Sherred & Anor v McDonald & Ors

[2] By an originating application filed on 10 August 2004 the applicants, (Frank Raymond Sherred and Total Building Group Pty Ltd - it is convenient to refer to these applicants as Sherred) applied for declarations that the appointment of the first respondents, Geoffrey McDonald and Richard Albarran (the administrators) as administrators of the third respondent Castle Development Group Pty Ltd (Castle) was void ab initio and for other relief.

[3] The shareholders in Castle were a company controlled by Sherred and a company controlled by Arthur David Dewis (Dewis). It is clear that there was a deadlock in respect of Castle's affairs prior to and at the time of the appointment of the administrators.

[4] On 24 August 2004 I ordered, without any opposition, that Castle be wound up on the just and equitable ground. This was uncontentious, there was clearly a deadlock. On 23 September 2004, for reasons which I then published, I declared, on Sherred's application, the appointment of the administrators invalid.

[5] I concluded that the administrators' appointment was invalid on the basis that the purported appointment of Baker as director and his purported appointment of Sherred and Dewis as directors did not comply with clause 21 of Castle's constitution, had not been ratified and that in any event Dewis had no power as sole director to bind it.

[6] Castle's creditors have largely been paid out with outstanding amounts of $253,000 and unidentified GST or tax liabilities are said to be $280,400. The company's only asset is $430,000 leaving a deficiency of $115,400.

[7] At the time of delivering the reasons I indicated that I was not prepared to deal with any application by Dewis for curative or remedial relief in respect of his role in the appointment of the administrators or by the administrators for payment for their conduct of the administration without appropriate applications and evidence. Three applications were then filed in the originating application.

[8] On 30 September 2004 the administrators filed an application seeking that the costs of the administration be the costs in the winding up of Castle. If this was not an order that Dewis indemnify the administrators for the costs of the administration was sought as was an order that the costs of the application be costs in the winding up.

[9] On 5 October 2004 Sherred filed an application for an order seeking that in the event the court awarded the administrators any costs that Dewis indemnify Castle for those costs.

[10] On 2 November 2004 Dewis filed an application that the administrators' remuneration be fixed at nil or alternatively at the amount properly incurred for work done up to 1 July 2004 or alternatively a declaration of an agreement that the remuneration be fixed at $14,000.

[11] That application also sought orders that any remuneration be paid in accordance with Part 5.3A and s 556 of the Corporations Act (Cth) 2000, the applications of 30 September and 5 October be dismissed and that Sherred pay Dewis's costs of and incidental to "all applications".

[12] The outstanding matters came before me on 7 February 2005 when Sherred, the administrators and Dewis each sought orders to dispose of these matters and costs. The final form of the relief sought by the various parties (there are differences from earlier forms of relief sought or canvassed in correspondence, applications and evidence) is:

1. The administrators entitlement to remuneration as administrators of Castle pursuant to their appointment dated 30 June 2004 be restricted to steps necessarily taken to recover the sum of $430,000 from the trust account of Sydney solicitors and be fixed at $8,000.

2. Dewis indemnify Castle in respect of the moneys allowed to the administrators pursuant to paragraph 1.

3. The costs of Sherred and Total Building Group Pty Ltd (Total), of and incidental to the application (including reserved costs) be assessed on a standard basis and be paid by Dewis and the administrators.

1. The administrators' remuneration of incontrovertible benefit to Castle be fixed in the sum of $10,408.80 plus GST and be costs in the winding-up.

2. The administrator's other fees associated with conducting the administration be assessed and paid by Dewis.

3. Dewis indemnify Castle for the fees allowed to the administrators in paragraph 1.

4. The administrators' costs of responding to the originating application be the costs in the winding-up.

5. Sherred's costs of the originating application be costs in the winding-up.

6. The administrators' costs of the cross-application for the payment of its fees be paid proportionally as to 1/6th costs in the winding up and 5/6ths by Dewis.

1. The application filed 5 October 2004 be dismissed.

2. The administrators' remuneration "be fixed by the Registrar" for work which was of incontrovertible benefit to the Company and be paid in accordance with the Corporations Act.

3. Sherred pay Dewis's costs of and incidental to the Applications to be assessed on a standard basis.

4. There be no order in respect to the administrators' costs.

[13] As disclosed by the reasons published on 23 September 2004, Castle was incorporated to act as a trustee for a unit trust for the purpose of a townhouse development at Strathpine. The project was not completed and the land was sold for $2,360,060. There was a dispute between Sherred and Dewis about the payment of costs relating to the development to a company controlled by Dewis.

[14] Eventually Alan Graham Baker was appointed sole director of Castle in circumstances not altogether clear although Castle may have ratified the appointment. Baker was unable to resolve the deadlock and resigned and purportedly appointed Sherred and Dewis as directors.

[15] Sherred deposes, and I accept, that on 10 June 2004 it was agreed that Baker would cease to act as a director and appoint Dewis and Sherred, both orally consented. He was not aware until the administrator advised him on 1 July that a document had been lodged with ASIC stating that he (Sherred) had ceased to be a director as at 25 June and deposes that he did not authorise the lodgement of any notice or cease to be a director on that date.

[16] Dewis's explanation of the events leading up to the appointment of the administrators is contained in his affidavit filed 2 November 2004. He deposes his consultant business services adviser drew his attention to the provisions of the Corporations Act that a signed consent to act as a director was required before a person could be appointed to be a director, the time he had forgotten that he had signed a consent on 8 June. At the time Dewis consulted the adviser referred to, he was aware that Castle's assets amounted to $420,000 and of the deficiency of $103,000.

[17] Dewis subsequently decided that because Sherred had not signed a consent he was not a director but because Dewis had signed, his was the only valid appointment following Baker's resignation. Dewis thereupon notified ASIC that Sherred had ceased to be a director as at 25 June 2004.

[18] It is unnecessary to make detailed findings on those issues. Suffice is to say for the moment that Dewis must have been aware that it was unlikely Sherred would accept the course on which Dewis embarked. On 29 June 2004 he paid $430,000 of Castle's money into the trust account of Sydney solicitors and on 30 June appointed the administrators.

[19] So far as Dewis is concerned on 29 June 2004 (it will be recalled that the administrators were purportedly appointed on 30 June) he paid $430,000 to a firm of solicitors in Sydney purportedly to facilitate the payment of overseas funds to Castle without authority from or consultation with Sherred.

[20] The relevant considerations now are the administrators' knowledge of the challenge to the validity of their appointment, their subsequent conduct and their entitlement to remuneration. Dewis's role in the events also has to be considered_._

[21] It was accepted that since the administrators' appointment was invalid their remuneration should be fixed by the court. Section 447A of the Corporations Act provides that the court may make such order as it thinks appropriate about how "this part" of the Act is to operate in relation to a company. Section 449E provides that an administrator is entitled to such remuneration as the court fixes.

[22] The administrators rely on the Act and the decision of Young J in Sutherland v Take Seven Group Pty Ltd[1] as supporting the proposition an invalidly appointed administrator could recover reasonable remuneration done for work which was of an "at least" incontrovertible benefit to the company. See also Bovis Lend Lease Pty Ltd v Wily[2]; Wilson v Manna Hill Mining Company Pty Ltd[3]. I accept the proposition.

[23] In this case the administrators were purportedly appointed on 30 June 2004. The next day, 1 July, they were plainly told that there were doubts about the validity of their appointment when Sherred's solicitor rang Mr McDonald (one of the administrators) and told him that Sherred would be complaining to ASIC that they had not been validly appointed. Mr Standish reiterated that position up to and including the initial meeting of creditors on 7 July; in fact Sherred never departed from that position and the administrators never had any doubt about his position.

[24] The administrators embarked on the administration but took no step to confirm the validity of their appointment before Sherred's 10 August 2004 application for a declaration of invalidity. They did not file any material to support the validity of their appointment or appear to support its validity at the application. This course was said to be an indication of their independence.

[25] Mr McDonald deposes that his written requests for Sherred to confirm in writing that he was a director of the company were not, "to his surprise", confirmed as he expected. That of itself was a warning given the earlier expression of Sherred's position. Mr McDonald deposes he did not have information to determine the validity of appointment until 6 or 10 August.

[26] In a letter of 19 July 2004 the administrators advised they were seeking remuneration fixed at $50,000 plus GST and they subsequently sought $59,633.45. In a letter of 19 August they referred to fees restricted to preserving, realising or getting in assets and attempting to resolve the dispute between shareholders to be in the order of $5,000 to $10,000.

[27] They sought to have their remuneration fixed at $10,408 plus GST for work of incontrovertible benefit to Castle and "in the spirit of compromise" accepted a figure of $8,000 while submissions were being made to finally dispose of the matter.

[28] In my view it was imprudent, to say the least, for the administrators to proceed with the administration as though there was no doubt about their appointment and without taking into account the considerations I have canvassed in the circumstances of this case. It was not a question of "independence" but of clarification and resolution given the situation I have outlined.

[29] There was nothing about the position of Castle justifying ignoring the warning signs, for example to preserve assets which might otherwise be lost. I note it appears that in Sutherland ante [27] the administrator brought the application to clarify his position.

[30] I am not prepared to conclude, as Dewis submits that the appointment of a liquidator was inevitable because Castle was insolvent, although it was no doubt an option, prior to Dewis's actions leading up to and the appointment of the administrators.

[31] The evidence does not support a conclusion that the administration was necessary. Apart from the costs of the administration of incontrovertible benefit, the appointment of the administrators did not save any costs.

[32] The administrator's action to recover this fund is, in Sherred's submission (the submission is probably justified) the only act of uncontrovertible benefit to Castle by the administrators. It would have been unnecessary had Dewis not paid the money the day before their appointment and no justification for the payment has resulted in the circumstances of the administrators' appointment the next day.

[33] Dewis did not inform Sherred that he considered he was the only validly appointed director, was filing documents to that effect or that he intended to appoint administrators. Nor did he inform him of the payment of money to solicitors in Sydney which is subsequently referred to.

[34] Dewis's failure to inform Sherred, his transfer of the money and purported appointment of the administrators, his failure to disclose the facts as known to him caused the situation which has led to these applications.

[35] Paragraphs 5 and 6 of McDonald's affidavit filed on 17 January 2004 (Document 27) deposes to the effect that Dewis was dishonest with respect to events surrounding the existence of minutes of a meeting of 19 June, withholding books of a company and denying Sherred was a director. I do not propose making specific findings as to these issues but in the circumstances I accept the account of events on which he reached those conclusions.

[36] It may be that the administrators have a claim (a cause of action) against Dewis but I am not persuaded that this is the context in which to pursue the administrators claim against him other than those of incontrovertible value to Castle. The present purpose is to deal with the administrators' remuneration and costs issues so as to dispose of the originating and interlocutory applications referred to earlier.

[37] The orders consequent on these considerations canvassed are not matters, in a number of respects, of fine calculation but of balanced judgment based on the findings made. In my view the following orders should be made. I will however hear submissions as to their final form.

1. The administrators' should have the costs and outlays of the administration fixed at $8,000 and the costs are costs in the winding up of Castle.

2. Dewis indemnify Castle in respect of the costs and outlays paid pursuant to the order in paragraph 1.

3. Dewis pay Sherred and Castle's costs of the originating application and of the applications of 30 September, 5 October and 2 November 2004, including any reserved costs, assessed on a standard basis.

4. The administrators' legal costs reasonably and properly incurred as a consequence of the invalid appointment be assessed and paid as to one half by Dewis.

[1] [1998] NSWSC 538

[2] [2003] NSWSC 467

[3] [2004] FCA 1663