Smarter Way (Aust) Pty Ltd v D'Aloia [2000] VSC 408

5. In this application, brought by originating motion filed on 2 February 2000, the Company seeks a declaration pursuant to s. 447C that the appointment of the administrators was not valid on the ground that Waiviata was not a chargee of the property of the Company, and certain other relief to which I shall in due course refer.

8. The secondnamed plaintiff, Phillip David Jarvie is a director of the Company. It is not clear how it is said that he has standing to bring this application, but nothing appears to turn on this.

11. The administration had a very inauspicious beginning and has been, in terms of the purposes of Part 5.3A, almost entirely ineffective over the eight months of its duration.

14. Before accepting the appointment, the administrators considered and formed the view that the agreement dated 6 January 2000 which was said to create the charge was valid, duly stamped and registered with ASIC. Mr D'Aloia said, too, that he obtained legal advice from their solicitors, Baker & McKenzie, that the agreement did indeed constitute a charge. Having done these things and accepted the appointment, Mr D'Aloia at about 8.00 pm on the same day attended the registered office and principal place of business of the Company in Templestowe in company with Tolli Spilliopolis, an employee of Waiviata. The purpose of this visit was to collect the assets of the Company, including its accounting records. Mr Jarvie refused to hand over these assets, disputing the administrators' right to have been appointed. The police were called but the administrator went away empty handed. All of this was late on the Friday night.

17. On Monday, 31 January 2000 at 3.35 pm the administrators filed a Notice of Motion in proceeding number 4183 of 2000 seeking mandatory orders for the delivery up of the assets and books of the Company. The parties to this application were the administrators and Mr Jarvie. The application was mentioned ex parte to Mandie J as the judge in charge of Corporations business who stood it over to the next day. On 1 February Mr Jarvie was represented at the hearing of the application and affidavits were filed on his behalf in response.

20. On Wednesday 2 February 2000 his Honour dismissed the administrators' application with costs. His Honour's reasons show that he was of opinion that the agreement of 6 January 2000 was not a charge. The logical consequence of this conclusion was that the administration was not valid and that the demand for delivery of the Company assets was, therefore, ineffective. Notwithstanding this, I shall, for convenience, continue to refer to Mr D'Aloia and Mr Handberg in this judgment as the administrators. I should add that, on the same day, 2 February 2000, the Company commenced the present proceeding seeking declarations that the appointment of the administrators was not valid.

23. It is necessary that I pursue the unhappy history of proceeding number 4183 of 2000 and of this administration a little further. Two days later, on Friday 4 February, two summonses were filed, one by the administrators addressed to Waiviata and Mr Jarvie and one by Waiviata addressed to all parties in the proceeding. Each sought orders joining Waiviata to the proceedings. The administrators sought orders, in effect, that Waiviata pay the costs which had been ordered to be paid by them on 2 February. On the same day, his Honour heard these applications and ordered that the Waiviata summons be dismissed. On the administrators' summons, his Honour refused to join Waiviata as a party, contenting himself with an order that it, as a non-party, pay to the administrators the costs of Mr Jarvie of the unsuccessful proceeding ordered to be paid by them on 2 February and, further, that Waiviata pay the administrators' own costs of that proceeding.

26. On 9 February 2000 the administrators filed a notice of appeal against the orders of Mandie J of 2 February and 4 February. On the same day the administrators, as appellants, filed a summons returnable on 11 February 2000 in the Court of Appeal seeking orders, including the joinder of Waiviata and the Company as parties to the appeal and also a speedy hearing of the appeal. On 17 February the Court of Appeal, by consent, ordered that the administrators' summons of 9 February be dismissed without adjudication on the merits and that the administrators pay Mr Jarvie's costs. The appeal has thereafter proceeded at a leisurely pace so that, even now, the contents of the appeal book have not been settled.

29. It may be supposed that the position of the Company since 4 February 2000 has been intolerable from a commercial as well as a legal perspective. Until the question of the validity of the administration is settled the powers of the directors of the Company are uncertain,[1] as are the rights of its creditors or, indeed, any person who might be minded to deal with the Company. In these circumstances, Mr Jarvie's decision on 17 February to agree to the dismissal of the speedy hearing application seems surprising. The answer may lie in the events which were then taking place in this proceeding.

32. It will be recalled that on 2 February 2000 the Company commenced this proceeding seeking a declaration that the administration was not valid. This application was adjourned to 4 February when Waiviata was added as a second defendant upon the application of the administrators and the application further adjourned to 11 February. On that day Mandie J made orders effectively placing the administration in suspension and giving directions with a view to a speedy hearing. It must have been in the expectation that this would take place that the application for speedy hearing of the appeal was not pursued. The trial was fixed for 27 July when it was not reached and the present trial date was fixed.

35. I mention all of this for a number of reasons, the first and foremost of which is to explain my initial reluctance to hear this application. It seemed to me that what I was being asked to do was to revisit the point decided by Mandie J in February, a course which I found particularly unattractive since his Honour's decision is presently before the Court of Appeal. Counsel for Waiviata submitted that I should not refuse to entertain the application since the point was not precisely the same as that determined by his Honour. I was told that the case unsuccessfully presented by the administrators in February was that the agreement of 6 January 2000, properly construed, did amount to a charge. The case which he wished to present to me was that, in the light of evidence of the circumstances in which the agreement was made, I should conclude that the true nature of the transaction was such that the agreement to transfer the assets of the Company to Waiviata was in fact a transfer by way of security.

38. Having had my initial doubts dispelled in this way, I was immediately confronted with a submission put on behalf of the Company that the judgment of Mandie J gave rise to an issue estoppel which meant that the present application must succeed. Counsel argued that, so long as the decision of Mandie J stood, it was not open to the administrators or Waiviata to present a case which challenged the finding that the agreement of 6 January 2000 does not amount to a charge and that, as a result, the appointment of the administrators was not valid.

41. Notwithstanding the sound policy reasons for refusing to permit a litigant to reopen an issue previously determined, courts tend to look upon estoppels with disfavour. In the present case the argument for estoppel faces a number of hurdles. Properly understood, the decision of Mandie J, notwithstanding the firm conclusion which he expresses,[2] is in truth interlocutory only. Had the matter gone to a final hearing, it is likely, given the point raised, that his Honour would have directed service on the Company[3] and on Waiviata as the appointing party. Second, associated with this, is the fact that two of the parties before me, the Company and Waiviata, were not parties to the earlier proceeding. Counsel for the Company sought to avoid this latter difficulty by arguing that the determination of Mandie J on 2 February was a judgment in rem and, in the alternative, that it bound Waiviata as a privy of the administrators. On the question of privity, counsel sought to make much of the close relationship which, it was said, existed between Waiviata and the administrators. Reliance was placed on the fact that an employee of Waiviata accompanied Mr D'Aloia on his nocturnal visit to Templestowe seeking possession of the Company's assets and on the fact that the administrators retained Behan & Speed, the solicitors for Waiviata, to act for them in proceeding number 4183 of 2000. This was explained as having been driven by the urgency of the application, but I note that this firm still acts for the administrators in that proceeding. In this proceeding they are represented by Baker & McKenzie. Be that as it may, I think there is no substance in these estoppel submissions but it is not necessary that I express any concluded opinion upon them since I have formed a clear view that the Company must succeed on the more fundamental issue.

44. But for one matter, I would have thought it clear beyond argument that the agreement of 6 January is not a charge. It bears all the marks of a sale of the business of the Company which is to occur in the future in the event either, that the Company does not by the agreed date repay the loan made to it by Waiviata, or that the Company has not sold its business to Waiviata. Indications of transfer are to be found in cll. 4, 5 and 6. That the transfer once complete is unconditional and permanent appears from cll 5, 6(c) and 10. That there is in the Company no right of redemption upon repayment of the loan is further indicated by cl 7 under which the loan indebtedness of the Company is discharged, not by such a repayment, but by the completed transfer under cl 5(a), (b), (c) and (e). Finally, in cl 12 there is an entire agreement provision.

47. The one matter to which I have referred is the fact, which has emerged in the evidence, that prior to the making of the agreement Waiviata was negotiating to purchase the business of the Company. This business had a customer base of around 4,000 and an annual turnover of $1.3M. Mr Jarvie told me that its value was about $2M although David Ah Chee, the managing director of Waiviata, deposed that he did not accept this as a fair value. This fact bears upon my present concern in two ways. It puts in doubt the intent of the parties evidenced by the agreement that this business be transferred absolutely in consideration of the discharge of a loan debt of only $132,525.70 plus interest. Second, it suggests that the operation of cl 4 of the agreement may amount in law to a penalty so that it would be unenforceable. No argument was presented to me on this point and I express no view upon it. The point, however, appeared to underlie the contentions advanced before me by the parties. If two interpretations of the agreement are available, should not the court favour that which represents the intention of the parties and one which is achievable, rather than that which might produce an agreement which the parties did not intend and whose terms are against public policy and therefore unenforceable? With this in mind, I turn to the evidence to determine what was the true nature of the transaction of which the agreement of 6 January is part.

50. In December 1999 and January 2000 Waiviata was engaged in negotiations with the Company to purchase the Company's business of Internet service provider. These negotiations were conducted between Mr Ah Chee on behalf of Waiviata and Mr Jarvie on behalf of the Company. In early January Telstra had disconnected its services to the Company's business for non-payment of a debt of some $130,000. This disconnection threatened the business of the Company and Waiviata agreed to advance sufficient funds to pay the debt to preserve the value of that business which it was interested in acquiring. The amount of the loan was determined by the sum demanded by Telstra in order to reconnect communication services, not by reference to the value of the business assets and the money advanced was in fact used by the Company to pay the Telstra debt. Mr Jarvie said that when the loan was agreed he was confident that he would be able to repay it within the stipulated 14 day period. He told me that, at this time he was confident, too, that the sale to Waiviata would be completed.

53. I interrupt myself at this point to observe that the true position regarding the Telstra debt is a little more complicated than might appear from the preceding paragraph. Telstra's customer in 1999 and the company which was indebted to Telstra was not the plaintiff in this proceeding. It was a company which was, between 19 May 1998 and 25 November 1999, called Smarter Way (Aust) Pty Ltd and which then carried on the business of Internet service provider, which became in January 2000 the business of the plaintiff. This company, which I shall refer to as the old Smarter Way company, was in dispute with Telstra regarding its account. On 25 November 1999 the old Smarter Way company changed its name to ACN 082 681 561 Pty Ltd. On the following day a new company, ACN 087 747 359, which was previously named Home School Australia Pty Ltd and of which Mr Jarvie had been for some months a director, changed its name to Smarter Way (Aust) Pty Ltd. This, the new Smarter Way company, is the present plaintiff and the company with which Mr Ah Chee dealt. It does not appear how the new Smarter Way company acquired the business which it agreed to sell to Waiviata on 6 January in consideration for the sum of $130,000, or thereabouts, which was used to discharge the liability of the old Smarter Way company to Telstra. It does not appear how it was that on 5 January 2000, the day before the making of the agreement with which I am concerned, the old Smarter Way company, incorrectly calling itself Smarter Way (Aust) Pty Ltd and incorrectly asserting a cause of action based on its then carrying on business which it had previously transferred to the new Smarter Way company, commenced proceeding number 4002 of 2000 in this Court. It cannot be due to some oversight or want of understanding by a non-lawyer of the true position, because this proceeding was issued by Stamfords, the solicitors for the Company in this proceeding and the writ includes in its internal reference the initials "AH", which may well be a reference to Andre Ho, the member of that firm handling this proceeding. Mr Jarvie was asked about this corporate restructure in November 1999. He said that the old Smarter Way company continued to carry on the business of Internet service provider after that date in the sense that it continued to obtain telephone services from Telstra and sold them to the new Smarter Way company. He said that the reason for the restructure was "to clarify what assets belonged into that company [that is, the new Smarter Way company] as relating to the Smarter Way business" in preparation for a share float. He conceded, too, that it was conceivable that one purpose of the restructure was to isolate the dispute with Telstra from the Company which was to be the subject of the float. I mention this restructure, also, because it was relied upon to impair the credit of Mr Jarvie as a witness.

56. There was, however, not much conflict in the evidence as to the essential matters before me. Mr Ah Chee was not cross-examined on his affidavits. Nor was Anthony Lloyd Seyfort, the solicitor then in the employ of Minter Ellison, who prepared the agreement of 6 January on instructions from Waiviata. Mr Ah Chee deposed that Mr Jarvie asked him on 5 January 2000 to lend the money to the Company to protect its business at a time when negotiations to purchase were on foot. Mr Ah Chee's affidavit then contains the following passage which I accept to be truthful.

"7. I told Jarvie that [Waiviata] would have its solicitors draw an agreement to protect it from default in repayment. I knew he could not offer other security and I said words to the effect 'under the agreement, if you default we will own your business'. He replied that he understood what would happen if the loan was not repaid but that there would be no default in repayment because [the Company] would have the money to repay the loan. He gave me his assurance more than once in this conversation that he would not be risking his business over the loan because [the Company] would have the funds to repay the loan at the end of the 14 days."

60. Counsel for Waiviata submitted that I should understand the expression "we will own your business" as meaning "we will own your business as security for the repayment of the money". Mr Jarvie, for his part, said that the words used by Mr Ah Chee in this context were that, if the debt was not repaid "he was going to stitch me up", although he thought that this was said after the agreement had been made.

63. It was submitted on behalf of Waiviata that the whole purpose of the transfer was to provide security for the loan, in the sense that Waiviata obtained something more than a naked promise to repay it. This seems to be correct but it does not resolve the present issue. The question here is whether the transaction should be understood as conferring upon Waiviata and the Company the obligation and the right, respectively, to return the business or so much of it as remains after the debt has been repaid from these assets or otherwise by the Company,[4] as Waiviata would have it; or whether the transfer of the business was absolute and was taken in discharge of the loan. In that event, if it should appear that the assets were of less value than the debt, Waiviata would have no further rights. If, on the other hand, the assets were of greater value, Waiviata would not be obliged to return the surplus.

66. As was observed in argument, there is in this analysis a risk of circularity of reasoning. Where an unconditional transfer is construed as being made by way of security, the law will itself imply a right of reassignment upon redemption,[5] notwithstanding that there be no express right conferred by the transferee in the agreement. The question cannot therefore be determined by categorising the agreement as not being a charge unless there appears some expression showing that such a right has been conferred.[6] What I must look for is some indication of an intent that the assets of the business are transferred to Waiviata for the purpose of satisfying the loan debt and not for the sole purpose of its enjoying them for its own benefit.

69. Notwithstanding that the surrounding circumstances here show that the underlying transaction was a loan and that cl. 5 of the agreement provided a powerful incentive for the Company to repay that loan, they do not dispel the clear intention disclosed in the document that the transfer was not in the nature of a security in the sense of a charge or a mortgage. This appears to be one of those cases where the Company, perhaps out of desperation or out of misplaced confidence in its own ability to repay, assumed the risk that its business would be lost if it did not make repayment.

72. I am satisfied that the instrument under which the administrators were appointed is not a charge and that, accordingly, their appointment is not valid.

75. In the originating motion the plaintiffs, in accordance with R. 2.2(3)(b) of the Corporations Law Rules, state that the proceeding is brought under ss. 447A and 447C of the Law. As things turned out, the former provision was not relied on. In paragraph 2 they seek an order that the administration is to end, but this is not appropriate in the case, as here, where it did not begin. In paragraph 3, they seek an order for the removal of the administrators, presumably pursuant to s. 449. This power is inappropriate for the further reason that it would require the appointment of a substitute administrator. The proper power to be exercised in the present case is that to make a declaration of validity or invalidity under s. 447C and I will do so.

78. Before I leave this proceeding, it is desirable that I express my view upon an aspect of this administration which I have mentioned in [14] above and which provoked some factual controversy. This was the engagement by the administrators of the solicitors retained by the appointing chargee. Let me say immediately and shortly that such a course is, in general, undesirable. An administrator has powers and functions which are conferred and imposed by Part 5.3A of the Law for the purposes set out in s. 435A. It will often occur that the interests of the appointor, whether this be the board of directors of the company or a chargee, are or may be in conflict with the interests of the company's creditors or its members. The often burdensome duty of the administrator is to stand firmly and independently between these competing interests.[7] 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 section 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.[8] In principle, the creditors and members of the company are entitled to the same professional independence from an administrator appointed by a chargee.

81. I propose, therefore, the following declaration:

The purported appointment of the first and secondnamed defendants as administrators of the firstnamed plaintiff was invalid on the ground that the thirdnamed defendant, the appointor, was not a person who was entitled to enforce a charge on the whole, or substantially the whole, of the property of the firstnamed plaintiff.

[2] [2000] VSC 16 at [17] - [18]

[3] Corporations Law Rules, Rule 2.7

[4] Re National Westminster Finance Australia Ltd [1991] 1 Qd R 130 at 135, per de Jersey J

[5] Durham Brothers v Robertson [1898] 1 QB 765 at 772, per Chitty LJ

[6] See Gough, Company Charges 2nd Ed, 1996 at p.581

[7] See Re Central Spring Works Australia Pty Ltd [2000] VSC 144; 34 ACSR 164 at [13] - [14], per Warren J

[8] See McVeigh v Linen House Pty Ltd [2000] VSCA 4 at [39] - [43]