is doing that which is so utterly unreasonable and absurd that no reasonable man would so act.'

[15] In Re Mineral Securities Australia Ltd [1973] 2 NSWLR 207, 230-1, L W Street CJ in Eq discussed and applied these principles to the conduct of liquidations in this State. Both the York-O-Matic case and the Mineral Securities case have been followed on countless occasions by courts in this country in the last 30 years; see eg Yeomans v Walker (1986) 5 NSWLR 378 and UTSA Pty Ltd v Ultra Tune Australia Pty Ltd [1997] 1 VR 667." 15 Having regard to all the matters I have mentioned to this point, the case the plaintiffs seek to maintain, based on an alleged breach of a duty to obtain "the best possible price", is an extremely weak case. There is scarcely any serious question to be tried, if indeed there is any at all. 16 I proceed, nevertheless, to a brief consideration the balance of convenience. On that, it is highly relevant that the defendants have made a commercial commitment to the Russian buyer and may be in a contractual relationship already with that party, so that grant of the interlocutory relief might well open the way to a claim for damages for breach of contract which would rebound to the detriment of the body of creditors and shareholders. Since the interlocutory injunction would prevent completion of any contract that exists and would prevent conversion into a formal contract of any less formal contractual commitment that might exist, the interests of the Russian buyer as a third party are obviously highly relevant to the balance of convenience. 17 The plaintiffs are creditors and shareholders. The rights they have are the rights of creditors and shareholders. They have no proprietary claim to the subject matter of the sale. If, in the fullness of time, it were to turn out that the defendants had, in or about the sale, done some legal wrong productive of loss, they would no doubt be held accountable and subjected to an order that they pay damages or equitable compensation or make amends in some other way so as to augment the estate under administration. Those remedies for the benefit of the general body of creditors (and, if relevant, shareholders) must be regarded as adequate remedies. There will be no undue burden upon either such body if matters are left to run their ordinary course in that way. 18 In short, the balance of convenience clearly favours the defendants. 19 The claim for interlocutory relief by way of injunction is dismissed.

[Argument on costs] 20 The plaintiffs will pay the defendant's costs of the interlocutory application and this hearing. It is submitted that they should be paid on the indemnity basis but I do not regard the matter as warranting that outcome. Assessment will be on the ordinary basis. 21 The originating process and any balance of the interlocutory process are stood over to the Corporations Judge at 10am on Monday 10 July 2006. **********

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