Malhotra v Tiwari & Ors [2007] VSCA 101

1 The appellant, Dinesh Malhotra, appeals against the decision of a judge of the Trial Division of 22 December 2005 dismissing the appellant's originating motion of 12 July 2005 by which he sought, primarily, that the liquidation of S & D International Pty Ltd (in liq) ("the company") be terminated ("the proceeding"). At the time of instituting this appeal, the appellant sought orders that the liquidation be terminated forthwith and that there be a declaration that the company is solvent. Due to the passage of time and developments which have taken place in that time, he accepts that such relief would no longer be appropriate. He now argues that, even accepting the judge's findings, there is sufficient concern about the administrators' conduct of the administration to warrant their replacement as liquidators, and that there should be orders for their removal and replacement.

2 The company is trustee of the S & D International Unit Trust ("the Trust"). In that capacity it operated a business known as Bharat Traders International ("the business") that was concerned with the importing, wholesaling and retailing of Indian groceries. On 22 April 2005 the second respondents, Peter Robert Vince and Stirling Lindley Horne, were appointed the company's administrators under Part 5.3A of the Corporations Act 2001 (Cth) ("the Act") and, on 29 June 2005, the company went into voluntary liquidation, the second respondents being appointed as liquidators. It was the appellant's case that the second respondents had so misconducted themselves in dealing with the company's affairs that they were not entitled to their fees. Consequently, it was said, if that expense were disregarded, the company would be solvent and, therefore, should not be wound up. After a lengthy hearing, the learned primary judge concluded that the company was insolvent, that the second respondents did not misconduct themselves such as to be disentitled from charging fees, the reasonableness of which was not challenged, and that the appellant should not have leave to commence a derivative action against the first respondents, Sheela Tiwari and Pradeep Tiwari, as directors of the company.

3 We mention for completeness that the third defendant at the trial, David Mond ("Mond"), was the principal of the company's accountancy firm, David Mond & Associates. He appears also to have been at relevant times a financial adviser to the first respondents. For reasons which are not relevant, on 19 August 2005, it was ordered that, save for one matter, the proceeding against him be stayed until further order.

Circumstances leading to the proceeding

4 The circumstances that gave rise to the issues that his Honour was called upon to determine are set out in his comprehensive reasons for judgment and there is no need to restate them here. It is sufficient, for present purposes, to note the following. The business commenced trading in 1991 as a partnership between the appellant, his brother, Vinod Malhotra, and Markandey Tiwari who was at that time married to the first of the first respondents, Sheela Tiwari, although they divorced in 1992. Pradeep Tiwari, the second of the first respondents, who was born in 1983, is their son. Upon the exit of the other two partners in June 1992, the appellant remained its sole proprietor. The appellant and Sheela Tiwari subsequently married in January 1993 and were divorced in June 1995. The relationship between them, however, continued to the extent that, since at least 1996, they jointly conducted the business through the company that was incorporated on 29 July 1996, the same date as the Trust was established.

5 Sheela Tiwari had been a director of the company from its inception, and the holder of the only two issued shares in it as well as the sole holder of the issued units in the Trust. On 4 March 2005 Balmford J effectively declared that the appellant was the holder and the beneficial owner of one-half of the units in the Trust. The remaining units that were formerly held by Sheela Tiwari are now held or controlled by interests representing her or her family. Sheela Tiwari and Pradeep Tiwari are and have been for some time the only directors of the company.

6 In January 1997 the company purchased premises comprising a shop and dwelling situated at 580 Barkly Street, West Footscray ("the Footscray property") from which the business thereafter was conducted, and in 2002 it purchased a vacant block of residential land at 45 Boronia Drive, Hillside. The Footscray property and the property at Hillside remain trust assets and are registered in the name of the company.

7 On 26 April 2002, the relationship (including the business relationship) between the appellant and Sheela Tiwari completely broke down and Sheela Tiwari told him to leave the Footscray property and thereafter she excluded him from participation in the running of the business. In July 2002 Sheela Tiwari purchased residential property at 5 Livorno Lane, Point Cook for an amount of $474,242.35 that was partly paid from funds of the company. In the result, on 19 August 2002 the appellant commenced proceedings in the Supreme Court claiming a beneficial interest in one-half of the assets of the Trust. On 4 March 2005, as has been noted, Balmford J effectively held that the appellant was an equal beneficial owner of the units in the Trust. On 18 March 2005 Sheela Tiwari and the company filed a notice of appeal against that decision.

8 On 29 January 2004, while the appellant's first proceeding was pending, Pradeep Tiwari registered the business name "Tiwari & Co", with a proposed starting date for the business of 3 March 2004. The address for the business was said to be that of the Footscray property. In July 2004, a cheque for the sum of $39,500[1] drawn on the company's business account with the Commonwealth Bank of Australia ("CBA") was used, it seems, to pay the deposit on a warehouse property at Hoppers Crossing that was purchased by Pradeep Tiwari and that is registered in his name ("the Hoppers Crossing Property"). By letter dated 3 August 2004 from Mond to the ANZ Bank funding was sought for the purchase of the Hoppers Crossing property at which, it was said, a new business was to be conducted by Tiwari & Co Pty Ltd, the sole director of which was Pradeep Tiwari. In an attached summary, Pradeep said that the new business would involve itself predominantly in the wholesaling of food and other goods imported from India, with the possible expansion into full retail operations. The documents showed that Tiwari & Co Pty Ltd would be trading as Bharat Imports.

9 Shortly after Balmford J handed down her reasons for judgment, Mond, as the Tiwaris' accountant, procured a report from a firm of management consultants relating to the remuneration of seven members of the Tiwari family who had worked in the business after the appellant's departure from it. The report, dated 28 February 2005, assesses the remuneration for the period from 2000 to 2005 at in excess of $1 million. On 25 February 2005, the company's former solicitors, Velos & Davis, served a statutory demand on it in the amount of $146,925.33.

10 It is apparent that even before the proceedings before Balmford J had been instituted, the relationship between the appellant and the Tiwaris had irretrievably broken down. Almost immediately following her Honour's judgment the appellant advised the company's principal banker of his success and effectively required it to freeze the company's bank accounts. Shortly thereafter, in the company of his solicitor, he sought to enter the Footscray property, but was stopped from doing so by Pradeep Tiwari. As a consequence, he commenced a proceeding in the Supreme Court to restrain the first respondents "from interfering with ... his right to ... occupation" of the Footscray premises and for contempt. The Tiwaris then issued a summons seeking a stay of execution of the orders of Balmford J and an injunction restraining the appellant from entering into possession of the Footscray property or interfering with the operation or management of the business. Eventually, this Court (differently constituted) heard an application by Sheela Tiwari for a stay of the relevant orders of Balmford J pending the hearing and determination of the appeal. At the suggestion of the Court the parties considered, and agreed to, the appointment of administrators to the company. In other words, they agreed to procure the company to appoint administrators. At the same time, mutual undertakings were given, including an undertaking by Sheela Tiwari to execute a transfer to the appellant of 50 per cent of the issued shares in the company and one half of the units in the Trust. The appellant undertook not to interfere with the operation of the business. As has been mentioned, on 29 April 2005 the company appointed the second respondents as administrators under Part 5.3A of the Act on the basis, as was accepted by the appellant's counsel before his Honour, that the company was likely to become insolvent at some time in the future, given the existence of the substantial debts that had been called up. In those circumstances, on 22 April 2005 the Court relevantly ordered, by consent, that the orders of Balmford J be stayed pending the hearing and determination of Sheela Tiwari's appeal.

11 One of the appellant's complaints then, and before his Honour below, was that Sheela Tiwari and Pradeep Tiwari had, in breach of their duties, impermissibly used the company's assets for their own purposes, including the improper use of company funds by Sheela Tiwari to purchase the property at Point Cook and pay her legal fees of the action before Balmford J. And it was said that Pradeep Tiwari acted in like manner in relation to the Hoppers Crossing property and his new business and that he effectively took away business that belonged to the company. The appellant at every opportunity complained to the administrators about the Tiwaris' alleged wrongful conduct and did so verbally and lengthy memoranda to them, as well as doing so through his solicitors and, later, counsel. He also often raised with them the alleged conflict of interest of Pradeep Tiwari in continuing to run the business.

First meeting of creditors - 6 May 2005

12 The first meeting of creditors was held on 6 May 2005 at which the administrators noted that the business seemed to be running at a loss and presented to the meeting their plans for its administration. At the meeting a committee of creditors was appointed that included the appellant, Mond and the Tiwaris' solicitor, Mr Koobal. A few days thereafter, the administrators effectively engaged Pradeep Tiwari to conduct the seven day a week business and fixed the amount that he and others would be paid in that regard. The appellant, however, was essentially kept off the premises by the administrators.

13 The appellant was highly critical of the administrators' decision to employ the Tiwaris, given their alleged conduct, and made those views, as well as other criticisms, known to them on numerous occasions and in clear and strong language. In his evidence before his Honour, the first-named second respondents said that the decision to employ members of the Tiwari family was a "commercial decision". The maintenance of the status quo, he said, was to preserve the business and to maintain its going concern value. He took into account that the Tiwaris had the knowledge of the daily operation of the business, had an ongoing relationship with suppliers and that they also "happened to live there". He also pointed out that it was difficult to see how someone else could have operated the business with the Tiwaris still living there, so they would have had to be removed from the premises, and that would produce its own difficulties. It seems that the administrators considered appointing an independent manager but decided this would not be justified given that it was anticipated that the administration would be of short duration. They considered at that time that there was scope for a reasonably early resolution of the problems, either by a deed of company arrangement or alternatively by a sale of the business. The administrators were well aware that Balmford J found that Sheela Tiwari was an unreliable witness and was not without doubt as to the appellant's credibility.

14 On 11 May 2005 the administrators attended the Hoppers Crossing property to determine if Pradeep Tiwari had divested the business of its wholesale and import side in favour of his new operation, and whether any property, assets or funds of the company were used to acquire the Hoppers Crossing property or to conduct the business there.

Administrators' first report

15 The administrators were required to convene the second meeting of the company's creditors no later than 26 May 2005 so that they had a relatively short time within which to investigate the affairs of the company and form the opinions required by s 438A of the Act. As it happened, the administrators convened the second meeting of creditors on 26 May 2005, by notice given on 18 May 2005 that was accompanied by their report. This report stated that the assets of the company were encumbered by a first-ranking fixed and floating charge registered by the CBA, supported by a registered mortgage over the titles of the Footscray and Hillside properties, and a second-ranked fixed and floating charge registered by the ANZ Bank. The report provided a summary of turnover and operating profits of the business that had been extracted from the financial reports prepared by Mond. It also showed that the company had a deficiency of some $900,000, having regard to the existence of over $1 million worth of unsecured creditors. The report summarised the activities of the administrators from the time of their appointment and referred to a number of issues that had been raised with them by the appellant, including the alleged unlawful diversion of the company's business by the new Tiwari entity and the withdrawal and/or use of company funds by the Tiwari interests for various purposes unrelated to the company and its business. The administrators described these matters as "complex" and said that they "may warrant substantial further investigation which could not be concluded within the time constraints under the provisions of" Part 5.3A of the Act. The report also said that, although the administrators had continued to trade with a view to maximising the value of the business as a going concern, the company was trading at a loss of approximately $2,325 per week and that it was unlikely that they would continue to allow the business to trade for an "extended period." The report also detailed the salary being by the company to members of the Tiwari family that was included in the operating expenses. The administrators considered that it was not appropriate that administration should then end, because this "would not solve the company's problems nor provide a forum for dealing with creditors' claims or the competing claims of the litigants."

16 The trial judge considered that, on their face, the opinions expressed by the administrators in the first report were reasonably open to them. Importantly, his Honour found that there had been a complete and irretrievable break down in the business relationship between the parties such that it was reasonably open to the administrators to consider that return of control to the directors would be a recipe for further conflict that would not be conducive to the successful operation of the business or to payment of the company's debts.

17 Through the letter of his solicitors of 26 May 2005, the appellant expressed strong and detailed criticism of the administrators' report and conduct, saying that the administration was "not being conducted in a manner that is consistent with the best interests of the company, its creditors and shareholders and the unit holders of the Trust". The appellant said that the continuing substantial costs of the administration were not justified.

18 On 24 May 2005, being the day on which this Court fixed 28 July 2005 as the date for the hearing of the appeal of Sheela Tiwari, Mond placed before the administrators a proposal for a deed of company arrangement on behalf of "a group of investors". The "offer", in essence, was to take over the real estate and the business of the company, and the liabilities to the Banks and to Velos & Davis and to pay $160,000 in cash.

The second creditors' meeting - 26 May 2005

19 The second creditors' meeting was held on 26 May 2005. The administrators reported that they were seeking expressions of interest for the sale of the business as a going concern or for a combined sale of the business with the Footscray property, and that they had taken steps to put the Hillside property on the market. They estimated that the company's total assets were approximately $200,000. They also said that their investigations into the appellant's concerns were continuing, as were their investigations into the claim of Velos & Davis for legal fees (which might be void as against the company) and the payment of $137,287 to Sheela Tiwari. They reported that the business was trading at a loss of about $2,000 a week and they explained that they were continuing to trade in order to preserve the company's assets, but were concerned about the costs of the administration dissipating the assets of the company. The meeting approved (without dissent) payment to the administrators of remuneration to 18 May 2005 in the sum of $61,883.36 and it was resolved (also without dissent) that the meeting be adjourned to 16 June 2005 to provide sufficient time for deed of company arrangement proposals to be considered by them.

20 In their letter of 31 May 2005, the appellant's solicitors again criticised the administrators for not conducting the administration in a fair, proper and transparent manner and claimed that they had not discharged their duties under the Act. They asserted that the company and the Trust were solvent and that the administration should be terminated. The appellant also told the administrators that he had secured finance to cover the CBA debt and sought an undertaking from them not to sell any of the company's assets prior to determination of the Tiwari appeal. This letter was followed by two further letters, in the same vein, written by the appellant to the administrators.

The administrators' second report - 7 June 2005

21 In their second report to the creditors of 7 June 2005, the administrators summarised their administration advising, amongst other matters, that the company might be entitled to an equitable interest in the Point Cook and Hoppers Crossing properties. They said that they were told by Pradeep Tiwari that he used $30,000 of the company's money to pay in cash suppliers to the business. Although the administrators noted that there was no documentary evidence relating to those transactions, his Honour found that "there was prima facie credible evidence of the use of a good part of these funds to pay suppliers". It seems the moneys were also used to pay a credit card, the Tiwaris accountant, and for petrol. Importantly, the administrators' second report concluded:

"Clearly, the above transactions require further, more intensive investigation [but that] ... voluntary administration does not provide the forum for the requisite investigation and the potential prosecution of these claims."

22 The administrators made it plain that they considered that, although they were investigating the merits of the deed of company arrangement proposal, they were of the view that the company was insolvent and that the circumstances of the company were such that they may require a public examination, and probably litigation. They expressed the opinion that, in the absence of any acceptable proposal for a deed of company arrangement and having regard to the potential further recoveries available to the company, it was in the best interests of the creditors that the company be wound up.

23 On 10 June 2005 Mond withdrew the proposal for the deed of company arrangement, but put forward an offer to purchase the Footscray property and the stock, plant and equipment located there for $525,000.

24 On 14 June 2005 the appellant caused a summons to be issued against Sheela Tiwari and the administrators seeking injunctive relief in relation to the conduct of the business and the relevant properties and the termination of the administration on the basis that the company was solvent. The summons was supported by a 37 page affidavit sworn by the appellant. An answering affidavit was filed by the administrators. It is not necessary to detail these matters here save to note that, on 15 June 2005, a judge in the Practice Court made what were essentially holding orders on the summons. In June 2005 a relative of the appellant, Naresh Malhotra, took an assignment of the CBA mortgage notwithstanding that the administrators did not consent to such action. On 20 June 2005, Sheela Tiwari abandoned her appeal against the decision of Balmford J.

25 By letter to the company's creditors dated 21 June 2005, the administrators informed them, amongst other matters, of their conclusion that the company was insolvent and said that, in the absence of any alternative proposal to deal with the affairs of the company under a deed of company arrangement, they recommended the company be wound up.

Adjourned second meeting of creditors - 29 June 2005

26 The adjourned second meeting of creditors was held on 29 June 2005. The administrators' representative explained to the meeting that the company owed substantial debts to the ANZ Bank and to Naresh Malhotra as the assignee of the CBA debt and securities. He also said that there were other claims that were being made against the company and its assets. Importantly, the meeting was told that since their appointment, the administrators had operated the business at a loss and that unless a resolution was achieved the administrators would, as a last resort, have no alternative but to cease trading. In the event, the resolution was put "that the company be placed into liquidation either on the basis of insolvency or on just and equitable grounds and that the administrators be appointed joint and several liquidators". We note for completeness that the resolution to wind up was passed after the taking of a poll. Sixteen creditors, to the value of $581,600, voted in favour and 14 creditors, to the value of $561,822, voted against the resolution, with two creditors to the value of $1,487 abstaining. In considering the entitlement of the various parties to vote, the chairman determined that Mond and the Tiwaris' solicitors were entitled to vote only to the extent of one dollar each, that the appellant was entitled to vote to the value of $309,350 and that none of the Tiwari family were entitled to vote in respect of employee entitlements or other claims.

27 By letter dated 6 July 2005 to interested parties, the liquidators sought tenders for the purchase of the business and its stock, plant and equipment and for the use of the premises at the Footscray property to conduct the business. This proposal was opposed by the appellant who on 1 July 2005 had expressed his strong criticisms of the liquidators' conduct and foreshadowed that he would institute a proceeding seeking a declaration that the "purported liquidation of the company be declared void" and substantial exemplary damages against the liquidators for their alleged gross dereliction of duties by allowing the "destroyers of the business" - the Tiwaris - "to rule the roost". As has been noted, the present proceeding was commenced by the appellant on 12 July 2005.

28 On 13 July 2005 Naresh Malhotra attempted to enter the Footscray property with the result that the Tiwaris instituted a proceeding in the Supreme Court against him seeking to restrain his proposed entry or interference with the business. In the event, Naresh Malhotra was paid out by MIG Property, a company associated with Mond that became entitled, by way of subrogation, to the rights of the CBA as the first mortgagee over the Footscray and Hillside properties and the registered chargee over the assets of the company.

29 By originating process filed 19 July 2005 the liquidators instituted a proceeding seeking directions as to whether they were entitled to dispose of the business and assets of the company. On 21 July they received a letter of that date from the ANZ Bank stating that the company was in default of its obligations to it in respect of its debt of approximately $190,000. The letter required a clearance of the debt and concluded that the bank supported the liquidators' proposed course of selling the company's assets. His Honour found that the sending of this letter was prompted by the liquidators in order to obtain supporting evidence for their application to the court.

30 On 10 August 2005, however, the liquidators were restrained from selling the business pending the trial and determination of the proceeding. By letter dated 12 August 2005 the liquidators' solicitors informed the solicitors for the appellant and the solicitors for Sheela Tiwari that, because they were restrained from selling the business, they had decided to close it forthwith, although this did not occur. On the same date the appellant wrote a 23 page letter seeking, unsuccessfully, to persuade the liquidators to give him a license to run the business pending the determination of the present proceeding and setting out in detail numerous complaints and contentions. We mention for completeness that Pratina Tiwari (Sheela Tiwari's daughter) was granted a licence to conduct the company's business (sanctioned by Whelan J on 6 December 2005) for $1,589 per week which was paid to MIG Property.

31 Before the judge below the appellant sought, among other orders:[2]

"L. An order that the second Defendants ["the administrators"] be disentitled to claim any remuneration for the conduct of the administration and/or liquidation by reason of their negligence and misconduct evident during the course of the administration of the company.

M. Alternatively, an order pursuant to section 449E(2) of the Act that this Court review and reduce the remuneration payable to [the administrators] to such sum as this Court deems fair and reasonable and having regard to the matters deposed to in the supporting Affidavits.

N. An order and declaration that [the administrators] are not entitled to be indemnified in respect of their legal costs, remuneration and disbursements from the assets beneficially owned by the [appellant] and the Trust."

32 The substance of the appellant's claim was that the administrators had acted so improperly or incompetently in failing to remove the Tiwaris as managers of the company, or with such bias or apprehended bias as between the Tiwaris and the appellant, or alternatively with such negligence in failing to impose effective controls on the Tiwaris, that the administrators were not entitled to be paid any fees for the work which they had done as administrators.

33 The judge refused the orders sought in paragraphs L and N and held that the order sought in paragraph M did not arise. His Honour concluded that the administrators' conduct in relation to the business did not constitute misconduct in any of the ways alleged by the appellant. He considered that, in any event, he was satisfied that the administrators were not guilty of such misconduct as would justify depriving them of their fees. The degree of misconduct required for that purpose was, his Honour said, such as would have justified an order for their removal or replacement as administrators. His Honour went on to say that his findings in relation to the conduct of the second respondents as administrators were also applicable to their conduct as liquidators. His Honour was satisfied that, looking at their conduct in both capacities, or in either capacity, there was no misconduct, whether by way of negligence, misleading conduct, lack of impartiality or otherwise, such as ought deprive them of their fees and no misconduct such as would justify their removal or replacement as liquidators.

34 His Honour did, however, consider that the liquidators would be justified in conducting further investigations into a number of matters relating to the company's business. This included the extent, if any, of the company's claim against its directors, the directors of Pradeep Tiwari's company and business, the use of company funds to assist in the acquisition of the Point Cook and Hoppers Crossing properties and the recovery of any payments that had been made to Mond on behalf of Sheela Tiwari. In this context, it is important to note that his Honour did not conclude - because it was not an issue before him - that the administrators had actually carried out the work for which they charged, or that the charges were reasonable, although it was conceded by the appellant that they were. The question whether the work in respect of which fees were charged had been carried out by the administrators was left open by his Honour.

Grounds of Appeal

35 A substantial aspect of the appellant's case before us was that his Honour erred in his findings that the various alleged acts of misconduct by the administrators were not made out or, in any event, were not such as to warrant depriving them of their fees.

(i) Failure to remove the Tiwaris as managers

36 The appellant attacks the judge's conclusions at a number of levels. He submits, first, that the judge failed to consider evidence, or alternatively that the judge's conclusions are against the weight of evidence, that:

a) On or around 21 February 2005 Pradeep Tiwari made a cash withdrawal of $56,278 from the company's CBA account which he claimed was used to pay trade creditors of the company. He was, however, at first unable or unwilling to provide documentary evidence that the funds were used for that purpose and when ultimately he did produce a bundle of invoices which he claimed in evidence in chief were evidence of the payments, he was later forced to concede in cross examination that alterations had been made to some of the Maxim Australia invoices; some of the Agrotrade International invoices had not been paid; payments to Lucky Asian had been made from other sources; and some of the invoices issued by the supplier Proventure Australia related to debts for which the supplier had submitted a proof of debt in the winding up of the company.

b) Another of the invoices, issued by Medfoods, showed that the address for delivery of goods was 565 Barkly Street West Footscray, which was the address of Mumbai Traders. An ASIC search showed that Merwyn Oshry was the holder as nominee of shares in Mumbai Traders. Meryn Oshry was the practice manager of David Mond who in turn was Tiwari's financial adviser. It was also said that other members of the Tiwari family had been seen at those premises and that one of the members of the family was the account holder for the telephone service at those premises.

c) An invoice issued by Velina Design and dated 13 October 2005 showed the address for delivery of goods as being 25 Richards Rd, Hoppers Crossing.

d) Although the appellant urged the administrators throughout the administration to investigate the cash payments and urged the administrators to accept that the payments had been improperly applied, the administrators did not send confirmation letters to creditors until 14 October 2005, after the administration had ended in winding up.

e) On 20 September 2004, Pradeep Tiwari withdrew $40,000 from the company's ANZ bank account and applied it to the purchase for his own benefit of the Hoppers Crossing warehouse property. He later claimed that the $40,000 represented the proceeds of four cheques each of $10,000 which were given to him by his father, sister, grandmother and grandfather on his 21st birthday on 10 August 2004, and that he had deposited the cheques into the company's account because he did not have his own bank account through which to clear them. But such examination of the matter as was conducted by the administrators was unable to verify whether that was so.

f) As at 16 February 2005, the company had total trade creditors of $2,500.00 a total credit bank balance of $38,965.06 (comprising $11,853.72 with CBA and $27,111.34 with ANZ). Under the management of the Tiwaris and the administrators, the company had been rendered insolvent.

g) Cash sales recorded for the period 16 February 2005 to 1 May 2005 totalled $81, 256.60 but cash receipts deposited at bank were limited to $10,870.10.

37 We are not persuaded that his Honour fell into error. The judge expressly identified parts of the evidence which he took into account, as follows:

"[Tiwari] was reluctant to give a clear or comprehensive account of the nature and size of the business conducted by Tiwari & Co and Tiwari & Co Pty Ltd... [and] this gives rise to considerable suspicion and the liquidators are justified in their view that further investigation is required. On the other hand...the precise nature and extent of any claim by the Company against its directors and against Tiwari & Co and Tiwari & Co Pty Ltd is difficult to assess on the evidence before the Court.

...

Tiwari's explanation of the source of the sum of $40,000 of the Company's funds applied towards the completion of the purchase of the Hoppers Crossing property [is another example of the difficulty of assessing the precise nature and extent of any claim by the Company against its directors and against Tiwari & Co and Tiwari & Co Pty Ltd]. The circumstances are suspicious but it is difficult on the evidence available in this proceeding, to determine whether Pradeep Tiwari's conduct was innocent or, if it was, whether other members of the family acted honestly or were involved in a device to utilise Company funds."

38 His Honour then referred to the remainder of the evidence, albeit more generally, in these terms:

"... No doubt the most serious allegation, denied by Pradeep Tiwari, relates to the misappropriation of cash from the business both before and after the appointment of administrators. Proof of this allegation is of its nature difficult for the plaintiff although the significant drop in the cash takings of the business raises reasonable suspicions. Pradeep Tiwari offered explanations, albeit belated, for the decline in the cash takings of the business. The principal explanation in substance was that there was increased competition from numerous Indian grocery shops which had opened in the neighbourhood and in the region and that there was also a decline in profit margins. I found his evidence on this to be credible but it may well be only part of the story. Other factors have probably affected the takings of the business since the commencement of the administration, namely, the cessation of importing activities leading to a reduction in the variety of stock and the reduction in staff numbers (coupled quite possibly with reduced enthusiasm in the circumstances). It may be (as was hinted by [counsel for the appellant]) that deposits into the bank accounts of Sheela Tiwari and Pradeep Tiwari (and perhaps others) might require explanation and I am sure that an investigation is warranted."

39 The judge also accepted that the evidence created considerable suspicion as to the nature and size of the business conducted by Tiwari & Co and Tiwari & Co Pty Ltd, and that the administrators were justified in their view that there should be further investigation into the possibility that parts of the company's business was diverted to Tiwari & Co and Tiwari & Co Pty Ltd and that the Tiwaris misappropriated some of the company's cash and other assets.

40 But, in the end, the judge was not satisfied on the evidence before him of the nature and extent of the business conducted by Tiwari & Co Pty Ltd, and his Honour was not satisfied either directly or as a matter of inference that there was any cash taken dishonestly by any members of the Tiwari family who were employed or involved in the business after the commencement of the administration. Having regard to the state of the evidence before him, we see no error in that.

(ii) Reasons for concern about the Tiwaris

41 Arguably, the evidence created more reason for concern than the judge allowed. On 11 May 2005 Terence Peterson, the administrators' responsible senior manager, reported to Mr Vince that he had attended the Hoppers Crossing warehouse in order to investigate the appellant's allegations that the Tiwaris were diverting the company's business to their own company, Tiwari and Co Pty Ltd, and that:

"There is perhaps little doubt that Tiwari & Co Pty Ltd operates a wholesale importing business from the premises and that the business is similar to the wholesale and importing activities which would otherwise have been undertaken by S & D International."

"Tiwari & Co is supplying goods to the same or similar customer as those supplied to by S & D. Tiwari & Co has, however, added to its customer base with a few more customers."

"Supplies are generally imported from India. Tiwari & Co say they have a new Indian supplier. S & D have done no importing in the last 12 months whereas Tiwari & Co have received at least four containers."

42 When pressed in cross-examination, Mr Vince conceded that the facts referred to in Mr Petersons' report were conveyed to him on 11 May 2005 and that they were very "close to the point" of being "cogent evidence" of misdeeds on the part of the Tiwaris. With that may be coupled the Med Foods and Velina Designs invoices, to which we have referred, and the findings of Balmford J against which the Tiwaris' appeal was abandoned. In our view, that evidence implies that the administrators were faced with a strong prima facie case that the Tiwaris were diverting the business of the company to their own interests and in the process were misappropriating cash and other assets of the company.

(iii) Reasons to retain the Tiwaris, despite concerns

43 As the judge discerned, however, concern about the Tiwaris' propriety was only one of the issues facing the administrators. As well as attempting to preserve the business and assets of the company, they had also to deal with secured lenders; grapple with a very short period of administration, in which their principal task as they perceived it was to preserve the status quo; handle a dispute which was as much a post-nuptial conflict as a commercial contest; and grapple with the physical constraints imposed by the fact that the Tiwaris had made their home in the premises from which the company's business was carried on.

44 Furthermore, as the judge held, it appeared that the administrators had given active consideration to the appellant's allegations against the Tiwaris. Both administrators deposed that it was so and their evidence appeared to be borne out by the contents of their reports to creditors.

45 At the same time, as both administrators also deposed and his Honour accepted, the conduct of the Tiwaris could not be investigated fully in the course of an administration, particularly an administration which was expected to continue for so short a period of time.[3] The emphasis had to be upon procuring a deed of company arrangement or alternatively a winding up in which such suspicions could be investigated more fully. The task was also complicated by the quasi-matrimonial nature of the dispute, and it was exacerbated by the difficulties which the administrators foresaw in ousting the Tiwaris from the Footscray property, which was also their residence, and the effect which that might have on the business of the company.

46 The judge noted that a considerable attack was made on the alleged failure of the administrators properly to investigate each of the appellant's allegations against the Tiwaris.[4] But his Honour dismissed that attack, largely on the basis that the contents of the administrators' reports to creditors recorded that they had investigated the appellant's allegations (which included sending Mr Petersen to Pradeep Tiwari's Hoppers Crossing warehouse to look into whether the company's business had been transferred to interests associated with the Tiwaris), and on the basis of those investigations had concluded and reported to creditors that many of the appellant's allegations had substance and were appropriate subjects for a public examination of the Tiwari family, especially Sheela and Pradeep Tiwari.

47 It is true, as the appellant submits, that some of the relevant parts of the administrators' reports bear a remarkable similarity to the appellant's letter to the administrators of 9 June 2005 (in which he set out his allegations concerning the acts and omissions of the Tiwaris). Were it not for the administrators' evidence, one might perhaps suppose that the administrators had not done much more than simply reiterate the appellant's allegations. But that cannot be said in every case, and in any event it is not contested that Mr Peterson did carry out some investigation into the Hoppers Crossing premises and report as has been observed. In the circumstances, we are not persuaded that his Honour's assessment was unsound.

(iv) Commercial decision to retain the Tiwaris

48 Furthermore, as the judge said, there were arguments both for and against the employment of an independent manager. So, in the end the administrators had to make a commercial decision whether to keep Pradeep Tiwari on as manager despite the risks of that course.[5] In the judge's view, the administrators probably made the correct commercial decision in deciding to keep him on. But, even if it were not the correct decision, it was one which was reasonably open to the administrators on commercial grounds.

49 With respect, we see no error in that part of his Honour's analysis. One way or another, it is apparent that the judge took into account the material which the appellant submitted in support of his contentions and reached a conclusion that was logically based on that material.

50 We accept that views may differ as to the commercial efficacy of retaining the Tiwaris after Mr Petersen's 11 May 2005 report. Arguably, the strength of the case which it established against them outweighed such commercial or other perceived disadvantages as may have been caused by their removal. But it is significant that, although the administrators in effect disclosed in their reports to creditors much of what they knew of the situation concerning the Tiwaris, none of the creditors apart from the appellant sought to have the administrators removed and replaced under s.449B of the Corporations Act 2001, or sought an order in respect of the Tiwaris under s.447A of the Corporations Act 2001.

51 Moreover, as the judge held correctly, it was up to the administrators to make the assessment on the basis of the evidence which was before them and, provided they acted honestly and reasonably, they are not now to be second-guessed on the basis of facts more lately coming to light. Granted, that if the Tiwaris had cheated the company in the past, as was suspected, it was not improbable that they would continue to do so for as long as they held the reins. But as the administrators perceived the situation to be, the Tiwaris' removal as managers would have been inconsistent with the objective of stabilising and preserving the status quo pending the adoption of a deed of company arrangement; and it would have entailed the added complication of attempting to remove the Tiwaris from their residence. As Mr Vince put it in evidence, which the judge accepted:

"The Tiwaris were also the occupants of the domestic premises and any thought that we may have given to removing them from the business would also have entailed us in effectively kicking them out of the domestic premises. That could have taken some considerable time. They had the recent experience and the recent dealings with the suppliers. To have removed them from the premises - we weren't sure how long the business was to be conducted. We were hopeful that it might have been sold but it would have involved very considerable disruption. It wasn't a choice between one unitholder and the other unitholder."

52 All things considered, we do not disagree with his Honour that the decision to persist with the Tiwaris may be seen as a commercial decision based on reasonable criteria.

(v) Bias in the conduct of the administration

53 The appellant next contends that the judge erred in holding that the administrators were not biased or that there was not a reasonable apprehension of bias in favour of the Tiwaris. He submits that there was a wealth of evidence that they were so biased, to which he says the judge did not refer, and of which he relies in particular on the following:

1. Although the Tiwaris were requested on the first day of the administration to provide a Return as to Affairs ("RATA") in accordance with s.438B(2) of the Corporations Act, and were bound to provide the report within seven days, it was not lodged until 14 September 2005, five months late and only after the application for the cessation of the winding up had been fixed for trial to begin on 26 September 2005.

2. The administrators demonstrated a degree of insouciance about getting in the report, in that the Tiwaris were in daily contact with the administrators in their capacity as employees of the company, and were paid $3,600 per week and $70,000 in total for the period of the administration, and yet for all that it appeared the administrators had not once followed up on the outstanding report.

3. The Tiwaris were offered $4,300 per week to manage the company notwithstanding that the appellant had made an offer to do the same job for only $1,500 per week.

4. By letter to the administrator dated 9 June 2005, the appellant offered to pay all trade creditors 100 cents in a dollar as part of his proposal for a take over of the company, but the administrators did not put that offer to the creditors.

5. The CBA had called up their loans and facilities to be paid by 30 June 2005. In his first meeting with the administrators on 3 May 2005 the appellant said that he would look into re-financing the CBA facilities. It appears that the Tiwaris, Mond and Kooblal wanted the company's assets to be sold off and therefore saw no threat in CBA's demand. On 9 June 2005, one of the administrators called Kooblal and told him of the appellant's proposal to refinance the CBA debt. That led to a letter from Kooblal protesting against the re-financing and in turn to a delay in the refinancing. The settlement which had been scheduled for 10 June 2005 did not go ahead. As a result the administrators refused to adjourn the meeting scheduled to take place on 16 June 2005 and the CBA refinance was stalled and only achieved after the appellant sought and obtained injunctions restraining Sheela Tiwari and her agents from interfering. On 17 June 2005, the appellant saw one of the administrators and asked him if he would consent to a transfer of the CBA mortgage to Naresh Malhotra. The administrator said that he could not so consent because it would not be in the interests of the Tiwaris and that the whole dynamics of the situation would change. Instead the administrator asked the appellant to come and see him on 20 June 2005 so that the possibility of an overall resolution could be explored and ultimately the refinancing went ahead because it did not require the consent of the administrators.

54 We do not accept that the judge erred in relation to the issue of bias or apprehended bias. In point of fact his Honour referred implicitly and, in some cases, specifically to most of the matters mentioned and he explained in considerable detail why he was not persuaded by those matters that the administrators were biased or that there was a reasonable apprehension that the administrators were biased.

55 The judge began in general terms with the appellant's allegations of bias, as follows:

"[Counsel for the appellant] put as his principal basis for a finding of misconduct that Messrs Vince and Horne had manifestly failed to impartially discharge their duties as between the unit holders by giving clear preferential treatment to the Tiwari family. I reject that submission. I am satisfied that Messrs Vince and Horne made their decisions bona fide in the interests of the creditors and of the Company, as they saw them, and without any intent to favour the Tiwari family. Nor do I think that a reasonable bystander, knowing the facts and circumstances, would have an apprehension that Messrs Vince and Horne were acting other than impartially as between the unit holders. I saw no evidence that Messrs Vince and Horne harboured a grudge against the plaintiff. I do not accept that they permitted the Tiwaris to 'run riot with the business' or to 'continue their rampage against the Company'. Indeed, I am not satisfied on the evidence that the members of the Tiwari family who were employed in the business after the commencement of the administration did 'run riot with the business' and, insofar as there was any rampage by the Tiwaris against the Company prior to the commencement of the administration, I am not satisfied that such rampage continued. There were many allegations made by the plaintiff concerning the conduct of the Tiwaris prior to the commencement of the administration, that I mention elsewhere, but as I understand it the main allegation of substance made in relation to the conduct of the business after commencement of the administration is an allegation that cash was being taken from the proceeds of sales without reporting the same to the administrators. For reasons that I have stated elsewhere in this judgment, I am not satisfied, directly or as a matter of inference, on the evidence adduced in this case that there was any cash taken dishonestly by any members of the Tiwari family who were employed or involved in the business after the commencement of the administration."[6] (Our emphasis)

56 The judge next dealt specifically with the administrators' reaction to the appellant's proposal to pay 100 cents in the dollar. His Honour observed, as was the fact, that the evidence of Naresh Malhotra as to what he was prepared to do was less than certain. In substance it was that, if the liquidation of the company were terminated, he would be prepared to provide financial assistance to the company. But Naresh Malhotra said that he had still not given it his final thought. He offered that he was prepared to pay out MIG Properties Pty Ltd (the company associated with David Mond that paid out Naresh Malhotra after he sought to enforce some of his rights as assignee of the CBA mortgage debt), or at least that he would be prepared to help out to the extent of $215,000 to $250,000 or thereabouts, and that he would also be prepared to pay out the ANZ. But when pressed in cross-examination, he said that he had only approximately $1M available in assets and finance; that he had not gone into specifics; and that if the debt were over $1M he may have some problems. He also emphasised that his funds were only available on the basis that the appellant was given control of the business and that he would only be prepared to pay out the trade creditors of the company in certain circumstances. Not surprisingly, the judge concluded it would be unsatisfactory to terminate an administration or liquidation based upon such amorphous proposals and assertions.

57 The judge also dealt specifically with the administrators' initial recalcitrance over the refinancing of the CBA facility, and he accepted that Mr Horne's negative attitude had been inappropriate and was rightly criticised. But as Mr Horne testified and his Honour also accepted, at the stage at which Mr Horne was asked to consider the takeover of the CBA debt by Naresh Malhotra, Mr Horne was more concerned to have a proposal for a deed of company arrangement than to be distracted by proposals for a change in the identity of the secured creditor. Furthermore, as the judge said, Mr Horne's conduct was but a peripheral and minor aspect of the administration, and it had no practical consequences. Consequently, whatever shortcomings there may have been in Mr Horne's attitude towards the CBA refinancing, they did not constitute or confirm the existence of a real or apparent bias towards the Tiwaris or involve any consideration by Mr Horne of voting power at the then forthcoming meeting.

58 With respect, we agree with the judge. Looking at the transcript of Mr Vince's and Mr Horne's cross-examinations, it appears to us that they were far more concerned to maintain corporate peace and achieve a deed of company arrangement than to prefer one side over the other. That meant that they were required from time to time to make decisions in favour of one side over the other. But that tended to cut both ways. Two clear examples are the rejection of the Tiwari's offer to purchase the assets of the company for $525,000 and the publication of the second administrators' report, including allegations against the Tiwaris, despite the protests of their financial adviser, David Mond.

59 The point is also well made that the delay in execution of the CBA refinancing was peripheral and of minor importance. We accept that it may not have seemed so to the appellant. For, as he submitted, in the end he had to go to court to get injunctions in order ultimately to achieve the refinancing. But it is plain that the consequent delay in implementation of the refinancing did not prevent or delay the occurrence of anything which might otherwise have saved the company.

60 We agree with the judge too that, if the administrators did make any decisions that had the effect of favouring one side over the other, it was only because they believed that the interests of that side most closely aligned with the interests of the company. The principal example is leaving the Tiwaris to manage the company.

61 Evidently, the judge did not deal specifically with the appellant's offer to manage the company for only $1,500 per week. But as Mr Vince explained in the course of his cross-examination, the offer was irrelevant:

"It wasn't a choice between one unitholder and another unitholder. If there ever was a choice it was a choice between retaining the employees that were there and going to the marketplace and identifying an independent person."

We assume it was for that reason that the judge said nothing about it.

62 Finally, as to the other matters mentioned, such as the delay in getting in the RATA or in sending out the creditor confirmation letters, it seems to us that, although they may be cause for concern about the care and competence with which the administration was conducted, they were, in context, of sufficiently minor significance as to be incapable of affecting the judge's conclusion on the questions of bias and apprehended bias. Like the judge, we do not see any compelling signs of bias or at least of bias that would have been sufficient to warrant the removal of the administrators as such and thus to deprive them of their fees.

(vi) Lack of effective controls

63 The appellant argues in the alternative that, even if the administrators were justified in allowing the Tiwaris to remain in the management of the company, it was incumbent on the administrators to impose effective controls, especially given the cash nature of the business, the apparently unexplained or incompletely explained cash withdrawals from the company's accounts, and the suspicion that the Tiwaris had diverted parts of the business of the company to their own interests.

64 There is more force in that submission. Apart from an initial stocktake conducted by the Tiwaris, and over which the administrators appear to have exercised only limited supervisory control, the extent of the administrators' supervision is doubtful. Among other indications of laxity, there is the delay in getting in the RATA from the Tiwaris, delay in issuing a statutory notice for the company's books until 16 June 2005, the manner in which the Tiwari's wages were set - on the evidence they were in effect invited to name their price - and scant detail of any controls over daily cash takings, purchase orders and approval of stock purchases or any diversion of the business. The point is well made that, so far as can be seen, the administrators did not even sight the bank deposit book or vouch it to cash receipts.

65 The judge said this about the administrators' supervision of the Tiwaris:

"Finally, the administrators' first report concludes by setting out a summary of their activities from 29 April 2005 to the time of the preparation of the report. Having regard to the allegations of misconduct made by the plaintiff against the administrators it is relevant to note the substantial work which the administrators reported that they had performed in that period of just under three weeks, which they listed as follows:

'Since the appointment the Joint Administrators have attended to the following:

• Reviewed the company's assets, liabilities and premises.

• Interviewed the directors.

• Undertook the requisite investigations required to prepare and complete this report in accordance with Section 439A(4).

• Meetings and correspondence with the company's secured creditors, being the CBA and the ANZ pursuant to Section 450A.

• Liaised with suppliers to establish supply to the company and dealt with procedural issues.

• Arranged the transfer of the company's merchant facility to the Joint Administrators' account.

• Arranged for funds to be transferred from the company's bank account to the Joint Administrators' account.

• Implement and monitor controls over daily cash takings and banking.

• Implement controls over purchase orders for approval of stock purchases.

• Monitored the trading and financial position of the company's business since the date of appointment as Joint Administrators.

• Negotiated appropriate wages to be paid to the company's employees.

• Called two creditors meetings to date.

• Arranged meetings between the Tiwari Family and Mr D Malhotra and their respective legal representatives.

• Attended to all statutory matters in relation to the administration including notification to all creditors and government bodies.

• Attended to day to day queries and administration issues in respect of the likelihood of recovering undue preferences in the event of liquidation and also of insolvent trading.

• Attended to and observed stocktake, including calculating and collating the stocktake and conducted subsequent testing of the integrity of the stocktake.

• Instructed Dominions in respect of a valuation of the company's plant and equipment and assessment of the value of the company's stock under a forced sale scenario.

• Instructed Sutherland Farrelly Valuers in respect of a valuation of the company's business and freehold property located at 580 Barkly Street, Footscray, the company's property located at 45 Boronia Drive, Hillside.

• Liaised with valuer in relation to market rental and possible lease in respect of the Footscray property.

• Prepared a budget forecast for the business.

• Liaised with our insurance broker in relation to the company's existing insurance cover and further insurance needs, to ensure adequate insurance cover is in place.

• Advertised for expressions of interest in respect of the company's business and freehold property.

• Sought independent legal advice in relation to the validity of Mr Velos' security.

• Sought independent legal advice in relation to the Joint Administrators' obligations under the Supreme Court orders.

• Correspondence and meetings from time to time with the company's directors, legal and accounting representatives.

• Correspondence and meetings from time to time with Mr Malhotra and his legal representatives to consider a submission from Mr Malhotra in relation to the operation of the business.

• Attended the property at Hoppers Crossing in order to determine the nature of the business and assess the level of business activity.

• Reviewed the company's records in relation to video deposits paid by customers in order to estimate the company's potential exposure to its customers.'

At that juncture the administrators said that their total professional fees to 18 May 2005 were $61,883.36. The total amount claimed is perhaps not surprising given the work said to have been performed and the context of continuing litigation and of many claims and disputes. Appended to the administrators' first report was a list of creditors."

66 But there is a difficulty with that recitation of events in that it treats the administrators' account as if it were an accurate representation of the work which they did. In truth it was not. In cross-examination, Mr Vince frankly conceded that the description was in part "false" and was "generous" (in the sense of misleading):

"Turn to page 17 please. Therein you describe the activities of the joint administrators since the administration began, is that so?---Yes.

You have said there that one of the activities was that you interviewed the directors and that's plural, isn't it?---Yes.

Well, that's false, isn't it?---Yes.

Is this just a pro forma, is it? --- It is like a pro forma.

It's a pro forma, is that correct? --- Yes. It's probably - we are probably being fairly generous with those words.

Were you being generous in relation to the description of your activities between 29 April to 18 May? --- Yes.

You have been, have you? --- I think that that's probably a generous interpretation of what was involved.

I suggest to you that's a pro forma description of what administrator should be doing, given the time constraints imposed by the Act. Correct? --- Yes.

One of the matters that you refer to there is ["Implement and monitor controls over daily cash takings and banking."] ... how often would Mr Terence Peterson attend the premises to your knowledge, at 580 Barkly Street --- Terence Peterson was involved as the senior manager and - - -

Now, how often is my question? --- There would be an attendance of approximately once a week.

Is there a record of that? --- I haven't - no.

Sorry? --- I don't have a record here.

Is there a record maintained by the administrators of each and every attendance made by Terence Peterson at the premises? Yes or no? --- No.

You have no personal knowledge of when he attended the premises, is that correct? --- No, that's right.

...

The control of and the taking of stock - a stocktake was performed, was it not? --- Yes, that's right.

Who performed the stocktake upon your appointment? --- I believe it was Matt Chivers who was one of my staff in conjunction with one of the employees of the company.

Which employee was that? --- I don't know.

In terms of ensuring the integrity and reliability of stocktakes you would agree, would you not, that the stock[take] should be by the administrators or their direct employees rather than by the occupants of the business? --- No.

Is it fair to say you trusted Pradeep Tiwari in relation to the stocktaking activities ---? --- Yes.

...

So you trusted Mr Tiwari even there, is that correct? --- I trusted the employees of the company to undertake the stocktake with the assistance of my office.

With the assistance of your employees, is that right? --- Yes.

So I take it from that answer you would require your direct staff, in particular Matt Chivers, to be in attendance. Is that correct? --- To be there and to generally supervise it.

You wouldn't expect him to trot off, as it were, and allow Pradeep Tiwari to complete the stocktake in his absence? --- I would expect him to use his own judgment and - - -

...

That's recording a file note of Mr Chivers' attendance at the premises on 3 May. Correct? --- Yes.

If you look towards the bottom it refers to 'Attended to stocktake.' Correct? --- Yes.

Mostly completed. Staff (Pradeep) to complete? --- Yes."

67 There was also evidence[7] which, on one view of the matter, suggests that the administrators may have authorised payment of invoices which were ex facie suspicious and so in apparent need of further investigation. It included that:

• After being appointed on 29 April 2005, the administrators authorised payment by the company of an invoice no 843 purportedly dated 17 March 2005, which is to say before the commencement of the administration, addressed to S & D International P/L (Administrators Appointed) 580 Barkly St, West Footscray**.**

• Another invoice no 820 and also dated 17 March 2005 was addressed to Raghu, S & D International P/L 580 Barkly St, West Footscray**.** That invoice for the amount of $3280.00 formed part of a proof of debt later submitted to the administrators.

• It is possible that some other invoices were processed twice. They included Invoice number 349 of V2 Entertainment, which was approved for payment in the amount of $1,611.50 and was later the subject of a proof of debt in the amount of $4,898.75. As first approved, the invoice was addressed to S & D International (Administrators Appointed), 580 Barkly Street, Footscray 3011 and dated 28 March 2005, but as the subject of the proof of debt the invoice although dated 28 March 2005 was directed to "Pradeep Tiwari Bharat Traders..."

68 As well as that, the judge said nothing about the manner in which the Tiwaris' remuneration was set, which as against the figure offered by the appellant does appear excessive, or anything about the detail of day-to-day controls.

(vii) Administrators did not act so improperly as to be deprived of fees

69 So to say does not mean that the judge was in error in refusing to make an order which would wholly deprive the administrators of their fees. As the judge was at pains to make clear, the issues that he was required to determine were circumscribed by the way in which the appellant put this part of his case in final address. It was as follows:

"...the principal basis upon which the court ought make a finding of misconduct against the current liquidators is that they have manifestly failed, and perceptibly so, to impartially discharge their duties as between the unitholders by giving clear preferential treatment to the Tiwari family in circumstances which could only be described as uncalled for and a draconian exercise of discretion, having regard to the matters of probity that are adverted to in the submission.

...

"The submission is a reasonable bystander, looking at all the matters of which the court is apprised must bear a reasonable apprehension that the administrators/liquidators have not impartially and fairly discharged their duties as between the unitholders and that is manifest from every step of the decision-making process that the administrators have indulged in and particularly manifest in certain respects."

The question for the judge, therefore, was simply whether the administrators had been guilty of misconduct in that sense, and as to that the judge said no more than that he was satisfied that the administrators were not guilty of such misconduct, whether by way of negligence, misleading conduct, lack of impartiality or otherwise, as would wholly deprive them of their fees.

70 With respect, we see no error in that conclusion. While it may be that there were more significant shortcomings in the administrators' supervision of the company than the judge acknowledged, we accept that the evidence went no further than that the administrators were not guilty of such misconduct as would have warranted their removal as administrators and thus deprived them wholly of their fees as administrators.

71 We note that the judge also said that he was not satisfied on the evidence that the Tiwaris took any cash dishonestly, and that he did not accept the appellant's submission that the conduct of the administrators had contributed to the worsening of the financial condition of the company. With respect, we agree with his Honour that the evidence on those two issues did not go far enough to support any positive findings. But, for the avoidance of doubt, we add that his Honour should not be taken thereby to have determined either issue in a fashion which binds the company. Consistently with his Honour's earlier observations as to the need for further inquiry into the appellant's allegations, it remains for investigation by the liquidator of the company whether the Tiwaris diverted any part of the company's business, misappropriated any cash or other assets of the company and whether anything which the administrators did or failed to do in the course of administration of the company was productive of loss or damage to the company. It also remains to determine whether the administrators are entitled to all of the fees which they claim. Nothing said by the judge below or by this court on this appeal forecloses either inquiry.

Replacement of the administrators as liquidators

72 As we have said, the appellant no longer seeks orders that the liquidation of the company be terminated and a declaration that the company is solvent. He now seeks orders that the second respondents be removed and replaced as liquidators. We agree that those orders should be made. Given the need for further investigation as recognised by the judge and, more specifically, because of uncertainty as to what was done and not done in the course of the administration, it is inappropriate that the administrators remain as liquidators.

73 That does not mean that we have reached a conclusion that is adverse to the administrators. As already stated, there is not sufficient evidence from which to decide whether the administrators caused or are responsible for any loss or damage which the company may have suffered. It would also be inappropriate to make that decision without first affording the company an opportunity to be heard through an independent representative. But it is axiomatic that the administrators cannot investigate themselves. The consequent possibility of a conflict of interest necessitates that an independent liquidator be appointed in their place. It follows in our view that the appeal should be allowed in part. And the orders of the judge below should be varied to that extent.

74 As was observed in Re National Safety Council,[8] it is of the greatest importance that there should be no possibility of criticism attaching to one of the court's own officers on the ground of conflict of interest and duty. It would, therefore, be a substantial injustice to the appellant if the administrators' conduct of the administration, and their relationship with the respondents throughout the administration, could not be fairly, promptly and independently investigated and be seen to be independently investigated.

Appellant's application to bring derivative proceedings

75 In his submission to us the appellant did not put forward any argument in support of the grounds of appeal (grounds 6, 7 and 12) that challenge the correctness of his Honour's decision to refuse him leave to bring derivative proceedings against the respondents. For completeness, however, in light of our conclusion that his Honour's decision is not vitiated by any of the errors contended for by the appellant and that it would be appropriate that new liquidators be appointed in place of the second respondents, we consider that there is no basis for disturbing his Honour's refusal to grant leave to the appellant to commence the proposed proceedings that resulted in the matter being left to the liquidators. As his Honour correctly observed, there are a considerable number of potential claims against the first respondents at least that need to be evaluated and many of them have already been assessed by the present liquidators as having some validity or strength. We consider that there is no reason to think that the new liquidators will not adopt a like attitude.

76 We apprehend that the appellant's primary reason for seeking such relief in the first place was his concern that the second respondents would not bring appropriate proceedings, given the quality of the administration of the company as was alleged by him. On an objective basis, however, we think that such concern can no longer be present given our decision as to his Honour's findings relating to the second respondent's administration of the company and, importantly, the impending appointment of new liquidators.

77 In any event, ordinarily, it is inappropriate to allow derivative proceedings to be brought when a company is in liquidation because it would require the court to permit another to supplant the liquidator as the personification of the company for that purpose.[9] And as Gummow J said in Scarel Pty Ltd v City Loan & Credit Pty Ltd:[10]

"The ordinary rule is that the liquidator, in the ordinary case, is the appropriate person in whom is vested the authority to decide whether the company should take or continue action to recover damages or secure other relief for an injury done to the company. In my view, this follows from the operation of the provisions of the Code to which I have referred. ... [T]he general proposition is that with the liquidation, both the directors and shareholders in general meeting cease to have authority to institute or continue litigation by the company".

78 We are not satisfied that it is probable that the liquidators will not bring such proceedings against the relevant respondents as may be warranted, assuming sufficient funds are available to adopt that course. Overall, we consider that it is in the best interests of the company that, as his Honour concluded, the matter be left with the liquidators. In the circumstances, we would not uphold grounds 6, 7 and 12.

[1] His Honour said that the cheque butt was altered to read "$39,500 distribution to Tiwari Family Trust on account of Pratina, Pradeep, Pratibha and Pranita, Sheela's four children.

[2] Other orders included that the Tiwaris be removed as managers of the company, and that the appellant be permitted to assume the management of the company.

[3] And see Deputy Commissioner of Taxation v Pddam Pty Ltd (1996) 14 ACLC 659 at 668-9, to which the judge referred.

[4] Albeit, as the judge observed, that the attack was not carried through into the appellant's final written or oral submissions.

[5] A conclusion verified by the evidence of Mr Vince.

[6] In his final submissions to the judge, counsel for the appellant had grouped matters such as the failure to follow up on the Report as to Affairs and failure to conduct further and more extensive investigations under the rubric of allowing the Tiwaris to "run riot with the business" and to "continue their rampage against the Company").

[7] To which the judge did not specifically refer.

[8] [1990] VicRp 2; [1990] VR 29 at 34.

[9] See, for example, Freshstart Australia Pty Ltd v Lofthouse [2006] VSC 317 at [15], per Whelan J.

[10] (1998) 17 FCR 344 at 350.