Re Keldane Pty Ltd (in liq) [2011] VSC 385 (23 August 2011)

2 Keldane was wound up in insolvency by order of this Court on 9 February 2011. Mr Sterling Lindley Horne ("Mr Horne") was appointed liquidator for the purposes of the winding up. In April 2011 Mr Horne appointed himself and his partner, Mr Petr Vrsecky ("Mr Vrsecky") of Lawler Draper Dillon as the administrators of the company pursuant to s 436B of the Corporations Act 2001 (Cth) ("the Act"). Mr Horne, as liquidator of the company, and Mr Horne and Mr Vrsecky together, as administrators of the company, applied for relief under s 482(1) and s 1322(4) of the Act. They sought before his Honour, and before me, a number of orders including the termination of the liquidation and declarations that a deed of company arrangement and a deed of charge were not invalid by reason of any contravention of a provision of the Act. They also sought orders to omit certain words from the name of the company pursuant to s 450E(2) and a declaration that in the applicants' capacity as administrators of the company during the voluntary administration or as administrators of the deed of company arrangement or otherwise they are not personally liable for any debt of the company.

3 The appeal from his Honour's orders challenged his Honour's conclusion that there had been a contravention of s 436B in the appointment of Mr Horne and Mr Vrsecky as administrators in April 2011. Section 436B(2) provides:

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.

The liquidator appointed himself and his partner as administrators without having obtained the leave of the Court to appoint himself and his partner as administrators. His Honour also found that the appointment had occurred without the approval of the creditors.

4 In the proceeding before me it was contended that his Honour erred in his construction of s 436B(2) in requiring the creditors' approval to be given before an appointment. It was contended that the section did not require approval to be given by the creditors before an appointment that would otherwise be in contravention of s 436B(2) but that the approval may, as it was suggested had occurred here, be given subsequent to the appointment. I do not agree with the construction advanced. The prohibition is a prohibition upon the act of appointment and any approval must precede, or occur at the same time as, an appointment which would otherwise contravene the section. The section is not to be construed as one permitting ratification of an act which was otherwise unlawful but subsequently made lawful by ratification. The section is directed to the act of appointment and provides a mechanism by which a liquidator may seek approval for the doing of an act which would otherwise be contrary to the provision. The approval must be obtained before, or at least no later than, the appointment.

5 An additional, and separate, reason for holding against the conclusion urged by Mr Horne is that there was not a meaningful approval of the appointment at a meeting of the company's creditors. A resolution may have been passed which in form appointed Mr Horne (the liquidator) and Mr Vrsecky (Mr Horne's partner) as administrators but there was no meaningful sense in which that resolution can have been understood by those attending as approving something otherwise proscribed by s 436B(2). There was no evidence before the meeting, as counsel for Mr Horne accepted in the proceeding before me, that those meeting and passing resolutions were made aware that the resolution sought by Mr Horne was one which gave approval to something which s 436B(2) otherwise prohibited. A statutory prohibition is not to be taken lightly and is not to be waived without knowledge, consideration and consciousness of at least the fact of, if not the significance of, an approval of something otherwise prohibited by statute.

6 Much of the proceeding before me focused upon what was said to be his Honour's error in the construction and application of s 436B but, in fact, his Honour's decision not to terminate the winding up of the company and not to make the other orders sought was based upon different considerations. Section 482(1) gives the Court a discretion to terminate the winding up of a company. It 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 or terminating the winding up on a day specified in the order.

His Honour referred to the factors to be taken into account in considering an application to stay or terminate a Court ordered winding up summarised by Finkelstein J in E-Fahkri v Elfah Pty Ltd (In Liquidation).[2] Counsel for the applicants also relied upon the subsequent dicta of Austin J in Re Nardell Coal Corporation Pty Ltd[3] which referred with approval to the decision of Finkelstein J in E-Fahkri. Efthim AsJ considered the factors relevant to a consideration of an application to terminate a winding up. His Honour took into account the interests of creditors, the liquidator, the contributories and the public interest. His Honour's analysis does not bind me in a proceeding by way of de novo hearing but is of assistance as a valuable analysis of the material especially where, as here, there is no controverter to the application.

7 Efthim AsJ gave careful consideration, and detailed reasons, to the matters which weighed on his mind both for and against the orders sought. A consideration of those factors have assisted me in considering the material before me as supplemented by two affidavits and a letter from ASIC. In the end my conclusion has been the same as that of his Honour. In particular his Honour said in considering the public interest:

1. 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.
2. 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.[4]

Earlier in his reasons his Honour, in considering the interest of creditors, had said:

1. 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.
2. 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.[5]

The material before me, as supplemented by the additional material filed and dated 16 August 2011, does not lead me to any different conclusion. I too am unpersuaded that the winding up should be terminated on the material before me. It may be that a different conclusion should be drawn on fresh material after a new meeting. But the doubts which his Honour had are doubts which I share and I am unpersuaded that I should make any of the orders sought by Mr Horne and Mr Vrsecky.

8 The additional material filed in the proceeding before me were two affidavits and a letter from ASIC. The letter from ASIC does not alter the position from that before his Honour. It confirmed that as at 16 August 2011, as was the position in the proceeding before his Honour, ASIC had been served with the relevant process (updated to include the notice of appeal filed 27 July 2011 and correspondence of 11 August 2011) and that the Commission did not propose to intervene in the proceeding or to seek leave to appear at the hearing but left the matter for the determination by the Court. The Commission had taken the same position at the time of the applications before his Honour. The Commission did not seek to support (nor oppose) the appeal from the orders made by Efthim AsJ.

9 There was also filed an additional affidavit by Mr Horne directed to the honesty of his belief concerning compliance with s 436B(2). It was submitted that the affidavit dealt with the concern expressed by his Honour that there was no evidence before the Court upon which any finding could be made in relation to whether the liquidator had acted honestly. His Honour, however, had also said in the sentence next to the one which caused concern to the applicants that there was nothing which would lead the Court to conclude that the liquidator had acted dishonestly in appointing himself and his partner as administrators. The affidavit of Mr Horne dated 16 August 2011 purported to give evidence about his honesty by an assertion that he "honestly believed" that the appointment of himself and Mr Vrsecky as administrators of the company would comply with s 436B(2) if the appointment was subsequently approved by a resolution of a meeting of creditors. Subjective evidence by a witness requires "close scrutiny"[6] and may require something more than an assertion.[7] No evidence was tendered about the construction of the section actually having been considered by Mr Horne at any time prior to or even at the point of appointment. There was no objective or contemporaneous evidence of the matter ever having been thought about by Mr Horne. He may well have acted honestly upon a view of the construction of the section but there is no evidence that he had any consciousness about the issue at the relevant time. In any event the affidavit is directed to an issue which, as I have explained, is not critical to the decision to reject his application either by the Associate Justice or by me.

10 Mr Horne's affidavit also brought up to date matters relevant to a Mr Kaspar whose position had been of some significance in his Honour's decision. His Honour had noted that Mr Kaspar was a director of the company from 15 May 2007 until 15 February 2010 and was also a shareholder. Later in his reasons his Honour said:

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.[8]

This was a matter which his Honour considered weighed against the orders sought under s 482. The affidavit of Mr Horne made 16 August 2011 purported to bring the Court "up to date on relevant matters involving Mr Kaspar" since the hearing before Efthim AsJ but in fact little was said that added to what had been before his Honour. The most that I am able to discern from the affidavit which may qualify as bringing the Court up to date in relation to Mr Kaspar appears to be that on 20 June 2011 his lawyer had been reminded that he could submit a proof of debt in the administration but had not done so and that notices sent to Mr Kaspar had otherwise been returned without any correspondence with Mr Horne. These matters add little to what was before Efthim AsJ and did not address the substance of the concern which his Honour took care in his reasons to explain.

11 The other affidavit filed before me was that of Mr Giuseppe Casabene relating to his company Casabene Plumbing & Drainage Pty Ltd ("Casabene"). It was Casabene which had brought the application to wind up the company. Casabene's and Mr Casabene's solicitors are Messrs Best Hooper who are also the solicitors for Mr Horne and Mr Vrsecky. The affidavit of Mr Casabene appears to have been directed to his perception of whether or not there may have been a conflict of interest in Best Hooper acting both for Casabene and for Messrs Horne and Vrsecky. His evidence in relation to whether there was a conflict of interest was the assertion that he "did not see things that way". Whether or not his way of seeing the matter as an actual or potential conflict does or does not bear upon whether there was or was not a conflict of interest, the affidavit does nothing to advance the case in favour of the applicants by the assertion by Mr Casabene of his view[9] especially in the terms by which his subjective view was expressed.

12 Mr Casabene also deposed to his company's position concerning the Deed of Company Arrangement. His evidence in that regard was:

1. I understand that the Court has expressed some concern about matters relating to my company, the liquidation, and the Deed of Company Arrangement approved by a meeting of creditors on 16 May 2011. I provide the following background information.
2. Shortly after the winding up order was made, I was telephone by Mr Nardella, one of the directors. He said words to the effect of, "This winding up is all a mistake. We want the company to trade on. You must agree to having the order reversed." I said words to the effect of, "I would agree to that, if our debt is paid in full, plus costs." This never happened.
3. I received notices for both meetings of creditors. I did not attend, or send a representative, because I did not see the point. I preferred the outcome of the Deed of Company Arrangement to the outcome of a continued liquidation, but I was not prepared to spend the time required to attend the meetings. I understood that the Deed was likely to be approved, and did not wish to oppose that.

Efthim AsJ had said in relation to the position of Casabene at the time of the proceeding before him that it had relied on a presumption of insolvency as a statutory demand served by Casabene on the company not having been satisfied or set aside. His Honour also observed that the application before him had not been served on Casabene. Why that was not done was not explained in any of the new material and, as I have said, what has been explained in the new material does not satisfy me that the orders sought should be made.

13 It was also submitted that any breach of s 436B(2) should be given dispensation under s 1322(4)(a) of the Act. In that connection s 1322(6)(a) provides that a Court must not make an order under the section unless satisfied:

(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.

It is unnecessary for me to consider reliance upon this section since I am not satisfied that an order to terminate the winding up of the company should be made. In those circumstances it may be undesirable to express any adverse views about the conduct of Mr Horne and Mr Vrsecky in relation to an appointment contrary to s 436B(2) unless it were strictly necessary for that to be done. It may be sufficient for present purposes to indicate that the prohibition in s 436B is not something to be treated as a mere formality or mere procedural obstacle. Section 436B is the expression of a legislative policy designed to keep separate the roles, tasks, duties and privileges of liquidators on the one hand and of administrators of a company on the other. Its terms require compliance and dispensation from its requirements should not be given lightly.

[1] Supreme Court (General Civil Procedure) Rules 2005 (Vic) r 77.06(7).

[2] [2002] FCA 1469, [5]-[8].

[3] [2004] NSWSC 281, [76]-[83].

[4] Re Keldane Pty Ltd (in liq) [2011] VSC 337.

[6] Riley v Penttila [1974] VicRp 67; [1974] VR 547, 572 (Gillard J).

[7] Abbatangelo v Whittlesea City Council [2007] VSC 529, [12]; AWB Riskassist Ltd v Barlow [2011] VSC 258, [17]; Mediterranean Olives Financial Pty Ltd v Lederberger [2011] VSC 301, [34].

[8] Re Keldane Pty Ltd (in liq) [2011] VSC 337, 32.

[9] See Nangus Pty Ltd v Charles Donovan Pty Ltd [1989] VicRp 17; [1989] VR 184, 185-6 (Young CJ).