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: