Should the administration be terminated?
122 A substantial dispute arose between the parties as to whether the administration should be terminated pursuant to s 447A of the Corporations Act in the event that the Court found that the administrators were not legitimately appointed. Although not expressly stated, Mr Hutchinson's submission was effectively that, if the administrators had been invalidly appointed, their appointment should, nevertheless, be validated by an order under s 447A.
123 Whilst it is true that the Court has power to terminate or validate an administration under that section, the circumstances of the present case that have given rise to the possible exercise of that power compel the conclusion that it should be used to bring the administration to an end. The evidence overwhelmingly supports the conclusion that Green Day Energy was solvent when the administrators were appointed and has remained so since then. There was no legitimate foundation for the purported appointment of administrators under s 436A. Indeed, their appointment was effectively an abuse of Pt 5.3A of the Corporations Act. It goes without saying that Pt 5.3A should not be used merely to quell shareholder or director disputes, or for the manipulation of members' respective shareholdings. Any attempt to use it in such a way must be found to be without effect.
124 On behalf of Mr Hutchinson, it was submitted that the manner in which the company was operated prior to its administration suggested that it would be imprudent of the Court to return it to the hands of the directors. Even if that were correct, however, it is not entirely clear what the future of the company would be if the administrators remained in place. There is no suggestion that a deed of company arrangement is likely to be proposed, or any indication as to where it might come from or what it might hope to achieve.
125 On the other hand, if the administrators are removed, it is sufficiently clear that a general meeting of the members of the company will occur, at which the majority shareholder, WFA, will be able to exercise its voting rights to reconstitute the board of directors, should it wish to do so. The current intention, as expressed by Mr Carswell, would be to remove Mr Hutchinson and replace him with two independent directors. The evidence before the Court shows that Mr John Dunleavy is prepared to act as a director. Although he is known to Mr Carswell, he has extensive experience in securing Commonwealth and State grants and funding initiatives, as well as in assisting with ongoing compliance obligations. He also has experience in corporate advisory work in relation to capital raising, business planning, and developing expansion plans for businesses of varying sizes. A second proposed director is Mr Roger Emmerson, who has experience in corporate management and a long track record of success across several industries. He is also appropriately qualified to conduct Green Day Energy's business. This evidence suggests that returning the company to the directors will likely result in it having more effective governance than it has had to date.
126 Section 447A of the Corporations Act is expressed in broad terms and allows the Court to "make such order as it thinks appropriate about how [Pt 5.3A] is to operate in relation to a particular company". Nevertheless, the power must be exercised so as to achieve the objectives of Pt 5.3A, as expressed in s 435A. In the recent matter of Re Premier Energy Resources Pty Ltd [2023] NSWSC 1185, Williams J set out the established principles that guide the exercise of the Court's power. Her Honour said (at [63] - [64]):
63 The power under s 447A has been applied in numerous cases to make orders validating the appointment of administrators that would otherwise be invalid, or dispelling uncertainty that would otherwise exist about the validity of the administrators' appointment. These include cases in which there were doubts about whether instruments of appointment had been forged.
64 The factors relevant to the exercise of the discretion include:
(1) whether the company is insolvent, or is likely to become insolvent;
(2) whether the administrators made inquiries to confirm the validity of their appointments, including by seeking external legal advice;
(3) the potential disruption that may be caused by a future challenge to the validity of the administrators' appointment;
(4) the conduct of the directors prior to the administrators' appointment, and whether it would be wrong to give the imprimatur of the Court to that conduct by validating that appointment;
(5) the work carried out by the administrators - and, in the present case, by the liquidators - on the assumption that their appointments were valid;
(6) whether substantial injustice would be occasioned to any person by the validation of the appointment of the administrators and, in the present case, by the consequential effect of such validation on the validity of the appointment of the liquidators; and
(7) whether the proposed orders under s 447A are otherwise consistent with the objectives of Part 5.3A of the Corporations Act.
(Footnotes omitted).
127 A significant factor in this case is that articulated at point (4) above. Applied to the present circumstances, it could be observed that to permit Green Day Energy now to remain in administration would, effectively, be to give the Court's imprimatur to Mr Hutchinson's improper use of the power of appointment in s 436A. As mentioned previously, there was simply no legitimate basis for the appointment of the administrators, which constituted an abuse of Pt 5.3A. There would be a considerable deal of incongruity in reaching that conclusion on the one hand while, on the other hand, declining to terminate the administration on discretionary grounds - particularly because this would allow Mr Hutchinson to retain the benefit of his misuse of the statutory scheme.
128 The parties referred to a number of other events that occurred in the management of Green Day Energy in an attempt to justify their respective positions as to the termination or validation of the administration. There is no need to describe them all in detail, but some of the more prominent examples do bear mentioning.
129 Though there was some debate as to the proper apportionment of blame for the freezing of Green Day Energy's NAB account, it has remained difficult to ascertain exactly who was at fault, and to what extent, in relation to that matter. Ultimately, there is no need to draw any final conclusion on that point, given the other factors that effectively necessitate the termination of the administration.
130 There is no similar difficulty in apportioning blame in relation to the use of the $500,000 in Commonwealth grant money that was transferred out of Green Day Energy's NAB account. In May 2023, Mr Carswell became concerned that this amount of money had been withdrawn. As it transpired, it had been transferred to a mortgage offset account belonging to Mr Stephen Hutchinson and his wife. Neither of those persons was an officer or an employee of the company, though it appears generally from the evidence in this proceeding that Mr Hutchinson did give his brother some measure of access to, or control over, the company's bank account.
131 As explained above, the transfer of funds was described in the company's records as a payment to a company controlled by Mr Winter for "plant and equipment". That description was false. Although Mr Hutchinson was responsible for the accounts, he had no explanation as to why the recipient of the funds and the use to which they were being put were misleadingly represented in this way.
132 It seems that the effect of the transfer to the offset account was to reduce the amount of interest that Mr Stephen Hutchinson and his wife were required to pay on their loan. Despite Mr Hutchinson's assertions to the contrary, there was no valid reason for Green Day Energy's funds to have been used in that manner. In his affidavit of 16 October 2023, he said that the money was transferred at the suggestion of his brother, so that it could "earn income that could offset expenses when the project ultimately commenced". While he acknowledged that the documentation surrounding this transaction "could have been more robust", he claimed that there was an email outlining the terms of its use and that the interest that it earned was recorded as a separate savings account within the company's accounts. The email to which he referred was sent to him from Mr Stephen Hutchinson on 24 September 2022. In full, it stated:
As discussed, will place 500k from the Green Day Energy account on call at a rate of 3.65% (~$50 a day). If rates continue to rise this could increase.
133 Plainly, this is not an adequate set of terms on which a director of a company might transfer to the personal offset account of his brother, who is neither a director nor employee of the company, $500,000 from the company's funds, which had been received in the form of a Commonwealth grant (assuming that such a course could ever properly be taken, whether on terms or otherwise). To say that the documentation of the transaction "could have been more robust" is an understatement in the extreme. Most noteworthy is the omission from the email of any explanation of the purpose of the arrangement - leaving open the possibility that, in reality, it was contrived purely for the private benefit of Mr Stephen Hutchinson, to the detriment of Green Day Energy. One thing is for certain: the purpose of the arrangement to which Mr Hutchinson deposed in his affidavit evidence went unfulfilled, as the funds in the offset account did not earn interest at all. Taking a view of the circumstances that is especially generous to Mr Hutchinson, all things considered, it might be supposed that he simply failed to inquire whether his brother had proceeded to invest the funds in an interest-bearing account as he had suggested he would. At the same time, it so happens that the Court was not shown any evidence of a separate account in which the interest earned on the $500,000 sum was (or was to be) recorded, perhaps suggesting that Mr Hutchinson also failed to set that up. To complete the picture, Mr Hutchinson conceded in cross-examination that he had not informed Mr Carswell, or sought approval from the board of Green Day Energy, prior to transferring the money.
134 Mr Hutchinson subsequently asserted in his affidavit of 16 October 2023 that a calculation was to be made of the interest that the $500,000 in the offset account would have earned, and that amount would be paid to Green Day Energy. That evidence should not be accepted. There was a telling absence of any contemporaneous documentation evidencing the existence of such an arrangement, which was, with respect, very difficult to reconcile with the facts as they ultimately emerged.
135 Mr Hutchinson further deposed that, on about 29 May 2023, approximately $20,810 was held in cash for the benefit of Green Day Energy, which had been paid by Mr Stephen Hutchinson "on account of interest referable to the money borrowed from [the company]". It was claimed that this money was spent by or on behalf of the company, but the specifics of the transactions were recorded only in the Xero account maintained by the company. The records from the Xero account were not produced because, according to Mr Hutchinson, he did not currently "have access to review those records". That is a surprising state of affairs, given that he had financial control of the company. In cross-examination, he gave the more equivocal explanation that he did not know whether or not he had access to the Xero account but, if he did have full access, he did not utilise it to review the company's records. It is not unfair to say that this evidence was unsatisfactory.
136 Whilst Mr Hutchinson and his brother have returned the $500,000 to the account of Green Day Energy, and may have paid some interest on the sum, that cannot negate the obvious impropriety of the transaction that was undertaken. Indeed, it gives the appearance merely that they were trying to restore some of their credibility once they were caught in the process of, quite unmistakably, misusing the company's funds.
137 Further evidence of Mr Hutchinson's financial mismanagement can be seen in his acquisition of two motor vehicles.
138 On 22 July 2022, he withdrew the amount of $67,145.11 from Green Day Energy's NAB account in the form of a bank cheque payable to a motor dealer, Metro Ford. In his affidavit of 16 October 2023, he said that this was for the purchase of a Ford Ranger, which was to be used in Richmond for the benefit of the company's staff. However, the vehicle has never since been taken to Richmond and used there for the company's business. Instead, it has been kept by Mr Stephen Hutchinson at his home for his exclusive, private use. As mentioned above, Mr Stephen Hutchinson is neither a director nor an employee of Green Day Energy. Mr Hutchinson provided no valid explanation for his brother's possession and use of the vehicle. Downplaying the circumstances to quite a remarkable extent, he deposed in his 16 October 2023 affidavit in respect of the vehicle that "due to delays in the project that were outside of the control of [Green Day Energy] it is not yet required in Richmond, and the Ford Ranger is currently located in Brisbane". Amplifying the cause for concern in relation to this transaction is the fact that Mr Hutchinson did not inform his co-director, Mr Carswell, of the purchase of this vehicle, or of the manner in which it was being used.
139 In August 2022, Mr Hutchinson transferred $36,000 of Green Day Energy's funds to himself for the purchase of a Nissan Navara. This vehicle was purchased with the knowledge and involvement of Mr Carswell, and has been used for the Biomass Project in the Richmond area. However, all throughout, it has been registered in Mr Hutchinson's name - not in the company's name. In cross-examination, Mr Hutchinson could not recall whether or not he had told Mr Carswell that the vehicle would be registered in his own name in this way. He indicated that his intention was to transfer the registration, at some point, into the company's name, but he said that he had simply forgotten to do so. He was prepared to accept the suggestion, squarely put to him, that there was no valid reason why he had registered the Navara in his own name. It might also be noted that, given that the Navara was purchased for use on the project at Richmond, and was so used, the asserted purpose behind the prior acquisition of the Ford Ranger seems to have been shown to be false.
140 These dealings by Mr Hutchinson reinforce the view that he has been prepared to misapply the company's funds rather audaciously for his own benefit and for the benefit of his relatives. Such behaviour is offensive to ordinary understandings of sound financial management. It strengthens the conclusion that he should not remain in a position where he enjoys financial control over Green Day Energy.
141 Mr Hutchinson's failure, as the putative financial administrator of Green Day Energy, to regulate access to the company's funds, to ensure that the company entered into appropriate transactions, and to document the use of funds, renders it inappropriate for him to remain in any office that affords him a measure of control over the company. On its face, his permitting - if not actively facilitating - the misuse of company funds for his benefit and the benefit of his brother, involved a breach of his statutory duties as a director, as set out in ss 180, 181 and 182 of the Corporations Act, as well as a breach of the fiduciary duties that he owed. Those breaches were serious and were exacerbated by the misrepresentations in the company's accounts. Additionally, it is a matter of great concern that, in the course of his cross-examination, he was seemingly unable to acknowledge that certain of the dealings with his brother were inappropriate.
142 The plaintiffs submit that these matters evidenced serious mismanagement of Green Day Energy's finances by Mr Hutchinson. They say that such failures, of themselves, provide a substantial reason for terminating, or not validating, the administration. This will allow control of the company to vest, ultimately, in the hands of Mr Carswell and the two independent directors. These submissions should be accepted.
143 The termination of the administration in this case will also permit the company's members to exercise their voting rights to arrange the company's management in accordance with their entitlements afforded by the constitution. To the extent necessary, the shareholders can pursue any grievance in accordance with the dispute resolution clause in that document, failing which they may invoke one of the statutory remedies. In relation to the reorganisation of the board, the fact that WFA intends to appoint Mr Dunleavy and Mr Emmerson as independent directors, each of whom has experience in financial management and corporate governance, supports the conclusion that, if the administration is brought to an end, Green Day Energy will be able to proceed with the Biomass Project in accordance with the conditions upon which funding has been received from Commonwealth Government.
144 The restoration of the company to the control of validly elected directors through the application of the relevant voting procedures will also permit the removal of any restrictions on access to Green Day Energy's NAB account. In turn, that will allow for the ready payment of the company's creditors, as and when required.
145 There is nothing to suggest that any current creditor of the company will be disadvantaged by the termination of the administration. That is largely because the company is not insolvent and has the capacity to pay all of its debts.
146 There was some suggestion by Mr Hutchinson that Green Day Energy's future is problematic because it has not yet raised and contributed to the business an amount of $750,000 in accordance with its "contingent co-funding obligation". This, so it was said, would cause the Commonwealth to require the return of its grant funding. However, that is a matter of pure speculation, and it is far from certain that the Commonwealth would take such action. Moreover, Mr Dunleavy's appointment to the board will likely mitigate difficulties with the administration of the grant, as he has particular expertise in such matters. In any event, the grant was provided as part of a program that had the objectives of, inter alia, supporting the research and development of innovative and locally sourced raw material supplies. The Biomass Project's scope included the development and implementation of sustainable harvesting and collection methods, using Prickly Acacia as raw feedstock, and the commercialisation of research outcomes through the bringing of the low-emissions biomass fuel to market. In this respect, the grant was substantially focused on preliminary processes of research and development. Necessarily, that gives rise to an expectation that some leeway might be afforded in the project's progression.
147 This latter point also disposes of the suggestion, made on Mr Hutchinson's behalf, that the administration should not be terminated because the project is unviable in any event. By nature, the Biomass Project involves substantial research into an emerging product, with little to no certainty as to its commercial prospects. A commercial success is certainly hoped for, but is not necessarily anticipated or even imperative. It might also be pointed out that this is an unusual submission to be made on behalf of Mr Hutchinson in circumstances where neither he nor Firewheel Trading has previously raised the suggestion that the research and development exercise, and the Biomass Project more generally, will be fruitless. It is difficult not to perceive an element of spitefulness in this submission in the present circumstances - giving the appearance that Mr Hutchinson is attempting to bring the business down because it is likely that he will not enjoy a position of great influence in its future.
148 On behalf Mr Hutchinson, it was further submitted that it is likely that the members of Green Day Energy will end up in litigation in the future and that should be avoided. The foundation of that submission was not made entirely clear. Certainly, on the evidence that has emerged in this proceeding, there is a real possibility that Green Day Energy may seek to recover against Mr Hutchinson in relation to the performance of his director's duties, albeit that it may face some difficulties proving the losses that it has suffered. It may be that Mr Hutchinson's submission was hinting at an oppression action but, again, on the evidence presently before the Court, it is difficult to see who the targets of any such claim might be. There was nothing to suggest clearly that WFA had, to date, engaged in any conduct that might offend ss 232 and 233 of the Corporations Act. On the contrary, it has sought to ensure the proper management and administration of Green Day Energy, and it has not indicated any intention to pursue further proceedings. Although accusations of mismanagement were levelled against Mr Carswell and WFA, none of them were sustained. While Mr Carswell's conduct may not have been at all times faultless, the mismanagement of the company has for the most part been the product of Mr Hutchinson's cavalier, self-interested attitude to his duties as a director.