Warner Capital Pty Ltd v Shazbot Pty Ltd [2024] NSWCA 245 | Case summary

Court of Appeal (NSW)|2024-03-19|Before: Gleeson JA, White JA, Kirk JA, Parker J

Background facts

Insolvency practitioners are accountants but the features of their practice are very different from accounting practices generally. As Ms McCallum said: "• Each administration is a 'one off', i.e. when the administration is completed no further work is done for that client. In fact, legislation and industry codes of conduct do not generally permit repeat work for associates of these clients within specified timeframes; • The nature of the work in each administration has wide similarities and differences. There is a fair degree of similarity in compliance and reporting, but the issues encountered in each job result in a diverse set of actions; • There is a great deal of uncertainty about each job as often assets are not realised until investigations are complete, it is not known whether the IP will receive assistance from AFSA and ASIC (as these are subject to criteria that may not be met), and the actual work required to be done to complete the administration is usually not fully known at commencement; • The 'client' is insolvent and unable to pay the costs of the administration other than out of any assets of the insolvent entity that the IP may be able to recover. Unless the IP can get an undertaking or indemnity from a director or bankrupt or other party that they will meet the costs of the administration, the risk lies solely with the IP for recovery of fees, and it is an accepted fact that a certain proportion of all insolvency work is partially or totally unfunded; • The incumbent appointees may have such indemnities, but these are not generally transferable, and therefore the purchaser would need to obtain replacement indemnities from the parties. As the administrations have already commenced, there is little incentive to the parties to agree to provide such undertakings or indemnities and therefore this would be unlikely; • There are frequently factors which are out of the control of IPs which will impact their ability to control costs - these factors might be actions of other parties such as creditors, the need to seek judicial direction, disputes over ownership of assets and the like …"

The first issue

There were two versions of APES 330 Insolvency Services, one issued in November 2011 and the second being a revised version issued in September 2014. The second would be the relevant version for a purchaser considering acquisition of the book after 22 September 2014. It relevantly included the following: "3.20 A Member in Public Practice shall not provide any Inducement to any Entity to secure an Appointment for the Member or to secure or prevent the Appointment or nomination of another person. 3.21 A Member in Public Practice shall not accept an Appointment or perform an Administration that involves: (a) referral or other commissions, or monetary or non-monetary benefits; (b) spotter's fees; (c) understandings or requirements that work in the Administration will be given to a referrer; or (d) any other such arrangements that restrict the proper exercise of the Member's judgement and duties. … 8.23 Where a Member in Public Practice receives monies prior to acceptance of an Appointment to meet the costs of the proposed Administration, the Member shall ensure: (a) the monies are held in a bank account that is separately identifiable from the Firm's bank accounts; (b) there are no conditions on the conduct or outcome of the Administration attached to the monies; (c) full disclosure is made to creditors in the Declaration of Independence, Relevant Relationships and Indemnities; (d) approval of Professional Fees is obtained prior to them being paid to the Appointee; and (e) the monies are accounted for as funds of the Administration."
Section 595 of the Corporations Act at all relevant times has relevantly provided: "Inducement to be appointed liquidator etc. of company (1) A person must not give, or agree or offer to give, to another person any valuable consideration with a view to securing the first - mentioned person's own appointment or nomination, or to securing or preventing the appointment or nomination of a third person, as: (a) a liquidator or provisional liquidator of a company; or (b) an administrator of a company; or (c) an administrator of a deed of company arrangement executed, or to be executed, by a company; or (ca) a restructuring practitioner for a company; or (cb) a restructuring practitioner for a restructuring plan made, or to be made, by a company; or (d) a receiver, or a receiver and manager, of property of a company; or (e) a trustee or other person to administer a compromise or arrangement made between a company and any other person or persons. …"
Both sub-s 595(1) and cl 3.20 of the Standard have the effect that an insolvency practitioner who was a hypothetical purchaser of the book could not pay a premium to the firm as vendor of the book to obtain the right to be nominated as liquidator in the corporate insolvencies. That is common ground. It was the basis for the respondents not pressing their claim (in support of which they adduced evidence) that on a hypothetical sale of the book the hypothetical purchaser would have been prepared to pay a premium to acquire the book.
It is unnecessary to consider whether under s 595(1) the payment of a "discount" by the hypothetical vendor to the hypothetical purchaser of a book would breach the subsection. On one view, such a payment might have the object of preventing the appointment or nomination of other persons as liquidator. But that is not an issue raised by the respondents' Notice of Contention. It was not the subject of submissions and can be put aside.
In my view, for the hypothetical purchaser to accept a substantial "discount" payment for the acquisition of the whole of the book would involve his or her acceptance of a monetary benefit. Even if it be assumed that the "discount" paid reflected the parties' agreement as to the negative value of the book as a whole, the receipt of a sum certain in advance of acquiring the book, where the purchaser could take steps to reduce his or her future liability for expenses by resigning or obtaining the leave of the court to resign (if required), would be an immediate monetary benefit.
I do not accept that cl 8.23 affects this conclusion.
The appellants submitted that an arrangement permitted by cl 8.23 could not be prohibited by cl 3.21. That may be accepted.
The appellants also submitted that an arrangement contemplated by cl 8.23 would mirror the appellants' proposed structure for payment of a discount sum. That is not so. Clause 8.23 (and the clauses which precede it) are addressed only to an insolvency practitioner's acceptance of an appointment for a particular administration. This is reflected by the requirements for disclosure to creditors in a particular administration and, in particular, the requirement that moneys received in advance be accounted for as "funds of the administration".
The effect of this latter requirement is that if all of the moneys paid are not required to fund the insolvency practitioner's administration, the surplus must be accounted for, either to the creditors, or to the party providing the funds.
The "discount" payment the appellants contended a hypothetical purchaser would have required is not of the kind contemplated by cl 8.23.
The respondents' Notice of Contention on this issue should be upheld. This is itself a sufficient reason for dismissing the appeal. No hypothetical purchaser of the book could require or accept a "discount" payment without breaching his or her professional obligations.

The second issue

I accept the appellants' submissions that it was not an answer to their claim that a hypothetical purchaser would have required payment of a "discount" to take over the book and a hypothetical vendor would have been prepared to pay such a "discount", that there was no evidence of any such transaction in the "market".
The primary judge's reasons included the following (J3 at [90]): "I am concerned with the value of the book as at the termination of the CWK partnership in September 2014. If the question was the value of a car owned by the partnership, the question would be purely one based on the then state of the car, and the then state of the market, as at that date. It could not depend upon whether the car in fact lasted longer or shorter than might have been expected by the purchaser. I cannot see in principle why the valuation of the book should be any different."
There is a reason in principle why the valuation of the book should be different. That is because there was no market for the acquisition of the book. Instead, the orders required a valuation of the book on the hypothetical basis that there could be a purchaser desirous to acquire the book and the partners could be desirous of selling it. In Spencer v The Commonwealth of Australia, Griffith CJ said at 431-432: "… Bearing in mind that value implies the existence of a willing buyer as well as of a willing seller, some modification of the rule must be made in order to make it applicable to the case of a piece of land which has any unique value. It may be that the land is fit for many purposes, and will in all probability be soon required for some of them, but there may be no one actually willing at the moment to buy it at any price. Still it does not follow that the land has no value. In my judgment the test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, i.e., whether there was in fact on that day a willing buyer, but by inquiring 'What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?' It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural. The necessary mental process is to put yourself as far as possible in the position of persons conversant with the subject at the relevant time, and from that point of view to ascertain what, according to the then current opinion of land values, a purchaser would have had to offer for the land to induce such a willing vendor to sell it, or, in other words, to inquire at what point a desirous purchaser and a not unwilling vendor would come together. …"
The absence of an actual market for a transaction contemplated by the orders of 16 September 2019 is not a reason for not carrying out the valuation exercise required by those orders.
Nonetheless, for the book to have a capital value, either positive or negative, the hypothetical vendor and purchaser must not only be assumed to be willing, they must also be able to dispose of and acquire the book for a price. It is now common ground that the vendor could not extract a price for sale of the book. For the reasons above in relation to issue 1, the hypothetical vendor could not demand a price to acquire the book.

The third and fourth issues

As noted at [30] above, ground 3 of the Notice of Appeal did not identify with any particularity why the primary judge erred in not accepting the evidence of the appellants' expert witnesses, Mr Hird and Ms McCallum.
One of the reasons the primary judge did not descend into a critical analysis of their opinions was that his Honour found that those opinions did not address the ability of the insolvency practitioner to resign from unfunded administrations. It is desirable to address issue 5 before coming back to issues 3 and 4.

The fifth issue

It is noted at [47] that Ms McCallum opined that insolvency practitioners had an obligation to complete the administrations over which they had been appointed and could not "down tools" if costs became too excessive or the work became too onerous.
As a general proposition that should be accepted. But it does not address the question as to when an insolvency practitioner can relieve himself or herself of those obligations by resigning.
In the case of court appointed liquidators, s 473(1) of the Corporations Act relevantly provided (as at 22 September 2014) that: "473 General provisions about liquidators (1) A liquidator appointed by the Court may resign or, on cause shown, be removed by the Court. …"
Section 545 provided: "545 Expenses of winding up where property insufficient (1) Subject to this section, a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property. (2) The Court or ASIC may, on the application of a creditor or a contributory, direct a liquidator to incur a particular expense on condition that the creditor or contributory indemnifies the liquidator in respect of the recovery of the amount expended and, if the Court or ASIC so directs, gives such security to secure the amount of the indemnity as the Court or ASIC thinks reasonable. (3) Nothing in this section is taken to relieve a liquidator of any obligation to lodge a document (including a report) with ASIC under any provision of this Act by reason only that he or she would be required to incur expense in order to perform that obligation."
It follows that in the case of the court appointed liquidations, the hypothetical vendor would not pay a "discount" to a hypothetical purchaser to acquire the administration of those liquidations for two reasons. The first is that it would be a breach of his or her professional obligations to do so. The second is that it would make no financial sense to do so because the vendor could meet his or her obligations by complying with his or her obligations to provide a report and by resigning.
In the case of the bankruptcies and Part X administrations, the position is more complex.
Section 180 of the Bankruptcy Act 1966 (Cth) provides: "Resignation of trustee The Court may, subject to such terms and conditions as it thinks just, accept the resignation of a registered trustee from the office of trustee of an estate."
Thus, the bankruptcy trustee does not have the right to resign because the bankruptcy is unfunded. But the court has a discretion to allow resignation for that reason. The authorities suggest that any such application for resignation would be likely to be accepted (In Re Trocevski (Trustee), Moran A Bankrupt [2023] FCA 355 at [4], [9], [25]; Re Abdulrahman (Bankrupt) (No 2) [2011] FCA 899 at [3], [9]-[12]; Re Gollant [2017] FCA 1158 at [10], [13], [14], [20]).
The primary judge concluded (J3 at [103]-[104]: "103 … it is difficult to see that practitioners disposing of their practice could ever face a practical compulsion to pay a sum on the scale claimed by the defendants in these proceedings. Why would such practitioners not, as a last resort, simply apply to the relevant insolvency court to be replaced as insolvency officeholders? If no-one was prepared to volunteer, a replacement, or replacements, would just have to be appointed by rotation, or in some other way, from among the remaining pool of officeholders receiving appointments from the court. 104 Seen in this light, it may be that the true measure of the value of the book was the cost of bringing applications to the relevant insolvency courts to appoint someone else to each of the administrations. But there is no evidence as to what those costs would have been, and they are likely to have been no more than a few tens of thousands of dollars, if that. The defendants' case was not put in that way. The case put by the defendants fails."
That conclusion should be accepted.
The elaborate analyses of the appellants' witnesses, and the responsive analyses of the witnesses called for the respondents, failed to address the real issues.
In these circumstances there is no reason this Court should embark upon a detailed analysis of their evidence, or the asserted details of the individual files, as the appellants asserted with respect to the third and fourth issues The primary judge was right not to do so.
For these reasons I propose that the appeal be dismissed with costs.
KIRK JA: I agree with White JA.

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Solicitors: Emerson Lewis (Appellants) Uther Webster & Evans (Respondents) File Number(s): 2023/191618 Decision under appeal Court or tribunal: Supreme Court Jurisdiction: Equity Citation: Shazbot Pty Ltd v Warner Capital Pty Ltd (No 3) [2023] NSWSC 527 Shazbot Pty Ltd v Warner Capital Pty Ltd (No 4) [2023] NSWSC 1001 Date of Decision: 18 May 2023 Before: Parker J File Number(s): 2015/119465

HEADNOTE [This headnote is not to be read as part of the judgment] The second appellant (Mr Warner) and the second respondent (Mr Kugel) were insolvency practitioners who conducted their practice through a partnership known as CRS Warner Kugel from 19 September 2007 to 22 September 2014. The remaining parties in these proceedings were the companies controlled by Mr Warner and Mr Kugel. The partnership was profitable, and in the three years from 30 June 2012 to 30 June 2014 the net profits of the practice exceeded $1.8 million per annum. In September 2014, Mr Warner decided to bring the partnership to an end and to continue the insolvency practice by himself. At the date of dissolution of the partnership, the firm had on foot 461 insolvency administrations. The significant majority of the work and assets of the practice, including its employees, remained with Mr Warner. In 2018, the primary judge held that Mr Kugel was entitled to an order for an account as part of the dissolution of the partnership, and in September 2019 the primary judge made orders for the taking of accounts. Those orders were subject to an appeal in this Court in 2020, which was substantially unsuccessful but led to the variation of the orders made in 2019. Further variations were made to those orders under the slip rule in 2023. The orders as varied required the valuation of the "work in progress" (WIP) accrued as at 22 September 2014 as well as the valuation of any "residual goodwill", which represented a proxy for valuing the notional sale price for the book of administration matters in terms of what "premium" an incoming purchaser would be willing to pay (or "discount" the purchaser would have required to be paid to them) for the book as a whole. The taking of the accounts was remitted to the primary judge. Relevantly to this appeal, these orders included a requirement for Mr Warner and his companies to account for the "income collected" from 22 September 2014 which formed part of the partnership's WIP as at 22 September 2014. After a further hearing in early 2023 the primary judge directed the parties to bring in short minutes of order giving effect to his reasons. One question dealt with whether a purchaser could properly have paid a premium for the acquisition of the book or required a discount to take over the book, owing to the prohibitions contained in s 595 of the Corporations Act 2001 (Cth) and a cll 3.20 and 3.21 standard published by the Accounting Professional and Ethical Standards Board (APES 330 Insolvency Services) (the "APES Standard"). Without expressing a concluded view, the primary judge expressed a prima facie view that cl 3.21 of the APES Standard would be contravened if the hypothetical purchaser were to be paid money by the vendor as an inducement to acquire the book. The primary judge did not find that a purchaser acquiring the book would require such a payment to take over the book, and in doing so rejected the evidence of expert witnesses called by Mr Warner. These findings were based on the fact that there was no evidence of prior sales of this kind, a discount would never be required owing to the economies of scale that expanding a practitioner's book would have if they had capacity to take on the work, and that practitioners could resign from administrations which represented a liability. The appellants, in challenging these findings of the primary judge and the orders made on 6 September 2023, identified five interrelated issues on the appeal: (i) Whether the "discount" payment to a hypothetical purchaser to take on the entire book would have been permissible; (ii) Whether the primary judge erred in placing reliance on the fact that there was no evidence of actual market transactions in which a purchaser has insisted on payment by the outgoing practitioner to acquire the book; (iii) Whether the primary judge erred in not accepting the evidence of the appellant's expert witnesses and therefore finding that the appellants had not established that the book had a negative value; (iv) Whether the primary judge erred in concluding that the power of the court to appoint a replacement liquidator meant that a discount would never be payable; and (v) Whether the primary judge erred by not considering the detailed evidence available as to the stage and status of individual administrations which made up the book. By Notice of Contention the respondents submitted that on the first issue the primary judge should have held that such a hypothetical transaction would be impermissible, as it either breached cl 3.21 of the APES Standard and would not fall under cll 8.17-8.23 of the same, or that it would have been uncertain to the hypothetical vendor and purchaser if such an arrangement would breach cl 3.21 or fallen within cll 8.17 and 8.23. The Court (White JA, Gleeson and Kirk JJA agreeing) dismissed the appeal, holding: As to issue (i), per White JA (Gleeson and Kirk JJA agreeing at [1] and [82] respectively): It was common ground that sub-s 595(1) of the Corporations Act and cl 3.20 of the APES Standard have the effect that an insolvency practitioner who was a hypothetical purchaser of the book could not pay a premium to take over the book. Similarly, for a hypothetical purchaser to accept a substantial discount payment for the acquisition of the book would involve an impermissible acceptance of a monetary benefit: [53], [55]. Even though an arrangement permitted by cl 8.23 of the APES Standard could not be prohibited by cl 3.21, the arrangement regarding the entire book contemplated by the appellants did not fall within cl 8.23 as that provision addresses only a practitioner's acceptance of a particular administration: [57], [58], [60]. No hypothetical purchaser of the book could require or accept a discount payment without breaching the relevant professional obligations. This finding is sufficient to dismiss the appeal: [61]. As to issue (ii), per White JA (Gleeson and Kirk JJA agreeing at [1] and [82] respectively): It is not an answer to the appellants' claim that a hypothetical purchaser would require a discount payment to take over the book and a hypothetical vendor would be willing to pay this amount to say that there was no evidence of such transactions in the "market". The primary judge's orders required a valuation of the book on a hypothetical basis, and the absence of an actual market for a transaction of that kind is not a reason not to carry out the valuation exercise: [62], [64], [65]. Spencer v The Commonwealth of Australia (1907) 5 CLR 418; [1907] HCA 82, applied. Nonetheless, for the book to have a capital value, either positive or negative, the hypothetical vendor and purchaser must not only be assumed to be willing, but they must also be able to dispose of and acquire the book for a price. For the reasons in relation to issue 1, this was not permissible: [66]. As to issues (iii) and (iv), per White JA (Gleeson and Kirk JJA agreeing at [1] and [82] respectively): Noting the conclusions made as to issue (v), the elaborate analyses of the appellants' witnesses, and the responsive analyses of the respondents' witnesses, failed to address the real issues. In such circumstances, there is no reason that the Court should embark on a detailed analysis of their evidence, or the individual files, and the primary judge was right not to do so: [79], [80]. As to issue (v), per White JA (Gleeson and Kirk JJA agreeing at [1] and [82] respectively): In the case of court appointed liquidators, the ability to resign provided s 473(1) of the Corporations Act, and the fact that s 545 provides that a liquidator is not liable to incur any expenses if there is insufficient property, means that it would make no financial sense to make a discount payment where the vendor could simply provide a report to ASIC and resign: [71]-[73]. Whilst a trustee in bankruptcy does not have the right to resign solely because an administration is unfunded, the court has a discretion to allow resignation for that reason. The authorities suggest that such an application would likely be accepted by the court: [76]. In Re Trocevski (Trustee), Moran A Bankrupt [2023] FCA 355; Re Abdulrahman (Bankrupt) (No 2) [2011] FCA 899; Re Gollant [2017] FCA 1158, referred to. The primary judge's conclusion that a practitioner disposing of their practice would be unlikely to pay a discount as they could instead have resigned, or applied to resign and be replaced, without incurring any costs should be accepted: [77]-[78].

Warner Capital Pty Ltd v Shazbot Pty Ltd

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