Plaintiff v ANDREW JAMES McLELLAN and

5. The orders made on 29 March were subject to undertakings proffered by Mr McLellan and Mr Benton. The undertakings were twofold. Firstly, Messrs McLellan and Benton undertook to approach the court, following their appointment as joint administrators of the company Central Spring if any reasonable apprehension of conflict of interest subsequently arose. Secondly, they undertook to notify all creditors of Central Spring in the material sent out by them with the first notice of meeting under s.436E of the Corporations Law following their appointment as administrators of Central Spring that they required and obtained leave in respect of their appointment under s.448C of the Corporations Law. Messrs McLellan and Benton undertook, also, to draw the attention of creditors at the first meeting to the fact of their appointment and to the creditors' right to vote on a resolution for their removal and replacement as administrators. In addition to the undertakings proffered by Messrs McLellan and Benton a further undertaking was proffered by the first chargee of Central Spring, Scottish Pacific Business Finance Pty Ltd ("Scottish Pacific") whereby it undertook not to vote on any resolution relating to the removal and replacement of Messrs McLellan and Benton as administrators of Central Spring.

8. The circumstances leading to the financial difficulties of Central Spring and the appointment of Messrs McLellan and Benton as receivers and managers at first instance were set out in my reasons for making orders on 29 March 2000. In summary, Mr McLellan and Mr Carson were appointed receivers and managers on 10 March 2000 by Scottish Pacific pursuant to a first ranking fixed and floating charge granted by both Central Spring and a related company Coburg Spring Works (Vic) Pty Ltd ("Coburg Spring Works"). The relevant charge of Central Spring was granted by that company to Scottish Pacific on 31 January 2000 and registered by the Australian Securities and Investments Commission on 8 February 2000 being charge No. 735489. The charge provided by Central Spring was created to provide security to Scottish Pacific for advances made by it to Central Spring pursuant to a factoring arrangement. The appointment of Mr McLellan and Mr Carson as joint and several receivers and managers arose as a result of a breach by Central Spring of its obligations under the factoring arrangement with Scottish Pacific.

11. At the time of the appointment of Mr McLellan and Mr Carson as receivers and managers on 10 March 2000 the debt owed by Central Spring and Coburg Spring Works to Scottish Pacific was approximately $350,000. In the course of the receivership Mr McLellan formed the view that Central Spring would be unable to continue trading unless funds were provided to meet the payment of employees' wages. At one point wages were provided by a director of Central Spring, David Alan Armitage. As a result, Mr McLellan resolved to continue the trading of the business of Central Spring. He was able to call up sufficient receipts from debtors so that the total amount owed by Central Spring under the factoring agreement with Scottish Pacific could be paid out. As at 27 March 2000 Mr McLellan collected the sum of $382,236.05 giving rise to a net surplus of $29,630.02.

14. As a result of the orders granting leave under s.448C of the Corporations Law to Mr McLellan and to Mr Carson to be appointed as administrators of Central Spring on 30 March 2000 a copy of the notice of administrators' appointment and first meeting of creditors of Central Spring under administration dated 30 March 2000 was forwarded to creditors. Thereafter a meeting of the creditors of the company was held at 10.30 a.m. on 6 April 2000. Mr McLellan chaired the meeting of creditors. The creditors included the plaintiff in the present proceeding, Tubemakers of Australia Limited ("Tubemakers"). It is a secured creditor of Central Spring for the amount of approximately $250,000 representing the sum of money owed for goods supplied by Tubemakers to Central Spring. The goods were supplied pursuant to a credit contract between Tubemakers and Central Spring. The credit contract includes a retention of title clause. Payment under the credit contract was secured by a fixed and floating charge over the assets and undertaking of Central Spring. The charge is dated 8 February 2000 and numbered 735489.

17. At the meeting of creditors held on 6 April 2000 a motion was proposed that the administrators, Mr McLellan and Mr Benton be removed and another person appointed in their stead. A vote was taken on the removal resolution and declared lost. There is a dispute between the parties before me as to the distribution of the poll conducted.

20. Tubemakers seeks an order under s.449B of the Corporations Law for an order for removal of the administrators of Central Spring. In the present case Tubemakers says that it reasonably apprehends that the administrators are not independent and/or may not act independently. In summary, the complaints made by Tubemakers with respect to the administration conducted by Messrs McLellan and Benton are as follows:

1. The vote of creditors for removal of the administrators on 6 April 2000 was wrongfully proportioned by the administrators. It is said that if the votes cast by employees who are creditors with respect to outstanding long service leave and holiday pay are taken into account together with creditors related to Central Spring the votes against the removal of the administrators is reduced both in number and value. It is said that if a redistribution on those bases is made it would lead to a vote in favour of the removal of the administrators both in number and value. Ultimately, the value of the redistributed vote in favour would be approximately $70,000 in the context of total creditors of approximately M$1.47.

2. Originally one of the administrators, Mr McLellan was appointed a receiver by Scottish Pacific and it follows that he owed a duty to Scottish Pacific over and above a duty to all creditors of Central Spring.

3. As receiver Mr McLellan is owed fees and expenses by Central Spring and as a consequence he has a conflict of interest in the administration of the company.

5. Mr McLellan and Mr Benton are also receivers of Coburg Spring Works; Central Spring owns one-third of the shareholding of Coburg Spring Works; further, Scottish Pacific has a fixed and floating charge over Coburg Spring Works.

6. Tubemakers is concerned by the fact that Coburg Spring Works owes the company approximately $30,000 and McLellan is a receiver and manager of Coburg Spring Works while at the same time being administrator of the company.

7. Mr McLellan is an unsecured creditor of Central Spring because of his administrators' fee.

8. Mr McLellan has wrongly calculated and overstated the preferred creditors of Central Spring with respect to long service leave and holiday pay in breach of the Corporations Law.

31. Tubemakers also stated its concern that the administrators are immediately concerned with trading the company on until all debts incurred by McLellan and Carson as receivers have been repaid and until Scottish Pacific or they personally are better protected against any possible liability for employee claims.

34. Tubemakers complained further about the circumstances surrounding the making of the s.448C application and the justification sought for that order. Tubemakers says that Mr McLellan did not need to be appointed administrator since any floating charge assets if handed back to other administrators would be impressed with a trust to ensure the preferred creditors were paid in any event (see Lumsden v Long (1998) 16 ACLC 1743 at 1749).

37. Finally, Tubemakers criticised an alleged "threat" made by McLellan in paragraph 26 of his affidavit of 11 April 2000 that:

"If the defendants are removed as administrators of the company and I do not receive a sufficient guarantee and indemnity from any new administrators of the company, I would be obliged to take possession of the company's debtors and stock, in order to protect the receivership obligations. This would deprive the company of cash flow and compel the business to close. "

41. Section 449B does not set out the grounds upon which an order can be made. However, the authorities establish that grounds for the removal of an administrator will be made out where it is established that it is conducive to the better conduct of the administration or, put another way, it is for the general advantage of those interested in the assets of the company that the administrator be removed: Network Exchange Pty Ltd v MIG International 13 ACSR 544 at 551; City & Suburban Pty Ltd v Michael John Morris Smith (Liquidator of Conpac (Aust) Pty Ltd (in liq) [1998] 822 FCA cited in Citrix Systems v Telesystems Learning (1998) 28 ACSR 529 at 536.

44. Further it has been held that this test is satisfied where there is a lack of independence or perceived lack of independence on the part of the administrator, that is, where a conflict of interest arises or appears to have arisen: Dallinger v Halcha Holdings Pty Ltd (1995) 134 ALR 178 at 183-4; Advance Housing Pty Ltd v Newcastle (1994) 14 ACSR 230 at 234; Nambucca Investments v Star (1995) ACLC 1814; Nambucca was applied in Re James Developments (1998) 30 ACSR 62 at 66; City and Suburban; Citrix; Re George A Bond & Company Ltd (1932) 32 SR(NSW) 3 01 at 3 10; Re National Safety Council of Australia, Victorian Division [1990] VicRp 2; [1990] VR 29 at 34-35, Re Giant Resources Ltd [1991] Qd R 107 at 115 per Ryan J and Tracker Software v Smith (1997) 24 ACSR 644 (Mandie J) applying Re National Safety Council and Advance Housing.

47. It is a sufficient ground for removal of an administrator that a creditor perceives that the administrator is not independent or lacks impartiality and that perception is reasonably based: Citrix at 537; Advance at 234; Dallinger v Halcha Holdings Pty Ltd (1995) 134 ALR 178 at 183-5. The Court is not required to determine whether or not the administrators will act independently, rather it is required to assess whether there is an apprehension that the administrators will not act independently and that such an apprehension is reasonable: Citrix at 538: Dallinger at 185. Further, the interests and position of the or a major creditor carry significant weight: Re Giant Resources Ltd at 115.

50. Substantial involvement with a company prior to its administration will generally disqualify a person from appointment as that company's administrator. Such involvement is seen to detract from the ability of that person to act fairly and impartially during the course of an administration for the benefit of all creditors. It is necessary that a person appointed as an administrator be seen to be independent of the company and of each of its creditors so that his or her ability to perform the role of administrator is not open to question: Commonwealth v Irving (1996) 65 FCR 297 at 296-297 [cf Advance Housing (1994) 14 ACSR 230 at 2341].

53. Mr J. Beach QC who appeared for Tubemakers urged all creditors are entitled to:

(a) an objective assessment of the validity of the Scottish Pacific charge;

(b) an objective assessment of the circumstances under which the receivers came to be appointed;

(c) an objective assessment of the highly unusual circumstances where Scottish Pacific received more than the principal and interest owing, yet the receivers were still in control;

(d) an objective assessment of the precise liabilities that the receivers were obliged to pay which remained unpaid;

(e) an objective assessment of the fees and charges of the receivers.

59. The defendants were unwilling to retire as receivers without the priority debts referred to in s. 556(1)(e), (g) or (h) of the Corporations Law having been paid. It was their obligation under s.433 of the Law to do so. They were and remain prepared to delay payment of the priority debts (which it would be in their interest and the interest of Scottish Pacific for them to have simply paid) in order that the members and creditors of the company might have the chance of considering the implementation of a deed of company arrangement.

62. The amount of the priority debts is some $232,000. The amount of the receivers' costs and expenses is $313,848. The payment of those amounts before the termination of the receivership would have withdrawn essential working capital necessary for the continuation of the business of the company which in the absence of further funding would have seen its business close, and ushered in a winding up.

65. Scottish Pacific has indemnified the receivers in respect of their obligation to pay the priority debts, and this indemnity in turn is one of the obligations for which the Scottish Pacific charge stands as a continuing security. Scottish Pacific could appoint fresh receivers to protect its position in respect of the priority debts.

68. Tubemakers now wants the defendants replaced as administrators. It moved such a motion at the first meeting of creditors on 6 April 2000. The motion was lost. It was convincingly rejected by the unrelated unsecured creditors in number and amount (approx $421,000 in favour versus $702,400 against).

71. Turning to each of the matters relied upon by Tubemakers to support the assertion that the present administrators should be removed involves an analysis of clinical proportions of the conduct of the administrators in their capacities firstly as receivers and managers and subsequently as administrators. In order for Tubemakers to make out its claim that the creditors in favour of removal of the administrators when the vote was cast on 6 April 2000 in fact represented the majority requires in my view the conduct of an artificial analysis of the various interests of the creditors represented. It is complained by Tubemakers that the vote against removal included employees the vote of whom should have been discounted. It is further complained that the vote against removal included creditors related to the company. If these matters are taken into account a narrow margin is achieved in any event of value of creditors in favour of removal, that is, approximately $70,000 in the context of total creditors of the company of approximately M$1.47. In my view such artificial analysis of itself is not sufficient to substantiate the removal of the administrators. Something more is required.

74. Insofar as Tubemakers complain that Mr McLellan was appointed a receiver by the first chargee, Scottish Pacific that of itself in my view is not sufficient to warrant his removal. It is appropriate to assess the conduct of Mr McLellan and nothing has been put before me to cause me concern at this point as to his conduct of either the receivership or the administration. Insofar as Mr McLellan has allowed the debts to the company to be paid directly to Scottish Pacific notwithstanding that Scottish Pacific has been paid all moneys owed to it I note that Scottish Pacific presumably at the behest of Mr McLellan have in turn refunded or returned those moneys to the company. In any event, on the basis of the factoring agreement between Scottish Pacific and Central Spring, Scottish Pacific was entitled to receive all moneys under that agreement once the company was placed in receivership (and subsequently in administration).

77. In a similar vein the fact that Mr McLellan is owed fees and expenses by Central Spring is not of itself sufficient to demonstrate a conflict of interest in the administration of the company. The fact remains that Mr McLellan is personally liable for the ongoing trading costs of the company. Insofar as he has charged fees I am satisfied that in the overall prevailing circumstances of the matter and the work that he has done the fees on their face appear reasonable. In any event no evidence was put forward of an expert nature on behalf of Tubemakers to lead me to conclude to the contrary. Indeed the observation may be made that notwithstanding the strong attack launched by Tubemakers against the administrators, in particular, Mr McLellan, there was no application for leave to cross-examine him as to his bona fides in the conduct of the administration.

80. There was a plethora of matters raised against the administrators especially Mr McLellan such as his partnership with Mr Benton, their involvement with Coburg Spring and the like. These are, in my view, not matters that warrant the removal of Mr McLellan and Mr Benton. In my view before they could be removed in the context of this matter I would need to be satisfied of clear evidence of conflict of interest. I am not so satisfied. Indeed many of the complaints brought against Mr McLellan were of a pedantic nature and of no consequence which prompted a response of "so what?".

83. Insofar as an attack was made against the administrators by Tubemakers with respect to the earlier application under s.448C and the alleged threat made in Mr McLellan's affidavit it has become apparent that Mr McLellan has taken every endeavour on his part to avoid the company being placed in liquidation. Ultimately, I am satisfied that there is no sufficient basis put forward to support the removal of the administrators. Insofar as there is a complaint made with respect to incorrect calculations of preferred creditors, the fact that an error has been made does not of itself constitute a basis for finding an actual or potential conflict of interest. Indeed, I note that the alleged error had not been drawn to the attention of the administrators. Furthermore, it was conceded by Mr R. Garrett QC who appeared for the administrators that the matter would be considered and, if appropriate, rectified in the ordinary course of events.

86. The plaintiff relied also upon s.600A of the Corporations Law. Before the powers conferred on the Court by s.600A of the Corporations Law ("the Law") may be exercised it is necessary for the applicant to demonstrate that the outcome of the resolution at the meeting is one which is contrary to the interests of creditors as a whole, or has prejudiced or is reasonably likely to prejudice the interests of creditors who voted in the opposite way to the relevant related creditors: s.600A(c) and Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 13 ACSR 544 (Hayne J).

89. The administrators were not empowered under the Corporations Regulations to exercise a casting vote. The resolution was not carried. (See Corporations Regulation 5.6.21(3) cf Corporations Regulation 5.6.21(4) and Network Exchange at p.551.) Ultimately, I do not consider relief ought be granted under s.600A.

92. An order should only be made for the removal of an administrator under s.449B if it is demonstrated that such an order would be for the better conduct of the administration: Network Exchange. It is not enough to warrant making an order under s.449B to show simply that a majority in value of creditors but not a majority in number want the administrator removed. A fortiori this is the case where that result is only arrived at after the votes of related creditors are excluded: Network Exchange at 550 - 551. Those are matters dealt with by s.600A and that section contemplates putting the matter back to creditors rather than an order for removal: Network Exchange. I note that insofar as it is necessary to do so that employees are "creditors" of the company for the purposes of Part 5.3A and are entitled to vote in respect of their claims as if the company entered into a hypothetical liquidation as at the commencement of the administration: Brash Holdings Ltd (Admin. appointed) v Katile Pty Ltd [1996] VicRp 4; [1996] VR 24; Green v Giljohann (1995) 17 ACSR 518.

95. Ultimately, the plaintiff's material does not disclose how the removal of the administrator would be for the better conduct of the administration (s.449B) or how the failure of the resolution is contrary to the interests of creditors and has prejudiced the interests of creditors who voted for it (s.600A). There is no assertion of any conflict between the administrators' duty to all creditors and the prior duty of the receivers to Scottish, nor is it alleged that the charge conferred upon Scottish is invalid or liable to attack by a subsequent liquidator. I am satisfied that the removal of the current administrators is not in the interests of creditors as a whole or, indeed, those who voted for their removal. The removal of the defendants risks Scottish Pacific taking action to protect its position by appointing fresh receivers who may not be willing to defer paying priority creditors.