Knights Insolvency Administration Ltd v Duncan

CATCHWORDS : CORPORATIONS - winding up - liquidator is executive director of company carrying on insolvency administration business - termination of employment - employer seeks specific performance of term requiring former employee to facilitate assumption of his insolvency appointments by another employee - former employee, as liquidator of various companies, requires employer to deliver to him books of those companies in its possession - whether court should vary decision of former employee as liquidator to require delivery of books by employer

LEGISLATION CITED : Corporations Act 2001 (Cth), ss.530B, 1321

Leon v York-O-Matic Ltd [1966] 1 WLR 1450 Re Equity Funds of Australia Ltd (1976) 2 ACLR 238 CASES CITED : Re Mineral Securities Australia Ltd (1973) 2 NSWLR 230 Re Teller Home Furnishings Pty Ltd [1967] VR 313

Knights Insolvency Administration Limited - Plaintiff PARTIES : Adrian Stewart Duncan - Defendant

Mr M. Cashion SC - Plaintiff COUNSEL : Mr B.A.J. Coles QC/Mr R.K. Eassie - Defendant

Watson Mangioni - Plaintiff SOLICITORS : Nash O'Neill Tomko - Defendant

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

2817/05 - KNIGHTS INSOLVENCY ADMINISTRATION LTD v DUNCAN

1 The plaintiff is a company the securities of which are listed for quotation on the Australian Stock Exchange. According to the affidavit of Mr Offermans, one of its directors, which is relied on by the plaintiff, the plaintiff "trades in the specialised field of insolvency accounting". 2 Mr Offermans' affidavit outlines the administrative structure of the plaintiff which, in essence, involves employment of qualified insolvency practitioners and the conduct, through them, of the business to which Mr Offermans refers. Each individual, of course, holds appointments as liquidator, Part 5.3A administrator or receiver in an individual capacity. The situation is obviously not one in which the plaintiff, as a corporation, is liquidator, administrator or receiver; nor indeed could it be. 3 By a summons filed in court on 6 May 2005, by leave granted by Gzell J as Duty Judge, the plaintiff has commenced proceedings against the defendant, Mr Duncan, who, in 2003, entered into an executive services agreement with the plaintiff. The defendant is an insolvency practitioner in the sense that he holds the qualifications necessary to permit him to act as liquidator, Part 5.3A administrator and receiver. He was, at material times, a director of the plaintiff as well as an employee and has been referred to as an executive director. 4 The circumstances in which the defendant, as an individual insolvency practitioner, worked for and with the plaintiff would have remained uncontroversial had it not been for events of 22 April 2005 and specifically the giving by the plaintiff to the defendant of a letter purporting to terminate the executive services agreement pursuant to a term of that agreement, the purported termination being with immediate effect. 5 The proceedings to which I have referred are proceedings in which the plaintiff seeks declaratory relief and an order for specific performance directed towards implementation of a contractual regime that it regards as having come into operation under the agreement by virtue of the termination the plaintiff says was produced by its letter of 22 April 2005 to the defendant. That regime involves the defendant's cooperating in actions directed towards having another employee of the plaintiff become liquidator, administrator or receiver in place of the defendant in each case in which the defendant himself now holds such an appointment. The aim, clearly enough, is that the several appointments held by the defendant personally should, in accordance with the scheme contemplated by the agreement, devolve upon some other suitably qualified employee of the plaintiff. The agreement recognises that the parties cannot themselves achieve these objectives and that third party involvement is necessary. In some cases orders of the court will be required while in others resolutions of creditors may be necessary. 6 I have heard today an application by the plaintiff for an order in terms of paragraph 2 of a notice of motion also filed in court on 6 May 2005. The order thus sought by the plaintiff is an order pursuant to s.1321 of the Corporations Act 2001 (Cth) extending the time for compliance by the plaintiff with certain notices dated 27 April 2005. On that date, the defendant delivered to the plaintiff fifteen notices, each expressed to be a notice under s.530B of the Corporations Act in respect of a particular company of which the defendant is liquidator. Section 530B is as follows: " Liquidator's rights to company's books

(1) A person is not entitled, as against the liquidator of a company: (a) to retain possession of books of the company; or (b) to claim or enforce a lien on such books; but such a lien is not otherwise prejudiced.

(2) Paragraph (1)(a) does not apply in relation to books of which a secured creditor of the company is entitled to possession otherwise than because of a lien, but the liquidator is entitled to inspect, and make copies of, such books at any reasonable time.

(3) A person must not engage in conduct that results in the hindering or obstruction of a liquidator of a company in obtaining possession of books of the company.

(3A) Subsection (3) does not apply if the person is entitled, as against the company and the liquidator, to retain possession of the books. Note: A defendant bears an evidential burden in relation to the matter in subsection (3A), see subsection 13.3(3) of the Criminal Code .

(4) The liquidator of a company may give to a person a written notice requiring the person to deliver to the liquidator, as specified in the notice, books so specified that are in the person's possession.

(5) A notice under subsection (4) must specify a period of at least 3 days as the period within which the notice must be complied with.

(6) A person must comply with a notice under subsection (4)." 7 By each of the notices dated 27 April 2005, the defendant required the plaintiff to produce to him, as the liquidator of the particular company, "on or before 5pm on 5 May 2005" at a stated address, certain books and records of that company (which were then described), to the extent that they were in the possession or control of the plaintiff. The contention of the plaintiff is that the decision of the defendant to issue each such notice should, upon review by the court under s.1321, be modified so that the time limited for production of the identified items is extended up to and including the final hearing of the proceedings. 8 The plaintiff thus says that it, rather than the defendant, should have possession of the books in question until the principal proceedings are determined. It contends that compliance with the notices (by delivery of books to the defendant) in advance of the determination of the proceedings would bring about an undesirable situation in which the specified books and records of the particular companies, to the extent that they are in the possession or control of the plaintiff, came to be handed over to the defendant personally in circumstances where other resources and facilities of the plaintiff, as a company, are relevant to the ongoing progress of the particular administrations but cannot be availed of by the defendant. 9 The parties are at one in recognising that the overriding consideration on this application is the interests of the creditors and, to the extent relevant, the contributories of the various companies. Whatever decision is made should be a decision that best preserves the integrity of each insolvency administration for the benefit of those persons. 10 The defendant relies heavily upon the reality that each of his appointments is a personal appointment. To the extent that he has been appointed by order of the court, it is to him that the court has entrusted the particular administration. To the extent that he owes an appointment to a decision of creditors, then likewise it is to him that the creditors have entrusted the particular task. It may be that those decisions were made against a background of an appreciation of the connection between the defendant and the plaintiff, and an expectation that facilities in the plaintiff's office would be available to the defendant may even have been an unconscious expectation. But it cannot be gainsaid that the appointment is, in each case, a personal one to be performed and discharged by the defendant himself as a matter of personal duty and personal responsibility. 11 In the context of s.1321 of the Corporations Act, it is recognised that different approaches are appropriate according to whether the challenge relates to rejection of a proof of debt or some other act, omission or decision of the liquidator. This is a case of the latter kind. Apposite, therefore, is the following observation of Bowen CJ in Eq in Re Equity Funds of Australia Ltd (1976) 2 ACLR 238 at p.239: "In my view, the test to be applied under s 279 is similar to that applying to the exercise of a discretion which is committed by statute to some particular official. The principles applied by the court in such cases are reasonably well settled. The court will recognize that the discretion has been vested by the statute in the liquidator and will not interfere unless it is shown that he did not address himself to the correct question or that, he made errors of law or that he failed to take into account relevant matters or that he took into account irrelevant matters, to which may be added that if his decision in the circumstances appears such that no reasonable man could arrive at it, the Court will interfere." 12 Other formulations refer to the question whether the liquidator has exercised the discretion bona fide or is shown to have acted in a way in which no reasonable liquidator could have acted: see, for example, Leon v York-O-Matic Ltd [1966] 1 WLR 1450, Re Teller Home Furnishings Pty Ltd [1967] VR 313, Re Mineral Securities Australia Ltd (1973) 2 NSWLR 230. 13 The decision of the defendant, as liquidator of each of the fifteen relevant companies, to require the plaintiff to deliver to him books of those companies must be examined against the criteria recognised in the cases to which I have referred. That, it seems to me, raises two particular considerations in this case. One is as to the facilities that the defendant has to continue with the administrations, now that he is no longer under the umbrella, as it were, of the plaintiff. The other involves professional indemnity insurance and related matters. 14 On the first matter, there is evidence from Mr McDonald, a principal in another insolvency practice, that negotiations are under way between the defendant and that firm with a view to his becoming a consultant to it with the possibility of becoming a partner. Mr McDonald deposes that while those arrangements are not complete, his firm is, in the interim, prepared to enter into an arrangement with Mr Duncan, whereby an office will be provided to him, together with all necessary administrative and support staff to maintain any insolvency matters associated with him. That is one possibility. The other is that the defendant is somehow given interim access to the offices and facilities of the plaintiff (which, it appears, are being reduced as part of an economy drive) and in that respect the plaintiff points to a statement in the letter of termination of 22 April 2005: "For the purpose of enabling you to fulfil your duties as an insolvency administrator, Knights will allow you to access the books and records with respect to your appointment generally in accordance with clause 16.6 of the agreement".

Clause 16.6 envisages, in case of termination, retention of books and records in relation to each administration by the plaintiff, with access being granted to the defendant to enable him to comply with his statutory obligations. 15 There is a live issue whether clause 16.6 continues in force. That depends upon the ultimate characterisation of the events of 22 April 2005 - whether the notice of that date was effective to bring into play provisions predicated on termination of the agreement according to its terms or whether, on the other hand, the giving of the notice constituted a repudiation which, upon its acceptance, caused the contract to become non-existent so that recourse can no longer be had to clause 16.6 or any other provision of it. I do note, however, that the letter says that the interim arrangement would be "generally in accordance with" clause 16.6, so that perhaps the arrangement would exist even if the latter contractual situation were the one in fact prevailing. 16 The second matter of particular relevance relates to professional indemnity insurance. It appears that the defendant is no longer covered by professional indemnity insurance arranged by the plaintiff. But it is pointed out by the defendant that, in relation to liquidators, professional indemnity insurance is, in a practical sense, a substitute for a security deposit or bond held in accordance with statutory requirements. The matter is covered in ASIC Policy Statement 33 which, in paragraph 33.5, says that ASIC has determined that the maximum amount for liquidators is $250,000 by way of security deposit and goes on to detail insurance arrangements that may be an acceptable alternative. 17 If the present position is such that the defendant is not covered by insurance and has not furnished the necessary security deposit or bond, then that situation is not going to be improved by the making of the interlocutory order the plaintiff seeks. The location of the books at any given time and who has possession of them have nothing to do with the aspect of protection of the public that the statutory provisions with respect to bonds and security deposits in lieu of professional indemnity insurance are intended to enhance. 18 I note that in Mr McDonald's affidavit it is said that if the defendant enters into a consulting arrangement with Mr McDonald's firm, whether interim or final (and I take the reference to "interim" to mean provision of the bridging facilities to which I have already referred), then Mr McDonald's firm will take steps to note on its policy the appointment of the defendant as a consultant insolvency practitioner and ensure that he has insurance cover through this policy. That, in the circumstances, appears to be the only available plank in this particular storm, unless of course the defendant takes immediate action either to obtain his own insurance or to satisfy the security deposit or bond requirements of the legislation. 19 There is no perfect solution to the existing situation and no perfect way of ensuring that the interests that must be uppermost in the consideration of this matter are fully protected pending resolution of the parties' principal dispute. On balance, however, I am of the opinion that no sufficient basis has been shown, according to the tests in s.1321 matters to which I have referred, to modify the decision of the defendant, as holder of the fifteen individual appointments as liquidator which are the subject of the notices under s.530B, to take formal steps to get into his possession the documents the legislation intends that a liquidator should have. There is no reason why he should not be fully armed with whatever he needs in order to continue with his appointments. In some way or other he must obtain the infrastructure and facilities he needs to continue with his appointments. It is to be hoped that he will make those arrangements through Mr McDonald as foreshadowed, if arrangements with the plaintiff are not available. 20 It would be counter productive for an obstacle to be put in the way of the defendant's obtaining the documents he has called for under s.530B. No case has been made to show that his action in requiring production was affected by any matter of the kind which would cause the court to review, pursuant to s.1321, a decision of a liquidator or other person mentioned in that section. 21 For these reasons I will not make order 2 in the notice of motion. That order is refused. 22 I must say, however, that I am concerned about the matter of professional indemnity insurance and security deposit. On the evidence before me, I do not think I am at the moment in a position where I can form an opinion in terms of s.536(1)(a)(ii) in relation to that matter, but I would wish the defendant to give immediate attention to his responsibilities in this respect and to consider closely the question whether he should consult with ASIC in relation to it. **********

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