Rodgers v Radly [2000] VSC 570

6. In about 1996 Rodgers and the first defendant, Adam Radly, established a business relationship in the nature of a partnership. Their business was the provision of "corporate advice", whatever that may mean, particularly in relation to the public listing of corporations in the United States of America. During the life of the partnership, Capital General apparently became entitled to a valuable shareholding in a company in the USA as a result of services rendered by the company to others. The American company in which Capital General became entitled to a shareholding was Chancellor Group Inc ("Chancellor"). Rodgers claims that ultimately the shares in Chancellor were allocated directly to he and Radly in the proportions of 70 percent and 30 percent respectively.

9. Rodgers claims that he was wrongfully evicted from Capital General in February 1998. He alleges, also, that in September 1998 Radly and interests associated with him allotted a substantial number of shares in their favour in Capital General such as to reduce Rogers from the status of a majority shareholder in the company holding 69 percent of the shares to that of a small minority shareholder holding 6.9 percent of the shares. Thereafter, the Radly interests removed Rodgers as a director of Capital General. Rodgers claims these steps were taken without his knowledge or consent.

12. In separate proceedings (No.7133/99) in this Court ("the Chancellor proceeding"), Capital General, by then under the majority control of the Radly interests, obtained orders on 21 February 2000 to the effect that it was the beneficial owner of 6,460,000 shares in Chancellor. Rodgers alleges that the shares in Chancellor are worth approximately over $US1.6M at present and may, subject to certain developments, acquire a value of approximately $US9.6M.

15. Rodgers alleges that until recently he lacked the financial resources to bring the present proceedings. He seeks now reinstatement of his position as a director of Capital General and his majority shareholding. He says that he intends to apply to set aside the orders made in favour Capital General in the Chancellor proceeding with respect to the shares in Chancellor. No such steps have been taken at this point in time.

18. These matters provide the basis of the oppression proceeding.

21. A further relevant matter relied upon by Rodgers is the entering of a default judgment by one Udovenya against Capital General for the sum of $7,036 together with costs on 15 June 1998 ("the judgment debt"). It seems the judgment debt remains outstanding. Udovenya was a minority shareholder in Capital General as at September 1998 and may be, although it is by no means clear, an ally of Radly.

24. On 3 October 2000, approximately one month after the commencement of the oppression proceedings, Capital General was placed in administration by the then directors of the company including Radly. The administrators appointed were David Neil Lockwood and Kenneth Stewart Sellers ("the Administrators"). The then directors resolved that as a consequence of the judgment debt General was insolvent and ought be placed in administration.

27. The issue arose as to whether the company was in fact insolvent thereby justifying the directors' resolution to appoint administrators. Rodgers asserted on affidavit that to his knowledge Capital General had not traded since about August 1998, a period of two years. The assertion was not rebutted. Against that history of non-trading there stood the matter of insolvency. Radly dealt with the topic indirectly on affidavit. In summary, his evidence was of a number of old debts dating from September 1998 of about $9,800 but not including the judgment debt. Radly also exhibited to an affidavit a number of debtors' demands from December 1998 to February 2000 totalling, it appears, about $9,700. The financial position of the company was not presented in a clear manner but on the basis of the Radly affidavit the debts of the company including the September 1998 debts, the judgment debt and the debts up to February 2000 appear to be in total in the order of $26,500. The administrators deposed on affidavit that the company "is currently insolvent and unable to pay its debts as and when they become due and payable". No basis was provided for that opinion. Radly deposed that prior to his exclusion from Capital General in September 1998 the company owned shares in a US company called ASI Entertainment Inc presently worth about $55,000. He believed that the ASI shares were the only asset of the company. Arguably, therefore, the assets of the company exceeded its debts as at 3 October 2000 when the company was placed in administration. However, it seems the company does not have any cash assets. If the company succeeds in the pursuit of its interests in Chancellor it will have substantial assets if the shareholding in that company is of the order and value asserted by Rodgers. Notwithstanding the asserted value of the interests in ASI and Chancellor the administrators have deposed that the position of the company is one of insolvency.

30. As a consequence of the resolution on 3 October 2000, Rodgers issued further separate proceedings ("the administration proceeding") in relation to Capital General brought against the Administrators personally as defendants seeking to overcome the obstacle created by Capital General being placed in administration. In essence, the applications in the administration proceeding were threefold. First, he sought to continue the oppression proceeding on the basis that s. 440D of the Corporations Law did not have the effect of staying that proceeding. Second, if necessary, he sought leave to continue the oppression proceeding pursuant to s. 440D(1)(b) of the law. Third, Rodgers applies pursuant to s. 447A for the termination of the administration.

34. Section 440D(1) of the Law provides that during the administration of a company a proceeding against that company cannot be begun or proceeded with except by leave. As a consequence, the oppression proceeding brought by Rodgers, on its face, appears to have been stayed.

37. It was submitted on behalf of Rodgers that s. 440D did not have the effect of staying the oppression proceeding because the matters raised in that proceeding went to the very basis or foundation for the appointment of the Administrators. It was said that the oppression proceeding sought relief in the nature of the reinstatement of Rodgers as a director and his majority shareholding interest in Capital General. As a consequence, so the argument proceeded, the oppression proceeding did not relate in any way to the judgment debt that formed the basis for the alleged insolvency of the company that in turn led to it being placed in administration.

40. In my view the argument misconceives the purpose of s. 440D of the law. The section has the purpose of staying proceedings because the placement of the company in administration has the effect of "freezing" the affairs of the company pending assessment by the Administrators and further determination by the creditors pursuant to the statutory scheme. In this respect, s. 440D shares a similar purpose to that underlying s. 467(7) (staying proceedings after the filing of a winding up application) and s. 500(2) (staying proceedings after the resolution for a voluntary winding up). The purpose of these provisions is to ensure that the role of the administrator or the liquidator, as the case may be, is not frustrated or interfered with or distracted by other matters such as legal proceedings.

43. In J&B Records v Brashs Pty Ltd (voluntary administrator appointed)[1] Brownie J of the Supreme Court of New South Wales was concerned with an application by creditors for leave under s. 440D. The creditors were seeking information under s. 447B from the company so as to protect their interests whilst the company was under administration. The application was resisted by the company, Brashs on the grounds that generally leave should not be granted under s. 440D. Brownie J held that leave was not required for the request for information as a claim under s. 447B was not a proceeding against the company that required leave as it did not relate to any property of the company rather it was a claim to enable the creditors to know or determined their rights. The learned judge observed that leave was required in respect of determining claims that related to interests in property.

46. I move then from the general to the specific. Section 440D is concerned with proceedings first of all "against the company". The oppression proceeding is primarily against the Radly interests (Adam Radly, Nayer Radly and Radly Corporation Limited). It is also brought against Capital General, the company, as a defendant. The proceeding seeks to reinstate Rogers as a director of the company and his shareholding levels in the company. Accordingly, the proceeding is "against the company" for the purposes of section 440D. The circumstances here are entirely different from those in J&B Records v Brashs Pty Ltd. There the court was concerned with a party seeking information from administrators. Here Rodgers seeks relief against not only the Radly interests but also the company.

49. The section is concerned, secondly, with proceedings in relation to "any of its [the company's] property". Section 9 of the Law defines property:

" 'property' means any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description. It includes a thing in action."

53. Upon the application of basic legal principles the right to be reinstated as a director or to have a shareholding reinstated constitutes a thing or chose in action: see Halsbury's Laws of England, 4th ed., vol 6, para 1; vol 35 para 1105; also, Torkington v Magee (1902) 2KB 427, 429; Loxton v Moir [1914] HCA 89; (1914) 18 CLR 360, 379. However, here the thing in action lies, if it exists, with Rodgers and not the company. Hence the oppression proceeding does not relate to any of the company's property. In any event, for the reasons already stated, the oppression proceeding is brought against the company and thus, by application of section 440D, is stayed unless leave to continue is granted.

56. It follows in my view, therefore, that upon the appointment of the Administrators on 3 October 2000 the oppression proceeding brought by Rodgers was stayed pursuant to s. 440D(1) of the Corporations Law unless this Court orders otherwise.

59. I turn then to consider whether or not leave ought be granted to Rodgers to continue the oppression proceeding. The observation has been made that leave will rarely be granted under s. 440D and that it is difficult to contemplate circumstances where it would in fact be proper to grant such leave.[2] An obvious example where leave will be granted is an application under s. 1335(1) of the Law for security for costs where the corporation placed in administration is the plaintiff in a proceeding.[3] There are examples also where the courts have granted leave such as proceedings for the enforcement of a charge under s. 441B.[4]

62. Ultimately, the correct approach in my view is to construe s. 440D(1) of the Law as intended to stay proceedings "against the company" or "in relation to any of its property" pending the completion of the winding up. The purpose of the section is to prevent the creation of preferences and interference in the disposition of the property of the subject company prior to the completion of the administration.

65. The purpose of the section is to enable the administrators also to continue with their task without the distraction of the consideration and management of litigation. In the present matter, whilst on one view it may be argued that the oppression proceeding is concerned with the position of a director of a company and the shareholding entitlement of that director and as such is not concerned with the "property" of the company subject to administration in my view that misconceives the underlying purpose of the oppression proceedings. The purpose of those proceedings is to rearrange the affairs of Capital General so as to reinstate Rodgers as a director and reinstate or adjust the shareholding in the company. These matters of themselves broadly speaking go to the property of the company.

68. In my view, in accordance with the usual principles, there has been no proper basis put before me to justify the granting of leave pursuant to s. 440D(1)(b) of the Law. In my view the other sections in Part 5.3A of the Corporations Law concerned with administration demonstrate that it was the intention of the legislature to set in place a scheme such that whilst a company was subject to administration the property and affairs of the company were quarantined pending actions and decisions by the administrators and the creditors. So much is borne out by the additional provisions in Part 5.3A of the Law including s. 440F whereby enforcement process is suspended, s. 440G so that a court officer is precluded from taking action in relation to the property of a company under administration eg. a sheriff or registrar and s. 440J whereby a guarantee of liability of the company cannot be enforced or an enforcement proceeding begun whilst a company is subject to administration.

71. It follows that the application for leave to continue the oppression proceeding under s. 440D is refused.

Section 447A - An Order for the end of the Administration

75. Section 447A(1) of the Corporations Law vests general powers in the court whilst a company is subject to administration.[5] Sub-section (2) provides that if the court is satisfied that the administration of a company should end because the company is solvent or the provisions of Part 5.3A of the law are being abused or for some other reason the court may order that the administration is to end. Sub-section (4) provides that such an application may be brought by various entities or parties including as provided in paragraph (f) "any other interested person". Rodgers submits that on the basis of the oppression proceeding and his previous involvement in Capital General as a director and majority shareholder he fits within the category of an interested person.

78. The types of circumstances where the courts have made an order terminating an administration have arisen where there has been wrongdoing or commercial immorality on the part of parties concerned. For example, where a deed of arrangement was adopted against the wishes of a single large creditor in circumstances where the votes of the other smaller creditors were acquired or bought and in further circumstances where the report of the administrator was regarded as superficial.[6] In different settings, in circumstances of commercial immorality a deed may be terminated.[7]

81. In Aloridge Pty Ltd (provisional liquidator appointed) v Christianos and Anor[8] a provisional liquidator had been appointed by the court as a result of an application by Christianos. Subsequently, disputes arose between the provisional liquidator and Christianos as to the conduct of the affairs of the company. Christianos appointed an administrator of the company on the basis of a charge over the company. An application was made by the provisional liquidator on behalf of the company seeking to end the administration pursuant to s. 447A of the law. Burchett J ordered the termination of the administration and held that where a party elects to pursue a remedy curially it ought not be permitted to seek to enforce that remedy by other and more direct means. Burchett J observed (at 101) that s. 447A vests in the court a broad discretionary power to make orders. His Honour considered (at 101-102) the approach of the authorities to a creditors' winding up:

"But company law itself provides illustrations of situations in which the court has preserved the status quo pending a decision upon a disputed liability. There are the cases where creditors' winding up applications have been restrained because the existence of the alleged debts remained to be determined as the subject of litigation. As regards cases of that kind, in Brinds Ltd v Offshore Oil NL (No 3) (1985) 10 ACLR 419 at 424, the Privy Council held: `It is a matter for the discretion of the judge whether a winding up order should be made on a disputed debt, and it is also a matter of discretion whether he decides the substantive question of debt or no debt.' Their Lordships went on to cite, from an earlier decision of the board, the proposition that: `the general rule is, no doubt, that no order will be made on a petition founded on such debts. But each case must depend upon its own circumstances and it is a question for the discretion of the judge...' The decision of the Privy Council in Brinds Ltd is in accord with the views expressed by Gibbs J (as he then was) in Re QBS Pty Ltd [1967] Qd R 218 at 225, and has been followed by the Court of Appeal of New South Wales in Australian Mid-Eastern Club Ltd v Elbakht (1988) 14 ACLR 234; 6 ACLC 958. See also Ocean City Ltd (rec and mgr apptd) v Southern Oceanic Hotels Pty Ltd [1993] FCA 86; (1993) 10 ACSR 483. In my opinion, s. 447A confers upon the court a similarly wide discretion. In a particular case, it would be open to the court to determine, in proceedings under s. 447A, whether an alleged entitlement under s. 436C did or did not exist. But in a case of genuine dispute, I think it would generally be appropriate to follow the same course which the Privy Council in Brinds Ltd thought appropriate, as a general rule, in relation to winding up petitions. In the present case, the appointment of the administrator was made at a time when a provisional liquidator was actively pursuing a number of disputes on behalf of the company. He had been appointed by the Supreme Court of New South Wales at the request of Mr Christianos. The charge on which Mr Christianos sought to rely, in making the appointment of an administrator, was in dispute in proceedings between the company in provisional liquidation and Mr Christianos. There was no question about the existence of the dispute, and no evidence has been placed before me to suggest that the company in provisional liquidation did not genuinely raise that dispute. Mr Christianos has not chosen to give evidence. In the circumstances, I infer that the appointment of an administrator was made, not in pursuit of the purposes for which the Corporations Law makes provision for such an appointment, but in order to wrest control of the affairs of the company away from the provisional liquidator in the hope that the administrator might prove more compliant. I hasten to add that no submission was put at the hearing of this matter to suggest the administrator would in fact have shown himself to be partial. In my opinion, it would have been most undesirable for the administration of the affairs of the company in provisional liquidation to have been allowed to be taken away from the hands of the person appointed by the Supreme Court of New South Wales. No reason why that course should have been regarded as desirable was put before me. No interests other than the litigious interests of Mr Christianos appear to me to have been likely to have been served by the appointment of the administrator. At the least, those interests are likely to have been served by the disruption which would inevitably have attended a change of administration of the company. In the circumstances, I exercised my discretion under s. 447A by ordering that the administration was to end. I did so for the reasons I have now given."

85. In Cawthorn v Keira Constructions Pty Ltd (1994) 33 NSWLR 607 at 611 Young J took the view that the statutory scheme concerning administrations intended that the Court keep to the sidelines and become involved only to ensure that the spirit and objects of Part 5.3A are implemented.

88. In the present matter there are a number of observations to be made. Curiously the debts of the company have been allowed to lie for a period of over two years and it seems that only when the oppression proceedings were instituted by Rodgers that the company suddenly became "insolvent". The company has not traded for two years. It is deposed on affidavits on behalf of the Radly interests that the company is insolvent and hence the administrators were appointed. It is said that insolvency is made out by the fact of debts. Obviously a company is insolvent when it is unable to pay its debts as they fall due from its own resources. Be that as it may there can be no resiling from the fact of the late raising of insolvency in the context of old debts. In effect, the appointment of the Administrators by the Radly interests on 3 October 2000 bears all the hallmarks of a counter attack intended to place an insurmountable obstacle before Rodgers to prevent him from continuing with the oppression proceeding.

91. Criticism was levied against Rodgers for failing to pursue his claim to set aside the orders made by this Court in the Chancellor proceeding. It was said on behalf of the Radly interests that the delay in the absence of adequate explanation on the part of Rodgers should cause me to refuse the application to terminate the administration. The developments or investigation of the interest, if any, of General in Chancellor are said on behalf of the administrators to be matters that warrant investigation. That may well be the case. For the purposes of considering whether or not to terminate the administration pursuant to s. 447A I need to be satisfied that the administration has given rise to an abuse of the provisions of Part 5.3A of the Law or, further, that there are other reasons to warrant the termination of the administration.

94. There is evidence before me arguably sufficient to demonstrate that the provisions of Part 5.3A of the Law may have been abused and continue to be abused by virtue of the appointment of the Administrators on 3 October 2000. There is evidence also arguably sufficient to demonstrate other reasons for the purposes of s. 447A(2)(c) of the Law such as to warrant the termination of the administration. The reasons are the timing of the administration, the apparent ingenuineness of the fact of the debts being allowed to lie for a period of two years and then suddenly being activated for the purposes of demonstrating insolvency and the dormant state of the company for a period of two years. However, are these matters enough to lead me to conclude that it is appropriate to exercise the general powers under s. 447A to terminate the administration?

97. Whilst the authorities point to the court having wide powers under s.447A I am reluctant to have the court step in and intervene where two important factors operate. First, there is the affidavit of the administrators that the company is insolvent and unable to pay its debts. The administrators have been in place for a number of days and presumably have been able to form at least a preliminary view as to the financial position of the company. Second, despite the unsatisfactory evidence before me as to the financial position of the company nevertheless it is actually or potentially insolvent. There are debts that remain unpaid and its asset position is unclear at this time. In my view these matters must be investigated and reported upon by the administrators in the usual way.

100. Notwithstanding the ostensibly unsatisfactory conduct of the directors in placing the company in administration on 3 October 2000 I am faced by a fact of actual or potential insolvency so far as the company is concerned. On that basis, therefore, even if the directors had an ulterior motive in placing the company in administration on 3 October 2000 the actual or potential insolvency position of the company must now be dealt with. All these matters lead me to conclude that the application by Rodgers for the termination of the administration is premature. The first meeting of creditors is about to be held. I consider that the appropriate course is to adjourn the application under s.447A to a date to be fixed. If Rodgers wishes to pursue the application further full and adequate information should be placed before the court including a full affidavit by the administrators as to the financial position of the company as known by them at the time.

103. It follows from these reasons that in the oppression proceeding the application by Rodgers for leave to proceed under s.440D of the Law is refused. It follows that the oppression proceeding will remain stayed by virtue of the statute whilst the administration continues. In the administration proceeding I will order that the application be adjourned to a date to be fixed and grant liberty to apply.

[1] (1994) 12 ACLC 534

[2] See Foxcroft v The Ink Group Pty Ltd (1994) 15 ACSR 203.

[3] See Simoon Pty Ltd v Renbay Systems Pty Ltd (1995) 18 ACSR 415; Pasdale Pty Ltd v Concrete Constructions [1995] FCA 1471; (1996) 19 ACSR 693.

[4] See BBC Hardware Ltd v GT Homes Pty Ltd [1996] QSC 273; (1997) 15 ACLC 431.

[5] See Brash Holdings Ltd (Administrator Apppointed) v Katile Pty Ltd [1996] VicRp 4; (1994) 13 ACSR 504; re Brashs Pty Ltd (1994) 15 ACSR 477; re Giga Investments Pty Ltd (Administrator Appointed) (1995) 17 ACSR 547.

[6] See Re Bartlett Researched Securities Pty Ltd (1994) 12 ACSR 707.

[7] See Deputy Commissioner of Taxation v Woodings (1995) 13ACLC 469.

[8] [1994] FCA 972; (1994) 13 ACSR 99, Burchett J. of the Federal Court considered an application under s. 447A of the law.