In the matter of Central Spring Works Australia Pty Ltd (No1) [2000] VSC 144 (29 March 2000)

5. The plaintiffs, Mr McLellan and Mr Benton are partners of the same firm, Carson & McLellan PPB. On 10 March 2000 they were appointed as joint and several receivers and managers of Central Spring and also a related company Coburg Spring Works (Vic) Pty Ltd ("Coburg Spring Works"). The appointment of the plaintiffs as administrators of Central Spring and Coburg Spring Works was made by Scottish Pacific Business Finance Pty Ltd ("Scottish Pacific") pursuant to a first ranking fixed and floating charge granted by both companies separately to Scottish Pacific. Although Mr McLellan was appointed jointly and severally with Mr Carson it was Mr McLellan who had full carriage of the receivership of both companies.

8. The appointment of Mr McLellan and Mr Carson was effected by a deed of appointment dated 10 March 2000 and an indemnity agreement of the same date between Scottish Pacific and both Mr Carson and Mr McLellan in relation to Central Spring. The relevant charge of Central Spring was granted by that company to Scottish Pacific on 31 January 2000 and was registered by the Australian Securities and Investments Commission ("ASIC") on 8 February 2000 as charge No. 735489.

11. The charge provided by Central Spring was created to provide security to Scottish Pacific for advances made by it to Central Spring pursuant to a factoring arrangement. The appointment of Mr McLellan and Mr Carson as joint and several receivers and managers arose as a result of a breach by Central Spring of its obligations under the factoring arrangement with Scottish Pacific.

14. Following their appointment Mr McLellan and Mr Carson determined on 14 March 2000 to continue trading the business of both Central Spring and Coburg Spring Works. The decision was based upon two factors. Firstly, there appeared to be adequate security available to Scottish Pacific to have its debt repaid without the necessity of closing the business of the company. Secondly, Mr McLellan and Mr Carson formed the view that continuation of trade would vastly improve the likelihood of Scottish Pacific being paid promptly from the assets of Central Spring and, in particular, they were mindful of the fact that certain debtors of the company had agreed to pay their accounts quickly in circumstances where payment would not have been forthcoming if Central Spring and Coburg Spring Works ceased to trade.

17. Upon their appointment as joint and several receiver and manager Mr McLellan and Mr Carson instructed auctioneers to value the fixed assets of the company and Coburg Spring Works. The valuation obtained was for an amount of $668,000 for sale of the assets on a going concern basis and a valuation of $288,000 for a sale of those assets on an auction value basis. At the time the valuation was obtained the debt owed to Scottish Pacific was approximately $350,000.

20. In accordance with the terms of the factoring agreement between Central Spring and Scottish Pacific, Mr McLellan directed that all debtor receipts be paid directly to Scottish Pacific.

23. In an affidavit sworn by Mr McLellan on 27 March 2000 he deposed that at the time of his appointment on 10 March 2000 the debt owed by both Central Spring and Coburg Spring Works to Scottish Pacific was approximately $350,000. Notwithstanding that there appeared to be sufficient security available to Scottish Pacific to eventually achieve payment of moneys owed to it by those companies Scottish Pacific declined to make available to Mr McLellan any moneys it collected from its factored debts. As a result, Mr McLellan formed the view that the companies would be unable to continue trading unless funds were provided to meet the payment of employees' wages. On about 16 March 2000 a director of Central Spring, David Alan Armitage provided funds to Mr McLellan in the sum of $30,000 that were applied to pay employees' wages on 16 March 2000. As a consequence, Mr McLellan resolved to continue the trading of the business. Thereafter Mr McLellan was able to call up sufficient receipts from debtors so that the total amount owed by Central Spring under the factoring agreement with Scottish Pacific could be paid out. As at 27 March 2000 Mr McLellan had collected the sum of $382,236.05 giving rise to a net surplus of $29,630.02.

26. In his affidavit sworn 27 March 2000 Mr McLellan deposed that he was informed by Scottish Pacific that it collected pre-receivership debts only. Notwithstanding an agreement of Scottish Pacific to release sufficient funds to Mr McLellan to pay the wages of the employees of Central Spring for the week ending 23 March 2000, Mr McLellan believed that he would not have sufficient funds to meet the wages bill for the week ending 30 March 2000. On about 23 March 2000 Scottish Pacific informed Mr McLellan that it would prefer the receivership of Central Spring to end and to facilitate that purpose would support an application by the receivers for leave for one of them to be appointed as an administrator of the company. Mr McLellan deposed in his affidavit that as Scottish Pacific and the directors of Central Spring had declined to provide further funds for the company both he and Mr Carson had no alternative but to retire as receivers and managers of Central Spring on 29 March 2000 and close the business of the company unless the court made orders pursuant to s.448C of the Corporations Law granting leave for them to be appointed as administrators of the company. Mr McLellan deposed, further, that if he and Mr Carson resigned as receivers and managers of Central Spring but retained sufficient of the debtors' receipts to meet costs and expenses, debts to properly incurred creditors and priority claims of the company's employees it would have the effect of depriving Central Spring of its cash flow and lead to the immediate closure of the business of the company.

29. On the basis that the secured creditor, Scottish Pacific, had been substantially paid out and on the further basis that if one of the receivers and managers continued as an administrator of the company it would be possible for that company to trade on, in all the circumstances it was desirable that the court grant leave pursuant to s.448C of the Corporations Law.

32. In support of the application I was informed that the directors of Central Spring would appoint Mr McLellan and Mr Benton forthwith as joint administrators of the company upon the court granting leave. In particular, both plaintiffs provided an undertaking to the court to notify all creditors of Central Spring in the material sent out with the first notice of meeting under s.436E of the Law that the administrators required and obtained leave in respect of their appointment under s.448C of the Law. They proffered a further undertaking to notify the court if any reasonable apprehension of conflict of interest arose subsequent to their appointment. In addition, the plaintiffs gave an undertaking to the court to draw the creditors' attention at the first meeting of creditors to the circumstances of their appointment and to the right of such creditors to vote on a resolution for the removal and replacement of Mr McLellan and Mr Carson as administrators of Central Spring.

35. On the application before me Scottish Pacific appeared and supported the application. In addition, an undertaking was proffered on behalf of Scottish Pacific that it would not vote on any resolution relating to the removal and replacement of the plaintiffs as administrators of Central Spring if leave was granted for their appointment by the court.

38. 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 investigation: Re National Safety Council [1990] VicRp 2; (1990) VR 29, 34-35. The principles stated in Re National Safety Council have generally been applied in applications for leave under s.448C of the Corporations Law.

41. In Nambucca Investments Pty Ltd v Star (1995) 13 ACLC 1814 Santow J of the Supreme Court of New South Wales refused leave for a receiver and manager of a parent company to be appointed as administrator of subsidiaries in circumstances where the subsidiaries may have potential claims against the parent under s.588V of the Corporations Law. However, a joint appointment was allowed ultimately in Nambucca subject to undertakings given to the court. On the same day that Santow J handed down his judgment in Nambucca Investments he delivered judgment in Re St George Builders Hardware Pty Ltd [1995] NSWSC 31; (1995) 13 ACLC 1,801. In the St George case Santow J considered an application for leave pursuant to s.448C(1) of the Corporations Law that a person who was an officer of a company that was the mortgagee of a property of the primary company be appointed as administrator of that company. The learned judge observed, at 1,802, the following:

"In giving leave in applications of this kind, the Court should have regard to analogous principles to the removal of a liquidator on the ground of actual or perceived conflict of interest. In Advance Housing Pty Ltd (in liq) v Newcastle Classic Developments Pty Limited (1994) 12 ACLC 701; (1994) 14 ACSR 230, the relevant principles are set out and may be summarised as follows:

1. The cases show that there must be a real and not merely theoretical possibility of conflict and that the guiding principle in the appointment by the court of a liquidator is that he must be independent and must be seen to be independent.

2. Those who assert that a liquidator should be removed are under a duty to establish at least a prima facie case that this 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.

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 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 inhibited or impeded.

There are several factors present here which in the end allow me to conclude that there is not a real possibility of conflict at the present time. This is as distinct from the theoretical or inherent in the fact that if I accede to the application for leave, Mr Dean-Willcocks will represent both the interests of creditors of St George as a class and the interests of one particular creditor, namely Driftpush, under a fixed and floating charge. If the test were the mere possibility of conflict, then not only would this force the courts to disregard advantages of cost saving often in circumstances where money is short. It would also require the Court to act with prophylactic zeal to anticipate what may never happen where, as here, there is no objection from any party."

49. It follows that in St George leave was granted under s.448C for the administrators of the parent company that held a full fixed and floating charge over the assets of the subsidiary companies to be the administrators of the latter. In that case the secured debt owed to the parent company was not in dispute, there was no possibility of conflict before the court and apart from the inherent potential conflict between the secured creditor and the unsecured creditors there were no other areas of potential conflict. Ultimately, as is apparent from the extract cited Santow J was satisfied that subject to appropriate undertakings leave should be granted.

52. In the present matter undertakings commensurate with those proffered in the St George case are provided. Furthermore, it is a well established principle that in deciding whether or not to refuse leave it is a significant and legitimate consideration as to whether the granting of leave will be to the general advantage of those interested in the company, that is creditors of the company: Advance Housing Pty Ltd v Newcastle Classic Developments Pty Ltd (1994) 12 ACLC 701. Ultimately, in the present proceeding on the face of the material before me I am satisfied that it is to the general advantage of the creditors of Central Spring that leave be granted to the plaintiffs to be appointed as joint administrators of the company. In forming this view I am satisfied that the interests of parties are protected and balanced by the undertakings proffered by both the plaintiffs and Scottish Pacific. In the event that there is a dispute between the creditors as to the continued administration of the plaintiffs as administrators of the company such matter can be brought before the court and, if appropriate, the plaintiffs can be removed as administrators by order of the court.

55. Accordingly, on the basis of the undertakings proffered leave will be granted to the plaintiffs to be appointed as joint administrators of the company, Central Spring.