In the matter of O'Neill v Advantage Hearing Pty Limited

Judgment - EX TEMPORE 1By originating process filed by leave today, Mr Matthew O'Neill seeks interlocutory and substantive relief against the defendants, including Advantage Hearing Pty Limited ("Company"), one of its directors, Ms Rhonda Hughes, another person with an interest in the Company, Mr Soeren Iversen, and associated entities. The Company is the trustee of the Advantage Hearing Trust, which it appears conducts a hearing assessment business. It appears there is a dispute as to the circumstances in which Mr O'Neill was purportedly removed as director of the Company and contractual arrangements for the provision of his services to the Company were terminated on 19 December 2012. Certain undertakings were requested by Mr O'Neill and then given by the defendants on 21 December 2012; it was suggested in submissions that the defendants had resiled from those undertakings and I will return to that question below. It is also suggested that there is a threat that the Company will be placed in administration and that the Company may be put at significant risk if that occurs. 2There are several difficulties with the manner in which the application has proceeded today. In particular, although it appears that the originating process has been served on the defendants, it is unclear whether the affidavits in support have been served and the defendants have not appeared; and a number of steps in establishing the basis on which interlocutory relief is claimed are not established by evidence and rise no higher than statements in solicitors' correspondence and, on occasion, matters put from the bar table. 3The first relief that is sought is an order under s 1324 of the Corporations Act 2001 (Cth) that, until final hearing of the originating process or further order, Ms Hughes, who as I noted above is a director of the Company, be restrained from appointing an administrator or voluntary administrator under Pt 5.3A of the Corporations Act. The steps necessary to establish such relief would seem to be, first, that there is at least a serious question that the Company is not in fact insolvent or likely to become insolvent so that the appointment of an administrator is inappropriate; second, implicitly, that the appointment of an administrator for an improper purpose would not only be invalid but also a contravention of the Corporations Act, for example, of Ms Hughes' duties as a director of the Company; and third, that a basis for interim relief under s 1324 of the Corporations Act is established, in that the balance for convenience favours interim relief. 4The threat of appointment of a voluntary administrator is said to emerge from a letter dated 26 February 2013 from the defendant's solicitors to Mr O'Neill's solicitors, marked "without prejudice except as to costs", which it is contended was not properly "without prejudice" and can be admitted in evidence. The letter notes that one of the defendants have put a proposal to resolve the matter to Mr O'Neill; that Mr O'Neill was not prepared to consider that proposal until certain other matters were addressed; and asked Mr O'Neill whether he would be prepared to consider the proposal, make a counter-offer, meet for a without prejudice conference and/or attend a mediation "in the hope of bringing the matter to a resolution". The letter also noted that, if no resolution was reached, the third defendant, Mr Iversen, was likely to call on a loan made to the Company which, it was contended, was on demand and that that demand for the loan would render the Company insolvent and Ms Hughes would then have no alternative to appoint an administrator. Mr O'Neill's solicitor responded on 27 February 2013 contending that the appointment of an administrator would not be for a proper purpose, and that there was no basis for the threat of that appointment because Mr Iversen's loan was not repayable until February 2016 by reason of a deed providing for the terms of the loan. 5I do not consider that the letter dated 26 February 2013 is properly admissible in the proceedings. On the face of it, it appears to be an invitation to Mr O'Neill to participate in various forms of negotiated resolution of the dispute, although it also foreshadows a consequence if the invitation to participate in those forms of negotiated resolution is not taken up. While I accept, as Mr O'Neill contends, that there is an element which might be characterised as a "threat" in the latter proposition, it seems to me that it is made in the context of what is in substance a proposal for a negotiated resolution which is properly protected by "without prejudice" privilege. It follows that the response from Mr O'Neill's solicitor would also be subject to "without prejudice" privilege, as part of a series of communications directed to a possible resolution of the dispute. 6However, even if I am wrong in that view and the letters are admissible so as to establish a threat of the appointment of a voluntary administrator to the Company, it does not seem to me that the basis for interlocutory relief restraining the appointment of an administrator has been established. 7First, Mr O'Neill relies upon the fact that the relevant loan by Mr Iversen is treated as non-current in the Trust's balance sheet as at November 2012 and a further balance sheet prepared in February 2013. However, that evidence seems to me to be equivocal, where that treatment would be consistent with the loan not then having been called; the fact that a loan which has not been called is treated as non-current at a particular date does not establish that it cannot be called at some future date. Second, Mr O'Neill relies on a deed of loan which, he contends, has the result that the loan could not be called until 2014. The difficulty with that proposition is, however, that the copy of the deed of loan on which Mr O'Neill relies is unsigned, undated and unstamped and, perhaps more importantly, Mr O'Neill gives no evidence either that it was executed or that the parties had conducted themselves on the basis set out in it. While a copy of the document is attached to a letter from Mr O'Neill's solicitor to the defendants' solicitor, that letter does not establish the fact that deed was executed or otherwise took effect absence evidence of that fact. Second, there is no affirmative evidence as to the Company's solvency, which would at least require some scrutiny of its cash flow position, and no basis for a finding that the Company is neither insolvent nor likely to become insolvent, so that a voluntary administrator could not properly be appointed. I emphasise there that I am not finding, as a matter of fact, that the Company is either insolvent or likely to become insolvent. I am simply noting that there is no evidence, one way or another, as to the Company's solvency. 8It seems to me that there may be a real question as to whether the Court would, without clear evidence of solvency, restrain the appointment of an administrator under s 436A of the Corporations Act, where the provision for an administrator to be appointed is important to the mechanism for reconstruction of potentially insolvent companies established under Pt 5.3A of the Corporations Act and also allows directors to avoid potential liability for insolvent trading from the point at which the administrator is appointed. A potential consequence of restraining the appointment of an administrator would be that directors would in fact be exposed to potential liability for insolvent trading, if a company then continued to trade in circumstances that it had been unable to appoint an administrator and was in fact insolvent. This is an issue of some complexity, but I do not address it further, particularly where I have not been taken to any authority addressing it. 9In this case, it is possible to resolve this aspect of the application on a narrower basis, because a serious question has not presently been established that it would be an improper step to appoint an administrator, in that the Company is plainly not insolvent or not likely to be insolvent. Whether that is the case is, as I have noted, simply not established by the evidence. 10I should add that there is no doubt that there are other avenues available to Mr O'Neill to address the position if an administrator is in fact appointed for an improper purpose. The first protection against such an appointment is that the administrator himself or herself has an obligation to at least take some steps to satisfy himself or herself as to the validity of his or her appointment, and in particular to review the terms of the resolution of the board by which he or she is appointed: Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 557; (2000) 34 ACSR 422. The second and more fundamental protection against that course is that the Court has jurisdiction to scrutinise the reasons given by directors for the appointment of an administrator, and, if they are not objectively established, the administrator will be removed and the appointment of an administrator for a collateral purpose is potentially a breach of directors' statutory duties: see the authorities cited at Austin and Black's Annotations to the Corporations Act [5.436A]. Accordingly, if an appointment of an administrator is made, in circumstances where that appointment is not objectively justified, the Court has ample powers available to invalidate the appointment. That course seems to me to be preferable, as a matter of the balance of convenience, than an interlocutory injunction - particularly given the difficulties with the evidence to which I have referred above - where it does not expose directors to potential liability for insolvent trading if an injunction is wrongly granted. 11Mr O'Neill also drew attention to the fact that there appear to have been recent changes to the Company's balance sheet to record additional liabilities to Ms Hughes and Mr O'Neill. The circumstances in which those changes were made are unclear and it may be that those changes are open to challenge. However, any such challenge can properly be brought in an application to set aside the appointment of an administrator, if such an application becomes necessary, or at a final hearing of the proceedings. 12I should add that Mr O'Neill also relied, as a matter relevant to the balance of convenience, on detriment to the Company if an administrator was appointed, by reason of risk to a contract with a government agency, the Office of Hearing Services. However, that contract is not in evidence; there is no evidence of the impact of appointment of administrator under that contract, and in particular no evidence that the contract will be terminable on such an appointment; indeed, the only evidence touching that contract relates to the different question whether the termination of the employment of Mr O'Neill's uncle would have an adverse effect on that contract. 13The second order that is sought relates to a range of injunctive relief, restraining specified conduct until a final hearing or further order, including restraining the defendants from preventing Mr O'Neill having access to certain offices of the Company, access to the Company's books and records, taking certain actions in respect of its bank account and having access to its computer server. This relief is supported by Mr O'Neill's affidavit dated 21 December 2012. However, the difficulty with Mr O'Neill's reliance on that affidavit is that undertakings were subsequently given by the defendants, and there are assertions and counter-assertions in solicitors' correspondence as to whether the undertakings have been honoured or breached. There is no further evidence to establish any breach of those undertakings or to establish any particular occasion on which the access which Mr O'Neill seeks to have has in fact been denied. 14Mr O'Neill also seeks interlocutory relief restraining the defendants from conduct preventing him from engaging in his duties as an officer and employee of the Company. While this relief is negative in form, it appears to be positive in substance since it is difficult to see how it could be complied with without taking steps to address the fact that Mr O'Neill's employment has been purportedly terminated and the office at which he worked has been closed. I am not satisfied that the balance of convenience favours the grant of relief in that form. 15Mr O'Neill also seeks relief restraining the defendants from inhibiting or preventing Mr O'Neill's recognition by the Australian Securities and Investments Commission as a director. Again, that relief has the difficulty that it appears that Mr O'Neill's purported removal as a director has already occurred, and it is difficult to see how the defendants could either inhibit or prevent ASIC's undertaking its statutory obligations in respect of the maintenance of records, reflecting the purported position. Again, I am not satisfied that the balance of convenience favours interlocutory relief in this form. 16It follows that I am not prepared to grant interlocutory relief in the form sought in the originating process. I will hear the plaintiff as to the steps which should be taken to bring the matter back for further directions so that the substantive matters that require to be heard can be addressed, or alternatively any further issues which may arise between the parties can be determined, preferably in circumstances where all parties are present and on a firmer evidentiary foundation and with clearer identification of the relief that is actually required than has occurred in the application before me today. 17In this matter I make the following directions: