REASONS FOR JUDGMENT
1 This proceeding arises from an application for review of orders made by a Registrar of this Court, although other applications were made during the course of the proceedings. The orders made by the Registrar were that Australvic Property Management Pty Ltd ('APM') be wound up in insolvency under the Corporations Act 2001 (Cth) ('the Corporations Act') and that Mr Michael Wesley McCann, an official liquidator, be appointed liquidator of the company.
2 The orders were made on the application of Xat Ky and Siv Cung Heng ('the creditors') and the application was based on the failure of APM to pay a debt which was the subject of a statutory demand served on APM by the creditors. APM did not apply under s 459G of the Corporations Act for an order setting aside the statutory demand.
3 The statutory demand was served on the registered office of APM on or about 30 November 2006 and the application by the creditors for a winding up order was made on 15 March 2007. The Registrar made the orders referred to above on 23 May 2007 and the application for review by APM was made on the same day.
4 At the time the statutory demand was served Brian Leslie Fisher was the sole director and secretary of APM.
5 The application for review is brought under s 35A(5) of the Federal Court of Australia Act 1976 (Cth) and is a hearing de novo (s 35A(6)).
6 On 23 May 2007, I stayed the operation of the winding up order. That stay has remained in place throughout the hearing of this matter. A number of companies and individuals appeared as supporting creditors, although APM disputed certain of these claims.
7 As I have said, APM did not make an application to set aside the statutory demand under s 459G of the Corporations Act. APM seemed to dispute the debt it is said to owe to the creditors. By reason of s 459S of the Corporations Act APM may not, without the leave of the Court, oppose the application for it to be wound up in insolvency on a ground that it could have relied on but did not so rely on for the purposes of an application by it for the statutory demand to be set aside.
8 No application for leave under s 459S was made by APM. In the context of an adjournment application by APM, hearsay evidence was introduced by APM through Mr Fisher seeking to dispute the debt owing to the creditors. This was on the basis that the promissory notes the basis of the statutory demand were effectively altered to roll over payment for a further period of time, and that the promissory notes were executed without the authority of APM. Such evidence is not admissible in proceedings of this nature, and no reliance could be placed upon s 75 of the Evidence Act 1995 (Cth) to introduce such evidence. In any event, as no application was brought pursuant to s 459S, no effort was made to show the Court that it could be satisfied that the ground would be material to proving that APM was solvent (s 459S(2)) as distinct from just leading evidence as to solvency generally. No explanation was provided by APM as to why it did not apply under s 459G of the Corporations Act to set aside the statutory demand.
9 In these circumstances, I am proceeding on the basis that the application by the creditors is an application based upon a failure by APM to comply with a valid statutory demand. No argument was addressed by counsel for APM to suggest there was any irregularity or defect that would prevent the statutory demand from being relied upon in this proceeding.
10 By reason of APM's failure to comply with the statutory demand it is presumed to be insolvent: s 459C(2) of the Corporations Act. APM seeks to establish that it is not insolvent and whether it has discharged the onus of proving that it is not insolvent is the important question before me.
11 At the outset I set out some legal principles I rely upon for determining this proceeding:
- APM bears the onus of proving its solvency: s 459C;
- In order to discharge that onus the Court should generally be presented with the "fullest and best" evidence of the financial position of APM: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081;
- Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency: Commissioner of Taxation v Simionato Holdings Pty Ltd (1997) 15 ACLC 477; Re Citic Commodity Trading Pty Ltd v JBL Enterprises (WA) Pty Ltd [1998] FCA 232; Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 463;
- The nature of a company's assets, and its ability to convert those assets into cash within a relatively short time, at least to the extent of meeting all its debts as and when they fall due, must be considered in determining solvency: Rees v Bank of New South Wales (1964) 111 CLR 210; Re Tweeds Garages Ltd [1962] Ch 406 at 410; Simionato Holdings Pty Ltd 15 ACLC 477; Melbase Corporation Pty Ltd v Segenhoe Ltd (1995) 13 ACLC 823 at 832; Leslie v Howship Holdings Pty Ltd
(1997)15 ACLC at 465-466;
- The appropriate test is the "cash flow test" rather than a "balance sheet test" of insolvency. The adoption of a cash flow test for solvency does not mean that the extent of the company's assets is irrelevant to the inquiry. The credit resources available to the company must also be taken into account: Sandell v Porter (1966) 115 CLR 666 at 671 per Barwick CJ (with whom McTiernan and Windeyer JJ agreed); Leslie v Howship Holdings Pty Ltd (1997)15 ACLC at 466; Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808 at 812;
- The question of solvency must be assessed at the date of the hearing, although relevant future events are not to be ignored: Leslie v Howship Holdings Pty Ltd (1997)15 ACLC at 466-467.
12 The above legal principles (and others) were conveniently set out by Weinberg J in Ace Contractors Staff Pty Ltd v Westgarth Development Ltd (1999) FCA 728 at [44].
13 I have concluded that APM has failed to demonstrate that it is solvent, it having the burden to the requisite civil standard to prove solvency. I have reached this conclusion for a number of reasons.
14 In order to demonstrate solvency, reliance was finally placed by APM upon a report of James Edward Miller dated 30 August 2007, an expert accountant, who prepared a Balance Sheet and Profit and Loss Statement of APM as at 30 August 2007 and provided a report as to solvency as at 30 August 2007.
15 Mr Miller put a number of important and significant qualifications in his report that would affect his conclusions. The material he relied upon was not audited, he relied upon representations of third parties as to their current intention, and unverified valuations, and he did not have a complete set of the records of APM because they were not available. Mr Miller could not make any proper assessment of assets which were said to arise from intercompany transactions, the amount of $590,638 out of $775,118.19 shown as current assets was said to be "risky", and APM had a number of properties in which a mortgagee had taken possession. It would appear that APM's liabilities are increasing faster than its assets, looking at the course of evidence that has been adduced by APM during this hearing.
16 Mr Miller, as to solvency, could only go so far as to say:
Subject to a number of factors, including the sale of the remaining properties at or greater than the valuations reflected in the Balance Sheet, the accuracy of the Balance Sheet, the immediate sale of the properties and the net proceeds being placed with the court, Australvic can be assessed as at the date of this report as marginally solvent.
17 Putting aside the lack of supporting documentation, Mr Miller approached the matter from the point of view of a balance sheet appraisal, and more significantly stated that:
It appears to me that Australvic cannot be viewed on a commercial basis as a going concern, and that the question of solvency must also be addressed from Australvic's ability to meet the ongoing demand for repayment following the sale of the properties.
18 Further problems with the approach taken by Mr Miller are that the timing of the sale of the remaining properties remains uncertain, the sale at or greater than the valuations reflected in the balance sheet remains uncertain, and whilst the net proceeds of sale may be of the magnitude suggested by Mr Miller, there are claims upon that money which have existed for some time and which will not be determined within a reasonable period to allow any money to be paid to the creditors of APM, or any other supporting creditors who it is accepted by APM have valid claims.
19 Assuming all the factors raised by APM in its favour as to its liability to pay the promissory note holders and other loans, as indicated by Mr Miller in his report, I am not satisfied that in view of the qualifications to his report and the material he relies upon, APM has overcome the onus of proving solvency. The factors upon which his conclusion of "marginal" solvency are subject, putting aside the accuracy of the Balance Sheet, depend upon the immediate sale of the properties and net proceeds being not only placed with the Court, but also available to the creditors and the other supporting creditors who APM accepts have valid claims. In addition, Mr Miller recognised that the high interest rates accruing to the loans of APM meant that, putting aside any other calls upon any money in court, these funds would be needed to repay loans in order to minimise ongoing interest charges and that the sale of properties must accordingly be made immediately. The evidence before the Court does not indicate that this will or can occur in any reasonable time frame, or that the moneys from such sales will be available in any event to pay creditors.
20 I have given APM ample opportunity throughout this hearing to demonstrate solvency, and it has already had the benefit of substantial time. Adjournments have been allowed to permit APM to put further material before the Court, and the "best" position has been that put by Mr Miller.
21 I have also allowed some time to observe whether money held in the Supreme Court of Victoria, to which APM says it is entitled, could be paid into the Federal Court to satisfy the claims accepted by APM, including the claims of the creditors. I did this because it was submitted on behalf of APM that the proceedings instituted in the Supreme Court by APM, seeking that it be paid the money in court in priority to other competing claims, would be dealt with quickly and I considered that APM should be given the opportunity to pay out the creditors it accepted had valid claims. However, it appears that whilst expedition has been given to that proceeding, the money in court is in substantial dispute, and I cannot be satisfied that that proceeding will be completed within the reasonable future or that the money held in the Supreme Court of Victoria will be available to the creditors.
22 I am mindful that the Supreme Court proceedings are in the Commercial List, and that the court will be in a position on 17 October 2007 to determine how the matter is to proceed. There is a possibility the matter may be heard in late October 2007, but having regard to statements made by the various participants at the latest directions hearing before the Supreme Court and the content of the statement of claim in the proceedings, I think this is extremely unlikely. The learned judge in the Supreme Court did indicate that if the matter was ready for trial and APM could convince the court on proper affidavit material there was an urgency about the matter, he would endeavour to hear it in the last week of October 2007. However, his Honour did suspect that the matter would not be ready and, in any event, the matter was not set down for a hearing. Therefore, I am not satisfied that the proceedings before the Supreme Court (which do involve a number of competing claims and likely factual disputes) will be resolved within any reasonable time.
23 In any event and perhaps more significantly, even assuming in APM's favour that all the funds in the Supreme Court are in fact the assets of APM, and would be available to pay the creditors and those creditors who APM regard as making valid claims, I would still find that APM has failed to prove its solvency. This is because this was the very assumption in Mr Miller's report, which report in my view did not demonstrate that APM was solvent even on this assumption. Therefore, even if APM is totally successful in the Supreme Court of Victoria, this would not materially affect the position I have now reached as to the future of APM. Therefore, to allow APM any further time, and await the result of the Supreme Court proceedings, would be of no consequence.
24 I should indicate that Mr Miller was not cross-examined upon his report of 30 August 2007 by any of the creditors, supporting creditors or the Australian Securities and Investments Commission ('ASIC') (which was given leave to intervene in these proceedings). APM contended that in these circumstances, because of the rule in Browne v Dunn (1893) 6 R 67, I should ignore the criticisms made of his report, or give APM the opportunity to recall Mr Miller to address the criticisms.
25 I accept that the rule in Browne v Dunn (1893) 6 R 67 has an important function to play in the course of a trial, as recently made clear by the Full Court in Jardein Pty Ltd v Stathakis [2007] FCAFC 148, at [27] to [33]:
Where a party intends to contradict or challenge the testimony of an opposing party's witness, the party is obliged to put that witness on notice that his or her account will be challenged: Browne v Dunn (1893) 6 R 67. This gives the witness an opportunity to respond to the allegations. The reason this is done is as a matter of basic fairness. See Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1 per Hunt J.
Adherence to the rule in Browne v Dunn also gives the party calling the witness the chance to adduce supporting evidence which might not otherwise have been led.
Compliance with the rule requires only that the substance of the contrary version is put to the witness, and not every detail of the challenge: White Industries (Qld) Pty Ltd v Flower & Hart (a firm) (1998) 156 ALR 169 at 217 per Goldberg J.
In a civil case the consequences of a failure to observe the rule will vary. However, they will usually be related to the central object of the rule which is to secure fairness.
In Seymour v Australian Broadcasting Commission (1977) 19 NSWLR 219 Mahoney JA said (at 236-237):
"This kind of problem may arise at different times in the litigation. It may arise during the trial. Thus, where a party fails to cross-examine a witness at all or on a particular matter, it may be prudent for the trial judge at the time to draw the attention of counsel in an appropriate way to the effect this may have on the later conduct of the trial. It may be that the question arises at a later stage in the trial when counsel seeks to call evidence contradicting the witness or discrediting his evidence, or seeks to address upon the basis that the witness' evidence is untrue. The trial judge may then have to determine what course should be followed. Sometimes the interests of justice may be served by having the witness recalled for cross-examination. Sometimes the circumstances may be such that the only way in which justice can be achieved is by directing that, for example, it is not open to counsel, in address, to make such suggestion. What is to be done will depend, as I have said, upon the circumstances of the case."
A possible consequence of a breach of the rule may be that the party in breach will be prevented from suggesting that the witness' testimony should be disbelieved. Another possible consequence will be the exclusion of evidence that challenges the witness' account with respect to those matters upon which there was no cross-examination. A third possible consequence will be to permit the witness to be recalled so that the breach can be remedied. One thing is clear. The rule is not simply to be ignored.
The rule in Browne v Dunn has not been abrogated under the uniform Evidence Acts: Heaton v Luczka (unreported, New South Wales Court of Appeal, 3 March 1998) per Beazley JA. Indeed, s 46 of the Evidence Act 1995 (Cth) specifically enables the recall of a witness where there has been a breach of the rule and therefore implies its continued existence.
26 However, in my view the approach taken by the parties in making submissions on Mr Miller's report was fair and appropriate in the circumstances.
27 Mr Miller provided an earlier report, providing a Balance Sheet as at 15 June 2007, upon which he was cross-examined. The purpose of that report was to demonstrate the solvency of APM, and was in a similar format to the report of 30 August 2007. Many of the matters raised by the parties (including ASIC) in cross-examination in respect of the earlier report were repeated in his later report of 30 August 2007, although in some respects he had already conceded their inappropriateness in relation to the Balance Sheet included in his report of 15 June 2007. Prior to receipt of Mr Miller's report dated 30 August 2007, both APM and Mr Miller were well aware of the range of matters needed to be considered by them, as canvassed in prior cross-examination and earlier submissions. It could not be said that Mr Miller or APM were not made well aware of the matters that the other parties (including ASIC) were going to put to the Court. There has been no attack upon the credit of Mr Miller at any stage. I accept Mr Miller as a credible expert seeking to assist the Court. The attack made was upon the appropriateness or otherwise of his approach and the material he relied upon.
28 In any event, whilst I accept that the rule in Browne v Dunn may apply to expert testimony, there is no rule of law requiring that evidence not challenged in cross-examination be accepted. In this case, APM has an onus of proof to establish solvency. The legal approach to such a task is well established on the authorities. The real attack in this case was that Mr Miller's evidence as to solvency should not be accepted as it was based upon incomplete records and unsubstantiated source material, a mistaken approach to what needs to be shown to prove solvency, and the fact that the qualifications made to the report were such that the conclusion of "marginal" solvency could not be accepted by this Court. It seems to me that all a cross-examiner would have put to Mr Miller on this basis would be the very qualifications to his report Mr Miller himself acknowledged, which in themselves show his report of 30 August 2007 could not satisfy the Court as to solvency. APM and Mr Miller have not been unfairly treated. APM came to Court bearing the onus of proof as to solvency, but in my view has failed to provide the "fullest and best" evidence of its financial position.
29 In addition to what I have concluded above, there are other matters which demonstrate that APM has not discharged the onus of proving solvency:-
(i) APM has failed to comply with the statutory demand of the creditors, and that of a supply creditor, T & G Welding Pty Ltd.
(ii) APM has been in default under mortgages over its property, and has no immediate or foreseeable capacity to service the mortgages.
(iii) The application for winding up was made on 15 March 2007, over six months ago. On 18 June 2007, in the written submissions of APM, it was stated:
[APM] is able to raise sufficient funds with which to pay for its short term creditors and it is anticipated that it will receive further funds in the near future from the sale of a properties [sic]. It is conceded that there are other further supporting creditors. [APM] will be able to use the funds that it is capable of raising and which it is anticipated of receiving in the near future with which to pay these debts.
This has not eventuated despite the time lapse and there is no evidence to suggest that there will be sufficient funds to pay creditors in the near or reasonably near future. All the evidence relied upon by APM over recent months simply raised possibilities which have not eventuated.
(iv) APM has been involved in disputes and legal proceedings with a number of people in addition to the Supreme Court proceedings mentioned above. The proceedings instituted already do not appear to be capable of resolution in the short term.
(v) APM's books and records are incomplete and unsubstantiated. There have been a number of suggestions by APM since this matter was first heard to the effect that the new director Mr Fisher would take steps to put the books of accounts in order - these suggestions have not been fulfilled and even Mr Miller in his report of 30 August 2007 necessarily relied upon incomplete and unsubstantiated records.
(vi) No director can make a declaration of solvency. The then current directors of APM on 9 June 2006 resolved that APM was solvent as at that date, but this is obviously not sufficient to persuade me that the company was solvent at the date of hearing of this application.
(vii) No cash flow statement or projections have been provided by APM despite ample opportunity to do so in these proceedings.
(viii) There is no material to demonstrate that the company, in its attempts to refinance or obtain sufficient funding, will succeed in the foreseeable future or at all - see Crema (Vic) Pty Ltd v Land Mark Property Developments (Vic) Pty Ltd (2006) 24 ACLC 889, at [172] per Dodds-Streeton J; Re Presha Engineering (Aust) Pty Ltd (1983) 1 ACLC 675 at 677 and Ace Contractors Staff Pty Ltd v Westgarth Development Ltd (1999) FCA 728;
30 I now turn to some specific submissions of APM.
31 It was complained that the company has been placed in a position of lack of funds because of the actions of various investors and beneficiaries. It was claimed that there has been a concerted effort by some parties to bring about or contribute to the winding up of APM. In my view, none of these matters needs further enquiry. The question I need to determine is whether APM has shown the Court that it is solvent. The reason for its current position is not directly relevant to that enquiry, other than to show that the reason for its current position could be overcome in the short or reasonably short term so that creditors could be paid. However, as I have said, it has not been demonstrated that the company will be in a position to pay its debts in the foreseeable future. It was also claimed that court orders made in other proceedings would prevent the payment of creditors. I should indicate that any court order which may be seen by APM as preventing it from paying out monies could always have been varied or vacated upon the appropriate application, and I do not see that contention as one which would justify the conclusion that the reason for the non-payment of creditors is the existence of any court order.
32 APM wishes to dispute the claims of some of the supporting creditors, and to dispute the debts that are not bona fide. There were a number of supporting creditors that sought to place material before this Court. In the end, I have not needed to rely upon any material placed before the Court on their behalf, nor have I relied upon any affidavits of Walter Percival Edwards. The affidavit material of Mr Edwards was objected to by APM, and in my view was not relevant to the question for my consideration. The affidavit material of the supporting creditors takes the matter no further in light of my above reasoning, and it is unnecessary for me to determine any questions going to the validity of the supporting creditors' claims further to the position accepted by Mr Miller in his report of 30 August 2007. I rest my conclusion upon the basis of Mr Miller's report and the other matters set out above as indicating that APM has not discharged the burden of proof upon it.
33 APM also contended that APM's financial position must be considered from its position as a "trustee company", APM having a right of indemnity that was equal to the value of the benefits that it provided to the trust estate and that was equivalent to the value of any liabilities that it has incurred, whilst acting as trustee of the trust. It was further contended that the indemnity ranked as a first charge upon the assets of the trust and, if the Court were not satisfied of the solvency of APM, that it should exercise its power to accede to the request of APM to be removed from the office of trustee (a request made during the course of the hearing) upon certain undertakings being made as to certain funds. In effect, APM wanted a receiver to take the place as trustee upon APM's removal as trustee. In addition, APM submitted in reliance upon comments of Young J in Horwath Corporate Pty Ltd v Huie (1999) 32 ACSR 413 (at 416) that the courts have traditionally have been reluctant to wind up a trustee company as difficult questions of rights and entitlements are involved that would need to be determined by litigation, and there would be no useful purpose in winding up the trustee upon its removal from the office of trustee.
34 APM then submitted, in reliance upon the principles enunciated in Ron Kingham Real Estate Pty Ltd v Edgar [1999] 2 Qd R 439 at 443 per McPherson JA, that there would be no benefit to the creditors in the trustee company being wound up, and it was trite law that a creditor can claim to be subrogated to the right of indemnity of the trustee company and directly enforce the debt against the trust assets or even the beneficiaries personally.
35 The way in which these submissions were put seemed to relate both to the question of solvency and the discretion to be exercised by the Court as to whether to order a winding up, assuming I was not satisfied as to solvency. As a matter of procedure, APM moved the Court for its removal as trustee, the appointment of a receiver, and that a winding up not be ordered by the Court.
36 I do not consider that the contentions of APM should be accepted. At the outset, I do not accept that the principles applied by Young J in Horwath 32 ACSR 413, which was a case concerning a trust and not a corporation, apply to APM, as was contended by APM. APM cannot be treated as a "trustee company" simply because it holds assets on trust for certain beneficiaries. In any event, unlike that before Young J, this is a case where it is necessary for a skilled insolvency practitioner to go through the books and records, having regard to their current state as accepted by Mr Miller and APM itself. Further, the liquidator once appointed will be in a good position to deal with competing claims, which may involve no litigation at all.
37 The simple answer to the other contentions of APM is that in this case, accepting a right of indemnity exists, it is a right which has not been shown will result in the foreseeable future in the availability of funds to pay creditors. This is a case where there will be issues to be determined as to whether a right of indemnity can be exercised, assuming it exists in theory, because of the actions of APM. There is the question of whether the trustee (APM) has properly incurred liabilities in acting as trustee: only if it has done so will it be entitled to be indemnified out of the trust assets.
38 As to APM's reliance on Ron Kingham Real Estate 2 Qd R 439, in that case the question of whether the trustee had properly incurred liabilities was not a matter that was or could be in contention. The defendants could not, having authorised the action of the trustee, have complained of a breach of trust.
39 Putting aside the correctness of the decision in Ron Kingham Real Estate 2 Qd R 439 in allowing the trustee's creditor to sue trust beneficiaries directly to enforce the trustee's right of indemnity against the beneficiaries, I do not consider it appropriate where there is an issue or potential issue as to whether the right of indemnity is available in the circumstances of this case to conclude that the creditors should be left to pursue such claims individually. In any event, there is no evidence that there will be sufficient assets to pay the creditors after the secured creditors have been paid. I do not consider that APM's contentions relating to the right of indemnity demonstrate that APM is solvent, assuming that at law there is a right of indemnity in favour of APM, or that such right of indemnity is a factor in favour of exercising my discretion not to wind up the company. If a liquidator is appointed he will be well placed to consider and deal with the question of the right of indemnity, and pursue with priority claims over the beneficiaries.
40 I now turn to other discretionary matters raised by APM and the issue of APM continuing as a trustee and the appointment of a receiver.
41 As I have indicated above, it was contended that if I came to the conclusion that APM had not discharged the burden of proof to show it was solvent, I should not order the winding up of the company but should instead remove it as trustee and appoint a receiver over the trust assets. In support of this approach, evidence was led of a number of creditors who expressed a desire for such a course. It was argued that it would save time and costs if the appropriate person, already familiar with the company, was appointed (in this case Mr Andrew Leonard Dunner). It was further contended that with the number of actions threatened against the company a receiver would be in a better position to defend the company with the aid of the current director, that the principal director (Mr Edwards) who was responsible for the bad state of the books of accounts of the company is no longer involved with APM, and that the current director is taking steps to put the books of accounts in proper order and prepare proper financial statements.
42 In addition, it was argued that because of the operation clause 11 in the Memorandum of Agreement between APM and the developer, Rocco Antonio Calderone, dated 3 August 2005, in the event of the appointment of a liquidator, APM would not be able to rely upon its right of indemnity, as the developer would be released from its duties and obligations under the agreement, and the trust properties would vest in the hands of the beneficiaries.
43 I have come to the view that I should order the winding up of APM despite these contentions. In addition to the views I have expressed in coming to the view that APM has not discharged the burden of proof upon it and my views on the report of Mr Miller of 30 August 2007, I have concluded that APM should be wound up, and that the alternative course of action contended for by APM not be followed, for the following reasons:
(i) Whilst some creditors do not want the appointment of a liquidator, this is not the universal view of the unsecured creditors, and in any event is not a decisive factor.
(ii) Whilst the appointment of a receiver familiar with the company already may save some time and costs, this is not the important consideration when balanced against the important public interest of ensuring an insolvent company ceases trading even if only a presumed insolvent company.
(iii) Clause 11 does not, in my view, release the developer from any past responsibilities or liabilities it may have had under the agreement - all it seems to do is to release, upon the appointment of a liquidator, the developer from any further duties and obligations under the agreement from the date of the appointment. In any event, even if clause 11 does have the result as contended for by APM, including the vesting of trust property in the beneficiary, the other factors I have relied upon in these reasons would indicate that it is appropriate for the company to be wind up, the public interest being a paramount consideration where APM is unable to prove its solvency and the books of accounts are incomplete and are unsubstantiated. Upon vesting of the trust property in the beneficiaries, the company will still have a beneficial interest with priority over the beneficiaries if, as trustee, it has a right of indemnity as submitted. If the debts have been incurred in the administration of the trust, the liquidator can call upon the right of indemnity.
(iv) I do not consider that there are now better prospects for the creditors as a whole (including the unsecured creditors) if the company, with or without a receiver, were allowed to continue to trade on.
44 The question then arises as to the appointment of the appropriate liquidator. The Deputy Registrar ordered that Mr McCann be appointed liquidator. Whilst I must approach the matter as a hearing de novo, the fact is that Mr McCann has done some introductory work as liquidator before the ordering of the stay of the winding up. APM submitted that Mr Dunner should be appointed liquidator as he has already some knowledge of the company, as he was appointed Receiver and Manager of M.K. River Pty Ltd (an associated company of APM), and there would be a saving of costs. Some creditors favoured the appointment of Mr Dunner and others were against it. The attitude of creditors is a factor to take into account, but is obviously not decisive. It was accepted by all parties that the same liquidator should be appointed over APM and any other associated companies that may have a provisional liquidator appointed in proceedings which were heard in conjunction with those proceedings.
45 Whilst Mr Dunner may have done some work concerning the financial affairs of APM to the extent they relate to M.K. River Pty Ltd, he has not been involved in investigating the affairs of APM, an important task ahead. Much further work will need to be done, substantially more than undertaken already, and the fact that Mr Dunner has been involved as a receiver and manager of a company associated with APM does not operate as an important factor in favour of his appointment. I do not consider, in any event, that the evidence shows in the scheme of things that Mr Dunner has done such extensive work that large costs will be wasted if he is not appointed liquidator. Mr McCann, whilst having only undertaken a little work, has at least commenced dealing with the affairs of APM itself.
46 Mr Dunner was appointed receiver to M.K. River Pty Ltd by Mr Fisher, now the sole director of APM. In view of the past history of APM and the state of its books of accounts, it is preferable to appoint a completely independent person as liquidator. It is not that the perception of independence is necessarily decisive (for in many cases administrators are appointed liquidators, notwithstanding that they were initially appointed by the directors of the company) but where APM has a history of not keeping proper books of account and where litigation is anticipated (which may involve Mr Fisher himself), then I consider it preferable not to appoint Mr Dunner. In view of these factors, I propose to appoint Mr McCann as liquidator.
47 In the event that I appointed a liquidator, it was submitted by the creditors that the liquidator be appointed as receiver of certain trust assets. In the appropriate case this could be ordered - see ASIC v Eastlands Pty Ltd [2006] FCA 1702.
48 In my view, the appropriate approach is to appoint the liquidator who has power to administer any trust assets (at least at the early states) (see Crest Realty Pty Ltd (No 2) (in liquidation) (1977) 1 NSWLR 664 and Wells v Wily [2004] NSWSC 607), and the liquidator can approach the Court if any problems arise. I would not think it desirable to separate the function of the liquidator and any receiver of the trust assets in this case, and these functions should (at least initially) be fulfilled by the same person. The liquidator may apply to the Court if his appointment needs to be extended to that of receiver of the trust assets or if he needs further assistance. Equally, if any conflict arises because of the appointment of Mr McCann to other companies associated to APM, he can apply to seek directions on how to deal with that conflict: see ASIC v Westpoint Corporation Pty Ltd (2006) 56 ACSR 646 at 652.
49 During the course of the hearing, a number of matters arose for decision, which I disposed of without providing reasons. I now provide the reasons for those decisions.
50 By notice of motion dated 24 July 2007, APM sought, the following orders:
· The hearing of the proceeding be aborted and the matter be reheard;
· Alternatively, APM have leave to file further evidence and leave to cross-examine Damien Christopher Lilly, Kathleen Murphy, Mark Beck, Giles Bray, Helen Fairhall, Wai Yee Wong, David Dunoon, Noel Ramage, Leonor Ramage, Dennis Meir and Thilani Ghammamphilia.
· The firm of Saxbys Lawyers ('Saxbys') (which firm acted for supporting creditors) produce their entire files in relation to the proceeding, including all attendance notes, correspondence, court documents, and all trust ledgers, office ledgers, trust receipts and accounts and to produce their entire files in any other matter in which information pertaining to the proceeding has been obtained.
· The firm of Saxbys be restrained from continuing to act in these proceedings.
51 APM also sought to call upon a number of subpoenas which were directed to the issue of the restraint of Saxbys and the exercise of my discretion as to whether to order a winding up. In relation to the exercise of my discretion, the submission was that a fraud had been practised on APM by its former directors actively trying to create a situation where the APM had difficulties paying its debts, and that this was a matter I should take into account in the exercise of my discretion as to whether to order a winding up.
52 These applications were made after I had reserved my judgment in the matter, and APM needed leave to re-open its case. I did grant APM leave to re-open its case on a limited basis, effectively to update the court as to the financial circumstances of APM, but no further leave was granted. I refused the application for the hearing to be aborted. I also heard the application against Saxbys, and dismissed that application.
53 In respect of the other matters which involved the introduction of evidence by APM, I refused those applications and withdrew the leave to issue the subpoenas, or alternatively set them aside. The withdrawal of leave was directed to the subpoenas not actually made returnable before the Court that day but for a future date, although I have no doubt the Court could set those aside in any event even though the return date had not been reached.
54 I deal first with the application to restrain Saxbys. This application was made pursuant to the inherent jurisdiction of the court to restrain legal practitioners from acting in a proceeding and to ensure the integrity of the judicial process. No other basis was contended for - it was not argued that Saxbys had any confidential information pertaining to APM, only that Saxby's were in a position of potential conflict in relation to various parties before this Court, and because of this the Court should prevent their acting in the proceeding at all.
55 I accept that in the appropriate case a legal practitioner, even if merely in a potential conflict situation, may not appropriately act for a number of clients and the Court could intervene. However, in my view the intervention of the Court in this case was not required. The principles to apply are conveniently summarised below.
56 Young J said in Geelong School Supplies Pty Ltd v Dean [2006] FCA 1404 at [35]:
The crucial question, therefore, is whether on the evidence before me a fair-minded, reasonably informed member of the public would conclude that the proper administration of justice requires that Vogrig and WVL be restrained from acting for GSS in these proceedings. In answering this question it must be borne in mind that this is an application for a permanent injunction: Yunghanns v Elfic Ltd (unreported, Supreme Court of Victoria, Gillard J, 3 July 1998). It must also be borne in mind that the Court's jurisdiction is an exceptional one; it is to be exercised with appropriate caution and due weight must be given to the public interest in a litigant not being deprived of the solicitor of its choice without due cause.
57 In Woodgate v Leonard [2007] NSWSC 495, Barrett J said (at [37]):
The jurisdiction discussed in these cases is an extraordinary and protective jurisdiction. It is separate from the jurisdiction involved in protection of confidential information and the enforcement of fiduciary duty. This is made clear, in particular, in the extract from the judgment of Whealy J just quoted. The concern is with the due and proper administration of justice in a proceeding before the court. The jurisdiction exists to ensure that the integrity of the proceeding is maintained. Identification of the means needed to maintain that integrity will, of course, depend on the nature of the proceeding and its likely course.
See also Bahonko v Nurses Board of Victoria (No 3) [2007] FCA 491.
58 The court must be careful not to intervene unless it is absolutely required in the circumstances of the case. Here Saxbys had brought the potential conflict to the attention of their clients and requested they seek independent legal advice, and no client of Saxbys came to court complaining of the conduct of Saxbys. No improper conduct on Saxbys' part was evident, and no basis arose to retrain Saxbys.
59 The application was brought at a late stage in the proceedings, after I had reserved judgment. Even if I considered Saxbys had in some way acted improperly, in the exercise of my discretion, I would not at the stage the proceedings had reached have restrained Saxbys from future participation in the proceeding. The cost, inconvenience and practicalities of requiring lawyers to cease to act are a proper basis to refuse relief - see Young J in Geelong School Supplies [2006] FCA 1404 at [32] and [51]. Subject to a limited re-opening being permitted to APM after I reserved my judgment, the hearing of the proceedings was otherwise at an end.
60 It was suggested that this Court would need to determine, after a proper hearing, Saxbys' conduct and the effect their conduct had on a fair trial of these proceedings.
61 No proper basis was established for such an enquiry. As I have said, Saxbys have brought the potential conflict to the attention of the relevant persons, and I do not assume that any of their alleged improper conduct has impacted upon a proper and fair trial in these proceedings. No particulars of such impact were provided to the Court even to give cause to make further enquiry.
62 By reason of the views I took on the application to restrain Saxbys, I refused leave to introduce further evidence going to that issue as sought to be introduced by APM, did not permit cross-examination of Mr Lilley on that issue, and withdrew leave to issue, or alternatively, set aside, the subpoenas said to be relevant to that issue.
63 Another issue that remains to provide reasons is the application to adduce evidence relevant to the "fraud" of the previous directors of APM. No explanation was given as to the failure to lead this evidence earlier. It may have been deliberate, or it may have been through inadvertence or ignorance. No explanation has been given as to the failure to cross-examine Mr Lilley on this issue, although he had provided affidavit material and was available for cross-examination if required. No particularisation was attempted as to the nature of the evidence sought to be adduced, other than through the generalised allegation of "fraud" brought at the late stage of the proceeding. The allegation, in any event, going to the reason for the APM's current position, could only impact upon the exercise of my discretion if I otherwise came to the view that APM had not discharged its onus of proof to demonstrate solvency. Even if there had been substance to the allegations, in view of the many factors in favour of the winding up of APM, the allegation itself would have not affected the exercise of my discretion in favour of ordering the winding up of APM.
64 As I indicated above, the enquiry I needed to undertake was in respect of the solvency of APM. The factors leading to its current position may be relevant if they could impact upon APM's ability to pay its creditors in the near or foreseeable near future. The "fraud" allegations would hardly impact upon that issue following upon the evidence that had been presented to me by APM, particularly through the report of Mr Miller of 30 August 2007. There is also the need for finality in litigation and the particular need for prompt resolution of winding up applications - putting aside the public interest, there is, as this case shows, the possibility of the evidence becoming stale or out of date: see Expile Pty Ltd v Jabb's Excavations Pty Ltd (2002) 194 ALR 138 at [9].
65 The above considerations were all matters I could take into account in considering whether it was in the interests of justice that the proceeding be re-opened: see Smith v New South Wales Bar Association (No 2) (1992) 176 CLR 256 at 266-267, per Brennan, Dawson, Toohey JJ and Gaudron JJ; Urban Transport Authority of NSW v Nweiser (1992) 28 NSWLR 471 at 478-479, per Clarke JA (with whom Mahoney and Meagher JJA agree); Londish v Gulf Pacific Pty Ltd (1993) 45 FCR 128 at 138-139, per Neaves, Bruchett and Ryan JJ; Nikoloski v Ridge Consolidated Pty Ltd (1994) 116 FLR 192, per Higgins J; Boucher v Australian Securities Commission (1996) 71 FCR 122 at 126 at 132, per Spender, Drummond and Merkel JJ; Hindmarsh Medical Clinic v Hindmarsh Family Practice Pty Ltd (1997) 38 IPR 616 at 631-632, per Mansfield J.
66 Whilst I was and am mindful of the importance of allowing a party the full opportunity to put its case, for the reasons set out above, I refused APM to re-open its case other than to update the Court on the financial position of the company. Therefore, I refused leave to introduce further evidence going to the "fraud" issue, did not permit cross-examination of Mr Lilley in this issue, and withdrew leave to issue, or alternatively, set aside the subpoenas said to be relevant to that issue.
67 Two other matters arose after I reserved my judgment upon which I have not already determined. First, there was an application by ASIC to re-open its case. Essentially ASIC sought to introduce new evidence which came into existence since reserving my judgment, which would have indicated that the value of certain assets was less than that relied upon by Mr Miller in his report, and that a liability was greater than indicated in the material relied upon by APM. The application was opposed by APM.
68 The application by ASIC to re-open should be refused. In light of my reasoning above, the evidence sought to be adduced has no material bearing on my conclusions. I appreciate that ASIC desired to keep the Court up to date on the financial position of the company, and in normal circumstances that material would be a basis for re-opening a case. However, in view of the approach I have taken to this proceeding, re-opening the case is unnecessary and would lead to further delay.
69 Secondly, APM sought an adjournment of the proceedings for a month, asking that I not make a decision in this matter pending the further hearing of the Supreme Court proceedings referred to above, so that the moneys in the Supreme Court could be paid into the Federal Court, and the creditors and certain other nominated creditors could be paid. Application was also made by APM under s 459R(2) of the Corporations Act to extend the time for one month in which to make a determination in this matter so as to accommodate the request for further time. For the reasons given above in connection with the Supreme Court proceedings, and on the grounds I have found that a winding up order is appropriate, I refuse those applications brought by APM.
70 Accordingly I will make the following orders:
- Application for review of the decision of Deputy Registrar Mussett made on 23 May 2007 be dismissed.
- The stay order granted in respect of the winding up be removed.
- Australvic Property Management Pty Ltd (ACN 113 858 021) be wound up in insolvency by the Court.
- Michael Wesley McCann be appointed liquidator of Australvic Property Management Pty Ltd (ACN 113 858 021).
- The notice of motion of Australvic Property Management Pty Ltd (ACN 113 858 021) dated 24 July 2007 be dismissed.
- The notice of motion of Australvic Property Management Pty Ltd (ACN 113 858 021) dated 5 September 2007 be dismissed.
- The notice of motion of the Australian Securities and Investments Commission dated 28 September 2007 be dismissed.
- Each party, each supporting creditor, the Australian Securities and Investments Commission and Saxbys Lawyers file with the court and serve on each other by 5:00pm on 19 October 2007 written submissions as to costs (including any orders sought as to the security for the respondents/plaintiffs' costs provided to the Court pursuant to orders dated 29 May 2007 and 3 July 2007).
- Leave be granted to the liquidator (if so advised) to file with the Court and serve on each party, each supporting creditor, the Australian Securities and Investments Commission and Saxbys Lawyers, any submissions as to costs on or before 5.00pm on 26 October 2007.
I certify that the preceding seventy (70) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Middleton.