Re Paradise Constructors Pty Ltd (administrator appointed); Pong Property Development Pty Ltd v Sleiman [2004] VSC 92

Supreme Court of Victoria|2004-03-30|Before: Mandie J

CORPORATIONS - application to replace administrator or to terminate administration and wind up company - conduct of administrator - whether s.447A Corporations Act 2001 (Cth) empowers to the Court to make a winding up order

By originating process dated 5 December 2003, the plaintiff seeks orders, pursuant to s.447A (or s. or s.) of the (Cth) ("the Act"), that the first defendant, Joseph Sleiman ("Mr Sleiman"), be removed as administrator of Paradise Constructors Pty Ltd ("Paradise") and that the Court appoint an alternative administrator "independent of the director and creditors". Alternatively, the plaintiff seeks an order that Paradise be wound up. The plaintiff joined as second defendant to the proceeding Bruno Strangio ("Mr Strangio") who is the sole director of Paradise.

Mr Sleiman was appointed (by Mr Strangio) as administrator of Paradise on 19 November 2003 and on 20 November 2003 he gave notice of the first meeting of creditors to take place on 26 November 2003. Some aspects of what occurred at the first meeting are referred to below. Then, by letter dated 9 December 2003, the administrator convened the second meeting of creditors, to be held on 16 December 2003.

This proceeding first came on for hearing on 12 December 2003, at which time the Court restrained the holding of the second meeting of creditors until further order. That injunction has remained in force pending determination of this proceeding.

Paradise was incorporated under the name "B & F Strangio Investments Pty Ltd" on 21 November 1985. It changed its name to "B & F Atingo Investments Pty Ltd" on 27 March 1990 and its name was changed to its present name on 11 May 2001. There are twelve issued ordinary fully paid $1 shares in Paradise which are held by Mr Strangio. The only previous member of Paradise was Philippa Strangio, who at one time held six of these shares. Mr Strangio was appointed as a director on 25 November 1985, and has remained a director at all times thereafter. Apart from two directors who ceased being such on 25 November 1985, Paradise has only ever had one other director, Philippa Strangio, who was a director from 25 November 1985 until 1 July 2000. Mr Strangio also is, and has been, the company secretary of Paradise since 25 November 1985.

A "Memorandum Of Resolutions Of The Directors" is in evidence, which shows that on 1 July 2000, the then directors of Paradise (Mr Strangio and Philippa Strangio) resolved:

"to submit the following special resolution to the members of the company; It was resolved unanimously to approve the cancellation of the original Memorandum & Articles of the Company and the adoption of a new Constitution of the Company dated 1 July 2000 as presented to this meeting pursuant to the amendments of the Corporations Law. Resolved to appoint Bruno Strangio the sole director of the company."

Mr Sleiman has deposed that he relied upon the above resolution as evidence of Mr Strangio's power as sole director to appoint an administrator. The new Constitution of the company is not in evidence, and when asked to produce it, Counsel for Mr Strangio said that, on his instructions, it could not at present be located.

The following matters (which are uncontradicted by evidence) appear from an affidavit of Tony Pong ("Mr Pong") sworn 5 December 2003 on behalf of the plaintiff:

(a) Mr Pong is a project manager employed by the plaintiff.

(b) The plaintiff owns land at 377 Centre Road, Berwick and has, since about April 2001, been developing that land as a residential housing development.

(c) Paradise was at all material times trading as a building contractor, carrying out civil earthworks and drainage and road construction, especially for residential developments.

(d) The plaintiff's consultant invited tenders from various contractors, including Paradise, in relation to works for the Berwick development. These works included demolition of an existing house and excavation including filling, drainage and similar work.

(e) Paradise's tender was accepted and Paradise started work in December 2001.

(f) Paradise (allegedly) "failed to carry out the works in a proper and workmanlike manner and carried out the works defectively, including causing damage to an adjoining property namely a commercial nursery..."

(g) Paradise (allegedly) "also failed to proceed with due expedition in breach of [the conditions of contract] and failed to reach Practical Completion on time, or at all."

(h) The plaintiff terminated the contract with Paradise and is now claiming damages against Paradise and Mr Strangio in a proceeding in the Domestic Building List of the Victorian Civil and Administrative Tribunal ("VCAT").

(i) Paradise and Mr Strangio deny the plaintiff's claim and have made a counterclaim for damages in excess of $300,000.

(j) The VCAT proceeding was not resolved at a compulsory conference on 14 November 2003 and a directions hearing was fixed for 9 December 2003.

(k) On 19 November 2003, Mr Strangio as sole director of Paradise appointed Mr Sleiman as administrator of Paradise.

(l) By letter dated 20 November 2003 from "Frasers" of 99 Elizabeth Street, Sydney and signed by Mr Sleiman, the plaintiff was advised that Mr Sleiman had been appointed administrator of Paradise on 19 November 2003 and was convening a meeting of creditors to be held at the offices of Lewenberg & Lewenberg, 340 Little Lonsdale Street, Melbourne on 26 November 2003. Accompanying the letter were a notice of first meeting and proxy and proof of debt forms.

(m) On 26 November 2003, Mr Pong attended the first meeting of creditors at the offices of Lewenberg & Lewenberg. Present at the meeting were Mr Strangio (who held about 20 proxies of various alleged creditors, including related companies and persons), Mr David Burstyner, solicitor as proxy for Lewenberg & Lewenberg (who claimed to be owed in excess of $50,000 in legal fees), Ms Chua (of the plaintiff's solicitors), Mr D Klempfner (a barrister representing a creditor), and a number of other creditors or their representatives. Mr Sleiman was not present in person at the meeting but "he was in Sydney on the telephone." Mr Sleiman purported to preside over and conduct the meeting by telephone.

(n) During the meeting, Mr Klempfner asked Mr Sleiman and Mr Burstyner to state what dealings they had had before the appointment of Mr Sleiman as administrator, and they both said that they had not had any dealings. Mr Klempfner asked Mr Sleiman to say why the office of Lewenberg & Lewenberg was chosen for the venue for the meeting. Mr Burstyner interrupted and said that he could answer that, and that it was a matter of a convenience, in that after he had received the notice of meeting, he had called Mr Sleiman and offered the venue so as to save money. Mr Sleiman then agreed with that account. Mr Klempfner then stated that the venue was listed on the notice of meeting, so that the account could not be true. Neither Mr Burstyner nor Mr Sleiman responded to Mr Klempfner's statement.

For reasons which Mr Pong sets out in his affidavit, he questioned the validity of Mr Sleiman's appointment as administrator and stated his apprehension that Mr Sleiman was biassed against the plaintiff and in favour of Mr Strangio, and not independent or able to properly serve the interests of the creditors.

Further evidence as to what occurred at the first creditors' meeting was provided by affidavits of Mr Klempfner and Ms Chua. Mr Klempfner deposed that he attended the meeting and that at the outset he asked Mr Sleiman (via the telephone link) if Mr Sleiman had seen the Articles of Association of Paradise to satisfy himself of the validity of the resolution appointing him administrator. Mr Sleiman replied that he had not, but that he had seen the director's resolution. Mr Klempfner questioned whether the director's resolution was valid, pointing out that Paradise had been incorporated in 1985 at which time there was "no provision in the relevant companies legislation for sole director-shareholders". Mr Klempfner suggested that Mr Sleiman obtain a copy by fax of the Articles prior to the meeting continuing, but Mr Sleiman refused to do so. Mr Burstyner "prompted" Mr Sleiman on a number of occasions to suggest how Mr Sleiman could be satisfied of the validity of his appointment.

Mr Klempfner asked Mr Sleiman if he had requested or received any indemnity from Mr Strangio or any other person in respect of acting as administrator. Mr Sleiman replied that he had received a limited indemnity but did not indicate its nature or from whom he had received it, and refused to table any documents relating to it. Mr Sleiman told the meeting that Paradise had ceased trading and had no employees and that he had not yet received any financial records of Paradise from any person.

At another point in the meeting, Mr Klempfner asked Mr Sleiman whether he knew who had paid Lofts Quarries Pty Ltd to settle its application to wind up Paradise, which had been listed for hearing in the Supreme Court of Victoria on Wednesday 19 November 2003. Mr Burstyner objected to Mr Klempfner's question "on the basis of relevance" and Mr Klempfner said to Mr Burstyner that they were not in a court, that Mr Burstyner was not the administrator and it was not for him to object to questions being directed to the administrator. Mr Klempfner repeated his question and Mr Sleiman replied by saying that the payment to Lofts Quarries Pty Ltd had come from "third party funds", but Mr Sleiman did not identify the so-called third party.

A resolution was put to the meeting that Mr Sleiman be removed as administrator and that Mr Andrews of GS Andrews & Associates be appointed as administrator. The resolution was defeated 21 votes to 9, the 21 votes being composed of 20 votes and proxies controlled by Mr Strangio and the vote cast by Mr Burstyner. I note that the minutes record that the creditors requested a poll and "consideration of the dollar valuation of votes" which the minutes record as $719,241 against the replacement of Mr Sleiman and $404,148 in favour of his replacement. The evidence indicates that there was some confusion at the meeting concerning the counting of votes and the calculation of these amounts. A further resolution was suggested, but not formally put by Mr Sleiman, that a committee of creditors be appointed. Mr Strangio said that he would use his proxies to vote against such a resolution but that there was no need to vote on the resolution as none of the other creditors attending the meeting had expressed any desire for a committee to be appointed.

During the meeting, Mr Klempfner asked that the minutes record his concerns about the validity of the resolution by which Mr Sleiman was appointed administrator, and Mr Sleiman agreed to do this. However, Mr Sleiman did not carry out this agreement and the minutes did not record that matter.

An affidavit of Ms Chua sworn 5 December 2003 essentially confirms Mr Klempfner's account of the first meeting. It appears from Ms Chua's affidavit that the proxies (about 20) held by Mr Strangio included 3 companies which Mr Strangio controlled or with which he was associated as well as a company operated by Mr Strangio's son. Two of the proxies were from sons of Mr Strangio and all of the proxies were apparently prepared by or obtained by Mr Strangio.

A second affidavit of Ms Chua sworn 11 December 2003 exhibits the consent of six creditors to the removal of Mr Sleiman as administrator (although some of those consents have subsequently been withdrawn) and also exhibits a consent by Mr Paul Anthony Pattison ("Mr Pattison") to act as administrator of Paradise (should the Court so order).

A third affidavit of Ms Chua sworn 12 December 2003 shows that, as I have already mentioned, by letter dated 9 December 2003, Mr Sleiman convened a second meeting of creditors for 16 December 2003. Attached to Mr Sleiman's letter was the notice of meeting, a proof of debt form, a proxy form and an administrator's report. The administrator's report to creditors states at the outset:

"...This report summarises the results of my investigation into the company's business, property, affairs and financial circumstances pursuant to Section 438A(a).[1] I have also formed my opinion on the matters to be considered in Section 438A(b) and this opinion is detailed in this report. This report and recommendations have been prepared after initial investigation into property, financial position and affairs of the company including information provided by the directors. Whilst I have endeavoured to determine the accuracy or otherwise of the information I am unable to warrant the accuracy, completeness or reliability of same. Creditors should note my investigation does not constitute an audit and is constrained by the availability of records and the Corporations Act which requires, in the ordinary course a second report to be in the hands of creditors within 21 days of an appointment."

The administrator's report goes on to detail that Mr Strangio was the sole director and shareholder of Paradise and that the company was placed into administration as the company was insolvent. Mr Sleiman then reported that Mr Strangio had advised him that Paradise ceased trading in November 2003 due to its major debtor not remitting funds properly due and payable. The administrator goes on to say that "[d]ue to the lack of available books and records I have been unable to ascertain the reason for the company's failure, however, it is likely the legal disputes with creditors contributed to its overall demise. I understand the company operated as a building contractor carrying out civil earthworks and road construction primarily for residential developments".

The administrator's report then refers to demands issued to Mr Strangio for a statement about Paradise's business, property, affairs and financial circumstances and its books and records and that he had received "books and records" but not "the financial statements". Mr Sleiman refers to advice from Mr Strangio that the only asset disclosed is an action for $500,000 against a debtor (presumably the plaintiff), which Mr Strangio intends to fund, and creditors of $1,117,938 (including related party debts of approximately $365,000) and (after deducting the said claim for $500,000) a total deficiency of $671,938. The administrator then says that he has received a proposal from Mr Strangio for a deed of company arrangement involving the payment by Mr Strangio of $15,000 to unsecured creditors (excluding related parties) in full settlement of their claims.

The administrator's report then turns to the alternative of liquidation, and, after pointing to the costs and difficulties of a liquidator proceeding against directors for insolvent trading, says that his investigations indicate that it is unlikely that Mr Strangio "recently engaged" in insolvent trading. He goes on to say that, from his investigation of the books and records, there appear to be some voidable transactions amounting to approximately $80,000. He then contrasts the costs, uncertainties and delays involved in any actions by a liquidator with the benefit of a dividend of about two cents in the dollar for creditors offered by a deed of company arrangement, and expresses his opinion as follows:

"In my opinion I consider it in the creditors' interest to accept the [deed of company arrangement] proposed by the directors as:

i. there are uncertainties associated with litigation.

iii. unsecured creditors will receive a distribution which is not diluted by related party claims."

Mr Sleiman's report concludes by saying that it would be in the best interests of the creditors for Paradise to execute a deed of company arrangement and not in their best interests either for the administration to end or for Paradise to be wound up.

The affidavit of Ms Chua of 5 December 2003, in the course of identifying the proxies held by Mr Strangio at the first meeting of creditors, identifies a number of creditor companies associated with Mr Strangio. One of these companies was Paradise Constructors & Co Pty Ltd (incorporated with this very similar name on 26 August 2002), of which Mr Strangio was the sole shareholder and his son the sole director and secretary. Another company was Aussie Vic Plant Hire Pty Ltd (of which Mr Strangio is the sole director, secretary and shareholder).

In this proceeding, Mr Sleiman relied upon two affidavits sworn 16 December 2003 and 5 February 2004, and he was extensively cross-examined upon his affidavits by Senior Counsel for the plaintiff. The following matters emerge from Mr Sleiman's affidavits and his cross-examination.

Mr Sleiman has been a certified practising accountant for about 9 years and has been a registered liquidator for about 10 years, and is included on the list of liquidators maintained by the Supreme Court of New South Wales. Mr Sleiman is a designated specialist in insolvency and reconstruction and a member of the Insolvency Practitioners' Association.

Mr Sleiman had no prior relationship or connection with Paradise or Mr Strangio. He had been requested to act as administrator by Mr Mark Cooper, a partner of Frasers Insolvency Advisory (a Sydney firm or company with which Mr Sleiman had a business relationship and which referred work to him as a consultant from time to time). Paradise had been referred to Frasers by a management consulting firm, 180 Corporate Pty Ltd, and by Lewenberg & Lewenberg, solicitors. Mr Cooper of Frasers had asked Mr Sleiman to act as administrator of Paradise, and Mr Sleiman told Mr Cooper that he was willing to do so.

In his first affidavit, Mr Sleiman said that he had not met or spoken with Mr Strangio before he commenced acting as administrator. Further, in his second affidavit, Mr Sleiman deposed that on or about 16 November 2003, he spoke by telephone with Mr Strangio who said words to the effect that Paradise was having trouble paying its debts and that Paradise was pursuing a $500,000 claim against the plaintiff. Mr Sleiman then asked Mr Strangio to give him a written list of Paradise's creditors (which he received on or about 19 November 2003). However, in cross-examination, it became clear that Mr Sleiman had probably had a number of discussions with somebody on behalf of Paradise prior to his appointment as administrator. It emerged from Mr Sleiman's evidence that the only persons with whom he could have had the relevant conversation or conversations were Mr Strangio and Mr Burstyner. In an affidavit dated 17 December 2003, Mr Burstyner deposed that he had not had any association whatsoever with Mr Sleiman prior to 19 November 2003. Mr Burstyner was briefly cross-examined, but there is no reason to reject this evidence. Mr Strangio was not called to give evidence and had made no affidavit. As Mr Sleiman was emphatic that there was a conversation or conversations prior to that date, and in the light of the whole of his evidence, I am satisfied that the conversations which he referred to in his evidence were with Mr Strangio and not with Mr Burstyner. I am therefore satisfied that the contents of paragraph 6 of Mr Sleiman's first affidavit were incorrect.

An issue of some importance was developed in cross-examination in relation to the above conversations. It developed in this way.

Mr Sleiman was asked what arrangement he had in relation to fees with Mr Cooper of Fraser Insolvency Services. His first reply to this question was that he got paid for his charges depending on available resources of the company and creditor approval, as any other appointment. His second answer to this question was that Mr Cooper had made available to him a sum of money to initiate the administration because Paradise was a company without funds, and that the sum made available to him by Mr Cooper was $10,000. In response to the question as to who gave the money to Mr Cooper, he replied that they were not company funds, they were third party funds. In response to the question as to how he knew they were third party funds, he replied because they were not company funds, not moneys that were owned by Paradise. In response to the question as to how he knew that, he said that Mr Cooper had specifically advised him that that was the case and had told him that the funds had come from Mr Strangio. There followed this question and answer:

"Q: How much of that $10,000 were you to get? A: They were funds that I was to utilise to get the matter to the second meeting and to get a deed up and running as well." [Emphasis added]

Mr Sleiman was then asked whether he had any arrangement as to who would be paying for the rest of his fees (on the accepted basis that the $10,000 had now been absorbed) and he replied that that was to be from other third party funds as well.

"Q: Did you have any arrangement as to who would be paying you the balance of it? A: There was a verbal arrangement with Mr Strangio... Q: Who was the verbal arrangement between with Mr Strangio? A: Again, through my people. Q: Did you have a verbal arrangement with Mr Strangio yourself? A: Directly? Q: Yes, directly. A: I - I - I had conversations with Mr Strangio to... [interjections] Q: Did you have a verbal arrangement with Mr Strangio as to the payment of funds? A: Yes. Q: When did you enter into that verbal arrangement? A: In mid-November... Q: What was that arrangement? A: That he would pay $10,000 to initiate the matter, so I had some funds to proceed with the administration, and then a further $12,000 to the time a deed is agreed or entered into. ... HIS HONOUR: I'm sorry, I didn't hear that. A further $12,000 to the time a deed - - - ? A: - - - is approved, so at the time of the second meeting if the creditors agreed, then - then I would be paid a further $12,000 towards my fees. Q: What date did you enter into that arrangement with him? A: Mid to late November. I can't recall the exact date. ... We did try to formalise the arrangement, provide an indemnity, and that - that written indemnity was not - we didn't agree upon, it wasn't completed, so it goes - it just went back to our - back to our verbal understanding that I would be paid 10[000], then 12[000] to finalise the deed. Q: Can I ask you again what date did you enter into that arrangement with Mr Strangio? A: On or about 24 November as a - or, sorry, maybe, sorry - probably the following week, probably 29 November. Thereabouts, yeah. Sort of mid to late November from memory, yeah. Q: So that's even after the first meeting has been held? A: Correct, yes. Q: Did that agreement that you had with Mr Strangio, you haven't sworn anything about that in your affidavit have you? A: No." [Emphasis added]

I further note that in later cross examination, the following exchange occurred:

"Q: Mr Sleiman, when was the first time that a deed was ever contemplated, a deed of arrangement? A: The deed of arrangement was envisaged from the start of the administration...I think it was envisaged from almost the very first conversations that I would have had. Q: Conversation that you had with whom? A: With the director and his solicitor, yes...within the few days prior to the 19th." [emphasis added]

Mr Sleiman testified that he had not mentioned the above arrangement as to his fees in his affidavit because it was not a formalised agreement, and that he did not think that the amount he would be paid was important even though his appointment was being challenged at that stage and that, because Paradise was a company without funds, it was obvious that his fees would need to come out of some third party funds. He added that he knew from the start that Paradise was without funds and it was quite clear that Paradise was hopelessly insolvent. He reiterated that he definitely had a verbal agreement with Mr Strangio, although the dates "may be slightly incorrect".

When asked whether he had ever asked a Mr Woszczalski of 180 Corporate Pty Ltd to do anything on his behalf about getting a cheque for $10,000, Mr Sleiman then identified a letter dated 17 November 2003 signed by him and addressed to Mr Woszczalski, in which asked Mr Woszczalski to confirm that the company had ceased trading and did not have any employees at the time. The letter then said "Please forward to me a cheque made payable to Fraser Insolvency Trust Account to cover this firm's minimum fee charge of $10,000". Mr Sleiman deposed that the funds requested from Mr Woszczalski were coming from Mr Strangio, but he had forgotten about this letter. He added that he had one or two telephone conversations with Mr Woszczalski prior to his appointment.

Reference was then made to the fact that Mr Strangio had then advised Mr Sleiman (as he later reported) that Paradise had an action against the plaintiff for $500,000. When questioned, Mr Sleiman agreed, in effect, that he had made the recommendation in relation to the deed of arrangement without investigating whether or not the $500,000 was collectable - he had asked the solicitor acting on Mr Strangio's behalf (Lewenbergs) but they had not got back to him in time with any advice one way or the other. He said that the reported deficiency of $617,000 assumed that the $500,000 was collectable. It was put to him that the deficiency was closer to $1.35M, and he agreed that it could be depending on the proofs of debt and the substantiation and evaluation of them.

Mr Sleiman deposed that he was able to conclude that it was in the benefit of creditors to accept $15,000 between them all because it was likely that they would get nothing in a liquidation and it was likely that a liquidator of Paradise would not pursue the plaintiff because he would have no funds to do so.

Questioned about his reference to potentially voidable transactions of $80,000, Mr Sleiman said he calculated this by going through the cash books, in which he noticed some payments to related parties, but that he had not mentioned that the parties were "related" in his report. Mr Sleiman said that underlying his recommendation for a deed of arrangement was the view that litigation in relation to preferences and insolvent trading was unlikely to succeed, but he admitted that he only had the cash books and not creditors' ledgers; however he said he knew that most debts were long outstanding through his discussions with Mr Strangio. He said that he had no ledgers, profit and loss statements or balance sheets and was not sure whether they existed.

In his report recommending a deed of arrangement, Mr Sleiman had said that employees would be paid out in full, but he admitted that he had understood from Mr Strangio that there were no claims outstanding by employees. Mr Sleiman deposed that it was his view that it was not in the best interests of the creditors for Paradise to be wound up "because there was a potentially valuable asset there which they were attempting to recover" and if there were not that asset, he would not have recommended a deed. However, he then conceded that if the deed of company arrangement was approved, the company (and not the creditors) would get that asset.

Mr Sleiman accepted that Paradise had been hopelessly insolvent for two years, but said that he was not aware of debts being incurred in the last six months or of the debts increasing over the last two years. In relation to his statement in his report that legal disputes with creditors had contributed to the demise of the company, Mr Sleiman conceded that this was incorrect given that the company had been hopelessly insolvent for two years. He also admitted that he had not been frank with the creditors in indicating that he had a limited indemnity (when he did not).

Mr Sleiman testified that his fees would exceed the $22,000 promised to him by Mr Strangio, but said he did not expect to recover the excess. However, he then conceded that he had asked the creditors to authorise him to take the fees from any moneys held by him as administrator or deed administrator.

Under further questioning, Mr Sleiman said that he had also had a verbal agreement with Mr Strangio, entered into in mid-January 2004 in relation to funding for this very proceeding. When his attention was drawn to a letter which he wrote to Mr Burstyner on 15 December confirming "that Mr Strangio has agreed to pay the costs of the Supreme Court proceedings", he conceded that he had reached such agreement with Mr Strangio on or around 15 December 2003 (the proceeding having commenced on 5 December 2003). Mr Sleiman then agreed that it was likely that he entered into the agreement with Mr Strangio before he was represented by Mr Dreyfus QC on 12 December. He then said that he had not received written confirmation and was not sure that he had a firm agreement, although he had received no objection to his letter.

Mr Sleiman agreed that the list of creditors which had been supplied to him by Mr Strangio was not (and could not be) independently verified by him, because he had received no records which would have permitted him to compile a list of creditors, nor had he received records which would enable him to compile a list of debtors, or the source of the company's income. Mr Sleiman said that Paradise was in the business of residential development, but he had not been supplied with any building contracts; however, Mr Strangio had told him that there were no debtors and that there had been other works which are "done in other companies" which had resulted in debtors but they were not the debtors of Paradise. The following exchange in cross examination then occurred:

"Q: Mr Sleiman, can I just put to you quite clearly: you have no idea whether or not the people for whom the work has been done have been charged by the correct company or not, do you? A: I couldn't conclude that, no. Q: But you've got no idea, do you, because you don't even know what's been charged out by Paradise, do you?" A: That's right, that's right, but given the inactivity I'd said if there were any debtors which arose from work done previously, they wouldn't be collectable in any case because of the time, other than obviously the Pong matter which is still on. Q: So you understand that there are a number of companies associated with Mr Strangio? A: Yes. Q: And that they have been, for example, getting invoices to people? A: Yes, that's right."

Mr Sleiman then said that he had made some inquiries with debtors of associated companies, who confirmed that their debt was not with Paradise, but with a related company:

"Q: Do you know, though, whether or not any of the work that was carried out on that job has been charged to Paradise Constructors by the creditors? A: No, I don't have the invoice to determine that. Q: You have no invoices? You have got absolutely no idea, do you, about what the real position with this company is, other than what Mr Strangio has told you? A: I can't reconcile from the accounting records to the report as to affairs the activity of the company because there's no balance sheet at any point in time for me to be able to reconcile...[and no income statement at any time]"

Mr Sleiman agreed that he could not make an assessment one way or the other as to whether there had been any insolvent trading, other than that there were losses incurred over a period of time which were not insubstantial.

Mr Sleiman agreed that the company's accountants had claimed $11,000 for accountancy services, and accepted that they would have done a substantial amount of work if that figure was correct, but he had not been provided by them with copies of any financial statements or tax returns, or any explanation for their absence.

Mr Sleiman was asked why he should believe Mr Strangio when Paradise had not kept proper records and apparently had not lodged tax returns, and he replied "My confidence isn't terribly high in these circumstances". Nevertheless, Mr Sleiman deposed, it was a commercial decision that a deed of arrangement was better than liquidation.

Finally, reference was made to an application for the winding up of Paradise by a company known as Lofts Quarries Pty Ltd. Just prior to his appointment, Mr Sleiman said that he was advised that Lofts Quarries Pty Ltd had been paid out. Mr Sleiman deposed that he had been so advised by Mr Strangio's solicitor. Mr Sleiman said that Lofts Quarries Pty Ltd had not lodged a proof of debt and he agreed that the payment out of Lofts Quarries Pty Ltd indicated that Mr Strangio was anxious for the company not to go into liquidation. In advising that a deed of arrangement was appropriate, Mr Sleiman said that he had made no investigation as to what arrangement had been made to "pay out" the $20,000 claimed by Lofts Quarries Pty Ltd.

The plaintiff contended that Mr Sleiman was not validly appointed in accordance with the Constitution of Paradise but, if he was, he should be removed.

The plaintiff submitted that there were doubts as to the authenticity of the signed resolution appointing Mr Sleiman as administrator. I will say at once that I am not satisfied that any basis is made out to attack the authenticity of the document itself. The plaintiff next submitted that because the company's Constitution had not been produced, it had not been demonstrated that the original provisions of the Articles (when the company was first incorporated in 1985) and which would have required at least two directors, had been altered so as to authorise the appointment of one director only. In my opinion, it should be inferred from the special resolution which is in evidence[2]

that the Constitution of Paradise was duly altered so as to authorise the appointment of a sole director. At any rate, the contrary has not been proved. I am satisfied that Mr Sleiman adequately addressed the question of the validity of his appointment.

The plaintiff also submitted that Mr Strangio, as director, had not complied with the requirements of s.436A(1) of the Act because there was considerable doubt as to the authenticity of the resolution alleged to have been passed by him. I do not accept this submission. On its face, the minutes of meeting of the directors of Paradise of 19 November 2003 satisfies the requirements of s.436A of the Act, and I am satisfied that the minute was created on that day. In any event, I am not satisfied that it was not.

It was next submitted that, it being common ground that Paradise was hopelessly insolvent, no reasonable purpose was to be served by the administration continuing and an independent liquidator ought to be appointed. It was alternatively submitted that the appointment of an administrator was for an improper purpose and ought to be set aside.

The plaintiff argued that the administrator ought to be removed or the administration terminated pursuant to s.447A of the Act on the grounds that the administrator was not independent of Mr Strangio and of Mr Strangio's solicitors, and that he was appointed for an improper purpose. Reliance was placed upon Mr Sleiman's lack of independence or his apparent lack of independence. It was also put that Mr Sleiman had not pursued his duties in a professional, diligent and objective manner. Reference was made to a very large variety of matters. I will refer to those of particular pertinence in the course of dealing with the foregoing submissions.

The solicitor for Mr Strangio said that he had no submission to make either in favour of or opposing the application for removal and replacement of Mr Sleiman. It was a matter for the Court, he said, on all of the evidence, but he pointed out that costs might be thrown away if one administrator was appointed to replace another. However, the making of a winding up order was opposed by Mr Strangio.

In essence, it was submitted by Counsel on behalf of Mr Sleiman that he was properly appointed, that he had conducted himself properly in all the circumstances and that he should not be removed. In what follows, I have taken into account all of the matters put to me by his Counsel.

The object of Part 5.3A of the Corporations Act is expressed by s.435A of the Act to be:

"To provide for the business, property and affairs of an insolvent company to be administered in a way that:

(a) maximises the chance of the company or as much as possible of its business continuing in existence; or

(b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from immediate winding up of the company."

Thus, the legislation expressly contemplates two alternative aims of an administration. One aim is that the company or as much as possible of its business continues in existence. The other aim is that, if the first is not possible, the insolvent[3] company's affairs be administered in such a way as would result in a better return for creditors than would occur in a winding up. The objects thus contemplate the conduct of an administration to achieve the survival of the company in the interests of creditors and members and, if that is not possible, to procure the adoption of means other than liquidation for providing a return to creditors and members. These objects are reflected in what s.435C(2) refers to as the normal outcome of an administration. The first outcome is a deed of company arrangement executed by both the company and the deed's administrator.[4] The prime purpose of a deed of company arrangement will usually be to achieve a better return for the company's creditors and members than would result from an immediate winding up. Hence an administrator, in recommending such a deed, must express his opinion whether it would be in the creditors' interests for the company to execute a deed of company arrangement and his reasons for that opinion.[5] The second outcome is a creditors' resolution that the administration should end.[6] The reason for such a resolution would normally be that the company was solvent and able to continue its business.[7] Presumably, the only justifiable basis for ending an administration without the appointment of a provisional liquidator or a resolution or order for winding up would be the solvency of the company. Thus the ending of the administration would be as a result of that administration having maximised the chances of the company or its business continuing in existence.[7] The third normal outcome of an administration is a creditors' resolution that the company be wound up.[8]

Notwithstanding that the foregoing provisions do not expressly contemplate the continuance of the company if a deed of company arrangement is executed, that outcome is implicit in the provisions of Part 5.3A. Section 444A(4) requires that the instrument setting out the terms of the deed of company arrangement must specify, among other things, the property of the company that is to be available to pay creditors' claims and to what extent the company is to be released from its debts. Thus it is contemplated (as often happens) that the creditors accept a compromise and are paid out under the deed, and that the company may then continue free of some or all of its liabilities. Part 5.3A does not guarantee that, when the company emerges from this process, it will be solvent, but when it does so emerge, the protective provisions of Part 5.3A will no longer apply and all of the other provisions of the Act in relation to insolvency will again become applicable.

Part 5.3A intends that the administration process should normally be a speedy one, so that the first meeting must be held within 5 business days after the administration begins[9] and, as soon as practicable after the administration begins, the administrator must investigate the company's business, property, affairs and financial circumstances and report thereon.[10] As a result, it must be recognised that administrators are constrained in their capacity to carry out a detailed investigation,[11] as Counsel for Mr Sleiman submitted. The second meeting of creditors must be convened within 5 business days after the end of the convening period, which is (unless extended by the Court) either the period of 21 days or 28 days from the commencement of the administration (depending on the date when the administration commenced).[12] The second meeting may be adjourned from time to time, but cannot be adjourned to a day more than 60 days after it was first held.[13]

Division 12 of Part 5.3A provides for what is to happen if the company is wound up under one or other of the provisions of that Part. In addition, s.446B provides that regulations may prescribe additional cases where a company under administration or that has executed a deed of company arrangement is to be taken as passing into liquidation.[14]

Given the variety of circumstances which may arise, the Court is given a very wide power by s.447A to make such order as it thinks appropriate, and subject to any conditions, about how Part 5.3A is to operate in relation to a particular company. By way of example only, s.447A(2) provides that the Court may order that the administration is to end, inter alia, "because provisions of this Part are being abused" or "for some other reason". Such an order may be made on the application of the company, a creditor, the administrator, the deed administrator, ASIC or "any other interested person".

I interpolate that I am satisfied, and it was not disputed, that the plaintiff is an "interested person" within the meaning of s.447A(4)(f) and therefore has standing to make this application pursuant to s.447A. The plaintiff also made application under ss.447B(2) and 449B. However, these latter sections provide for the application to be made by a creditor of the company concerned. The evidence before the Court does not make it possible to determine whether the plaintiff is in fact, as it claims, a creditor of Paradise, nor was this conceded. Accordingly, I will deal with the plaintiff's application as one made under s.447A only.

It is necessary to consider some of the cases decided in relation to s.447A because, although it was accepted by all of the parties that the Court had power thereunder to remove and replace an administrator, the power of the Court to remove an administrator, and/or to terminate the administration, for the sole purpose of ordering the winding up of a company was disputed.

In Deputy Commissioner of Taxation v Woodings[15] (1995) 16 ACSR 266, a meeting of creditors was held at which it was resolved to execute a deed of company arrangement. The administrator told the meeting that he had become aware that a de facto director of the company (M) had offered to pay certain creditors the full amount of their debts in return for their proxies. The plaintiff submitted to the Court that the company should be wound up on two grounds. The first ground was that it was in the public interest that the company be wound up because M had engaged in a course of conduct with associates whereby a series of companies which had accumulated significant debts to the Tax Office had been systematically stripped by selling their undertakings to other companies controlled by M and his associates, leaving behind indebtedness to the Tax Office. Therefore it was in the public interest for the Court to exercise its discretion to wind up the company to prevent further "commercial immorality". The second ground was that the proxies had been obtained by equitable fraud. The Court set aside the deed and ordered the winding up of the company pursuant to s.447A. Wallwork J referred to the width of the power under s.447A. He referred to the various cases in which the stay of a winding up order was refused where it would permit a company to continue on in an insolvent state, which was contrary to the public interest. Given that on the facts of the case, it was appropriate to terminate the deed of arrangement, it was not in the public interest for the company to continue in an insolvent state under the control of M and his associates. Wallwork J concluded that s.447A gave the Court power to order a winding up of the company in the public interest, a power which was not inconsistent with the provisions of Part 5.3A.

In Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270, the High Court was concerned with the extent of the power given to a court by s.447A of the Act. The High Court, in a joint judgment (Gleeson CJ, McHugh, Gummow, Hayne and Callinan JJ), said that it was important to notice that the orders were described as orders about how Part 5.3A was to operate "in relation to a particular company" and that "the words of the provision are wide enough to confer power to make orders which will have effect in the future but which are occasioned by something that has been done (or not done) under Part 5.3A" and that cogent reasons must be advanced for the power to be read down. The reference to the operation of "this Part" was a reference to the whole or any part of Part 5.3A. The examples given in s.477A(2) of the Act showed that the orders that could be made might alter the operation of other provisions of the Part. The other provisions of the Part conferred other wide powers upon a court but there was nothing to indicate that the generality of s.447A was intended to be thereby limited.

The High Court said that times fixed by other provisions of the Part might be varied. Orders were not limited to "retrospective" rather than "prospective" orders (a misleading distinction in this context) and that there was no reason why orders might not be made even after an administration had come to an end, provided that the subject matter of the orders was the operation of Part 5.3A in relation to the particular company, eg, an administration could be revived (thus interfering with vested or accrued rights) - although an order which was inconsistent with rights which had accrued subsequent to an administration might perhaps not be lawfully interfered with.

Despite submissions by the defendants to the contrary, I find nothing in the reasoning of the High Court in Australasian Memory Pty Ltd v Brien to suggest or to support an argument that Deputy Commissioner of Taxation v Woodings was wrong, in so far as it decided that the Court had power under s.447A, independently of any other empowering provision in the Corporations Act, to wind up a company and to terminate an administration for that purpose. In my respectful opinion, the decision of Wallwork J was correct. The power conferred by s.447A is a broad plenary power, as was said by Young J in Cawthorn v Keira Constructions Pty Ltd (1994) 33 NSWLR 607, 611:

"[W]hilst the court is to keep on the sidelines as much as possible, ... it is to be involved and to use its powers to tailor make a procedure for each company, so that the spirit and objects of the Part will be implemented. It seems to me that this reinforces the construction that I have placed on s 447A, that the Court is to have plenary power to do whatever it thinks is just in all the circumstances...".

The scope of orders that can be made under s.447A(1) include orders which permit alterations to the way in which Part 5.3A operates in relation to a particular company[16] and also include, but are not confined to, orders which fill gaps in the legislative scheme. As I have noted, the Act and regulations make provision for when a voluntary winding up is to be the consequence of, or may follow upon, the termination of an administration or a deed of arrangement. It seems to me that the existence of a power of the Court to order the winding up of a company under administration pursuant to s.447A is within the scope and intendment of Part 5.3A. Deputy Commissioner of Taxation v Woodings is a good example of a case where administration was inappropriate and a winding up was appropriate in the public interest. In the present case, it being disputed that the plaintiff is a creditor (as earlier mentioned), it was not contended that the Court had power to make a winding up order under any other provision of the Act such as s.459P or s.461. Therefore, in the present case, if it be just and appropriate to wind up Paradise in the public interest, there is a "gap" in the legislation under Part 5.3A which, but for the existence of s.447A, could not be filled. In any event, the winding up of an insolvent company is often an alternative to the administration regime and closely associated therewith. Considerations relating to winding up are within the scope of Part 5.3A of the Act and its objects.

In my opinion, the plaintiff has established a good case for the removal of Mr Sleiman as administrator in all the circumstances that I have recounted, essentially for two reasons. The first reason is that Mr Sleiman has objectively shown a lack of independence. The second reason is that Mr Sleiman has failed to properly carry out his duties as administrator. In addition, and in any event, I consider that in the circumstances, it is inappropriate for Paradise to be or remain in administration under the provisions of Part 5.3A.

Turning first to Mr Sleiman's perceived lack of independence, I am satisfied that Mr Sleiman has approached his task from the beginning (or at least appears to have done so) with the object of achieving a deed of company arrangement. I am satisfied that he has not, or appears to have not, approached his duties as an administrator with an impartial frame of mind. It is not the mere fact of his prior contact or contacts with Mr Strangio, but the content of his discussions with Mr Strangio, which create serious concern. In my opinion Mr Sleiman's negotiations with Mr Strangio to obtain funding for his administration show that Mr Sleiman had a cast of mind from the outset that it was a deed of company arrangement which was to be achieved. As he said in evidence, the funds that he was promised were to be utilised "to get the matter to the second meeting and to get a deed up and running as well", and that he was to be paid $10,000 to initiate the matter and "a further $12,000 to the time a deed is agreed or entered into". As Mr Sleiman said in evidence: "the deed of arrangement was envisaged from the start of the administration...I think it was envisaged from almost the very first conversations that I would have had." Having seen and heard Mr Sleiman give this evidence, I am satisfied that he was, or appears to have been, committed to a deed of company arrangement and did not approach his task with appropriate impartiality. It is well established that an administrator, like a liquidator, must not reasonably give the appearance of not being independent.[17] As Byrne J opined in Re Smarter Way (Aust) Pty Ltd (2000) VSC 408 at [26]:

"In particular it is important that the administrator not act and not appear to act merely at the bidding of the appointor to whom, it may be thought, they owe their employment as such. This may be of particular importance where the appointment is made by the directors who may wish to present a deed of company arrangement to the creditors with the support of the administrator's opinion in the s.439A(4) report. In such a case, the creditors are entitled to the independent opinion of the administrator as well as a full and accurate report of the matters specified in that section and in the regulations made under it..."

This appearance of lack of independence and impartiality to which I have referred was shown, in my opinion, by the conduct of Mr Sleiman at the first meeting in permitting the solicitor (Mr Burstyner of Lewenberg & Lewenberg) then acting for his firm as a creditor, but also acting from time to time for Mr Strangio (or his interests), to "prompt" the administrator, and at times to interfere with the answering by Mr Sleiman of questions put to him by creditors. The holding of the meeting at the offices of Lewenberg & Lewenberg adds colour to the apparent lack of independence.

I turn secondly to Mr Sleiman's approach to his performance of his duties. In my opinion, it is strongly arguable that it is not lawful for the person purporting to preside at a creditors' meeting under Part 5.3A to "preside" by telephone, but, whether or not it is permissible, I do not think that it is prudent or appropriate. The evidence as to the way that the meeting was conducted, I think, shows why this is so. It was not a satisfactory way of dealing with the creditors' concerns and of considering the matters raised by them or on their behalf. Nor did it prove to be a satisfactory procedure where the counting of votes both as to number and value on a relevant resolution was involved. I think that the absence of the administrator from the meeting and his availability simply by telephone from Sydney shows, at least in the circumstances of this company, a lack of proper attention to the interests of creditors and to his duties as administrator.

I am further strongly of the view that Mr Sleiman failed to investigate, adequately or at all, the affairs and financial circumstances of Paradise. It is evident that such limited information as he had came from Mr Strangio. The records provided to him were insufficient to form any sound views about matters of concern to an administrator and to the creditors. There were no ledgers, no financial statements and no income tax returns. It was not possible to form a view as to the activities of Paradise and as to the business transactions conducted by it in the last few years. Even if it was a case where the short time limits provided by the Act prevented Mr Sleiman from going further than he did, in my opinion it was incumbent upon him either to seek an extension of time from the Court for the purpose of conducting a reasonable investigation or, in the alternative, to frankly tell the creditors that he had insufficient data upon which to properly provide to them his statutory report or to recommend a deed of company arrangement. As Sheppard J said in DCT (Cth) v Comcorp Australia (1996) 21 ACSR 590, 597 - 8:

"It is plain that the legislature intended that creditors should be as well informed as they could be of the position of the company and the options which were open to them. ...[and] so far as possible that creditors act on adequate and reliable information."

Indeed, Mr Sleiman's failure to make or obtain any assessment of the value of the large claim against the plaintiff is a serious omission in the context of recommending a deed of company arrangement that offered a trivial two cents in the dollar to creditors. The references in his report to "directors" (when there was only one director) and to employees being paid out in full (when there were apparently no such debts owed) is perhaps only the sloppy use of a pro forma document, but it is, I think, indicative of his approach to the task at hand.

I now turn to the further matter, namely, that in the circumstances it is inappropriate for Paradise to be in administration under the provisions of Part 5.3A of the Act.

It is common ground that Paradise is insolvent, even if the claim against the plaintiff has a substantial value. The reasons for insolvency are unknown. Even the administrator has expressed a suspicion as to insolvent trading having occurred at some stage. There are no available financial statements or tax returns, and the administrator has been unable to identify the sources of income of Paradise. There is evidence at least of a reasonable suspicion by Mr Sleiman that other companies of Mr Strangio may have received income in relation to the activities in respect of which Paradise has incurred liabilities. This has not been investigated. The amount offered to creditors under the proposed deed of company arrangement is so small as to be almost insignificant, even in the case of a large creditor.

One can understand that creditors may consider that any payment, however small, is better than none, and in cases where the affairs of the company are reasonably evidenced or investigated, this may be an acceptable attitude. However, in my opinion it is not in the public interest to permit a deed of company arrangement to go forward where nothing of real substance is known about a company or its financial affairs and where the result of such a deed would be for extremely small payments to creditors to be made and for a company (still possibly insolvent) to continue in existence. In this regard, Mr Strangio's conduct should be taken into account. On the uncontradicted evidence before the Court, Mr Strangio had agreed to pay the legal costs of Mr Sleiman (including the costs of Senior Counsel) in opposing the plaintiff's application. One might have thought, apart from matters affecting his reputation, that Mr Sleiman might appropriately have abided the decision of the Court. I can only conclude that Mr Strangio was in truth opposing this application by subsidising Mr Sleiman. The evidence does not show what Mr Strangio's reasons may be for committing considerable funds to achieve a deed of company arrangement. Mr Strangio had arranged to pay the administrator's expenses up to an amount of $22,000 for the purposes of obtaining a deed of company arrangement and in addition has offered the sum of $15,000 to unrelated creditors under the proposed deed. He has made further commitments in relation to Mr Sleiman's legal costs in this proceeding and has incurred his own legal costs. Finally, there is the unexplained payment to Lofts Quarries Pty Ltd by a "third party". It does not readily appear how the preservation of Paradise could justify the expenditure of these sums. If Mr Strangio's purpose was partly to further the best interests of the creditors, one might have expected Mr Strangio to go on oath in this matter, and if there were good reasons for continuing the existence of Paradise, one might have expected him to swear an affidavit as to those reasons.

I infer that Mr Strangio's purpose in seeking to obtain a deed of company arrangement is of a self-interested nature and is either intended to procure for himself the ultimate benefit of Paradise's large claim against the plaintiff or intended to prevent any investigation of pre-administration transactions which might expose him or others of his companies to significant liabilities, or both. The minimal benefit to creditors offered by the proposed deed of company arrangement does not outweigh the foregoing considerations. It seems to me, therefore, that it is not in the public interest for this administration to continue. It would amount to an improper use of Part 5.3A of the Act.

Should Mr Sleiman be replaced by an alternative administrator, or should the administration be terminated, and Paradise wound up?

It would be appropriate to replace Mr Sleiman by an alternative administrator if the matters that raise concern in this proceeding were confined to Mr Sleiman's conduct. A replacement administrator might conduct further investigations if granted an extension of time to do so. However, because I am of the view that it is inappropriate for any administration to continue and because it would not then be in the public interest for Paradise to continue on as an insolvent company controlled by Mr Strangio, in my view it is just and appropriate that Paradise be wound up in insolvency. Mr Pattison has consented to be appointed as liquidator in the alternative to being appointed as administrator, and he consents to be so appointed notwithstanding that Paradise is hopelessly insolvent.

The interests of Paradise were represented in this proceeding by Mr Strangio, its sole director and shareholder, but Paradise itself ought to be added as a defendant (although no point was taken about this). An appropriate order will be made.

For the foregoing reasons, and pursuant to s.447A of the Act, it will be ordered that Part 5.3A of the Act should operate in relation to Paradise so that:

(a) Mr Sleiman is removed as administrator and the administration is terminated forthwith;

(b) Paradise is wound up in insolvency under the Corporations Act and Mr Pattison is appointed liquidator for the purposes of the winding up.

I will grant liberty to apply to the liquidator should any consequential orders be thought necessary and I will hear submissions as to costs and otherwise as to the consequences of the above orders.

"As soon as practicable after the administration of a company begins, the administrator must:

(a) investigate the company's business, property, affairs and financial circumstances; and

(b) form an opinion about each of the following matters:

(i) whether it would be in the interests of the company's creditors for the company to execute a deed of arrangement;

(ii) whether it would be in the creditors' interests for the administration to end;

(iii) whether it would be in the creditors' interests for the company to be wound up."

See too s.439A(4) as to the documents that an administrator is required to send with the notice of meeting.

3] Sections 436A(1) and 436B(1) provide that the basis for appointment of an administrator is an opinion of the directors or of a liquidator that the company "is insolvent, or is likely to become insolvent at some future time".

[I note that s.435C(3) empowers the Court to order that an administration is to end "for example, because the Court is satisfied that the company is solvent."

[10] See Division 4 of Part 5.3A.

[11] See Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139

[12] See sub-s.439A(1), (2), (5) and (6).

[14] See reg. 5.3A.07, passed pursuant to this provision.

[15] Woodings was referred to with approval by Hansen J in Wood v Laser Holdings Limited (1996) 19 ACSR 245.

[16] See Re Brashs Pty Ltd (1994) 15 ACSR 477, 481-482; Brash Holdings Ltd (Administrator appointed) v Katile Pty Ltd [1996] VicRp 4; [1996] 1 VR 24, 26-27; Australasian Memory Pty Limited v Brien (2000) 200 CLR 270, 281-282; Re Inventive Marketing Pty Ltd (in liq) [2000] VSC 432; (2000) 36 ACSR 206; Panasystems Pty Ltd v Voodoo Tech Pty Ltd [2003] FCA 428 at [18]; In the matter of National Express Group Australia (Bayside Trains) Pty Ltd [2003] FCA 764 at [7].

[17] See, for example: Re Biposo Pty Ltd (1995) 17 ACSR 730; Citrix Systems Inc v Telesystems Learning Pty Ltd (in liq) (1998) 28 ACSR 529.

At a glance

Court

Decision date

Before

Source

Judgment (123 paragraphs)

Parties

Cases Cited (2)