Supreme Court of NSW|1998-09-29|Before: Young J

Sutherland v Take Seven Group Pty Ltd Matter No 4036/98 [1998] NSWSC 538 (29 September 1998)

The Supreme Court of New South Wales Equity Division

HIS HONOUR: It is very hard to classify this case, but what I am essentially dealing with is who should be the custodian of the administration and property of a company pending the determination of a summons to wind up. However, that summons to wind up is in itself an extraordinary one.

Unfortunately for Mr Sutherland, it would appear that there was another director of the company, Mr Tsang's sister, Cysie Ying Sui Tsang, a Hong Kong resident. She had allegedly been appointed a director, but notice of her appointment had not been lodged with the appropriate authorities in Australia until yesterday.

However, the Articles of Association of the company provide that there must be two directors and do not give authority for one director to do what Mr Alfred Tsang purported to do or to affix the common seal.

Whichever way one looks at it, Mr Sutherland was not validly appointed as administrator of the company.

Since he was purportedly appointed administrator, Mr Sutherland has expended effort. That effort included investigating the affairs of the company. It included freezing the company's bank account, which had the effect that a series of cheques, which had been written to pay, it would seem, most of the smaller creditors, were dishonoured. He also sent notices to creditors and took the assets of the company into custody.

All this happened with the consent of Mr Alfred Tsang, who appeared today in person. However, when he told his sister about the above events his statement to the court from the bar table was that his sister called him an idiot and said there were other ways in which the matter should have been approached. Today Ms Tsang, by her counsel Mr Johnson, opposes any attempt to keep the company out of the control of the directors.

The case made by Mr Sutherland, through his counsel Mr Newlinds, was that his investigations show that the company is probably insolvent; it may owe a major creditor about $868,000; it may owe the Commissioner of Taxation some $85,000, or perhaps even $5 million. He says that he is also concerned that the records of the company seem to have left Australia and gone to Hong Kong; there has been an attempted preferential payment of all the minor creditors; that the directors have started some operation in premises next door, which would affect the goodwill of the company; and that if control is handed back to the directors then there may be nothing for the major creditors.

On the other hand, Mr Johnson says that (a) in the ordinary course of events the Commissioner's $85,000 can be paid out of current resources; (b) that the $5 million claim from tax audits is just unsubstantiated; (c) the claim of the major creditors does not reflect the true trading position between the two companies; (d) that the summons to wind up the company by Mr Sutherland has been made without standing and so should be summarily dismissed; or (e) in any event, could not found the appointment of a provisional liquidator. Thus, he puts that the company should be left to trade in the normal way with its directors and that if the Commissioner of Taxation or the major creditors wish to take some action then so be it. Mr Johnson further says that Mr Sutherland could not be a creditor and that there is no power of the court of its own motion to appoint a provisional liquidator or to put a company into liquidation. Again he puts that unless something happens in the near future what appears to be an invalid demand under s 459E of the Corporations Law may put the company into an embarrassing position where it would not be able to defend a winding up petition brought by major creditors.

Some time has been spent during this hearing in trying to work out whether there is some way of adjusting the rights between the parties for the next few weeks so as to avoid, as much as possible, damage being caused. One way would be to deal with the whole matter today, but that does not seem possible because there really does need to be some time for Mr Sutherland to put on evidence to show that he is a creditor.

Mr Johnson says he should have done that already, and that comment has some validity, but the way in which the higher courts approach these problems in this day and age is that people should be given a full opportunity to present their case before being shut out of court.

It would seem to me that it would be appropriate to allow Mr Sutherland until 9 October 1998 to put on his evidence and to stand the matter over to the Company Judge's list on 16 October 1998.

There are three possibilities. The first is that the company should go back into the control of the directors. This would mean that the custody of the assets should be given back to the directors. They could then make an application under s 459G to set aside the 459E notice given by the major creditors. The status quo would be held by undertakings, which are proffered by both directors, that they would not write any cheques on the defendant's bank account, encumber or deal with the assets or incur any further liabilities on behalf of the company, return the books and records to Australia and instruct the bank not to honour the cheques which have already been written but which have not been met because of the proceedings.

The second possibility is just to leave Mr Sutherland in control, but as provisional liquidator, up until 16 October 1998 on the basis that he would, as he has offered to do, file the appropriate application under s 459G, provided that Mr Alfred Tsang would put on the appropriate evidence, and would otherwise merely hold the assets up until 16 October 1998, plus perform any necessary ancillary work.

The third possibility is that because Mr Sutherland is, or may be, in some conflict both as a creditor of the company and a person who may be sued in conversion by the company for what has already happened, that some other person should be appointed as provisional liquidator. The downside of this is that Mr Sutherland says he has incurred costs of $18,000 already. Mr Johnson suggests this is greater than necessary, but even if another consultancy practice had to spend half of the time Mr Sutherland has spent, the company would be poorer by a further $10,000.

I turn away for the moment from commercial considerations to legal considerations. The summons was filed by Mr Sutherland seeking to clarify his status and to postpone the times prescribed under Pt 5.3A of the Corporations Law for the purpose of holding the relevant meeting. He also sought winding up, and that he be appointed provisional liquidator. As it is clear that the appointment is invalid there is no need to deal further with the extension of time.

The claim to wind up is a claimed insolvency, so under s 459P of the Law the persons who are competent to make the application do not include a person such as Mr Sutherland, who has been invalidly appointed administrator, but does include creditors.

The answer to this question is that he might very well be, and on the evidence before me at the moment it is more likely than not that he is a creditor. He may very well not be a creditor in the full amount of $18,000, which he claims, but that is by the bye. It is also irrelevant that he has not yet rendered a bill.

Mr Johnson's prime submission is that as the appointment was invalid there can be no liability from the company and that any work that Mr Sutherland has done would be work he did on behalf of Mr Alfred Tsang and not on behalf of the company.

However, there is a line of authority which commences with Craven-Ellis v Canons Ltd [1936] 2 KB 403, the most recent example of which is Re Pearl Maintenance Services Ltd [1995] 1 BCLC 449, 458, that a person who is invalidly appointed as an officer, including a receiver of a corporation, may recover the reasonable remuneration for work done which is at least of incontrovertible benefit to the company, cf Birks An Introduction To The Law of Restitution (1985, Clarendon Press, Oxford) pp 116 and following.

It will be necessary to examine what Mr Sutherland did, and for him to put on affidavit those acts and things that he did to his detriment, which were of incontrovertible benefit to the company. There undoubtedly was conduct of incontrovertible benefit on the evidence before me such as restricting the trading of the company's bank account, but the judge who finally hears the proceedings can determine that matter. I am merely indicating what is suggested by the material before me at this stage.

On the material before me at this stage, it is more likely than not that Mr Sutherland is a creditor and has standing to bring the petition. There is then a case for looking at s 472(2) of the Corporations Law, which provides that the court may appoint an official liquidator provisionally at any time after the filing of the winding up application.

The literal wording of the section would indicate that the court might appoint a provisional liquidator so long as there is a petition on file, no matter how suspect that petition may be.

However, I think it is correct, as Mr Newlinds submitted, that the petition would at least have to be one which is not an abuse of process, that is one brought by a person who apparently arguably has standing and is not purely vexatious. Otherwise the court can, if it considers it appropriate, appoint a provisional liquidator. A provisional liquidator is appointed for the purpose of protecting the assets if there is some jeopardy, although there is a wide discretion; see McPherson The Law of Company Liquidation 3rd ed (1987, LBC Sydney) p 101.

It seems to me that the matters which I have already mentioned show that there is some jeopardy, and that the assets will best be protected by the appointment of a provisional liquidator.

I am often reluctant to appoint provisional liquidators because of the costs. There is also the matter which Mr Johnson mentioned, that when creditors see there is a provisional liquidator it is often the death of the company. However, these two factors are mitigated in the instant case, first, because there will be minimal expense in merely holding the assets and bringing the summons to set aside the statutory demand, and the appointment is only until 16 October 1998, and, secondly, because the creditors have already been alerted by the notification of the appointment of an administrator.

Mr Johnson submitted that the provisional liquidator should not be appointed without an undertaking as to damages by the provisional liquidator personally. Although there is no hard and fast rule about the matter, the court tends only to ask for undertakings for damages where there is a quasi partnership company and the provisional liquidator is put in at the request of one of a group of warring parties.

In other cases an undertaking as to damages can be ordered as a term, but in view of the minimal activity that should take place between now and 16 October 1998 I do not consider that I should take such an undertaking in the present case.

The next matter is whether the provisional liquidator should be Mr Sutherland or some independent person. I think that for reasons of costs and the minimal activity anticipated, the better course to take is to appoint Mr Sutherland. However, as he is a creditor and that indebtedness may be of the required amount, I think that I would need to give the appropriate consent under s 532 of the Corporations Law to allow him to do that.

I think it is appropriate to make a declaration as to Mr Sutherland's status because otherwise there will be public uncertainty about the matter. Although this matter before me at the moment is an interlocutory application, the authorities show that the court can, in an interlocutory application, make a final declaration, even though there is no such thing in Australian law as an interim declaration.

1. I declare that Roderick Mackay Sutherland has not been validly appointed administrator of the defendant company.

2. I order that Roderick Mackay Sutherland be appointed provisional liquidator of the company.

3. I give leave for Mr Sutherland to so act, notwithstanding that he may be a creditor of the company.

4. I order that the proceedings be adjourned into the Company Judge's list on 16 October 1998.

5. I direct that any further evidence to be filed by Mr Sutherland be filed and served no later than 9 October 1998.

6. I direct that any evidence in reply by the company or Mr or Ms Tsang be filed and served no later than 14 October 1998.

7. I direct that any notice to produce or subpoena may be made returnable before a Registrar on 12 October 1998.

8. The costs of the present proceedings in which both parties have been partially successful are reserved.

9. I order that until further order the provisional liquidator is only to have the powers under s 477(2)(a) and (b) of the Corporations Law together with the power to get in the books and records of the company and to notify creditors and other persons with a need to know the present status of the company.

10. I grant liberty to apply on twenty-four hours' notice.

Sutherland v Take Seven Group Pty Ltd Matter No 4036/98 [1998] NSWSC 538

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Judgment (42 paragraphs)

Sutherland v Take Seven Group Pty Ltd Matter No 4036/98 [1998] NSWSC 538 (29 September 1998)

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