MTIC CORPORATE PTY LTD (ADMINISTRATOR APPOINTED) (ACN 080 111 413)

Corporations - Corporate Finance - Arrangements and reconstructions - Unregistered charges by subsidiary in favour of holding company - Replaced by new charges which were duly registered - Voluntary administrators appointed to subsidiary within 6 months - Whether holding company could appoint receiver - Whether holding company a "relevant person" under s 267 - Whether holding company acting in concert with a director of subsidiary so as to be an associate of the director

Corporations Law, s 11, s 15(1)(a), s 267(1), s 267(7), s 441A

Plaintiff : Mr N W McKerracher QC and Mr A R Heaver

Bans Pty Ltd v Ling (1995) 16 ACSR 404

Deputy Commissioner for Corporate Affairs v Caratti (1980) 5 ACLR 119

Dunn v Shapowloff (1978) 3 ACLR 775

Re Monolithic Building Co; Tacon v Monolithic Building Co (1915) 1 Ch 643

Re RHD Power Services Pty Ltd (1990) 3 ACSR 261

Williams v NCSC; Lockyer v NCSC (1990) 2 ACSR 131

Zytan Nominees Pty Ltd v Laverton Gold NL (1989) 7 ACLC 150

1 OWEN J: This is an application by the plaintiff for a declaration that it is free to exercise its remedies in relation to two charges which were granted to it by a subsidiary company on 16 October 2000. The subsidiary company is in the hands of voluntary administrators.

2 The plaintiff is a listed public company. Originally it was involved in mineral exploration. It then changed its business focus to what might loosely be called the technology arena. The business of the defendant is described as "providing e-commerce services to the corporate market". In March 2000 the plaintiff acquired 20 per cent of the issued share capital of the defendant. On 14 April 2000 the plaintiff provided a loan facility of $500,000 to the defendant and that was immediately drawn down. A loan agreement and a floating charge over the assets of the defendant was executed. Although it was stamped, the charge was not registered.

3 In June 2000 the plaintiff acquired a further 60 per cent of the issued share capital of the defendant. On 28 July 2000 a second loan facility agreement was entered into between the defendant and the plaintiff, by which the plaintiff agreed to provide a facility of $2,000,000 to be drawn down from time to time on the conditions set out in the agreement. That loan agreement was also supported by a floating charge over the assets of the defendant. The charge was neither stamped nor registered.

4 From time to time moneys were drawn down from that facility. It is not entirely clear what the situation is in relation to the total drawdowns but they were made throughout August and September 2000. According to par 9 of an affidavit of Patrick Joseph Lyons (a director of the plaintiff) sworn on 4 December 2000, by 16 October 2000 approximately $1,060,000 had been drawn down, leaving a further $940,000 or thereabouts available to be drawn down under that loan facility.

5 At some stage, probably in early October 2000, the fact that the charges had not been registered under the Corporations Law ("the Law") became known and the plaintiff took legal advice as to what it should do. In an affidavit sworn by Lyons on 29 November 2000, he describes the failure to stamp or register the charges as due to an oversight. A decision was taken to prepare new floating charges to replace the charges which had been executed but not registered. I will refer to these documents as "the October Charges".

6 On 30 October 2000 the October Charges were provisionally registered at the Australian Securities and Investments Commission ("ASIC"). On 16 November 2000 the directors of the defendant resolved to appoint voluntary administrators under Pt 5.3A of the Law. The administration commenced on that date. On 24 November 2000 the directors of the plaintiff resolved to appoint a receiver and manager of the assets of the defendant pursuant to the October Charges. The plaintiff has not actually effected that appointment.

7 The only evidence as to what actually occurred about the creation of the October Charges comes in an affidavit of Adrian Jason Floate sworn 8 December 2000. I should digress here to say that Floate is a director of both the plaintiff and the defendant. He is the only common director. In his affidavit, Floate says:

"4. On 12 October 2000 I attended a meeting of directors of the Plaintiff. Present were myself, Patrick Lyons ('Lyons') and 'Roger' Nikolaenko ('Nikolaenko') who were, at all material times, the only other directors of the plaintiff. Also present at the meeting was Robert Barras ('Barras') whom I was aware had been an alternate director for Nikolaenko. Barras, to the best of my knowledge and belief, was also an employee of Quadrant Management Pty Ltd ('Quadrant') which provided management and financial services to the Plaintiff.

5. After the directors' meeting on 12 October 2000 had finished Barras came up to me and said words to the effect that: 'the Plaintiff needs new floating charges executed by the Defendant to secure the assets as there had been a slight oversight as the previous floating charges had not been registered and new ones were needed for good corporate governance.'

6. I responded to Barras with words to the effect 'that it seemed like a good idea and there would be no problem in getting them executed and that he should send the floating charges to the Defendant's offices for execution, as I was going to Sydney and I would tell the directors of the Defendant to execute them.'

7 On my way home from the meeting to pack before going to Sydney I telephoned Russell Miln ('Miln'), who is a director of the Defendant and told him of my conversation with Barras as set out above. I then told Miln to expect to receive the floating charges and that he and Andrew Mann ('Mann') were to execute the floating charges when they received and then return them to the Plaintiff.

8. I was told by Miln on my return that the floating charges were executed (being [the October charges])."

8 There is a further short reference to the circumstances in which the October Charges came to be executed. It is contained in the affidavit of Russell David Miln (a director of the defendant) sworn 8 December 2000. He says:

"3. On the evening of 13 October 2000 I received a telephone call from Adrian Floate ('Floate') who at this time was the managing director of both the Plaintiff and the Defendant. Floate told me words to the effect that the Plaintiff had not registered the floating charges which the Defendant had previously given and that it was good corporate governance to execute and register new floating charges. Floate then said to me that the floating charges would be delivered to me shortly and that I was to arrange with the other director of the Defendant, Andrew Mann ('Mann'), to execute them and return them to the Plaintiff. I told Floate that I would do that.

4. Some time after 13 October 2000 (I do not recall) two floating charges in favour of the Plaintiff were received and I arranged with Mann to execute them and return them to the Plaintiff. I recognised those floating charges as being the [October charges].

...

12. On 16 October 2000 Brad Moore phoned me and told me that no further funds would be provided unless the floating charges were executed."

9 As to par 12 of Miln's affidavit, Moore is an employee of a company that provides management and advisory services to the plaintiff. Apparently he is a director of the defendant and is, or is seen to be, a representative of the plaintiff. I have seen an affidavit sworn by Bradley Moore on 12 December 2000 in which he denies telling Miln on 16 October 2000, or at any time, that no further funds would be provided to the defendant unless the floating charges were executed. In other words, there is a clear conflict of fact on that issue and it is a conflict that I cannot resolve on the affidavits.

10 As I have already said, the October Charges were provisionally registered at ASIC on 30 October 2000. Those charges have since been stamped and the provisional registration has been confirmed. Under the terms of the Law, they are therefore said to have been duly registered.

The Relationship Between the Plaintiff and the Defendant

11 For some time, probably since the creation of the loan facility in July 2000, there had been a tension between the plaintiff and the defendant about the corporate governance and financial reporting and administration of the defendant. There is voluminous evidence about exchanges between the plaintiff and the defendant in the period, particularly in September 2000 and through October 2000 leading up to the execution of the charges on 16 October 2000, and since then, about budgetary and other similar issues.

12 I wish to make it clear that I make no binding findings as to whether the defendant was solvent or insolvent at 16 October 2000 and, if the defendant was insolvent, whether or not the plaintiff had actual or imputed knowledge of that insolvency. I do not propose to examine the evidence on those issues in detail other than to say that it is clear that the plaintiff was most unhappy about the budgets that had been presented to it by the defendant. The plaintiff had put the defendant on notice that no further funds could be drawn down from the loan facility except in relation to a proper and accepted budget. The evidence contains material sufficient to raise the question of solvency and there are some aspects of the plaintiff's approach to the issues that may require further attention. But they are matters for another day.

13 There is material which suggests that at least by 10 October 2000 the directors of the defendant had become concerned about the solvency of the defendant. There is unchallenged evidence that Moore, as a representative of the plaintiff, was present at a meeting on 10 October 2000 when those concerns were raised. The extent to which that reflects on the solvency of the defendant and on the knowledge that the plaintiff might be said to have had about it, arising from the 10 October 2000 meeting and from the exchanges of correspondence and other evidence generally, are matters for another day. All I think I need to take from it is that there were issues of concern and they were concerns which had been expressed.

14 On 15 November 2000 the defendant wrote to the plaintiff putting the plaintiff clearly on notice that unless moneys were made available under the loan facility, the defendant would have to take steps to protect its creditors and those steps might include putting the company in administration. On the same or following day the plaintiff responded to the defendant, indicating in essence that the plaintiff's position had not changed, that it would only permit funds to be drawn down according to approved budgets and that if the directors of the defendant thought they needed to take action then they should do so. That is exactly what happened. On 16 November 2000 the directors of the plaintiff resolved to appoint voluntary administrators. The process of administration has continued. I am told that a first meeting of creditors was held within the requisite statutory period and that the second meeting of creditors is due to be held shortly.

15 That then brings me to the question at issue. It is whether the relationship between the plaintiff and the defendant is such that the October Charges fall within s 267 of the Law. If they do not, the plaintiff may be at liberty to exercise its rights under the October Charges despite the fact that the defendant is under administration: s 441A. If they do, the plaintiff could only enforce rights with the leave of the court under s 267(3).

16 This requires the interpretation of s 267 of the Law, but perhaps I should start with s 266.

17 The general structure of s 266 is that a charge that is required to be registered must be registered by certain notices being given to ASIC within 45 days of the creation of the charge. Charges can be lodged for registration provisionally and that often occurs when, for example, there is a delay in stamping. Once the formalities have been completed, the provisional registration is confirmed and the charge is then deemed to have been registered as at the date when it was lodged for provisional registration.

18 If a charge is not lodged for registration within the 45-day period, an application can be made to the court for an extension of time. The court may grant an extension if the failure to lodge was accidental or due to inadvertence or some other cause, and the position of creditors or shareholders is unlikely to be prejudiced: s 266(4). Alternatively, the charge can be left unregistered. An unregistered charge remains effective as between the parties to it. However, the risk is that if the company granting the charge goes into liquidation or administration, the charge is void as a security as against the external controller: s 266(1).

19 I come now to s 267, which provision I would paraphrase as follows. Section 267(1) is predicated on the defendant creating a charge over property of the defendant in favour of the plaintiff, and on the plaintiff being a "relevant person" in relation to the charge. In those circumstances, if, within six months of the creation of the charge, the plaintiff purports to take a step in the enforcement of the charge without leave of the court, the charge and any powers purported to be conferred by an instrument creating or evidencing the charge are and shall be deemed always to have been void.

20 In this case the plaintiff holds approximately 80 per cent of the issued share capital of the defendant. The plaintiff and the defendant have one common director, namely Floate. It is common ground that the October Charges were created by the defendant in favour of the plaintiff and that they are charges over property of the defendant. The first condition is therefore met. The period of six months since the creation of the October Charges has not yet expired. The plaintiff now wishes to appoint a receiver and manager . That would clearly be the taking of a step in the enforcement of the charges. That is not in issue. This leaves only the question whether the plaintiff is a "relevant person". This question is most definitely in issue.

21 Under s 267(7), the plaintiff will be a "relevant person" if, in relation to the charge created by the defendant, the plaintiff is "associated", in relation to the charge created by the defendant, with an officer of the defendant. To ascertain whether the plaintiff is associated with an officer of the defendant, regard must be had to the definition of "associate" in Pt 1.2, Div 2 of the Law, particularly s 11 and s 15.

22 There can be no doubt that the plaintiff is an associate of the defendant and vice versa, because they are related bodies corporate: see s 11(1)(b), s 50(a) and (b), and s 46(a)(iii). One is a holding company and the other its subsidiary. Similarly, Floate, as an officer of the plaintiff, is an associate of the plaintiff and Floate, as an officer of the defendant, is an associate of the defendant: see s 11. However, the mere fact of a common directorship does not make the company an associate of the director under s 11: Re St Barbara Mines Ltd [2000] WASC 300 per Steytler J at [14]. Accordingly, the plaintiff is not a "relevant person" under s 267(7) simply because of any association with Floate arising under s 11.

23 However, the plaintiff could be an associate of a director of the defendant under s 15(1)(a) of the Law, if the plaintiff is found to have acted in concert with a director or directors of the defendant in relation to the charges. Neither party argued that any other provision of the Law would be applicable so as to ground a relevant relationship.

24 The next question is: what is meant by the term "acting in concert" for the purpose of s 15(1)(a)? There is a paucity of authority on the point. In Bank of Western Australia v Ocean Trawlers Pty Ltd (1994) 13 WAR 407, I had cause to consider the meaning of the phrase "acting in concert". After setting out s 15(1)(a) (among other sections), I said, at 431 - 432:

"These provisions are of wide import and should be construed according to their tenor. However, that does not mean that they are to be interpreted in a vacuum. The meaning to be ascribed to the words used must be gleaned from the context to which they relate and from the scope and purpose of the instrument in which they appear. The phrase "acting in concert" connotes knowing conduct the result of communication between parties and not simultaneous actions occurring contemporaneously. Of course, the statutory definition expands that concept by including a proposal so to act. However, in the context of this case the allegation is of a bilateral arrangement. "Acting in concert" involves at least an understanding between the parties as to a common purpose or object: see Adsteam Building Industries Pty Ltd v Queensland Cement & Lime Co Ltd (No 4) [1985] 1 Qd R 127 at 132. It is necessary that the understanding should be consensual and that there should be some adoption of it. However, it is not essential that the parties are committed to it or bound to support it. An arrangement or understanding can be informal as well as unenforceable and the parties may be free to withdraw from it or to act inconsistently with it notwithstanding their adoption of it: see Commissioner of Taxation (Cth) v Lutovi Investments Pty Ltd [1978] HCA 55; (1978) 140 CLR 434 at 443-444. Such an understanding may be proved by inference from the circumstances surrounding the impugned transaction and from what the parties have done as well as by direct evidence: see Adsteam (at 133)."

25 The principles that I take from that recitation of the authorities and which are relevant to this application are these. First, the words take their meaning from the context and the scope and purpose of the Law. Secondly, "acting in concert" involves an understanding or arrangement between parties as to a common purpose or object. Thirdly, the common purpose or object can be established by inference as much as by direct evidence.

26 I think, though, I need to go a little further in this case, to decide what the phrase "associate" means in the context of s 267(1) as imported through s 267(7). It seems to me that the phrase "acting in concert" must mean something more than the mere entry into a transaction. It is not the mere creation of the charge that attracts the operation of the section. If it were as broad as that, then any party involved in the creation of a charge would be an "associate" for the purposes of the definition for a bank may ask a director to have a charge executed. The bank and the director would have the common purpose of effecting the execution (as a critical step in the creation) of the charge. Even if it is benign and in the ordinary course of business, the bank would be a "relevant person" for these purposes. That cannot have been the intention of the legislature.

27 It would not be appropriate to attempt to define exhaustively the phrase "acting in concert". However, it seems to me that in the circumstances of this case "acting in concert" must have a purposive element. It must go beyond the mechanical aspects of the creation of the charge and focus on the background to, and underlying reasons or purpose for, the creation. Bearing in mind the context and the scope and purpose of this part of the legislation, and bearing in mind also that the definition requires the association to be present in relation to the charge, there must be some pejorative element. It will most often (although not always) be found in a common purpose to circumvent the letter, or perhaps even the spirit, of some other statutory obligation or requirement.

28 What, then, is the purpose of this transaction which could bring it within those principles? It was put to me on behalf of the defendant that that purpose was to circumvent the problems which arose because of the failure to register the initial charges; that is, the charges of April and July 2000. Assuming for the moment (without making a finding) that the defendant was insolvent, or of doubtful solvency, at the time, the registration of the charges under s 266 outside the 45-day period would leave the plaintiff seriously at risk, at least for a period of six months. An alternative would have been for the plaintiff to apply to the court for an extension of time within which to effect registration. That would have required the plaintiff to have made disclosure of the financial position of the defendant and its state of knowledge of those circumstances. Viewed in this light, the creation of new charges, which could then be registered within the statutory time frame, could be seen to work a benefit to the plaintiff, by avoiding the potential risks. The plaintiff says that it acted solely to cure "an oversight". Inferentially it denies any base motive or purpose in requesting that the defendant execute the October Charges.

29 It seems to me, however, that even if the purpose driving the plaintiff's actions was to achieve a benefit that might not have been available had it sought to regularise the initial charges, the question still arises whether there was a common purpose arrived at between the plaintiff on the one hand and the directors of the defendant on the other. I believe I can decide that question on a narrow basis.

30 Even if there is ascribed to the plaintiff the purpose that I have mentioned, the evidence as to the circumstances in which the October Charges came to be created on 16 October 2000 does not go to the extent of ascribing that same purpose to Floate or to any other director of the defendant. I have already quoted from the affidavits of Floate and Miln. The evidence goes no further than to say that a request was delivered by Barras to Floate for the execution of new charges. This was because "there had been a slight oversight" causing non-registration of the initial charges and that "new ones were needed for good corporate governance". Floate's evidence is that he told Barras that he thought that "it seemed like a good idea". There is nothing in that statement to suggest that Floate considered that there was anything base, improper or inappropriate in the request. Similar language is used by Miln to describe the way in which the request was passed on to him by Floate.

31 In the light of the conflict of evidence between Miln and Moore as to their conversation on or about 16 October 2000, I am not able to draw the additional inference that, to resort to the vernacular, a gun was being held at the defendant's head such that if the defendant did not execute the new charges, it would be deprived of further funding.

32 I think it would be inappropriate, in the light of the evidence as it is, for me to draw an inference that Floate was a party to a purpose which, if not improper, had a base or pejorative element. Floate was in a difficult situation. He was a director of both companies. The relationship was souring. He owed duties to both companies. Even if it is assumed, for the purposes of this application, that the purpose of the plaintiff was questionable, there is nothing to suggest that Floate shared that purpose with the plaintiff. It would, in my view, be difficult to make such a finding without characterising Floate's conduct as something dangerously close to a breach of his fiduciary duties, at least to the defendant. It is undoubtedly "good corporate governance" to effect registration of charges. Because of the circumstances, Floate may have felt compelled to assist the plaintiff. However, he does not say that, nor does he say that he was a reluctant participant in an endeavour that, to his knowledge, had untoward elements.

33 I have not been satisfied that the plaintiff and Floate, as an officer of the defendant, were "acting in concert". Nor am I prepared to find that there was anything in the contact between Floate and Miln which would cause me to find that Miln was "acting in concert" with the plaintiff in relation to the creation of the charge.

34 The common directorship is not sufficient to create a relevant "association" which would, in turn, render the plaintiff a relevant person. Because I am not satisfied that the plaintiff and an officer of the defendant were "acting in concert" such as to render the plaintiff a relevant person, s 267(1) has no application and the question of leave under s 267(3) does not arise.

35 On 29 November 2000 I made an order extending the decision period (as defined in s 9 for the purposes of s 441A) within which the plaintiff could take a step in the enforcement of the charge, notwithstanding that the administrators had been appointed. It was not put to me at the time that there were any other reasons, other than the associateship argument, which would militate against the plaintiff being permitted to enforce the charge.

36 Other issues may arise on another day concerning the validity or enforceability of the October Charges. Issues might, for example, arise under Div 2 of Pt 5.7B of the Law. But it seems to me that, so far as the present situation is concerned, the plaintiff is free to make its decision in accordance with s 441A of the Law.

37 For those reasons it seems appropriate that I make a declaration, in terms of par 3 of the originating process, that s 267(1) does not apply to the plaintiff. I will hear counsel as to any consequential orders.