Pinklillies Pty Ltd (Trustee), in the matter of Northwest Motel Group Pty... [2011] FCA 1543 | Case summary

Summerslegal is joined as a defendant.
Mr Carl Alan Louis Huxtable is removed as the liquidator of Northwest Motel Group Pty Ltd (ACN 141 014 708).
Mr Jonathan McLeod, an Official Liquidator, is appointed as the liquidator of Northwest Motel Group Pty Ltd (ACN 141 014 708).
Mr Jonathan McLeod, as liquidator, is to have the powers specified in s 477 of the Corporations Act 2001 (Cth).
Summerslegal pay the plaintiffs' costs of and incidental to the application to be taxed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011

REASONS FOR JUDGMENT 1 Pinklillies Pty Ltd, in its capacity as the Trustee of the Blight Family Trust and Squire's Pty Ltd as Trustee for the Marden Superannuation Fund have applied pursuant to s 473 of the Corporations Act 2001 (Cth) (Corporations Act) for the removal by the Court of the liquidator of Northwest Motel Group Pty Ltd (in liquidation) (Northwest Motel Group), Mr Carl Alan Louis Huxtable (Mr Huxtable). 2 The application raises for consideration a principle which was succinctly stated by Mr Justice McPherson in his seminal work, McPherson BH, The Law of Company Liquidation (3rd ed) by Professor J O'Donovan, at page 209, as follows: The guiding principle in the appointment by the court of a liquidator is that he must be independent and seen to be independent. 3 That particular statement of principle in the third edition of that work was expressly approved by the Full Court of the Victorian Supreme Court in Re National Safety Council of Australia; Victorian Division [1990] VR 29 at 34. It is repeated in the current edition, Gronow M, McPherson's Law of Company Liquidations (Lawbook Co, subscription service at [6.400] and [8.120] (update 26). It has been applied on many occasions. The question is whether or not on the facts of this case that principle has application such that Mr Huxtable ought to be removed, and in his place another official liquidator, Mr McLeod, appointed? 4 Mr Huxtable's position in respect of the application, as he made clear by his legal representatives at an earlier interlocutory occasion, was that he would abide the order of the Court, and did not wish to be heard in respect of the application, save in respect of costs. He did, though, having regard to what he considered to be his duty, provide a comprehensive affidavit deposing to the position reached with respect to the liquidation. 5 The plaintiffs are creditors of Northwest Motel Group. Indeed, they are the largest creditors. Another creditor, and the creditor which applied for the winding-up of Northwest Motel Group, is a firm, Summerslegal. That firm applied, pursuant to r 9.05(1)(b)(ii) of the Federal Court Rules 2011 (Cth), and also, though it is unnecessary further to consider it, r 9.05(1)(b)(iii) of the rules for joinder as a defendant. As will become apparent from a recitation of pertinent facts, a joinder of Summerslegal is necessary to ensure that the question of whether Mr Huxtable ought to be removed is able to be heard and finally determined. 6 There is no doubt that a creditor has standing to bring an application for the removal of a court appointed liquidator: see, for example, Re Shanks Byrne Industries Pty Ltd and the Companies Act (in liq) (1979) [1979] 2 NSWLR 880; ACLR 676 (Re Shanks Byrne). The plaintiffs, therefore, have standing. So too would Summerslegal, were it minded to seek, as opposed to resist, the removal of Mr Huxtable. Its position, having regard to the facts which I shall recite, is truly that of a contradictor. Absent that, there would be no contradictor in respect of the application. 7 The winding up order in question was made by the Court's West Australian District Registrar on 16 August 2011 in proceeding WAD261 of 2011. The winding up order was a sequel to an unsuccessful application made before the District Registrar that the winding up application should be adjourned, pursuant to s 440A of the Corporations Act, on the basis that the Court should be satisfied that it was in the interests of the company's creditors for the company to continue under administration rather than be wound up. 8 Northwest Motel Group had been placed in administration and it was proposed that a deed of company arrangement be put to its creditors. It is unnecessary for the purpose of resolving today's application to consider whether or not such an adjournment application was one which fell to a registrar to determine, or whether that was a matter for a judge. What does matter is that a winding order was made and, further that there were matters which were not disclosed to the Court at the time when that winding up order was made. 9 To understand the background to the application, an excursion into particular features of that modern phenomenon known as the multi-disciplinary practice is necessary. The evidence before me establishes the following: Mr Huxtable is employed by a company, Somepart Pty Ltd (Somepart). Somepart Pty Ltd is ultimately controlled by a Mr Paul Summers (Mr Summers). Somepart is a service company. It provides services to a firm, Summerscorporate, for the purpose of managing insolvency services. Summerscorporate is a business name registered to Mr Summers. One of the services Some Part provides is the provision of staff, including Mr Huxtable. Summerscorporate, since 1 July 2011, has been owned and controlled by Corporate Solvency Solutions Pty Ltd. Corporate Solvency Solutions Pty Ltd is owned and controlled by Mr Summers. Summerslegal is a legal firm. It too is owned and controlled by Mr Summers. 10 In his consent to act as liquidator, Mr Huxtable disclosed none of these background relationships. He was not expressly obliged so to do by the Corporations Act. But that does not mean that they ought not to have been disclosed. He did disclose the existence of these relationships, although not the commonality of control by Mr Summers, in a separate declaration which he made to creditors in compliance with ethical obligations as a member of the Insolvency Practitioners Association of Australia. 11 Summerslegal was a creditor for the purposes of the winding up application as a result of legal fees, which it claimed were owed to it by Northwest Motel Group. The debt in respect of those fees had been the subject of a statutory demand. There was no application to set aside the statutory demand. However, prior to the making of the winding up order, there was evidence before the Court of a dispute in relation to those fees. That evidence was put forward in the context of the application for the adjournment of the winding up, so as to allow consideration of a proposed deed of company arrangement. The evidence was provided by a Mr Kenny, who was a director of Northwest Motel Group. 12 I was taken in the course of submissions on behalf of Summerslegal, to email correspondence earlier in 2011 which, on one view of that correspondence, did not question the existence of an indebtedness in respect of legal fees. But rather sought forbearance from recovery proceedings in respect of them, in light of an unexpected failure on the part of a financier to put Northwest Motel Group in funds. There is no evidence which shows that Mr Huxtable was personally aware of the existence of the controversy in respect of whether Summerslegal was owed some or all of what was claimed. Nonetheless, there is, at present on the evidence, a controversy. 13 It is no part of determining today's application to resolve that controversy. It enough to note that it exists. The strengths and weaknesses of the dispute are for another to decide in the first instance. That "another" is, of course, the liquidator of Northwest Motel Group. 14 It is convenient to explore further questions of principle. In Brian Cassidy Electrical Industries Pty Ltd (in prov liq) v Attalex Pty Ltd [1984] 3 NSWLR 52 at 76 and following. McHugh JA, as his Honour then was, offers a helpful summary of the practice before and after the Companies Act 1961 (NSW) in respect of the appointment of liquidators. That was to the end of resolving the issue in that case which concerned a practice then prevailing in the Equity Division of the New South Wales Supreme Court with respect to the appointment of liquidators from a list known as the "A list". His Honour's survey of history goes much further than that. He states at pages 76 - 77: Prior to the Uniform Companies Act 1961, it was enough that the liquidator was a disinterested and suitably qualified person. Even the secretary of the company might be appointed. A debtor of the company, however, was not usually eligible. Nor would a shareholder usually be a proper appointee. Any person, likely to have a conflict of duty, would not be eligible: Re Swanbank Collieries Ltd (1894) 7 QLJ (NC) 88. But the 1961 Act altered the law in some respects. It fettered the court's discretion to the extent of requiring that a person acting as a liquidator should be (i) registered (ii) not indebted to the company for more than a specified sum and (iii) not an officer of the company or a partner, employee or employer of such a person or a partner or employee of an employee of an officer of the company: Uniform Companies Act, section 10. [some authorities are omitted] 15 Later, at page 77 and again by reference to practice prior to the 1961 Act, his Honour observed: In New South Wales the earlier practice appears to have been that, as a rule the person nominated by the petitioning creditor was appointed: see Re General Motor Co Ltd (1911) 28 WN NSW 77. But in Re Wentworthville Estate Limited v Building Co Ltd (1890) 1 BC (NSW 50), Manning J said that, prima facie, one of the official assignees in bankruptcy should be appointed. The court adopted the practice of appointing them in rotation. In Re General Motor Co Rich AJ stated that, in future, unless special circumstances were shown, one of the official assignees should be appointed. He said that it "is very desirable that a body of permanent official liquidators should be appointed". This practice was brought to an end in 1926 by the judgment of Long Innes J in Re Austral Knitting Mills Ltd (1926) 43 WN (NSW) 131. His Honour said (at 132): "the guiding principle to be applied in the exercise of that discretion is to ask oneself in every case; 'What do the interests of the parties concerned in the winding up require?' and the Court should in every case endeavour to make such an order as will best serve those interests." 16 Also noteworthy in McHugh JA's judgment is his Honour's reminder (at page 80): a public interest element in the appointment of liquidators which has long been recognised by the courts. 17 Though enacted forty years after the Uniform Companies Act of 1961 there are still to be found in the Corporations Act analogous restrictions in respect of who may be appointed a liquidator of a company: see s 532. There has never been any suggestion in the 40 years between those two pieces of corporations legislation, nor has there since 2001 Act, been a suggestion that s 532 or its earlier analogues is exhaustive of the circumstances in which a person ought not to be appointed liquidator or, for that matter, ought not to be permitted to continue as liquidator. 18 The following cases exemplify that absence of regarding section 532 or its earlier analogues as exhaustive: in this Court see Re RK Newson Pty Ltd (provisional liquidator appointed) [1993] FCA 386 (Burchett J) and also a later decision of his Honour, Re West Australian Gem Explorers Pty Ltd (1994) 13 ACSR 104 at 108 and following; see for example, in other courts exercising corporations jurisdiction: Re Allebart Pty Ltd (in liq) [1971] 1 NSWLR 24 at 30 (Re Allebart) where Street J, as his Honour then was, stated: It is essential that the independence and impartiality of a liquidator should at all times exist in point of substance, and be manifestly seen to exist. and also Re Stewden Nominees No 4 Pty Ltd (1975) 1 ACLR 185 at 187 (Re Stewden Nominees) per Bowen CJ in Equity, as his Honour then was. 19 Particular facts have given rise to particular applications of that principle. For example, in Re Shanks Byrne. Needham J removed a person as liquidator in a creditor's voluntary winding up. That person was a member of the firm which was the company's auditors. In so doing, his Honour observed at pages 677 - 678, having made reference to Re Allebart and Re Stewden Nominees as follows: I think, from what I have said, it is already clear that if I were appointing a liquidator of this company, I would not appoint Mr Brown [who was a partner in the firm of auditors], or one of his partners, not because there is any criticism voiced of Mr Brown nor because there was any suggestion that Mr Brown would perform his duties in any way other than to the best of his ability; I would not appoint him because he would be placed immediately in to a position where a conflict might arise, and it is not proper that an order of the court should place anybody in such a position. 20 That is exactly the position in which I find myself in the facts of this case. That is not to voice any criticism of the West Australian District Registrar, for that officer was not aware as, with respect, he should have been made aware, of the various relationships impacting upon Mr Huxtable's ability to be seen to be independent. The test, in relation to the removal of a liquidator, is whether, having regard to the liquidator's conduct as a whole, it can be said to be such as to give rise in the mind of a fair minded observer to a perception of a lack of impartiality as between the various interests that he or she as liquidator must serve, and a lack of objectivity in serving those interests. Apple Computer Australia Pty Ltd v Wiley (2003) 46 ACSR 729 at 738. 21 The test which I have described bears comparison with the test for a reasonable apprehension of bias of a judicial officer: see Ebner v Official Trustee in Bankruptcy (2000) 205 CLR 337. 22 Here Mr Huxtable may be called upon to determine the validity of a proof of debt of a firm controlled by the very same person who controls his employer. 23 It was put on behalf of Summerslegal that one way of rectifying this, short of ordering Mr Huxtable's removal, was to appoint, for example, Mr McLeod as a special purpose liquidator. That would complicate a liquidation by having two persons involved in the undertaking of work with respect to the making of decisions in the liquidation not in a way which is not uncommon as liquidators who may act jointly and severally but rather as liquidators who had the control of decision making with respect to different aspects of the liquidation. That aside, and more fundamentally, it would still leave Mr Huxtable in the position of making, for example, decisions with respect to other proofs of debt or deciding whether or not to pursue particular recovery proceedings. Those decisions would necessarily impact, amongst other things, on the amount, if any, of a dividend which might flow through to Summerslegal as one of the creditors of the company. Hence, my attraction to the observation made by Needham J earlier quoted. 24 Were these associations to have been disclosed to the Registrar, Mr Huxtable ought not to have been appointed a liquidator. 25 It follows then that the plaintiffs have discharged the onus which falls upon them, in an application of this kind, to show that there is cause for the removal of Mr Huxtable. It is necessary though, to make the following, additional observation. 26 Whilst, in my opinion, the disclosures ought to have been wider than those expressly mandated, as opposed to necessarily by implication mandated by statute, there is no suggestion on present materials that Mr Huxtable has acted in any improper way in the conduct, to date, of the liquidation. By that I mean that, though the appointment is one which ought not to have occurred had full disclosure been made it does not follow that Mr Huxtable has, to date, misconducted himself. That is just not a question which falls to me to decide on today's application. The order for his removal does not carry with it any condemnation on my part in respect of the actions which he has or has not taken as liquidator. The only criticism is that of incomplete candour when it became known to him that his appointment as liquidator was in prospect. 27 It is to be remembered that the appointment of a person in a winding up such as this is the appointment of a person who will be an officer of the Court. It behoves a person whose appointment to such an office is in prospect to be candid with respect to matters that may give rise to a conflict as between duty and interest, or duty and duty. That disclosure requirement includes, but is not limited by, express disclosure requirements in the Corporations Act. 28 The orders, therefore, will be that: 1. Summerslegal is joined as a defendant; that 2. Mr Huxtable is removed as the liquidator of Northwest Motel Group; and that 3. In his place, Mr McLeod - an official liquidator - is appointed as the liquidator of the company. 4. Mr McLeod, as liquidator, is to have the power specified in section 477 of the Corporations Act. 29 So far as costs are concerned, no order for costs is sought as against Mr Huxtable. Though I have been critical of him in respect of the absence of a wider disclosure than that expressly mandated by the Act, this is not a case where, in any event, I would be minded to award costs against him, given the stance that he took in respect of the application, which was, with respect, a proper stance. It is true that, in the absence of Summerslegal seeking to be joined as a defendant for the purpose of contesting the question of removal, there would not have been a contradictor. Nonetheless, having sought to be joined and sought to contradict a position and having failed in that endeavour, in my opinion, the ordinary rule to costs should apply. 30 The further order I make, therefore, is that: 5. Summerslegal pay the plaintiffs' costs of and incidental to the application to be taxed. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan.

Pinklillies Pty Ltd (Trustee), in the matter of Northwest Motel Group Pty Ltd (in liq) v Huxtable

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