Network Exchange Pty Ltd v MIG International CommunicationsPty Ltd

Federal Court of Australia|1998-07-09|Before: Merkel J

REASONS FOR JUDGMENT INTRODUCTION Conpac (Aust) Pty Limited ("Conpac"), prior to its liquidation, was engaged in commercial, industrial and residential construction. On 6 June 1997, as a consequence of financial difficulties experienced early in 1997, Malcolm John Morris Smith ("the liquidator"), a chartered accountant, was appointed as voluntary administrator of Conpac pursuant to s 436A of the Corporations Law ("the Law"). On 22 August 1997 the liquidator was appointed as liquidator of Conpac after the creditors of Conpac had resolved that the company be wound up pursuant to s 446A of the Law. Representatives of the first, second, third and fourth applicants were appointed as the Committee of Inspection pursuant to s 548 of the Law. In the course of the liquidation there appears to have been considerable acrimony between the liquidator and the Committee of Inspection. That acrimony led to the two proceedings presently before the Court. The first proceeding is an application filed in the Federal Court by nine applicants, being trade creditors of Conpac, for an order that the Court remove the liquidator as liquidator of Conpac and appoint another liquidator in his place. The applicants also sought an order that the remuneration of $97,527.75 claimed by the liquidator not be approved by the Court. The second proceeding, issued in the Supreme Court of New South Wales, is an application by the liquidator for a declaration that he is entitled to receive remuneration of $97,527.75 for acting as liquidator of Conpac for the period 22 August 1997 to 30 November 1997. The liquidator also sought an order that his costs of the proceeding be paid out of the property of Conpac on an indemnity basis. The proceeding in the Supreme Court of New South Wales was transferred to the Federal Court. The proceedings came on for hearing on 17 and 18 June 1998. Initially, the matters relied upon by the applicants for seeking the liquidator's removal were extensive and wide ranging. In substance the applicants relied upon certain conduct and decisions by the liquidator which they contended had been primarily for the benefit of the directors of Conpac and their associated entities rather than for the benefit of the creditors. However, in the course of the hearing the substantive complaints relied upon by the applicants narrowed to two particular matters. The first related to an allegation that the liquidator had failed to act in the interests of the creditors of Conpac in relation to a substantial profit of about $1 million realised by the directors of Conpac, and entities with which they were associated, in relation to the purchase and development of a property at 67-69 Chandos Street, St Leonards ("the Chandos Street property"). The second matter related to termination payments, totalling approximately $83,500 ("the termination payments"), paid by the liquidator to certain employees on the basis that they were employees of Conpac. The liquidator also gave Richard Reid, the Managing Director of Conpac, a right to prove for a sum in excess of $31,000, apparently on the basis that he was employed by Conpac. The applicants contended that the employees were employed by Reibber Management Pty Limited ("Reibber"), a company associated with the directors of Conpac, and not by Conpac. The applicants' case was that the failure of the liquidator to carry out properly his functions as liquidator in respect of the two matters, his failure to investigate properly those matters and other matters involving the directors and the consequential loss of confidence in the liquidator of the Committee of Inspection and other creditors made it appropriate for the Court to remove him as liquidator under s 503 of the Law. The liquidator contended that he investigated and acted in accordance with the legal advice he obtained in respect of the Chandos Street property and adequately and properly investigated and considered the other matters upon which the applicants relied. He denied that there was any breach of duty or other misconduct on his part which would justify his removal and claimed that there was no basis upon which his claim for remuneration could properly be refused by the Court. There was a superficial attraction about the liquidator's case that, in effect, the Court is being asked to sit on appeal against the manner in which the liquidator exercised his discretionary powers. As a consequence it is necessary to consider carefully the two matters ultimately relied upon by the applicants.

THE CHANDOS STREET PROPERTY On 7 November 1996, in consideration of the sum of $15,000, Conpac was granted an option to purchase the Chandos Street property, for future development, for a purchase price of $1.1 million. The option was to be exercised prior to 5.00 pm on 31 January 1997. At some time prior to 30 January 1997 the directors of Conpac decided to exercise the option, but on the basis that the purchase and development was to be carried out by Conpac not in its own right, but as trustee of the Conpac Number One Unit Trust ("the Trust"). The units in the Trust were to be held by directors of Conpac or entities associated with the directors. On 30 January 1997 Conpac was appointed as trustee of the Trust under a Deed made that day. On 31 January 1997 Conpac, presumably after exercising its option, entered into a contract to purchase the Chandos Street property for $1.1 million. The deposit of $110,000 (which included the option fee) payable on the execution of a contract was paid out of Conpac's funds. The evidence before me did not disclose why the directors elected to proceed with the purchase by Conpac as trustee of the Trust rather than in its own right. One obvious inference that might be drawn was that the directors were concerned that Conpac's financial situation was, or would become, such that it was preferable for the project to be carried out for the benefit of the directors of Conpac rather than for the benefit of Conpac or its creditors. By early 1997 Conpac was in financial difficulties. However, that did not stop its directors from continuing to use its funds and assets for the acquisition and development of the Chandos Street property. In addition to providing the initial deposit of $110,000, Conpac provided a further $60,000 for costs incurred in relation to the project prior to settlement of the purchase on 11 April 1997. By 11 April Conpac was in severe financial difficulties yet on that day it advanced a further $219,632 and charged all of its assets in favour of the Commonwealth Bank of Australia ("CBA") to secure an advance to it of $775,000 from the CBA to enable it to pay the balance of the purchase price payable on settlement. The advance was also secured by a mortgage by Conpac as trustee of the Trust over the Chandos Street property. After 11 April 1997 Conpac made further advances of approximately $35,000. A further CBA bill was drawn down in the sum of $82,000 on 5 May 1997. It appears that prior to the administrator being appointed to Conpac on 6 June 1997, save for the CBA loan which was secured over Conpac's assets, all of the funds for the purchase and development were advanced by Conpac out of its own funds and little or nothing was contributed by the holders of the units in the Trust. According to the reconciliation statement prepared by the liquidator in respect of the Chandos Street property between 6 November 1996 and 5 June 1997 Conpac made payments or incurred liabilities in its own right in respect of the Chandos Street property in the sum of $1,282,198. The liquidator informed creditors on 8 January 1998 that subject to an audit he was carrying out, Conpac was still owed $1,208,373 in respect of the Chandos Street transactions. No audit of those transactions was ever carried out by the liquidator. The use of Conpac's funds and assets for the benefit of its directors involved another Conpac project. During the first half of 1997 Conpac was completing a development at 82-92 Cooper Street, Surrey Hills ("the Cooper Street property"). During April and May 1997 Conpac's directors accelerated the completion of that project, apparently to enable the funds to be realised from its completion to be utilised for the Chandos Street property. By 6 June 1997, when the administration commenced, Conpac had received in excess of $970,000 in respect of its projects, including Cooper Street, but was unable to utilise any part of that sum as it had been frozen by the CBA as security for the debt owing by Conpac to CBA in respect of the Chandos Street property. I interpolate that the applicants relied on the Cooper Street property on several issues but in my view its main significance, for present purposes, is the intended use by the directors of the funds raised from it or part thereof for the Chandos Street project. After Conpac went into voluntary administration BCL Construction Management Pty Ltd ("BCL"), another company associated with the directors of Conpac, was appointed trustee of the Trust. BCL proceeded to arrange for the refinancing of the Chandos Street project so that the funds advanced by Conpac could be repaid and the mortgage to the CBA, which had been assigned to Conpac upon payment of its indebtedness to the CBA, could be discharged. The liquidator entered into a deed of repayment with BCL in respect of the funds advanced which were to be repaid with interest at a commercial rate. On 24 October 1997 the liquidator sought the retrospective approval of the Committee of Inspection to the deed of repayment but the approval was not granted. By that stage the Committee had become increasingly concerned about the liquidator's conduct and, in particular, had formed the view that he had been exercising his powers in a manner which benefited the directors and entities associated with them rather than for the benefit of creditors. At an early stage the liquidator sought and received oral advice from his solicitors as to his rights in relation to the Chandos Street property and any profit realised from it. In substance, he was advised that the advance of the funds constituted a breach by the directors of their fiduciary duties but that as a consequence of the money having been repaid it was unlikely that Conpac suffered any loss. The liquidator was informed that if he could identify a loss then Conpac would have a cause of action against the directors. The solicitors also advised that if it can be established that Conpac would have not experienced cash flow problems had the loans not been made then there might also be a cause of action depending on what, if any, losses can be identified. Although the solicitors adverted to the possibility of claiming the profit realised from the Chandos Street project as a result of the breach of fiduciary duty a pessimistic view was given as to that entitlement. After receiving the oral advice the liquidator conducted little, if any, further investigation into the issues raised by the advice. After the proceedings for his removal were commenced the liquidator requested that the solicitors confirm in writing the oral advice which they had given. He received the written confirmation in April 1998 but did not disclose the contents of the advice he received to the Committee of Inspection. There are a number of problems with the advice given by the solicitors. Clearly, it was proper for Smith to seek and obtain legal advice in relation to the Chandos Street property. However, the factual basis upon which the advice was based is unclear. Information appears to have been provided to the solicitors by employees of the liquidator from time to time in the most general form. Little specific information was provided as to the financing, by Conpac, of the acquisition of the property. The solicitors appeared to view the amounts provided as a loan which was to be repayable with commercial interest. That view was consistent with a document said to be "a copy of minutes of extraordinary general meeting of Conpac held on 2 October 1996" which was forwarded to the solicitors by an employee of the liquidator. The document, which was unsigned, purports to record a meeting held by two directors of Conpac on 1 October 1996 at which Conpac resolved to advance a maximum of $500,000 for the purchase of the Chandos Street property and provide a guarantee to the CBA. The minutes record that the "Conpac Aust Property Trust No 1 Pty Ltd" is to pay interest at the CBA rate plus 1%. I have serious concerns as to the validity of the minutes. The minutes are unsigned. According to the liquidator no enquiry was made of the directors as to the minutes or whether the meeting was ever held. The meeting purports to have taken place in October 1996, about five weeks prior to the option being entered into in respect of the property. The minutes refer to a trust which was not established until 30 January 1997. They also refer to a guarantee to the CBA although the CBA loan was not made until 11 April 1997. Whilst these matters do not compel the conclusion that the minutes are a sham they obviously required that a proper investigation be made in relation to their validity prior to the minutes being acted upon as genuine. No such investigation was undertaken. A further problem with the advice sought was that it was sought very early in the investigation and was based on the assumption that Conpac did not have any beneficial or equitable interests in or rights in respect of the property. The liquidator made no enquiry as to why $15,000 was paid by Conpac on 6 November 1996 in respect of the property. Had such an enquiry been made or had the liquidator conducted the audit that he had informed creditors he was carrying out he would have ascertained that Conpac was the grantee of the option to purchase. I accept the liquidator's evidence that he only became aware of the option in the course of the hearing before me. However, in my view that only confirms the inadequacy of his investigation. The liquidator conceded as much when he said he did not review the Chandos Street loan account "in detail". The motives of the directors in appropriating for their own benefit the opportunity presented by the Chandos Street property also called for an inquiry that was never made. No explanation was sought from the directors as to why they used Conpac's funds and assets for their own purposes when Conpac was in financial difficulties. Clearly such matters were critical to the legal rights of the liquidator in relation to the property and the profit of about $1 million that was apparently realised by the directors or their entities upon its redevelopment. I am also satisfied that no proper inquiries were conducted by the liquidator as to the nature and extent of the loss caused to Conpac by the use of its funds and assets for the Chandos Street property. I have great difficulty in accepting the liquidator's evidence that in his view the commitment by Conpac of its funds and assets to the Chandos Street property was not a significant contributing factor to its financial difficulties. As at 6 June 1997 in excess of $1.2 million was owing to Conpac in relation to the Chandos Street property. According to the records before the Court at that date there were approximately 219 creditors of Conpac with claims totalling approximately $3.97 million. The debtors of the company totalled approximately $2.53 million. Although I accept the evidence that Conpac was involved in a number of proceedings clearly the inability to utilise the $970,000 frozen by the CBA as security for the Chandos Street debt at that point of time and the charging of all Conpac's assets to the CBA for Chandos Street were likely to be significant factors which contributed to the financial problems of Conpac. The liquidator did concede that those matters were likely to have made the difference between a successful administration and liquidation. For present purposes it is unnecessary for me to pursue the matter further as I am satisfied that in all the circumstances the investigation conducted and inquiries made by the liquidator in relation to the Chandos Street property were clearly inadequate. The inadequacy is exacerbated by the fact that the Committee of Inspection had called upon the liquidator "time and again" to investigate those transactions and complained on many occasions that he had not done so. The evidence before the Court establishes that it is probable that the directors of Conpac determined to use its assets and money for their own personal benefit at a time the company was experiencing, or was likely to experience, financial difficulties. The facts that warrant that conclusion were known or, had proper enquiry been made, ought to have been known by the liquidator. On the evidence before me the commitment of the assets and funds to the Chandos Street property by Conpac through its directors almost certainly constituted a breach of their fiduciary duties: see Walker v Wimborne (1976) 137 CLR 1. Breaches of ss 232(2), (4) and (6) of the Law may also have occurred. Any breaches which have occurred would have unnecessarily exposed Conpac to the risk of loss and seriously prejudiced its unsecured creditors: see Walker at 7. Remedies for any breach of the duties to which I have referred include the recovery of any loss and more importantly, in the present case, can extend to a requirement on the part of the directors to account for any benefit or gain made by them as a constructive trustee: see Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 and Chan v Zacharia (1984) 154 CLR 178 at 198-199 per Deane J. The liability to account for benefits or gains as a constructive trustee extends not only to the directors but to others who received the benefit or gain with actual or constructive knowledge of the circumstances that constituted the breach of duty. Associated entities or persons with knowledge also become constructive trustees of the gains or benefits for the person to whom the fiduciary duty was owed: see Barnes v Addy (1874) LR 9 Ch App 244, Consul Development at 398 and Equiticorp Finance Limited (in liquidation) v Bank of New Zealand (1993) 36 NSWLR 50 at 101-106 per Kirby P and the cases there discussed. In many cases there is some doubt as to whether the third party has the requisite knowledge but there can be little doubt on that issue in the present case as it appears that at all material times, in effect, the unit holders in the Trust or those who controlled its affairs were the directors of Conpac. Accordingly, on the basis of the information that was known or ought to have been known by the liquidator: · the directors of Conpac committed a breach of fiduciary duty in committing the assets and funds of Conpac to the Chandos Street property, and · the holders of units in the Trust were aware of and participated in the breaches knowing and intending that they were to be the beneficiaries of those breaches. Obviously there is a strong case for contending that the directors, BCL and the unit holders are liable as constructive trustees to disgorge the profit, or at least a significant part thereof, they received from the Chandos Street property. I accept that the directors have not been parties to or involved in the present proceeding and, as a consequence, all of the relevant facts have not emerged. It may well be that facts might emerge that place a different complexion on the relevant transactions. However, it is sufficient for the present purposes for me to conclude, as I do, that: · the failure of the liquidator to investigate adequately or properly the Chandos Street transactions was a serious and significant omission on his part; · a proper and adequate investigation was, and still is, likely to result in significant benefits for Conpac and its creditors.

THE TERMINATION PAYMENTS Conpac was the major operating company in the group of companies with which its directors were associated. Conpac employed, and paid group tax in respect of, "award employees" being the employees actually working on building sites. Reibber was established as a management company for the employment of non-award employees although the only activity of Reibber's employees was to supply services for Conpac. Group Certificates were issued to its employees by Reibber although their salaries were paid by Conpac as payments on account of management fees. Conpac and Reibber had the same directors and the same managing director, Mr Richard Reid. Mr Kurlow, one of the employees who received a termination payment from the liquidator, claimed that he was an accountant employed by Reibber. He gave evidence on behalf of the applicants in relation to the termination payments. Although Mr Kurlow now says that he was always an employee of Reibber he had made a claim for wrongful dismissal against Conpac and in support of that claim had previously produced a letter of offer of employment from Conpac, signed by Mr Richard Reid as its managing director. Obviously, as both Conpac and Reibber appeared to have been owned by the same interests and had common directors the distinction now drawn as to whether particular employees were employees of Reibber or Conpac had little practical significance, other than perhaps for taxation purposes, prior to the liquidation. In the circumstances set out above there was a real and significant question as to whether the employees were to be treated as employees of Reibber or Conpac for the purposes of the liquidation. If they were employees of Conpac the termination payments were said by the liquidator to be priority payments under Part 5.6 of the Law which were required to be made out of the funds of Conpac. On the other hand if they were employees of Reibber then the termination payments were liabilities of Reibber and were not to be paid by Conpac nor was their burden to be borne by the creditors of Conpac. Although the amount of the termination payments was about $83,500, and the proof of debt about $31,500, those sums were not insignificant to the creditors who may only receive about forty cents in the dollar in the liquidation. Although the liquidator did not regard the management arrangement as a sham he formed the view, based on his understanding of what he described as "the case law", that as the employees were under "the control" of Conpac they were employees of Conpac and not of Reibber. Accordingly, so he believed, Conpac was liable to make the termination payments which he then proceeded to make to each of the employees, including Mr Reid. The liquidator did not seek any legal advice on this issue. It is difficult to understand the liquidator's logic in arriving at the conclusion he did as the employees of Conpac and Reibber were subject to the control and direction of Mr Reid who was managing director of Reibber and of Conpac. Each company had common directors. It is not clear to me how the liquidator concluded that the employees were controlled by Conpac rather than Reibber. The liquidator, in evidence, also pointed to other factors that supported his conclusion. I need not pursue those matters as I am satisfied that the liquidator's reliance on the control test and the other matters misconceived the function of the test. The control test is applied primarily to determine whether a particular person is an employee under a contract of service or an independent contractor under a contract for services. It is in that context that numerous cases have had to ascertain the appropriate criteria for determining where the line is to be drawn between an employee and an independent contractor: see Stevens v Brodribb Sawmilling Company Pty Ltd (1986) 160 CLR 16. However, in the present case the issue was not whether the recipients of the termination payments were employees. The sole issue was whether they were employees of Reibber or Conpac. That question, which was whether the contract of employment was with Reibber or Conpac, was essentially a matter of contract law. That required the liquidator to have regard to the legal relationship between the relevant parties. That issue does not appear to have been considered, let alone investigated, by the liquidator. The basic failing on this issue on the part of the liquidator was his failure to obtain appropriate legal advice prior to making the termination payments. The payments were of particular significance as far as the Committee of Inspection were concerned as they benefited a company associated with the directors of Conpac to the detriment of the creditors. The Committee of Inspection was not consulted about the termination payments. The inquiries made by the liquidator in respect of his liability to make the termination payments were inadequate. He failed to ascertain the facts necessary to obtain appropriate legal advice. In any event his failure to seek legal advice, on the basis of the facts known to him, is difficult to understand. He had funds available to seek such advice and had solicitors available to give it. I have little doubt that if the payments were to be made by the liquidator out of his own funds he would have sought legal advice. He now concedes that it was remiss of him not to have sought legal advice. Although the identity of the employer of the relevant employees might have been unclear on the facts known to the liquidator there were substantial grounds for concluding that the employees were employees of Reibber rather than Conpac. If that is ultimately found to be the case then, in the event that a breach of duty by the liquidator is established, the liquidator would be liable for the loss that has been suffered by the creditors as a consequence of the making of the termination payments which otherwise would have been available for distribution to creditors.

THE LAW Section 503 of the Law provides that the Court may "on cause shown" remove a liquidator and appoint another liquidator. It has long been accepted that the section and its predecessors were not confined to situations where it is established that there is personal unfitness, impropriety or breach of duty on the part of the liquidator. Cause is shown for removal whenever the Court is satisfied that it is for the better conduct of the liquidation or, put another way, it is for the general advantage of those interested in the assets of the company that a liquidator be removed: see Re Adam Eyton Ltd; Ex parte Charlesworth (1887) 36 Ch D 299 at 306; Re The Mutual Live Stock Financial and Agency Company Limited (1886) 12 VLR 777; Re George A. Bond and Company Ltd (1932) 32 SR NSW 301 at 310; Re Giant Resources Limited [1991] 1 Qd R 107 at 115 per Ryan J; Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 13 ACSR 544 at 550 per Hayne J; Re Biposo Pty Ltd (1995) 17 ACSR 730 at 734 per Young J and Dallinger v Halcha Holdings Pty Ltd (1995) 134 ALR 178 at 183-4 per Sundberg J. As was said by Bowen LJ in Re Adam Eyton at 306: "Of course, fair play to the liquidator himself is not to be left out of sight, but the measure of due cause is the substantial and real interest of the liquidation." One of the more obvious situations where a liquidator ought not to continue to act is when a conflict of interest and duty arises or appears to have arisen: see George A. Bond at 307 and Re National Safety Council of Australia, Victorian Division [1990] VR 29 at 34-35. As was pointed out by the Full Court in National Safety Council a liquidator must have no interest in and be, and be seen to be, independent of, any matter which the liquidator's duties require him or her to investigate. See also Re Giant Resources at 117.

SHOULD THE LIQUIDATOR BE REMOVED? In my view the liquidator's removal would be conducive to the better conduct of the liquidation and for the general advantage of those interested in the assets of Conpac. I will endeavour to state my reasons for arriving at that conclusion.

For the reasons already set out in some detail the transactions of Conpac and its directors in relation to the Chandos Street property appeared to involve clear breaches of fiduciary duty that called for: · a detailed and proper investigation, which was not conducted; and · a request for a receipt of legal advice based on the facts ascertained from such an investigation, which did not occur. In my view no satisfactory explanation has been given by the liquidator for his failure to conduct a proper investigation. As explained earlier the failures are serious and significant. Although I do not have any evidence before me as to whether the failures on the part of the liquidator, to which I have referred, will ultimately cause loss to Conpac and its creditors it is possible that some loss might be suffered if a liquidator is entitled to recover the profit or any of the loss suffered but is no longer able to recoup that profit or loss. These possibilities, together with the natural inclination on the part of the liquidator to endeavour to justify his past conduct and demonstrate that it did not cause any loss, place him in a position of potential conflict concerning the further investigation. In my view the possibility of conflict is real and not merely theoretical: see Advance Housing Pty Ltd (In liquidation) v Newcastle Classic Developments Pty Ltd (1994) 12 ACLC 701 and Tracker Software International Inc v Smith at 646; cf National Safety Council of Australia at 34-35.
The making of the termination payments raises a serious issue as to whether the liquidator acted in breach of duty. If a breach of duty is established the company in liquidation will have suffered a loss in the amount of the payments for which the liquidator would be liable. The further investigation of this issue creates a situation of actual conflict for the liquidator. Counsel for the liquidator contended that an alternative approach is to appoint an additional liquidator to deal with any matter in which conflict arises. Reliance was placed on Re Obie Pty Ltd (In liq) No 2 [1984] 2 Qd R 155. In my view such a course is not appropriate in the present case for reasons similar to those given by the Full Court for rejecting a similar contention in Re National Safety Council at 35. The course suggested may be appropriate where removal might be prejudicial having regard to the stage the liquidation has reached. I am not satisfied that that is the situation in this case.
In my view the problems in the present case have arisen, not for reasons relating to the liquidator's professional competence, but as a consequence of the extent to which he has delegated his functions as liquidator. Many of the difficulties of which the Committee of Inspection complained arose from the fact that the liquidator had delegated most of his functions in relation to the matters in dispute to his employees. In the course of his evidence it was apparent that the liquidator did not have a detailed grasp of the issues raised by the applicants. That led to the following interchange: "HIS HONOUR: Do you think some of the problems that I've been raising with you may have come about because others have been looking at the mechanics of it and you've been getting the result of what they've been doing and maybe as a result the overview that has been put to you today has not really revealed itself?---Yes." Whilst it is both acceptable and, usually, necessary that many day to day responsibilities of a liquidator be delegated that does not absolve the liquidator from responsibility for his decision making powers. The liquidator was reluctant to concede any failures on his part in the past. As a consequence I am not confident that there would be any change in the manner in which the liquidation will be conducted in the future. In particular, I expect that the delegation of authority, which has caused many of the present difficulties, would be likely to continue if the liquidator is not removed.
The Committee of Inspection occupies an important role under the Law. As was said in the Law of Company Liquidation (B H McPherson, 3rd ed by J O'Donovan, 1987) at 236: "Their task is to superintend and assist the liquidator in the performance of his duties and to watch over the interests of particular groups of creditors or contributories whom they are appointed to represent." In the present case the acrimony which has arisen between the liquidator and the Committee of Inspection has not come about as a result of any unreasonable conduct on the part of the Committee. Rather, it has come about because the liquidator has carried out his tasks in respect of the liquidation with some insensitivity to the angst of the members of the Committee of Inspection who represent trade creditors that suffered significant losses as a result of Conpac's liquidation. I have not detailed the other matters upon which the applicants relied but it is sufficient for present purposes to say that those other matters had the appearance of the liquidator favouring the interests of the directors and their entities rather than the interests of the creditors. The matters included a failure to investigate insolvent trading by the directors during 1997 (when some $1 million in trade debts were incurred), a lax (or at best, generous) policy on payment of post administration entertainment expenses and staff salaries and a failure to take steps to prevent Conpac staff employed "full time" by the liquidator from continuing to work on directors' projects. Whilst I have not determined that the liquidator did favour the interests of the directors, his conduct afforded some justification for the apprehension of members of the Committee. The liquidator's approval, as administrator, of payment of entertainment expenses for a "director's wake following the appointment of a voluntary administrator" is an example of that conduct. In all the circumstances I am satisfied that the liquidator's conduct has led to a justifiable loss of confidence in him on the part of the Committee of Inspection and, no doubt, many of the creditors represented by the Committee. That is a matter which, amongst other matters, can be relevant to determining whether it is appropriate for the liquidator to continue as liquidator of the company: see Adsett v Berlouis (1992) 37 FCR 201 at 213; Re Giant Resources at 115 and McPherson in the Law of Company Liquidation (3rd ed) at 228-229. I agree with the liquidator's contention that loss of support of the creditors is not, of itself, a sufficient reason to remove a liquidator: see Network Exchange at 550 per Hayne J. However, a justifiable loss of confidence in the liquidator by the Committee of Inspection is clearly of greater significance and relevance. In considering this particular aspect of the matter I have not taken into account the evidence that a significant number of creditors support the application for the liquidator's removal. The support was based upon a prejudicial circular sent to creditors seeking their support for the current proceedings. The prejudicial content of the circular was such that the support for the liquidator's removal, which it gained, could only be evaluated by reference to the veracity of the matters stated in the circular. As I have not made findings as to the veracity of all of those matters it seems to me to be inappropriate to have regard to the support of those creditors for the liquidator's removal even if it were otherwise a relevant factor. However, as pointed out above, the loss of the confidence of the Committee of Inspection stands in a different category. The loss is based on an insensitivity displayed by the liquidator to the role of the Committee of Inspection and a general disregard for their functions under the Act. The liquidator did not adequately consult with the Committee in respect of the issues arising in respect of the Chandos Street property, the termination payments or the deed of repayment until after it was made. Whilst I do not find that the liquidator was under a legal duty to consult with or seek the approval of the Committee of Inspection in relation to those matters, in all the circumstances, it was imprudent on his part not to have consulted them. Counsel for the liquidator contended that the applicants are asking the Court to sit in judgment on the manner in which the liquidator has exercised his powers. It was contended that in such circumstances the Court will not interfere unless the liquidator "is doing that which is so utterly unreasonable and absurd that no reasonable man would so act": see Re Mineral Securities Australia Limited (in liquidation) [1973] 2 NSWLR 207 at 230 per Street CJ in Equity. The principle to which counsel referred is not applicable to the removal of a liquidator. Rather the principle, if it is applicable, relates to the circumstances in which a Court may interfere by directing that a liquidator or a trustee in bankruptcy exercise his, or her, discretionary powers or commercial judgment in a particular way. In those circumstances one can appreciate the reluctance of the Court to interfere in the manner in which the liquidator or a trustee is exercising powers unless it is established that the exercise of the power is a breach of duty or is otherwise unlawful. As was noted by Street CJ in Mineral Securities at 231 the Court does not sit on appeal from decisions of a liquidator particularly where the challenge is based on an alleged absence of prudence or wisdom. Further, as has already been observed the power of the Court to remove a liquidator is not confined to circumstances where a breach of duty or unreasonable conduct has been engaged in. Rather, the question relates to what is in the best interests of the liquidation. I also do not accept the further argument of counsel for the liquidator that he ought not be removed unless I am satisfied that a breach of duty has been clearly established. When considering an analogous issue in Tracker Software v Smith (1997) 24 ACSR 644 at 647 Mandie J considered that a liquidator ought not continue to act after a shareholder had raised "serious questions to be tried" as to a breach of duty in relation to the liquidator's sale of one of the company's assets when he was the administrator of the company. In George Bond at 308 Long Innes J suggested that a conflict requiring removal may not arise until a "prima facie" case of misfeasance or breach of duty is made out. The "possibility" that a conflict of interest and duty may arise was considered by the Full Court to be sufficient in Re National Safety Council of Australia (at 34-35). Whether a breach of duty has been established, whether there is a serious issue or a prima facie case as to whether such a breach has occurred or whether there is a real possibility of conflict of interest and duty in relation to matters a liquidator is to investigate or decide are important factors, amongst others, that are relevant to whether a liquidator should be removed. Whether one of these factors is determinative in a particular case depends on all the circumstances of the case. I need not pursue the issue further as I am satisfied that a prima facie case of breach of duty has been made out in respect of the liquidator's conduct in relation to the Chandos Street property and the termination payments and that a real "possibility" of conflict arises in respect of any further investigation of those matters by the liquidator. THE LIQUIDATOR'S REMUNERATION There was no challenge to the calculation of the liquidator's remuneration. Rather, the challenge by the applicants was on the basis that the liquidator had acted in serious dereliction of his duty to the company in liquidation and to its creditors. In my view the questions of whether the liquidator should be removed and whether he ought to be renumerated for the services he has provided raise separate issues. The liquidation has involved activity by the liquidator in relation to a range of matters. He is entitled to be paid his fees and expenses in relation to those matters. However part of the remuneration relates to his activities concerning the termination payments. I am satisfied that there were serious and significant failures on the part of the liquidator in relation to those payments and that those failures are such that he ought not to be remunerated for the services provided in relation to them. The parties are agreed that if I arrive at that conclusion it is appropriate that I treat five per cent of the remuneration as referable to the payments. For those reasons I am satisfied that it is appropriate to reduce the remuneration by the amount of $4,876.39. Accordingly, I am prepared to declare that the liquidator is entitled to the remuneration claimed by the liquidator in the sum of $97,527.75 less the sum of $4,876.39, being $92,651.36. I am of the view that the liquidator has only himself to blame for the fact that the Committee of Inspection and the creditors did not approve the remuneration claimed by him and that, as a consequence, he was required to come to Court to gain that approval. In those circumstances it seems to me that it is appropriate to make no order in favour of the liquidator for the costs incurred by him in the proceeding in which he has claimed remuneration.

CONCLUSION For the reasons set out above I have arrived at the conclusion that the applicants have shown cause why the liquidator should be removed pursuant to s 503 of the Law. Richard Campbell Brien who is an official liquidator registered under s 1283 of the Law has consented to be liquidator of Conpac and, accordingly, I am prepared to appoint Mr Brien as liquidator pursuant to s 503 of the Law. In all the circumstances but, in particular as: · the applicants were successful in their removal proceeding; · the issues in the two proceedings overlapped; · the applicants acted reasonably in the conduct and prosecution of both proceedings; I have concluded that the applicants should recover their taxed costs of both proceedings. In Re Biposo at 737 Young J suggested that it is the convention, in cases where corruption has not been shown and the court is of the view that the public perception is that the liquidator ought to be removed, to stand the matter over for a short period of time to see whether after considering the court's view the liquidator might agree that it would be wiser to submit his or her resignation. See also Tracker Software at 680. I have some concern as to whether that convention is appropriate in many cases arising under s 503. The issue under s 503 relates to whether the removal is conducive to the better conduct of the liquidation rather than whether the liquidator is unfit to continue as a liquidator. In general, where the court has concluded that it is conducive to the better conduct of the liquidation that a liquidator be removed after a contested hearing in which the liquidator has disputed the factual and legal basis upon which his removal is sought then it is difficult to see why an order for removal should not be made. Whilst I would not go so far as suggesting that the niceties of the past should necessarily be discarded in all cases arising under s 503 I am satisfied that the convention is inappropriate in the present case where I have found, contrary to the factual and legal case put by the liquidator, that the case for his removal has been made out. The convention referred to in Re Biposo may be appropriate where the parties have bona fide and reasonable, but differing, views on questions of law which they seek to have the court resolve. As observed already that is not what has occurred in the present case. In my view the facts of the present case ought to offer a salutary lesson to liquidators of companies in which the directors have utilised the assets of the company for their own benefit and to the detriment of the company and its creditors. In such circumstances it is incumbent upon liquidators to investigate properly whether losses suffered by the company and profits or gains made by the directors or their associated entities as a consequence of breaches of fiduciary duty are to be recouped. Often the circumstances will be complex and the proceedings required for recovery expensive. Obviously the resources available to the liquidator to undertake an appropriate investigation will be of critical importance. However, subject to such matters, liquidators are required to conduct their investigation properly having regard to the circumstances of the case and to seek appropriate advice based upon the facts ascertained. Where there is doubt as to the course to be followed it may be prudent for the liquidator to consult with the Committee of Inspection in relation to the investigation or such other matters as may be appropriate. That did not occur in the present case. The present case also shows the dangers inherent in excessive delegation by a liquidator of his, or her, functions under the Law. Had the applicants not been prepared to undertake the burden of the removal proceedings at their own expense it is doubtful that the serious issues raised by the Conpac liquidation and the conduct of its directors would ever have emerged. Upon the handing down of the reasons counsel for the liquidator requested the opportunity to make submissions as to costs and directions were given by me to enable that to occur. I certify that this and the preceding nineteen (19) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Merkel

Associate: Dated: Counsel for the Applicant: Mr B Skinner

Solicitor for the Applicant: Ross Koffel Solicitors

At a glance

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Judgment (8 paragraphs)

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