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[2011] VSC 337
General information, not legal advice.
Supreme Court of Victoria
2011-07-22
Efthim AsJ
Original judgment source is linked above.
CORPORATIONS - Section 482 of the Corporations Act 2001 - Liquidator appointing himself and his partner as administrator without leave of the Court or prior approval of creditors - Operation of section 1322(4) of the Corporations Act 2001 to validate appointment - Termination of wind up pursuant to section 482 of the Corporations Act 2001
1 On 9 February 2011, Keldane Pty Ltd ("the company") was wound up in insolvency by order of this Court and Sterling Lindley Horne was appointed liquidator for the purposes of the winding up.
2 On 18 April 2011, Mr Horne appointed himself and his partner, Mr Peter Vrsecky of Lawler Draper Dillon as the administrators of the company pursuant to s 436B of the Corporations Act 2001 (Cth) ("the Act").
(a) the Deed of Company Arrangement approved by a resolution of creditors the company duly passed on 16 May 2011 and executed by all relevant parties on 24 May 2011; nor
(b) the Deed of Charge pursuant to clause 9 of that Deed of Company Arrangement executed on 24 May 2011
is invalid by reason of any contravention of a provision of the Corporations Act 2001;
4 Messrs Best Hooper act on behalf of the applicants Messrs Best Hooper also acted on behalf of a creditor, Casabene Plumbing and Drainage Pty Ltd which brought an application to wind up the company. That creditor relied on a presumption of insolvency as a statutory demand served by that creditor on the company was not satisfied nor set aside. That demand claimed that the company owed the creditor $18,370. The application before the Court has not been served on that creditor.
5 At a meeting of creditors held on 18 April 2011 Mr Horne and Mr Vrsecky were appointed as administrators. After a company is put into liquidation, there is a possibility of conflict if the solicitor who acts for the creditor that obtains a winding-up order then acts on behalf of the liquidator. It should not occur. The solicitor has a continuing duty to the creditor.
6 Section 436B of the Act provides:
"436B(1) A liquidator or provisional liquidator of a company may by writing appoint an administrator of the company if he or she thinks that the company is insolvent, or is likely to become insolvent at some future time.
436B(2) A liquidator or provisional liquidator of a company must not appoint any of the following persons under subsection (1):
(a) himself or herself;
(b) if he or she is a partner of a partnership - a partner or employee of the partnership;
(c) if he or she is an employee - his or her employer;
(d) if he or she is an employer - his or her employee;
(e) if he or she is a director, secretary, employee or senior manager of a corporation - a director, secretary, employee or senior manager of the corporation;
unless:
(f) at a meeting of the company's creditors, the company's creditors pass a resolution approving the appointment; or
(g) the appointment is made with the leave of the Court."
7 Without a resolution of approval of the creditors the liquidator appointed himself and a partner of his as administrators, nor did he seek leave of the Court to appoint himself and his partner as administrators.
8 Mr Robinson, solicitor for the applicants, submits that the issue to be considered by the Court is whether a liquidator must seek the approval of creditors before he appoints himself and/or a partner administrator or whether he can rely on a subsequent resolution of approval by the creditors.
9 On the plain reading of the section, the liquidator must not appoint himself as an administrator unless the company's creditors pass a resolution approving the appointment. If such a meeting does not take place then the liquidator can, with the leave of the Court, make such an appointment. There is no ambiguity in that provision.
10 Mr Robinson submitted that if the Court is of the view that s 436B(2) has been contravened then the applicants should be given dispensation under s 1322(4)(a) of the Act which provides:
Subject to the following provisions of this section but without limiting the generality of any other provision of this Act, the Court may, on application by any interested person, make all or any of the following orders, either unconditionally or subject to such conditions as the Court imposes:
(a) an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation;
11 Section 1322(6) of the Act provides:
The Court must not make an order under this section unless it is satisfied:
(a) in the case of an order referred to in paragraph (4)(a):
(i) that the act, matter or thing, or the proceeding, referred to in that paragraph is essentially of a procedural nature;
(ii) that the person or persons concerned in or party to the contravention or failure acted honestly; or
(iii) that it is just and equitable that the order be made; and
(b) in the case of an order referred to in paragraph (4)(c) - that the person subject to the civil liability concerned acted honestly; and
(c) in every case - that no substantial injustice has been or is likely to be caused to any person."
12 In Re Ausam Resources Ltd,[1] in considering the operation of ss 1322(4) and 1322(6), French J said:
The conditions referred to in s 1322(6) have been treated as disjunctive by Barrett J in a decision which he made which is referred to in the submissions. That was Re Continental Pacific Insurance Co [2002] NSWSC 789 and I am prepared to accept that that construction is a correct construction and that notwithstanding that the act, matter or thing is not necessarily of a procedural nature it may be validated when the person or persons concerned in or party to the contravention or failure have acted honestly or it is just and equitable that the order be made.[2]
13 If the court is satisfied of any of the three matters raised in s 1322(6)(a) then an order can be made pursuant to s 1322(4).
14 The appointment by the liquidator of himself and his partner is a matter of substance going beyond a procedural irregularity. The status of the company if the appointment is validated has changed markedly from a company in liquidation to a company in administration.
15 There is no evidence before the Court upon which any finding can be made in relation to whether the liquidator has acted honestly. There is nothing which would lead the Court to conclude that the liquidator has acted dishonestly in appointing himself and his partner as administrators.
16 In determining whether the appointment of Mr Horne and Mr Vrsecky as administrators should be validated I am required to determine whether it is just and equitable that an order be made and that is a question of fact.
17 In Re Depsun Pty Ltd,[3] Young J had before him an application where a liquidator pursuant to s 436B applied for leave to appoint himself as administrator. A proposal was to be put to creditors in the administration. His Honour stated that if the liquidator's application was refused and if another administrator was appointed who put a similar proposal the company would need at some stage to be brought out of liquidation. Here, in my view, unless an order is made taking the company out of liquidation there would be no point invoking s 1322(4) to validate the appointment of the applicants as administrators. If an order should be made to terminate the winding up then it would likely to be just and equitable that an order be made pursuant to s 1322(4).
18 Pursuant to s 482 of the Act a liquidator, or in the case of a company subject to a deed of company arrangement, the administrator of the deed may apply for an order to terminate the winding up of a company.
19 Section 482(1) of the Act provides:
At any time during the winding up of a company, the Court may, on application, make an order staying the winding up either indefinitely or for a limited time on terminating the winding up on a day specified in the order.
20 The factors for a court to take into account in considering an application to stay or terminate a court-ordered winding up have been summarised by Finkelstein J in El-Fakri v Elfah Pty Ltd (In Liq),[4] as follows:
[5] In Re Calgary and Edmonton Land Co Ltd (in liq) [1975] 1 WLR 355; [1975] 1 All ER 1046, Megarry J set out most of the factors that the court must consider before making an order under s 482(1). First, I must consider the interests of the creditors. That presents no difficulty in this case. In the first place there are only two creditors. They do not object to a termination of the winding up. Second, even if those creditors had objected, little weight would be given to the objection because the parties have established that the creditors will, in due course, be paid in full.
[6] I should also consider the position of the liquidator. He has a statutory right to receive his costs, charges and expenses in priority to other claims in the liquidation and he has a charge or lien over the assets of the company to secure that priority. Usually it would not be right to stay or terminate a liquidation unless the liquidator's position is protected.
[7] Then there are the members of the company. It is generally accepted that a stay or termination should not be granted unless each member consents (or perhaps does not object) to giving up his right to take the surplus assets on the completion of the liquidation. Here again there is no difficulty as the members are the applicants for the termination order.
[8] In addition to Megarry J's three factors, it is also necessary to consider the public interest. That is, the court must consider not only whether the stay or termination is for the benefit of creditors and members but also whether it is conducive or detrimental to commercial morality and to the interests of the public at large: see Re Telescriptor Syndicate Ltd [1903] 2 Ch 174 at 180; Chan v Austgrove Enterprises Pty Ltd [1993] 12 ACSR 427. Clearly this is not one of those cases where the public interest would be injured by making the order sought.
21 From the director's report as to affairs pursuant to s 475 of the Act and based on the investigations of Mr Horne, the financial position of the company as at 9 February 2011 is as follows:
22 Mr Horne does not expect to recover any amount in relation to work in progress. In relation to contingent assets, the sum of $175,336 involves an action by the company against Mr Aidas Kaspar, a director of the company from 15 May 2007 until 15 February 2010, and a shareholder. The company claims that it is entitled to the balance of the sale of a property in the sum of $175,336. An offer of settlement was made in March 2011 that the company receive a third of those funds being $57,750. However, that offer was not accepted because the directors' consent (as joint plaintiffs in the proceeding) was required and the directors were not prepared to give that consent. That claim, according to Mr Horne, is currently being contested by a number of parties, including the company. Mr Horne states that owing to the uncertainty of the strength of the company's claim, the legal expenses required to contest the funds and the overall uncertainty as to the way in which the Court may rule, it is doubtful any funds will flow from this action.
23 At the second creditors' meeting, a deed of company arrangement was put to the creditors, which was accepted. Nine out of ten creditors voted in favour of the proposal.
24 An amount of $65,000 has been paid by the directors and a further sum of $45,000 will be paid no later than 120 days after the approval of the proposal. The terms of the proposal are as follows:
Administrators/Deed Administrators' remuneration and disbursements
Estimated legal costs associated with preference recoveries
25 The directors of associated companies will not participate in dividends for creditors, thereby lowering the quantum of unsecured creditors under a deed of company arrangement scenario.
26 At the meeting approving the Deed of Company Arrangement, the applicants noted a further debt of $15,000 had not been included in the report and therefore the estimated dividend was reduced to around 16 to 17 cents in the dollar. That dividend is 10 times the estimated dividend that would be put to creditors if the company remains in liquidation.
27 Prior to the Deed of Company Arrangement being passed by the creditors, the Chairman advised them that the company had ceased trading and projects had been abandoned. The Chairman also advised the creditors that Mr Campbell, a former director, explained that he had lost his building licence and therefore he could not continue to trade. After the resolution was passed that the company adopt the Deed of Company Arrangement, Ms V. Chan on behalf of the Australian Taxation Office asked a question whether the company would continue to trade. The Chairman replied, "No, as Mr Campbell had lost his building licence". Ms Chan responded saying that she was happy the company was not trading but asked that the company lodge their tax returns.
28 In his affidavit to the Court, Mr Horne has sworn that the directors of the company were particularly interested to salvage what they could of the company's business. As a building company, it has or is connected to building practitioner registration; insurance policies including statutory home owners warranty insurance; and partially completed building contracts. If the company's liquidation proceeded in the normal way, the contracts could not be completed profitably. Further, if the directors wished to resume business as builders they would need to negotiate new insurance policies and attach the Building Practitioner Registration to a new trading entity. From Mr Horne's affidavit and the submissions of Mr Robinson it appears that it is intended that the company will continue trading.
29 The creditors have voted to accept a Deed of Company Arrangement. They will receive 10 times as much as they will receive if the company remains in liquidation. The creditors voted to accept the proposal after they had been told that Mr Campbell had lost his building licence and therefore could not continue to trade. They may have suspected that the company would not continue to trade prior to the resolution being passed and were erroneously informed after the resolution was passed that the company would not trade.
30 I am unsure, on the evidence before me, whether the Deed would have been passed if the creditors had been advised that the company could have traded. The creditors should have been given all information prior to this resolution being passed.
31 The applicants will receive their remuneration for the liquidation and their remuneration in preparing a Deed of Company Arrangement. Of $110,000 to be paid by the directors, the applicants will receive $57,857, whereas if the company remains in liquidation, their payment will depend on estimated asset recoveries and also unfair preferences. The interests of the liquidator are provided for.
32 The company has three shareholders. Two are the directors who propose the deed of arrangement and the third shareholder is Mr Kaspar who is involved in the litigation with the directors and the company. Mr Kaspar was provided with a copy of the interlocutory process and his legal representatives on 15 June 2011 advised Mr Robinson that Mr Kaspar opposed the relief sought. Mr Kaspar had the opportunity to attend court but chose not to. It may be in Mr Kaspar's interests that the liquidation not be terminated as he is being sued by the company.
33 This factor in these circumstances is one preventing an order being made under s 482.
34 The fact that the liquidator has ignored the operation of the Act and appointed himself as administrator without the leave of the Court and without resolution prior to the appointment, or the creditors approving such appointment is, in my view, contrary to public interest. However, the Australian Securities & Investments Commission ("ASIC") has been served with the interlocutory process and the affidavit of Mr Horne and it does not object to the relief sought by the applicants nor does it support it.
35 From the report prepared by Mr Horne, I note that:
- a Porsche was used for the benefit of the company although it was registered to Mr Kaspar;
- a Porsche that was modified with approximately $25,000 spent in respect of the modification; and
- a Ford BA Utility 2005 which was purchased by company funds is registered to a director of the company;
36 It has been submitted that these are relatively serious matters but by no means at the upper end of the range. It is also said that improper conduct which involves offences will be included in a report under s 438D of the Act and that the creditors in liquidation not be forced to investigate such matters further, in the absence of funding, or any likelihood that the investigations will lead to a better outcome for the creditors than offered by the Deed of Company Arrangement.
37 It is also submitted the available evidence does not indicate matters which offend commercial morality sufficient to override the wishes or interests of creditors and any contributories.
38 I do not agree. In my view, on reading the liquidator's report, there are funds to investigate further offences. There is a strong possibility of insolvent trading. The company's records have not been kept in order. At the meeting of creditors, Ms Chan asked that tax returns and BAS Statements be filed. The meeting also seemed to proceed erroneously on the basis that the company would not continue to trade. In my view, commercial morality overrides the interests of the creditors. I am also not also convinced that the creditors had all of the information before them prior to the meeting. There is a possibility that they may have voted differently. This company should remain in liquidation.
39 The application to terminate the wind up must fail. I will not validate the appointment of the administrators as, in my view, it would not be just and equitable. The company will remain in liquidation.
[3] 13 ACSR 644 at 648,