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[2014] QSC 234
General information, not legal advice.
Supreme Court of Queensland
2014-10-08
Alan Wilson J
Original judgment source is linked above.
CORPORATIONS - RECEIVERS, CONTROLLERS AND MANAGERS - APPOINTMENT - GENERALLY - where the business of the second respondent companies was primarily conducted through the applicant company - where the family operating those companies invited the first respondent to invest in the business - where the first respondent did so through his company, the third respondent - where it was allegedly agreed that the third respondent's investment would be by way of loan rather than capital investment - where documents were executed by all parties relating to the loan - where defaulting in loan repayments purportedly triggered the appointment of the first respondent as controller of the second respondent companies under those documents - where it is unclear whether those documents were validly executed and therefore whether the first respondent's appointment by default of the loan was valid - where the applicant also contends that the procedure by which default was alleged was invalid - where the applicant further alleges that the third respondent did not in fact advance the money as purported by the loan - where the applicant seeks a declaration under s 418A of the Corporations Act 2001 (Cth) regarding the validity of the appointment - whether the first respondent's appointment as controller was validly effected by those security documents
CORPORATIONS - RECEIVERS, CONTROLLERS AND MANAGERS - DUTIES AND LIABILITIES - DUTIES - GENERALLY - where the applicant seeks a court inquiry into the conduct of the first respondent as controller of the second respondent companies - where the court can order such an inquiry under s 423 of the Corporations Act 2001 (Cth) - where the court must be satisfied that there is a prima facie case that an inquiry is appropriate to enliven the discretion to make such an order - where the applicant alleges that there is a prima facie case because the first respondent did not faithfully perform his functions as controller - where the applicant contends that this is evidenced by denying the members of the family running the second respondent businesses access to the business premises, books and records; by ceasing trading business and failing to maintain licensing and tenancy requirements; by attempting to remove documents from the premises; by acting solely in the interests of the third respondent company; by not paying employee entitlements; and by acting in breach of undertakings to the court - whether the applicant's allegations are made out such as to justify the exercise of the discretion to order an inquiry into the first respondent's behaviour during his controllership
CORPORATIONS - WINDING UP - LIQUIDATORS - APPOINTMENT - IN VOLUNTARY WINDING UP - APPLICATION TO COURT - where the applicant seeks the appointment of a provisional liquidator to one of the second respondent companies, Quality Blended Liquor Pty Ltd - where an appointment was made during the course of the hearing - where since the conclusion of the hearing the applicant has sought further orders in respect of the receivers and management of the second respondent companies - whether further orders should be made
CORPORATIONS - CHARGES, DEBENTURES AND OTHER BORROWINGS - GENERALLY - REGISTRATION - TIME FOR REGISTRATION AND ITS EXTENSION - where the third respondent Toyco Pty Ltd seeks to register security documents under s 588FL of the Corporations Act 2001 (Cth) - where the security documents include a loan deed under which the respondent forwarded funds to one of the applicant's interlinked companies - where the respondent's first solicitors lodged the documents after the 20 business day limit imposed by the Act - where the respondent applies under s 588FM for the court to extend the time for registration - where the discretion to make such an order depends on the court being satisfied that the failure to register the security document was accidental, or due to inadvertence, or some other sufficient cause - whether the application to extend time should be granted
Liquor Act 1992 (Qld), s 169, s 173
400 George Street (Qld) Pty Ltd v BG International Ltd [2012] 2 Qd R 302, cited
Australian Securities and Investments Commission v Forestview Nominees Pty Ltd (recs and mgrs apptd) [2006] FCA 1530; (2006) 236 ALR 652, cited
Burns Philp Investment Pty Ltd v Dickens (No 2) (1993) 31 NSWLR 280, cited
Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2010] NSWSC 233; (2010) 238 FLR 384, cited
Re Enviro Pallets (NSW) Pty Ltd [2013] QSC 220, cited
GE Capital Australia v Davis [2002] NSWSC 1146; (2002) 180 FLR 250, cited
IPT Systems Ltd v MITIC Corporate Pty Ltd [2000] WASC 316; (2000) 158 FLR 349, cited
Leslie v Hennessy [2001] FCA 371, cited
Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434, cited
Offshore Oil NL v Southern Cross Exploration NL (1985) 3 NSWLR 337, cited
Oswal v Carson & Ors (in their capacities as recs and mgrs of Burrup Fertilisers Pty Ltd (ACN 095 441 151) (recs and mgrs apptd)) (No 3) [2013] FCA 337; (2013) 300 ALR 149, cited
Papua New Guinea Dockyard Ltd v Adams [2005] FCA 413; (2005) 215 ALR 742, cited
Re S&D International Pty Ltd (in liq) (recs and mgrs apptd) [2009] VSC 225, cited
Strecko Juric-Kacunic v Stan Vaupotic [2013] NSWSC 41, cited
Vink v Tuckwell [2008] VSC 100; (2008) 216 FLR 309, cited
S Hogg, of counsel, for the applicant in proceedings 2133/14 and 3073/14
W Tschannen appeared for himself as first respondent and for the third respondent in proceeding 2133/14, and for the applicant in proceeding 3213/14
JA Bennie, solicitor, for the second respondent in proceeding 2133/14 and the respondent in proceedings 3073/14 and 3213/14
JHK Legal for the applicant in proceedings 2133/14 and 2073/14
W Tschannen represented himself as first respondent and the third respondent in proceeding 2133/14, and the applicant in proceeding 3213/14
McInnes Wilson Lawyers for the second respondent in proceeding 2133/14 and the respondent in proceedings 3073/14 and 3213/14
[1] Alan Wilson J: Quality Blended Liquor Pty Ltd has conducted a business selling alcoholic beverages wholesale from premises at Coomera, and Molendinar, for some time. In practical terms it was operated until 2013 by the Lewis family and, in particular, Ken Lewis, his wife Kathleen Lewis, and their daughter Elisa Lewis. Their involvement with QBL was primarily through another company, the applicant International Network Consultants Pty Ltd. INC had put money into the QBL business.
[2] The business was conducted through a number of interlinked companies: Power Beer and Liquor Pty Ltd, Power Beer and Liquor Operations Pty Ltd, Roma Security Pty Ltd and TCHG Secure Freight Pty Ltd.
[3] Mr Ken Lewis knew Warren Tschannen and, in 2013, invited him to invest in the business. Mr Tschannen agreed to do so, and says that has since happened through a company called Toyco Australia Pty Ltd. Initially, nothing about the investment was written down.
[4] Despite that, Mr Tschannen was actively involved in the QBL business after May 2013. In December 2013, he says, he had a conversation with Mr Lewis in which it was agreed that Toyco's investment in the business would be by way of loan, rather than capital investment, and loan and security documents were prepared. The Lewises have always maintained that they, through INC, had invested about $1,000,000 in the QBL business and the arrangement was that Mr Tschannen was, through Toyco, to invest the same.
[5] Mr Lewis says these arrangements were intended to 'preserve ... complete equality ... between the 2 lenders' (i.e., the Lewis/INC and the Tschannen/Toyco interests).[1]
[6] What then happened is contentious. Documents allegedly relating to Toyco's loan (and, also, to funds INC had advanced to the companies comprising the QBL business) were prepared by lawyers acting for all parties and executed in January 2014. They bear the signatures of Mr Tschannen's niece, Ms Alicia Gorham, and Ms Elisa Lewis, but when they were signed, and their effect, is a central issue in the case.
[7] One apparent effect of the documents was that a new company, Prudential Investment Corporation Pty Ltd, was set up. Ms Elisa Lewis and Ms Gorham were its directors, and shareholders. It now owned all the shares in all the companies associated with the QBL business, listed above.
[8] Another document called a 'Loan Deed' allegedly related to a loan of $1,000,000 from Toyco to Power Beer and Liquor Pty Ltd, and was guaranteed by the other Lewis companies including QBL. It required monthly repayments of principal of $11,904.76.[2]
[9] Relations between the Lewises and Mr Tschannen then deteriorated rapidly. In February 2014 Toyco, of which Ms Gorham was by then the sole director and shareholder, claimed that the companies associated with the QBL business had failed to make repayments due under Toyco's loan, and appointed Mr Tschannen to be 'controller' of all of those companies and, effectively, to take day to day control of the QBL business. He engaged security guards who purported to deny members of the Lewis family and employees access to the business premises.
[10] On 27 February 2014 all the interested parties met with Mr Ian Jessup, an accountant who acted as a mediator. They signed a deed under which Mr Tschannen's controllership continued and he would undertake a stocktake, but allowed Mr Kenneth Lewis and Ms Elisa Lewis access to the Molendinar and Coomera premises; and, otherwise, the parties were to '... negotiate in good faith to reach agreement in relation to the ongoing management of the Companies and the resolution of the dispute between the parties ...'.[3]
[11] Despite that agreement the Lewis company INC began action 2133/14 on 6 March 2014, seeking orders that Mr Tschannen be removed as controller, and for an inquiry into his conduct in that role. Other proceedings were, later, commenced. The matter went to a hearing in May.
[12] The Lewis interests advance a case that Mr Tschannen took steps to have himself appointed controller of the entire business so as to obtain unfettered access to its assets and withdraw as much value from those assets, for his own purposes, as he could. They allege that he had a large tax debt ($1,700,000) and saw gaining control of the QBL business as an opportunity to obtain funds to discharge that debt, and avoid bankruptcy. He used his niece Ms Gorham as, effectively, his instrument for these purposes.
[13] In particular, the Lewis interests allege that the original security documents were not validly executed and, therefore, did not permit Mr Tschannen's appointment as controller; or that Toyco did not, in truth, advance $1,000,000 or indeed any funds to the QBL business (as those documents indicate); and, that the procedure by which Toyco alleged default in repayments under that loan was invalid, and mischievous, and part of Mr Tschannen's overall plan. The case advanced by the Lewises was, then, one which alleged that his appointment as controller was invalid; and, they sought an inquiry into what happened during his controllership.
[14] Against this it is said, for Mr Tschannen, that the circumstances in which he ascended to controllership were proper, and above board; that his acts as controller were commercially necessary and appropriate; and, that the Lewis interests are motivated by simple disgruntlement that Toyco acted first, under its security. In light of these things no inquiry into his controllership is warranted, or necessary.
[15] Because events in the QBL business have generated three separate proceedings, and events in them are a little complicated, it is necessary to put this decision and the hearing in May in their proper context.
[16] Mr Tschannen represented himself at the hearing over four days, 12-15 May 2014. He had been represented by lawyers earlier in the proceedings, and he had some assistance in preparing written submissions which were exchanged by the parties and filed after that hearing.
[17] The matter was first listed for hearing on 4 April 2014 but was adjourned because Mr Tschannen was ill and receiving treatment. The previous day, 3 April 2014, he resigned as controller and Toyco appointed Mr Dinoris and Mr Combis as receivers and managers. They were represented at the hearing in May, but did not take an active role.
[18] At the conclusion of the May hearing, directions were given about an exchange of written submissions and, also, provisional liquidators (Mr Terence Rose and Ms Anne Meagher) were appointed to QBL.
[19] The exchange of written submission was diverted when submissions for the Lewis interests indicated that they sought orders which would have the effect of declaring the appointment of Messrs Combis and Dinoris, the receivers and managers, invalid and void. The receivers, through their lawyers, protested that they had not been named as parties in the proceedings and that relief of that kind had never been signified or sought against them; and, that their attendance at the hearing had been on a limited basis: that they would abide the order of the court.
[20] That protest necessitated a further hearing on 24 July 2014 at which the parties agreed that the question whether orders can or should be made in these proceedings against the receivers and managers, or affecting their rights and obligations, be adjourned to a date to be fixed after this judgment.
[21] There are now three proceedings relating to the dispute between the Lewis interests and Mr Tschannen: 2133/14, in which, again, the Lewis interests attack his appointment as controller, and seek an inquiry into what he did in that position; 3073/14, in which the Lewis interests sought the appointment of a provisional liquidator to QBL, and which was partly dealt with on the last day of the hearing (15 May) when an order to that effect was made; and, 3213/14, in which Toyco seeks an extension of time to register security documents including the Loan Deed mentioned earlier, under s 588FM of the Corporations Act 2001 (Cth).
[22] An order was made by Dalton J on 7 April 2014 adjourning action 2133/14 to a hearing on 12-15 May; and, that the application for the appointment of provisional liquidators in action 3073/14 be heard at the same time (as, of course, occurred).
[23] No order to similar effect was ever made, it appears, in Toyco's action 3213/14, but it was also addressed at various times during the May hearing and was the subject of written submissions from Mr Tschannen, and the lawyers representing the Lewis interests. All of the facts and matters, and legal questions, touching it were fully canvassed at the hearing before me and in the parties' written submissions and, despite the absence of any formal direction to the effect that it be heard with the other proceedings, I propose to determine it in this judgment.
The validity of Mr Tschannen's appointment as controller
[24] It is contended for the Lewis interests that Mr Tschannen's appointment was always invalid because the documents upon which it was based were not, themselves, validity executed; or, that the event of default under those loan security documents relied upon for his appointment had not in fact occurred (or, occurred in circumstances where he was the author of the default, with power to prevent it); or, because the security documents were themselves void under s 588FP of the Corporations Act 2001.
[25] The Lewises seek a declaration pursuant to s 418A of the Corporations Act, which empowers the court to determine, on application, whether the appointment of a controller was valid, and whether or not the person who assumed control of the corporation's property did so validly, under the terms of the security interest.
[26] The parties entered into a number of loan and security documents in January 2014. They all bear the date 3 January 2014.[4]
[27] A good deal of affidavit and oral evidence was devoted to the date, place and circumstances in which these documents were signed. In particular it was alleged for the Lewis interests that the documents were not signed by all parties on 3 January 2014 but at some other time, and separately, by Ms Gorham and Ms Elisa Lewis. Ms Gorham agreed that she probably did not sign the documents on 3 January but on a date later in that month; Ms Lewis was unsure, but thought she probably signed on a date between 6 and 10 January.
[28] A quite complex argument is advanced for the Lewis interests that Ms Gorham may not, therefore, have been properly appointed as a director of some of the companies (Roma and QBL, and PBL) at times when she purported to sign documents as a director of those companies, with the result that the security documents are themselves invalid as also, significantly, is the subsequent appointment of Mr Tschannen as controller of those companies (or, at least, Roma and PBL).
[29] The uncertainty, on the evidence, surrounding this question means it is impossible to be more precise than to say that the documents were signed sometime in January 2014 and, probably, about the middle of the month. It is not, however, necessary to make a conclusive finding of fact about the question because it would not, in my opinion, be determinative, for two reasons.
[30] The first is that the appointment of Mr Tschannen as controller was, on any view, at a later date - on or about 25 February 2014 - and Ms Lewis, on her own evidence, certainly executed them in January. She did assert that she had not read them and felt some pressure from Mr Tschannen to sign them but nowhere alleges that she would not have signed them, if she had read them or had more time to do so.
[31] Secondly, the fact that the loan deed documents might record a date different to that upon which the last person executed them does not, in law, invalidate them.[5]
No default triggering Mr Tschannen's appointment as controller?
[32] It was suggested in cross-examination of Mr Tschannen, and Ms Gorham, and in the Lewises' written submissions following the hearing, that there was no evidence that Toyco had in fact advanced $1,000,000 (as evidenced by the Toyco loan agreement) to the business, nor of any actual default under that loan - and, therefore, that the demand and notice triggering Mr Tschannen's appointment as controller had no proper legal foundation and was void or invalid.
[33] Some of these matters were not raised in the applicant's points of claim and the failure of the Tschannen/Toyco interests to attempt to strictly prove them by tendering documents at the hearing is not, in that circumstance, persuasive evidence that they were untrue. There was evidence in the affidavit material that the principal referred to in the Toyco loan was advanced to PBL, in documents filed by both parties.[6]
[34] It is then alleged that, as controller, Mr Tschannen had the power to ensure PBL did not default in payments of the loan and could, therefore, have easily prevented it but, again, that allegation was not pleaded in the applicant's points of claim. (It is also said that the Toyco loan deed required Mr Tschannen to give notice to PBL but that was only required, under the deed, if Toyco wished to bring the final repayment date forward.[7] It was also alleged that demand should have been made before notice of default was given but, on a plain reading, cl 8.1 of the deed extinguishes that necessity.)
[35] In light of the extensive affidavit material filed by the parties, before the trial, and the points of claim and outlines of submissions they had exchanged, the failure of the Tschannen/Toyco interests to formally prove the actual payment of the loan funds cannot, in the absence of specific allegations in those quasi-pleadings, be allowed to tell against those parties in any argument that the circumstances behind the appointment of Mr Tschannen as controller was faulty, defective, or invalid.
[36] It is then more broadly alleged, however, that Mr Tschannen '...engineered his appointment as controller ... in order to seize control of the second respondents' and that he was the 'controlling mind' of Toyco and the 'architect' of the security documents and that, in furtherance of his goal of securing control of the QBL business and selling its stock to put himself in funds to meet his personal debts, he undertook the whole default/controller transaction for a nefarious purpose.
[37] Even if some or all of these allegations are true - and, for reasons explored later, there is sufficient doubt about Mr Tschannen's actions, and his motives for them, to warrant an investigation of his controllership - they do not constitute a sufficient ground for a declaration that the default process, or Mr Tschannen's appointment as controller, was invalid. The evidence, discussed above, around the security agreements and the default process signifies that, as those documents are properly read, there was a sufficient documentary and evidentiary basis for his appointment.
Was Mr Tschannen's appointment as controller invalidated by s 588FP of the Corporations Act?
[38] Under s 588FP a 'security interest' may be void, and may be taken to have always been void, if a step is taken by a secured party to enforce a security interest within six months after the instrument is made, without the leave of the court. The enforcement process must, to attract the operation of the provision, have been taken by an officer of the company or '...a person associated, in relation to the creation to the security interest ...' with a person who is an officer of the company.
[39] It is said for the Lewis interests that Ms Gorham was a director of the companies comprising the second respondents at the time they granted the security interest to Toyco, of which she was also a director, and that Toyco's appointment of Mr Tschannen, at a time of her directorship, means that the appointment (being within six months of the creation of the security interest) is invalidated by the section.
[40] The term 'associate' is defined in s 15(1)(a) of the Corporations Act 2001 to include a reference to '...a person in concert with whom the primary person is acting, or proposes to act' and it is argued for the Lewis interests that this definition is sufficiently wide to include Toyco. It is argued for the Tschannen/Toyco interests that the mere fact of the directorship does not make Toyco an 'associate' of Ms Gorham, and that Toyco cannot be a person falling within the definition in s 15.
[42] It is said for the Lewis interests that Ms Gorham, Toyco and Mr Tschannen are caught under this section because it was her intention to secure Toyco's deed over the second respondent companies and to exercise that security within the forbidden six month window; or, that it was Mr Tschannen's intention that this occur and that he was a 'shadow director' of the second respondent companies and the third respondent and, in that role, exercised the security too early. (The second submission relies upon an argument that the definition of 'director' in s 9 of the Corporations Act is apt to catch Mr Tschannen's conduct because, as the evidence clearly showed, Ms Gorham was accustomed to act in accordance with his instructions and wishes and, as that definition reads, she was not then, herself, validly appointed as a director.)
[43] Neither ground is made out. There is no evidence of any understanding or arrangement between Ms Gorham and Toyco as to a common purpose or object, over and above the transaction involving the default notice itself, and Mr Tschannen's appointment. Nor, as the cases mentioned earlier show, is a common directorship sufficient in itself.
[44] Further, the mere entry into the loan and security documents cannot be sufficient to establish some action, in concert, between Toyco and the other corporate parties to those documents; as Owen J observed in IPT Systems, to extend the definition in that way would have impossible consequences - e.g., so as to include a bank or other lending institution as an 'associate' for the purpose of the definition.[10]
[45] As in Papua New Guinea Dockyard Ltd, there is no evidence of any conduct engaged in between Ms Gorham and Toyco in consequence of any understanding or agreement which is pursuant to '... an objective or purpose which is common to them both'.[11] The evidence is, rather, that the security documents were entered into as part of an overall company (re)structure for future conduct of the QBL business. In taking steps to secure payment after default under them, Toyco was acting in its own interest and for its own individual purpose.
[46] There is, therefore, no basis for concluding that the steps taken by Toyco or Ms Gorham offended s 588FP.
[47] It is argued, for the Tschannen/Toyco interests, that the terms of this deed prevent the Lewis interests from arguing, now, that Mr Tschannen was not properly appointed as controller.[12] In light of the conclusions I have reached about the circumstances surrounding Mr Tschannen's appointment it is unnecessary to decide the question.
[48] It may be observed, however, that the decision in Offshore Oil establishes that an estoppel by deed will only arise when the deed is, itself, the basis for the action, and that is not the case here. The applicant does refer to the deed to argue that Mr Tschannen has not complied with its terms and says that this is evidence of bad faith, but that is an evidentiary matter, not a cause of action. Nor is the applicant trying to enforce any term of the deed and it is not, therefore, the basis for its claims.
Should an inquiry be conducted into Mr Tschannen's controllership?
[49] Under s 423 of the Corporations Act a court can inquire into matters concerning a controller's performance of their functions and powers. Jurisdiction is enlivened if it appears to the court that a controller has not faithfully performed their functions, under the instrument through which they were appointed or took control, or the Corporations Act and associated regulations, and rules. The section can be brought into operation by the complaint of a 'person', a term which will be construed widely.[13]
[50] Deciding whether an inquiry should be ordered is a two-step process: first, the court must decide whether there is a prima facie case laid out that the inquiry is appropriate; secondly, if so, the discretion to decide whether one should be ordered is enlivened.[14]
[51] The nature and effect of the provision, and the discretion arising under it, was extensively considered in Oswal. It is to be applied so as to allow the court to conduct an inquiry into a controller's conduct to determine whether there is sufficient evidence that they have not been faithfully or competently performing their duties. In doing so, however, the court will not lightly interfere with the decisions of a controller particularly where, for example, questions involving things like commercial judgment are involved.[15]
[52] While GE Capital is authority for the proposition that s 423 may be inappropriate unless some breach of the controller's powers or functions can be established simply, and is not open to substantial dispute,[16] the Full Court of the Federal Court has said (in relation to a similar position concerning liquidators - s 536) that matters relevant to the exercise of discretion would include the strength and nature of the allegations; any answers offered by the liquidator; other available remedies; the stage to which the liquidation has progressed; the likely amounts of money involved; the availability of funds to pay for any inquiry; the likely benefit to be derived from it; and the legitimate interest of the applicant in the outcome.[17]
[53] Although I was not persuaded that some lack of clarity in the evidence surrounding the execution of the security documents, and Mr Tschannen's appointment as controller, was sufficient to warrant a declaration that his appointment was not valid, there remain a number of troubling aspects about that process. It was, for example, surprising that Mr Tschannen was unable to produce proof of Toyco's $1,000,000 loan to the QBL business. After security documents were signed in January 2014, Mr Tschannen's appointment as controller occurred with remarkable speed - so quickly, indeed, that any observer is compelled to query his motives, and intentions.
[54] The concern engendered by those events is exacerbated by the involvement of Ms Gorham whose evidence - while, I am satisfied, was entirely frank and honest - was also embarrassing in the sense that she plainly had no understanding of, nor any particular interest in, the many documents her uncle asked her to sign, including affidavits; nor, of performing any role as director in terms of managing the business. As she said, to her perception all that was involved in her role as a director was to 'just sign' whatever her uncle asked her to, and she left everything in terms of the conduct of the business and the obligations of the various companies in which she held directorships to him.[18]
[55] It is these background circumstances, combined with a number of particular acts Mr Tschannen undertook during his controllership, which mean that what might be called the 'conspiracy theory' advanced by the Lewises is neither farfetched, nor implausible. That is not to say that events preceding his controllership - which, as found earlier, did not invalidate his appointment - should be taken into account in deciding whether an inquiry is warranted; rather, that they provide a context in which certain things that happened while he was in control should be examined, and considered.
[56] The Lewis interests point to a number of specific actions on Mr Tschannen's part said to support the conclusion that he did not faithfully perform his functions.
[57] First, it is alleged that he denied Mr Ken Lewis access to the premises. The evidence to this effect was entirely convincing. The deed entered into by the parties on 27 February 2014, after the mediation conducted by Mr Jessup, granted Mr Lewis and Ms Elisa Lewis access to the premises between 7:00 am and 5:00 pm so as to carry on the second respondent's business, under Mr Tschannen's direction and supervision. There is compelling affidavit evidence from them, and other witnesses including employees, that they were all denied access in circumstances which were inexplicable with reference both to the orderly conduct of the QBL business (in which, at all times, the Lewises maintained a substantial interest) and, also, the terms of the February agreement.
[58] Secondly, there is compelling evidence that Mr Tschannen engaged security guards, and ordered them to prevent Mr Ken Lewis and Ms Elisa Lewis from accessing books and records. Despite his appointment as controller, Ms Elisa Lewis remained a director of a number of the companies, including QBL and PBL, and was always empowered to access books and records. This was also a term of the settlement deed.
[59] Mr Tschannen also admitted that he had employed a new bookkeeper, who, he alleged, had been instructed to provide copies of accounts to Ms Elisa Lewis every Friday or Monday. He did not, however, file any affidavit from this person and she was not called. The evidence is compelling that, by these means, he deliberately kept the Lewises away from business accounts.
[60] There is also independent evidence from a QBL employee, David De Gennaro, and an accountant engaged in the business after Mr Tschannen's appointment, David Tyrell, that Mr Tschannen effectively ceased any trading by or on behalf of the QBL business. Mr Tyrell's uncontested evidence was that Mr Tschannen did not pay trade creditors, or purchase stock.
[61] Clause 6 of the mediation deed provided that a stocktake would be carried out as soon as reasonably practicable and that the controller would not permit the operation of the business until after that occurred but nothing, otherwise, in the agreement suggested that the business was not to continue - and, indeed, Mr Tschannen claimed in cross-examination that he had bought limited quantities of stock, albeit less than the business had previously purchased.[19] He also agreed, in his evidence, that it was important to keep stock coming in so that customer orders could be fulfilled.[20] (He had also undertaken to this Court, as discussed later, to '...carry on the business of each of the second respondents, in the ordinary course...'.)
[62] Mr Tyrell also said, and I accept, that in mid-March he was instructed by Mr Tschannen to create entries in the business books showing a debt owed by Toyco to Mr Tschannen of $1,3000,000, and another showing a similar amount in Mr Tschannen's name for 'retained earnings'. The direction, and the entries, are inexplicable except as an attempt to give formality to a loan to Toyco and, then, the business to which income from sales of stock might be credited. The evidence, at the very least, raises a question whether monies were advanced by Toyco to the business and warrants further investigation of the nature, and veracity, of the transaction.
[63] Mr Tschannen told Mr De Gennaro that he would not have a job at the end of the controllership - a statement carrying strong implication that it was not Mr Tschannen's intention to continue QBL as a trading business. That conclusion was reinforced by uncontested evidence that Mr Tschannen did not, during his controllership, make payments to trade creditors; or the lessee of the Molendinar premises; or, on vehicle leases. Mr De Gennaro's evidence went even further; he said, as I accept, that Mr Tschannen told him that he intended '...to quickly sell all the inventory of the warehouse at the Molendinar [sic] to recoup the money I have invested in the business'.[21]
[64] Mr Tschannen also, I find, failed to attend to a number of steps necessary to secure the lawful and effective - and continuing - conduct of the business. He did not take steps to enable continued lawful trading in accordance with requirements of the Liquor Act 1992 (Qld) by obtaining proper licences. He admitted selling large quantities of liquor directly from the Molendinar premises, but claimed he was unaware that he needed a licence to do so - despite what he also said was his lengthy experience in the liquor industry. The need for licences under ss 169 and 173 of that legislation is both obvious, and vital. Trading without them suggests more than carelessness - rather, it supports the Lewises' contention that his primary interest was to sell as much stock as quickly as possible.
[65] There is also persuasive evidence from Mr De Gennaro, and Mr Ian Currie, that Mr Tschannen removed some of Mr Lewis' personal files from the Molendinar site. That is not necessarily unusual, or sinister but, while Mr Tschannen initially said that this was inadvertent, when cross-examined he admitted that he wanted the documents taken to his lawyer's office.[22] The purpose is unclear; but a direction from Mr Tschannen to transport another person's documents to his lawyer's office is both surprising, and puzzling.
[66] There was also uncontested evidence from employees, including Ms Loredana Smith and Mr Tony Zillman, that Mr Tschannen did not pay employee entitlements; and, that there was no valid tenancy agreement for the Molendinar premises but he took no steps to secure the tenancy, and, indeed, took no steps to determine the true position.[23]
[67] Mr Tschannen gave undertakings to this Court, recorded in the orders of P D McMurdo J of 12 March 2014, that he would carry on the business in its ordinary course. On any view a failure to pay trade creditors or employee wages or entitlements, or secure valid rights of occupancy of business premises, or trade without a lawful licence under the Liquor Act and, rather, to conduct the business in a way which apparently involved its winding down by selling off and not replacing stock, are all things quite inconsistent with the undertaking, and those orders.
[68] There is also the question of a payment of $100,000 from Mr Tschannen's controller's account on 7 April 2014 - i.e., three days after Toyco removed him as controller, and appointed receivers - without apparent authority. Mr Tschannen said, during his cross-examination, that he had transferred this sum to Toyco,[24] and also denied that the receivers had demanded the return of the money,[25] but there was evidence that the receivers had requested that he repay it. On any view the payment is surprising and not, presently, satisfactorily explained.
[69] That payment, together with uncontradicted evidence from Ms Elisa Lewis, that Mr Tschannen had been selling liquor at an undervalue (and causing a loss to the QBL business on each sale) and evidence that he had not paid any money to the applicant despite the fact that, under the security documents, it ranked equally with Toyco is, in concert, further cause for concern.
[70] This panoply of questionable acts in the course of his controllership occurred, as mentioned earlier, in the context of preceding events which had some unusual aspects. By Mr Tschannen's own evidence, he appointed Ms Gorham as sole director despite the fact that she had no experience in the liquor industry, or in managing a business, or a company.[26] He admitted that he appointed her because he knew he would thereby be allowed to have ongoing involvement in the company.[27] On any view he remained, throughout, the controlling mind of Toyco.
[71] The weight of evidence lends support to the applicant's contention that Mr Tschannen's plan, from the outset, was to achieve appointment as controller of the business; and, that his motive and purpose in doing so was to obtain unfettered access to its assets, with the intention of withdrawing as much value from them as he could.
[72] It is not, however, necessary to make a finding to that effect because the matters discussed above about his defaults during his controllership are sufficiently serious and concerning to warrant an order for an inquiry. In particular, his failure to carry on the business - as he agreed to do under the mediation agreement, and in an undertaking he gave to the Court - compels the conclusion that he did not faithfully perform his functions.
[73] I am, therefore, satisfied that a prima facie case has been made out that an inquiry is appropriate. When all of the acts catalogued above are taken into account, it is compelling that the discretion to order that an inquiry be conducted is attracted, and should be exercised.
[74] In light of the appointment of provisional liquidators on 15 May this year, and what I perceive to be the dormant nature of the QBL business and of relations between the competing interests, it is appropriate to seek further submissions about procedural aspects of the inquiry.
[75] Finally, in action 3213/14 Toyco has brought an application to extend the time for registration of its security interest - in particular, the Loan Deed and a General Security Agreement which were part of the suite of documents prepared and signed in January 2014, and discussed earlier.
[76] The relevant documents bear the date 3 January 2014. They give rise to what the Personal Property Securities Act 2009 (Cth) calls a 'security interest'. They were registered on the Personal Property Securities Register on 11 February but should have been registered within 20 business days after 3 January, i.e. 31 January.[28]
[77] Toyco's explanation for the failure to register in time is explained, in affidavits filed by Mr Tschannen and his solicitor, in terms that he returned the executed documents to his then solicitors on 21 February but that they neither advised him of the need for registration, nor lodged the documents for that purpose. Mr Tschannen changed solicitors on 7 February, and on 11 February his new solicitors told him of the oversight, and immediately effected the lodgement.
[78] The new solicitor swears that a perusal of his predecessor's file reveals no explanation for the failure to lodge.
[79] It is argued for the applicant that the discretion under s 588FM only arises for purposes associated with s 588FL, and that the latter section only applies if an order has been made to wind up the company or an administrator has been appointed, or it is entered into a deed of company arrangement. (The appointment of provisional liquidators, as occurred here at the end of the hearing, is not an insolvency event and does not operate to enliven s 588FM.)
[80] Conversely it is said for Toyco that the court's power to make an order under s 588FM is not contingent on s 588FL already being engaged, because there is nothing in the wording of the latter provision suggesting such a limitation.
[81] Section 588FL commences with a sub-section stating that the section itself applies if the company is wound up, etc., and a security interest is in place. Under sub-section (2), certain time limits attach to security interest to which sub-section (1), and the balance of s 588FL, apply.
[82] Section 588FM provides that a company or an interested person may apply to the court for an order fixing a 'later time' for the purposes of sub-section 588FL(2)(b)(iv). The latter says that sub-section 588FL(2) covers a security interest if it is registered at a later time (i.e., later than the 20 business days allowed under s 588FL(2)(b)(ii)) ordered by the court under s 588FM.
[83] The opening limitation on the operation of s 588FL(1) is not repeated in s 588FM and, in my view, the latter can operate independently of the former and the discretion is not contingent on s 588FL being engaged. It follows that Toyco's application can proceed even though QBL has not been wound up, etc.
[84] Section 588FM replaced s 266 in preceding legislation, and cases decided under that provision are relevant to the present application.[29] The discretion may be exercised if the court is satisfied that the failure to register the security was accidental, or due to inadvertence, or some other sufficient cause. Here, the evidence shows, the interest was not registered because of human error, oversight or inadvertence on the part of the lawyers previously acting for Toyco, on Mr Tschannen's instructions.
[85] That circumstance is to be considered in light of the alleged existence of a security interest for a large sum, the short delay in registration (11 days in total, and a lesser number of actual business days) and, ultimately, registration.
[86] There is no evidence that any unsecured creditor extended credit or advanced funds to QBL, or evidence suggesting any particular creditor would suffer hardship if the registration period was extended. In all the circumstances this is a case in which the discretion may, and ought, be properly exercised in the applicant's favour.
[1] Affidavit of Kenneth John Lewis filed 6 March 2014, para 13.
[2] Affidavit of Elisa Shannon Lewis filed 6 March 2014, Ex ESL-3, pp. 85-111.
[4] (a) Loan Deed with the third respondent as lender and Power Beer and Liquor as borrower. By this document QBL, Power Beer and Liquor Operations, Roma Security and TCHG Secure Freight were guarantors for this loan;
(b) Loan Deed in identical terms to the Toyco Loan Deed except with the applicant as lender;
(c) Deed of priority between Toyco and INC under which each party's security was to rank pari passu;
(d) Loan facility deeds between PBL and each of the other second respondents. Under this document PBL granted a $3,000,000 loan facility to each of the other second respondents and under clause 5.2 the borrowers granted PBL a charge;
(e) General security deeds entered into between Toyco and each of the second respondents. Under these documents each of the second respondents grants Toyco a security interest in their property;
(f) General security deeds in identical terms to the Toyco Security Deeds except with the applicant as the grantee;
(g) General security deeds in identical terms to the Toyco Security Deeds except with PBL as the grantee.
[5] Strecko Juric-Kacunic v Stan Vaupotic [2013] NSWSC 41; and, see 400 George Street (Qld) Pty Ltd v BG International Ltd [2012] 2 Qd R 302.
[6] Mr Tschannen's affidavit sworn 1 April 2014, court document no 36, para 7; QBL balance sheet as at 17 January 2014, affidavit of Kenneth John Lewis sworn 5 March 2014, court document no. 4, ex KJL-2.
[8] IPT Systems Ltd v MITIC Corporate Pty Ltd [2000] WASC 316; (2000) 158 FLR 349 and Papua New Guinea Dockyard Ltd v Adams [2005] FCA 413; (2005) 215 ALR 742; and, Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd [2010] NSWSC 233; (2010) 238 FLR 384.
[9] Buzzle at [131], and the cases cited there.
[11] Papua New Guinea Dockyard Ltd v Adams at [13].
[12] Offshore Oil NL v Southern Cross Exploration NL (1985) 3 NSWLR 337, at 340-344.
[13] Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434, at 438.
[14] Oswal v Carson & Ors (in their capacities as recs and mgrs of Burrup Fertilisers Pty Ltd (ACN 095 441 151) (recs and mgrs apptd)) (No 3) [2013] FCA 337; (2013) 300 ALR 149.
[15] Burns Philp Investment Pty Ltd v Dickens (No 2) (1993) 31 NSWLR 280; Re S&D International Pty Ltd (in liq) (recs and mgrs apptd) [2009] VSC 225; Australian Securities and Investments Commission v Forestview Nominees Pty Ltd (recs and mgrs apptd) [2006] FCA 1530; (2006) 236 ALR 652; Northborne Developments Pty Ltd v Reiby Chambers Pty Ltd (supra); Vink v Tuckwell [2008] VSC 100; (2008) 216 FLR 309; GE Capital Australia v Davis [2002] NSWSC 1146; (2002) 180 FLR 250.
[17] Leslie v Hennessy [2001] FCA 371 at [6].
[21] Affidavit D De Gennaro filed 1 April 2014, para 5.
[28] Corporations Act 2001 (Cth), 588FL(2)(b)(ii).
[29] Re Enviro Pallets (NSW) Pty Ltd [2013] QSC 220.
(applicant)
WARREN ERIC TSCHANNEN IN HIS CAPACITY AS CONTROLLER OF QUALITY BLENDED LIQUOR PTY LTD ACN 129 020 739, POWER BEER AND LIQUOR PTY LTD ACN 164 195 108, POWER BEER AND LIQUOR OPEARTIONS PTY LTD ACN 166 999 239, ROMA SECURITIES PTY LTD ACN 137 882 976 AND TCHG SECURE FREIGHT PTY LTD
(2006) 236 ALR 652
(1993) 31 NSWLR 280
(2010) 238 FLR 384
(2002) 180 FLR 250
(2000) 158 FLR 349
(1989) 19 NSWLR 434
(1985) 3 NSWLR 337
(2013) 300 ALR 149
(2005) 215 ALR 742
(2008) 216 FLR 309