Abacus Developments AG & Ors v Powerflex Corporation Pty Ltd & Ors Powerflex Services Pty Ltd & Ors v Abacus Research AG & Anor

[1996] FCA 880

IN THE FEDERAL COURT OF AUSTRALIA )

)

VICTORIA DISTRICT REGISTRY       )    No. VG 3708 OF 1995

)

GENERAL DIVISION                 )

BETWEEN:  ABACUS DEVELOPMENTS AG

(First Applicant)

AND:     ABACUS RESEARCH AG

(Second Applicant)

AND:     DANIEL RUDOLF SENN

(Third Applicant)

AND:     POWERFLEX CORPORATION PTY LTD (ACN 058 475 488)

(First Respondent)

AND:     DAVID MEREDITH BENNETT

(Second Respondent)

AND:     MARGARET ANNE BENNETT

(Third Respondent)

AND:     POWERFLEX SERVICES PTY LTD

(ACN 007 302 810)

(Fourth Respondent)

BETWEEN:  POWERFLEX SERVICES PTY LTD

(ACN 007 302 810)

POWERFLEX CORPORATION PTY LTD (ACN 058 475 488)

DAVID MEREDITH BENNETT

MARGARET ANN BENNETT

(Cross-claimants)

AND:     ABACUS RESEARCH AG

ABACUS DEVELOPMENTS AG

(Cross-respondents)

CORAM:    Ryan J

DATE:     13 September 1996

PLACE:    Melbourne

REASONS FOR JUDGMENT

RYAN J:   On 6 September 1996 Jenkinson J made an order appointing a provisional liquidator of the respondent Powerflex Corporation Pty Ltd ("Powerflex").  Powers of the
provisional liquidator in relation to the institution of future legal proceedings and the prosecution of the present proceedings and appeal in relation to these proceedings or any related application to the High Court were qualified by his Honour's order.  His Honour granted a stay of those orders until 5 pm on 12 September 1996 and I extended that stay until 4.15 pm today to permit full argument and consideration of a motion for a further extension of the stay until the hearing and determination of the appeal or an application for leave to appeal.

It appears from Jenkinson J's reasons for judgment that a principal, if not the sole, consideration which prompted him to make the order appointing a provisional liquidator was his conclusion, that:

... on the hearing of this motion there was evidence which convinced me that, under the stress of the litigation in which he has been, and is now, involved, Dr. Bennett is likely to engage in conduct which is both in breach of his legal obligations as a director of Powerflex and irrational.

Dr Bennett, I should say, in conjunction with his wife, Dr Howard, effectively has the day to day management and control of Powerflex.  After referring to evidence of a facsimile message from Dr Bennett his Honour continued, at p. 11 of his reasons:

Dr Bennett's explanation under cross-examination as to the reasons for the cancellation of an annual general meeting of Powerflex, which was to have been held in May 1996, indicated either an inept attempt on his part to mislead the court as to those reasons or, as he testified, confusion and conflicting advice to the directors on the part of the solicitors for the respondents.  Whichever be the correct alternative, I have reason to be concerned that under the pressures to which Dr. Bennett will be exposed until both the legal proceedings in which he is involved have been finally determined, he is likely to
breach, and to prevent his wife from effectively discharging, legal obligations they owe to Powerflex and the applicant shareholders, and thereby to put at risk the interests of shareholders and creditors of that company.

His Honour was not oblivious to the difficulties which the appointment of a provisional liquidator might create for the continued effective conduct of the affairs of Powerflex.  He said:

But the work which I contemplate the liquidator undertaking will not be so expensive as the work which a provisional liquidator commonly undertakes. I would order that the provisional liquidator not exercise any of the powers conferred by sections 477(1)(d), 477(2)(a) (except the power to defend a legal proceeding), 477(2)(c) and 477(2)(ca) of the Corporations Law except with the concurrence of Dr. Bennett and Mrs. Bennett or with the approval of the court.  If, as I would expect, the provisional liquidator offers Dr. Bennett and Mrs. Bennett appointment as his agent to manage the company's business, and if the appointments are accepted, the provisional liquidator's role will be limited to defining the acts they may do at their discretion in management of the company and the acts which neither of them may do without his authority, and to keeping their activities in performance of their agency under his scrutiny.  If the offers were not made, or were rejected, further directions by the court would be required. There would be a direction that the litigation in which the company is now involved be prosecuted by the provisional liquidator not otherwise than in accordance with the advice of the company's present solicitors except with the approval of the court.

There is some risk that the appointment of a provisional liquidator will dissuade users and potential users of the goods and services which Powerflex provides from dealing with the company.  But those people may be expected to exercise a relatively sophisticated and well informed judgment about the significance for them of the appointment.  No apprehension of insolvency was suggested by the evidence.  The goods and services Powerflex offers were not the subject of criticism.  And the appointment is, as I find and as I think those people would believe, very unlikely to result in any impairment of the conduct of the litigation in which Powerflex is engaged.  The main interests which it is a provisional liquidator's duty to advance - the interests of the company's members and creditors - are in the present circumstances the same as the interests of those to whom the company's goods and services are being provided or offered : success in the copyright case, and in this proceeding a termination of the joint venture satisfactory to all the members of the company.

However, since the making of his Honour's order, further evidence has been filed suggesting significant adverse effects on customers' perceptions of the company and its viability for the foreseeable future.  As well, an estimate has been given
by Mr Wallace Smith, a partner in the accounting firm of Deloitte Touche Tohmatsu, which suggests that the costs of a provisional liquidator, even one carrying out the restricted functions envisaged by his Honour, will be of the order of $7,500 a week.

The application for leave to appeal faces certain significant difficulties because the applicants will be seeking leave to appeal both from an interlocutory order and from the exercise of discretion based partly on his Honour's perception of the character of Dr Bennett, having heard and seen him give evidence in this and the related earlier proceeding.  It is inappropriate for me to express any view about the likely outcome of that application beyond indicating that I am not able to conclude that it is hopeless.

A recent judgment of a Full Court of this Court in Powerflex Services Pty Ltd  v Data Access Corporation 137 ALR 498, indicates that upon an application for a stay pending appeal there is "no limitation upon a broad discretion inhering in the Court", and it is not incumbent on an applicant for a stay to show "special circumstances". Approaching the matter in that way for myself, I have concluded that the appointment of a provisional liquidator should be further stayed until the hearing and determination of the respondent's application for leave to appeal.

In coming to that conclusion I have been influenced principally by the following considerations:

(a)As already noted, the prospects of success on the application for leave to appeal cannot be regarded as hopeless.

(b)Jenkinson J himself regarded it as appropriate to stay the appointment of a provisional liquidator for one week from 6 September 1996 to yesterday.

(c)There has been a considerable period between the institution of the proceedings on 23 November 1995 and the making of the application for a provisional liquidator on 13 June 1996 during which the applicants apparently acquiesced in the continuing control of the company by Dr Bennett and Dr Howard.

(d)A related consideration is that there is no evidence of any specific detriment to the shareholders or creditors of the company from its continued day to day control by Dr Bennett and Dr Howard during the period from November 1995 to date.  However, I am not unmindful of the fact that the nature of the company's activities and the extent to which its affairs can be confined to the bosom of those controlling it would make it very difficult for the applicants to obtain evidence of that kind.

(e)A major factor which has weighed with me in exercising my discretion in the way which I have indicated is that I have been assured upon enquiry that the application for leave to appeal will be listed for hearing in the week beginning 30 September 1996.

Accordingly, I am persuaded that the operation of paragraphs (1), (2) and (3) of the order of Jenkinson J of 6 September 1996 should be further stayed until the hearing and determination of the respondent's application for leave to appeal or further order.  I consider that the costs of the application for a stay should be the costs of each party in the application for leave to appeal.

I certify that this and the preceding five (5) pages are a true copy of the Reasons for Judgment of his Honour Justice Ryan.

Associate:

Date:

Counsel for the Applicants       :    Mr A.K. Panna

Solicitors for the Applicants        :    Stephens

Counsel for the Respondents      :    Dr J.F. Bleechmore

Solicitors for the Respondents    :    Trumble Szanto Braham

Date of Hearing                  :    13 September 1996

Date of Judgment                 :    13 September 1996