Australian Securities and Investments Commission v Edge
[2007] VSC 170
•25 May 2007
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
CORPORATIONS LIST
No. 5120 of 2006
| AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION | Plaintiff |
| v | |
| ROBERT JOHN EDGE | Defendant |
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JUDGE: | DODDS-STREETON J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 19, 20, 25, 26 September 2006, 2 and 26 October 2006 | |
DATE OF JUDGMENT: | 25 May 2007 | |
CASE MAY BE CITED AS: | ASIC v Edge | |
MEDIUM NEUTRAL CITATION: | [2007] VSC 170 | |
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CORPORATIONS – Corporations Act 2001 (Cth), ss. 180, 438A, 439A, 444B, 446A(1)(b), 447E, 477(2)(k), 449E, 450A, 450B, 450C, 475, 476, 499(3), 504, 508, 509, 531, 533, 536, 537, 539, 542(2), 598, 1279, 1290, 1324 – Winding up – Duties of liquidator – Court inquiry into defendant’s conduct as liquidator – Improper delegation of duties – Failure to maintain proper books, including books of account – Failure to prepare and lodge prescribed documents, including six monthly and final accounts, minutes of meeting and s.533(1)(c) reports – Failure to advertise, convene and hold meetings, including final meetings – Unauthorised destruction of companies’ books and records – Undue prolongation of liquidations – Drawing remuneration without approval or adequate supporting documentation – Exaggerated claims of work done – Failure to open separate bank accounts – Intermingling of funds – Writing of cash cheques and cheques direct to liquidator’s business or creditors – Failure faithfully to perform duties as liquidator – Removal – Funds drawn without approval disgorged – Unfitness to remain liquidator – Voluntary Administration – Delegation of sending notices to director - Failure to prepare adequate s.439A reports – Failure to execute deeds of company arrangement – Failure to disclose prior association with director – Whether administrator’s management, acts or omissions prejudicial to interests of creditors or members.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr E. Woodward | Australian Securities & Investments Commission |
| For the Defendant | Mr J. Evans | Madgwicks |
TABLE OF CONTENTS
INTRODUCTION.............................................................................................................................. 1
ASIC’S PRINCIPAL ALLEGATIONS........................................................................................... 3
ASIC’s principal submissions...................................................................................................... 8
THE DEFENDANT’S PRINCIPAL CONTENTIONS................................................................ 8
AFFIDAVITS RELIED UPON....................................................................................................... 10
CREDIT OF WITNESSES.............................................................................................................. 11
Mr Edge........................................................................................................................................ 11
Mr Armistead.............................................................................................................................. 13
ASIC’S SUMMARY OF SECTIONS AND REGULATIONS.................................................. 13
RELEVANT LEGAL PRINCIPLES............................................................................................... 16
The liquidator’s role, duties and powers................................................................................. 16
Delegation to an agent................................................................................................................ 21
Section 536 inquiry...................................................................................................................... 24
Power under s.447E of the Act.................................................................................................. 33
Requirements for approval of remuneration.......................................................................... 34
Duty to maintain proper books................................................................................................. 40
SUMMARY OF FACTS AND EVIDENCE................................................................................. 41
Professional history of Mr Edge................................................................................................ 41
Initial correspondence between ASIC and Mr Edge.............................................................. 44
Role of Mr Armistead................................................................................................................. 47
Lodgement of six monthly and final accounts and convening of final meetings by Mr Armistead........................................................................................................................................................ 49
Delegation to Harrisons Insolvency......................................................................................... 58
Mr Edge’s standard practices.................................................................................................... 62
Approval of remuneration........................................................................................................ 62
Document retention practice................................................................................................... 63
Premature destruction of documents....................................................................................... 69
Conclusion on destruction of documents................................................................................ 71
Failure to lodge reports under s.533(1)(c) of the Act............................................................. 74
The Pines...................................................................................................................................... 76
Disclosure of prior relationship............................................................................................... 77
Conclusion on appointment to The Pines and whether adequate disclosure........................... 80
The Pines DOCA..................................................................................................................... 82
Deficiency of The Pines s.439A reports................................................................................... 85
Other deficiencies in the administration of The Pines............................................................. 90
The Pines administration work and remuneration.................................................................. 93
Outstanding issues regarding The Pines................................................................................ 98
Invaway...................................................................................................................................... 100
Eighth Taljan.............................................................................................................................. 104
Eco Panels................................................................................................................................... 105
COURT ORDERED LIQUIDATIONS...................................................................................... 110
Asset-less administrations....................................................................................................... 110
Administrations where remuneration paid.......................................................................... 111
Cameo Arch............................................................................................................................ 111
Chelsea Springs...................................................................................................................... 112
Vicsworth............................................................................................................................... 114
CREDITORS’ VOLUNTARY LIQUIDATION........................................................................ 116
Companies where no remuneration paid.............................................................................. 116
ADF............................................................................................................................................. 116
Eurocapital................................................................................................................................. 118
CBS Global Communications.................................................................................................. 120
Greenchip Funds Management............................................................................................... 126
Tetherless.................................................................................................................................... 129
GCW Holdings.......................................................................................................................... 130
Validity of resolutions for CBS Global, GCW Holdings, Greenchip Funds Management and Tetherless.................................................................................................................................... 132
The cash cheques....................................................................................................................... 136
PRINCIPAL RELIEF SOUGHT................................................................................................... 138
FINDINGS....................................................................................................................................... 144
CONCLUSION............................................................................................................................... 145
SCHEDULE A................................................................................................................................. 148
HER HONOUR:
INTRODUCTION
In this proceeding, the plaintiff, the Australian Securities and Investments Commission (“ASIC”), by originating process dated 10 March 2006, seeks an inquiry by the Court pursuant to s.536 of the Corporations Act 2001 (Cth) (“the Act”) into the conduct of the defendant, Mr Robert Edge, an official liquidator, in relation to his alleged misconduct as the liquidator of 21 companies in liquidation and orders pursuant to s.447E of the Act in relation to Mr Edge’s alleged misconduct as the voluntary administrator or deed administrator of three companies in voluntary administration or under a deed of company arrangement (“DOCA”) pursuant to Part 5.3A of the Act. ASIC contends that Mr Edge’s misconduct is the most serious possible short of fraud. It seeks orders that he be removed as liquidator of a number of companies and prohibited from accepting appointment as a liquidator, administrator or receiver for a period of ten years. It also seeks an order that Mr Edge disgorge funds drawn as remuneration allegedly without valid approval.
The proceeding is complex, because the 24 companies currently fall into a number of different types of external administration including court-ordered liquidation, creditors’ voluntary winding up and administration under Part 5.3A of the Act. Some of the companies have, at various times, been in different types of external administration. In consequence, different provisions of the Act and different Corporations Regulations (“Regulations”) currently apply, or have applied, to various companies at different times.
The following companies are subject to a Court-ordered winding up:
1.ACN 007 335 168 Pty Ltd (“ACN 007”)
2.Balanceauto Distribution Pty Ltd (“Balanceauto”)
3.Cameo Arch Pty Ltd (“Cameo Arch”)
4.Chelsea Springs Pty Ltd (“Chelsea Springs”)
5.Hollycorp Investments Pty Ltd (“Hollycorp”)
6.Media Sales Network (Vic) Pty Ltd (“Media Sales Network”)
7.Precision Interconnect Australia Pty Ltd (“Precision Interconnect”)
8.Seymour Lands Pty Ltd (“Seymour Lands”)
9.Vicsworth Enterprises Pty Ltd (“Vicsworth”)
The following companies are in a creditors’ voluntary winding up:
1.ADF ACN 063 887 650 Pty Ltd (“ADF”)
2.CBS Global Communications Pty Ltd (“CBS Global”)
3.CTP Capital Trading Pty Ltd (“CTP Capital”)
4.Eurocapital Pty Ltd (“Eurocapital”)
5.GCW Holdings Pty Limited (“GCW Holdings”)
6.Greenchip Funds Management Pty Ltd (“Greenchip Funds Management”)
7.JGS (Vic) Pty Ltd (“JGS (Vic)”)
8.Jewel Group Services Pty Ltd (“Jewel Group”)
9.Pabulum Enterprises Pty Ltd (“Pabulum”)
10.Tetherless Access Ltd (“Tetherless”)
11.Wallistan Pty Ltd (“Wallistan”)
In the case of six companies, the creditors’ voluntary winding up followed a voluntary administration. In the case of two companies, the creditors’ voluntary winding up followed a voluntary administration and a deed of company arrangement.
The following companies entered voluntary administration under Part 5.3A of the Act:
1.Eco Panels Australasia Pty Ltd (“Eco Panels”)
2.Eighth Taljan Pty Ltd (“Eighth Taljan”)
3.Invaway Pty Ltd (“Invaway”)
4.The Pines Stud Bloodstock Pty Ltd (“The Pines”)
Due to the very large number of alleged contraventions in the present proceeding, in relation to many different companies, in some cases I deal with issues thematically. In other instances, it is necessary to deal with individual companies on a case by case basis. Sometimes a combination of a thematic and a specific approach is adopted.
ASIC’S PRINCIPAL ALLEGATIONS
A great number of particular breaches are alleged by ASIC. It contends that Mr Edge breached approximately 30 different provisions of the Act or Regulations in the course of the various liquidations and other administrations. ASIC’s principal complaints about Mr Edge’s conduct, however, fall into several broad categories. ASIC alleges that:
1.Mr Edge repeatedly drew remuneration from the assets of companies in liquidation or under administration without obtaining any, or any valid approval.
ASIC further submits that:
(a)Mr Edge’s evidence that he followed an invariable practice of obtaining prospective or retrospective approval should be rejected, and
(b)the evidence of Mr Edge and his associate, Mr Armistead, about the level of detail they provided to creditors as a basis for retrospective approval of fees since 2003 should be rejected. Further, were their evidence to be accepted, the information to which they testified was not a sufficient basis for valid approval.
2.Mr Edge destroyed, or caused to be destroyed, the books and records of numerous companies, including many of the relevant companies, prior to their deregistration and without obtaining the creditors’ approval or ASIC’s consent, contrary to the requirements of s.542 of the Act.
ASIC further submits that Mr Edge’s decision to embark on a wholesale destruction of corporate books, records and documents in September 2005, at a time when he was already aware that ASIC had commenced its inquiries into some of his administrations, was “difficult to understand”. It contends that the unauthorised destruction of documents, which deprived ASIC and the Court of important evidence of Mr Edge’s conduct, constitutes a contravention of s.180 of the Act in relation to each affected company.
3.Mr Edge failed to maintain adequate and proper records (or where relevant, hard copies), of the documents (including DOCAs) he lodged, or claimed to have lodged, with ASIC, and he failed consistently to maintain a postal register.
4.Mr Edge failed to lodge approximately 130 forms, reports and documents of different types with ASIC, as required by applicable legislation. ASIC submits that Mr Edge’s contention that the relevant forms, reports or documents were lodged, but were subsequently lost by ASIC, should be rejected.
5.Mr Edge failed to hold final meetings of creditors and failed to prepare and to lodge final accounts in relation to a considerable number of companies.
6.Mr Edge failed to lodge and file reports pursuant to s.533(1)(c) of the Act in relation to at least 12 companies which had failed to pay more than 50 cents in the dollar to unsecured creditors. Further, the director of The Pines was a director of at least two companies which had failed to pay more than 50 cents in the dollar to unsecured creditors. The opportunity for ASIC to take action against that director was lost as a result of Mr Edge’s failure to lodge the required reports. ASIC submits that Mr Edge’s explanation that he was unaware of the requirements of s.533(1)(c) of the Act was untenable, given his long experience and his previous execution of at least four reports which expressly referred to the requirements of s.533(1)(c).
7.Mr Edge consistently and improperly delegated his duties and functions as a liquidator or administrator to his associate, Mr Armistead, who was inadequately qualified, instructed and supervised.
8.In relation to numerous companies, Mr Edge, in breach of duty, made a general delegation of his duties to Harrisons Insolvency, thus failing to bring his personal skills and experience to all significant aspects of the relevant liquidations.
9.Mr Edge accepted his appointment as the voluntary administrator of The Pines for improper purposes, in circumstances where it was neither insolvent nor likely to become so at some future time, in order to assist the director, Mr Little (with whom he had a personal relationship), to resolve a matrimonial dispute. Mr Edge failed, in breach of duty, to make any, or any proper disclosure to the creditors of The Pines of his previous dealings and personal relationship with the director. ASIC submits that Mr Edge’s evidence that he had made a qualified disclosure of his prior association with the director, and his assertion that it was insignificant, should be rejected.
10.Mr Edge did not execute and lodge the DOCA resolved upon by the creditors of The Pines and Invaway, as required by s.444B of the Act, and consequently, those companies are in liquidation pursuant to s.446A of the Act, with Mr Edge taken to be the liquidator.
11.Mr Edge drew remuneration in relation to the voluntary administration of The Pines without obtaining the approval of the creditors and without producing any, or any adequate, substantiating documents to the creditors.
12.The timesheets for the work allegedly done by Mr Edge and Mr Armistead during the administration of The Pines are not a reliable record and exaggerate the time that they spent working on the administration of The Pines.
13.Although at a meeting of creditors of The Pines in March 2006 Mr Edge obtained approval for the payment of $194,088.29 for his remuneration (excluding any expenses), that approval applied only to his remuneration as a deed administrator because the terms of the resolution were limited to that capacity and the relevant creditors’ meeting was convened under s.445F of the Act. Therefore, the meeting could not validly approve any remuneration due to Mr Edge as a voluntary administrator. The amount purportedly approved at the s. 445F meeting, however, clearly incorporated an amount of remuneration for services as a voluntary administrator. The remuneration of Mr Edge as voluntary administrator of The Pines is therefore still unapproved.
14.During the voluntary administration of The Pines, receipts were not paid into a separate account, but into the office account of Robert Edge & Associates. ASIC also submits that additional payments (the nature and purpose of which were unclear), were made from the funds of The Pines. Certain funds of The Pines are therefore not accounted for.
16.Mr Edge also breached his duty in relation to The Pines by delegating to the director the responsibility for sending the notices of the first meeting of creditors and the s.439A meeting on 2 August 2004 and for preparing some parts of the administrator’s report; by failing to prepare or lodge minutes of creditors’ meetings; by failing to advertise adequately or at all the creditors’ meetings; by preparing seriously deficient s.439A reports to creditors, and by failing to lodge six monthly accounts with ASIC, as required by the DOCA.
17.The s.439A report to the creditors of Invaway was also inadequate. Further, Mr Edge may have destroyed Invaway’s records, although the administration commenced only in June 2004. There were no minutes of the creditors’ meeting at which the DOCA for Invaway was allegedly approved. No DOCA was produced, and its absence could not be explained.
18.Mr Edge failed to lodge documents confirming that the voluntary administration of Eighth Taljan had come to an end.
19.Mr Edge failed to convene the s.439A meeting of Eco Panels within the time prescribed by the Act, and thus was not validly appointed the liquidator of that company. He failed to respond to the letter of a creditor about the time limits, and made no independent assessment of the creditor’s query, but instead relied on Mr Armistead’s opinion and assurances. (Mr Edge subsequently applied to the Federal Court in order to validate his appointment as the liquidator of Eco Panels.) The s.439A report to the creditors of Eco Panels was deficient and inadequate. There was no evidence that Mr Edge obtained approval of his remuneration as voluntary administrator, or that invoices or documents were tabled at a meeting of creditors for that purpose.
20.Five companies wound up by the Court, of which Mr Edge was liquidator, were essentially asset‑less. Those companies were ACN 007, Balanceauto, Media Sales Network, Precision Interconnect and Seymour Lands. Mr Edge failed to lodge half‑yearly accounts with ASIC for three or more years in relation to the companies. Although he asserted that the liquidations had come to an end, no final accounts required pursuant to s.539 of the Act were lodged. There was no evidence that the sole director of Seymour Lands was ever contacted by, or on behalf of, Mr Edge.
21.In the case of three companies in court‑ordered liquidation, remuneration had been paid without being approved. Remuneration for Cameo Arch of no less than $9,932.32 was taken, but was not approved. Remuneration of $7,600 for Chelsea Springs was taken, but was not approved. Remuneration for Vicsworth of at least $959 was taken, but was not approved.
ASIC’s principal submissions
Mr Woodward, counsel for ASIC, submitted that Mr Edge’s contraventions and misconduct were the most serious imaginable, short of fraud. ASIC did not allege that the evidence supported a finding of dishonesty, but contended that the liquidator’s approach to applying creditors’ funds to the payment of his fees deserved particular condemnation. While some amounts in question were relatively small, other sums drawn as remuneration by Mr Edge were substantial, as in the case of CBS Global.
Mr Woodward submitted that Mr Edge’s approach to the duties of his office had been, at best, cavalier and unworthy of a liquidator. His approach to ASIC’s inquiries had been unsatisfactory. His evidence was shifting, and in some respects, was false.
ASIC contended that Mr Edge’s derelictions of duty evidenced a consistent pattern of bad practice, in which the treatment of moneys, remuneration and cheques was particularly disturbing. Mr Woodward submitted that the failures to lodge forms and reports were not ‘victimless’ contraventions. Their essential effect was to deny information to the companies’ creditors and members.
ASIC submitted that the Court should make the findings of breach of duty (including breaches of s.180 of the Act) it sought, in order to send a message both to the defendant and to the profession generally that such conduct by a liquidator would not be tolerated.
THE DEFENDANT’S PRINCIPAL CONTENTIONS
Mr Evans, counsel for the defendant, ultimately conceded that Mr Edge had failed to lodge many s.533(1)(c) reports, half-yearly and final accounts under s.539 and final meeting documentation under s.509. He contended that those contraventions were inadvertent.
Further, Mr Evans contended that there was little or no evidence of any complaints about Mr Edge’s conduct by the directors, shareholders or creditors of any of the companies, no evidence of prejudice to creditors and no evidence of dishonest conduct. He argued that much of what ASIC submitted was founded on inferences drawn from limited documentary evidence.
Mr Evans submitted that although ASIC had commenced its investigation into Mr Edge’s administrations under s.13 of the Australian Securities & Investments Commission Act 2001 (Cth) (“the ASIC Act”) in July 2005, it did not communicate that to Mr Edge until January 2006 and ASIC thus bore the responsibility for Mr Edge’s destruction of relevant documents during the intervening period, which had handicapped the Court’s inquiry. Mr Evans submitted that the quality of evidence against Mr Edge was poor and the cross-examination of Messrs Edge and Armistead constituted “little more than officious intermeddling into matters where there was no foundation for any form of inquiry”. There was, he said, “nothing of real substance in ASIC’s complaints.” The inquiry had disclosed nothing of significance which ASIC did not know when it issued the proceeding on 10 March 2006 and was “largely to serve ASIC’s public relations purposes.”
The defendant did not dispute that s.536 of the Act conferred jurisdiction for an inquiry into the companies in liquidation, but submitted that there was no power to make orders under s.447E of the Act in relation to the companies in voluntary administration or subject to a DOCA, because in no case could the Court be satisfied that Mr Edge, as voluntary administrator or deed administrator, “has managed or is managing the company’s business, property or affairs in a way that is prejudicial to the interests of some or all of the company’s creditors or members”, or that Mr Edge’s acts or omissions were or would be prejudicial to such interests. There was, in particular, no evidence of prejudice to the creditors of Tetherless, The Pines, Invaway or Eighth Taljan.
Mr Evans argued that a breach of a statutory obligation to lodge forms or contraventions of the provisions of Chapter 5 did not constitute a breach of duty under s.180 of the Act. In particular, a contravention of s.542 of the Act could not constitute a breach of duty, as the section deals with destruction of documents after deregistration, when duties could not be owed to the company.
Mr Evans complained that although a large number of the findings sought by ASIC could have an impact on third parties, no notice had been given to those parties. In particular, the creditors and directors of The Pines and Invaway had not been notified of ASIC’s submission that the DOCAs were not executed and the companies were consequently in liquidation.
Mr Evans argued that much of what ASIC complained of was really a failure to observe “best practice”, rather than a breach of duty under s.536, a contravention of a particular provision of the Act or a breach of duty under s.180 of the Act.
In particular, while Mr Edge did not deny his practice of signing cheques on company accounts in favour of the liquidator’s third party creditors, thereby “short circuiting” the process of payment of his remuneration, Mr Evans submitted that it was only a failure of best practice, provided that there were adequate journal entries recording the fact that remuneration had been received.
Mr Evans also submitted that Mr Edge’s failure to disclose his prior association with Mr Little and his failure to conform to Insolvency Practitioners’ Association of Australia (“IPAA”) recommendations in relation to the material to be included in the s.439A reports were merely failures to conform to best practice.
The defendant ultimately accepted ASIC’s contention that Mr Edge had not lodged approximately 120 Form 524s or final accounts in relation to 20 companies, mainly after May 2003. Mr Evans argued that, at worst, this showed a reliance on Mr Armistead, as it was an easy matter to lodge such forms, and the failure to do so indicated Mr Edge’s genuine belief that the relevant liquidations were complete and the companies deregistered.
AFFIDAVITS RELIED UPON
The principal affidavits relied on by ASIC were:
1.The first affidavit of John David Stack sworn 10 March 2006.
2.The affidavit of Timothy George Honey sworn 10 March 2006.
3.The second affidavit of John David Stack sworn 16 May 2006.
4.The third affidavit of John David Stack sworn 25 July 2006.
5.The affidavit of Ian Charles Bennett sworn 28 June 2006.
6.The affidavit of Ian Robert Smith sworn 28 July 2006.
7.The affidavit of Paul Graeme Rofe sworn 5 July 2006.
8.The affidavit of Maxwell Andrew Poyser sworn 28 June 2006.
9.The affidavit of Luke Ching Wong sworn 28 June 2006.
Mr Stack and Mr Honey are officers of ASIC. Mr Wong is a partner of Harrisons Insolvency, a firm which acted as Mr Edge’s agent and carried out work in the administration of a number of the companies on Mr Edge’s behalf over a number of years. Mr Bennett was a director of Seymour Lands. Mr Poyser was a director of Vicsworth. Mr Rofe was a director of CBS Global. Mr Smith is an employee of the secured creditor of Eco Panels.
The principal affidavits relied on by the defendant were:
1.The affidavit of Robert Edge sworn 16 May 2006.
2.The affidavit of Robert Edge sworn 31 August 2006.
3.The affidavit of William Armistead sworn 17 May 2006.
Mr Armistead is a former employee and longstanding professional associate of Mr Edge.
CREDIT OF WITNESSES
The defendant did not cross-examine any of the deponents who swore affidavits on behalf of ASIC. Mr Edge and Mr Armistead were cross-examined.
Mr Edge
Although Mr Edge presented as self-assured and composed, he was not, in my opinion, a reliable witness. There was considerable inconsistency between his initial letters and communications with ASIC, his affidavits, his initial assertions in oral testimony and his ultimate concessions.
He did not respond to an initial letter of ASIC dated 27 April 2005, but contended that he had never received it, although it was correctly addressed. He initially asserted that the outstanding documents the subject of ASIC’s complaint had been lodged. He persisted in that assertion during cross‑examination, despite making a number of concessions. In final submissions, counsel for Mr Edge conceded that a large number of the documents had not been lodged. The letter of Mr Edge’s solicitors, Madgwicks, dated 3 March 2006 (stated to be written on instructions), contained assertions from which he resiled in oral testimony. He asserted that his solicitors “got it wrong”. I did not accept that assertion.
In his first affidavit, Mr Edge did not refer at all to the substantial delegation of his insolvency work to Harrisons Insolvency, which was revealed by the affidavit of Mr Wong sworn 28 June 2006. His subsequent affidavit sworn 31 August 2006 acknowledged the delegation to Harrisons Insolvency.
I do not accept Mr Edge’s explanation that his original failure to advert to a significant, longstanding delegation of work in relation to the subject companies was due to inadvertence and that his subsequent recollection was provoked by discussions with Mr Armistead. The matter was highly relevant to the questions raised about the specified companies and I am persuaded that Mr Edge’s initial approach was not one of frank disclosure but of deliberate suppression of relevant facts in order to serve his case.
Mr Edge also contended that he was unaware of his obligation to lodge reports pursuant to s.533(1)(c) of the Act, despite his long experience as a liquidator and his previous execution of, or reference to, several such reports on various occasions which were in evidence.
If Mr Edge were, as he asserted, unaware of a significant and fundamental statutory obligation, it would denote a serious want of competence which must reflect adversely on his fitness as a liquidator. I am not, however, persuaded that Mr Edge was unaware of the requirements of s.533(1)(c). His profession of ignorance was not credible. Similarly, Mr Edge contended that he was ignorant of the requirements of s.542 of the Act in relation to the destruction of the companies’ books. His evidence on the destruction of documents and his understanding of the relevant requirements was shifting and inconsistent. I am not persuaded that Mr Edge was ignorant of the statutory requirements.
He initially contended that ASIC had previously acknowledged that it had “lost” documents which he had lodged. That was neither frank, nor convincing, in the light of relevant correspondence between ASIC and Mr Edge.
Mr Edge made a number of very specific, unqualified assertions about significant issues, which he later modified, abandoned or retracted in the course of cross‑examination. In other instances, he professed an inability to recall relatively recent events (such as the signing of cheques to cash in May 2006, shortly before he swore an affidavit in the proceeding).
Mr Edge’s evidence is discussed in detail below. Its general quality was vague, contradictory, inconsistent and untenable in the light of relevant documents.
Mr Armistead
Mr Armistead was, in my opinion, an unreliable and inconsistent witness. In oral testimony, he frequently contradicted assertions contained in his affidavit, and changed his testimony. He professed not to recall assertions contained in his affidavit. He initially failed to comply fully with the subpoena served on him, without any satisfactory explanation.
Mr Armistead’s evidence concerning many matters was shifting and contradictory. His evidence concerning the mail register altered progressively. His account of the hours of work he committed to The Pines administration was unconvincing. Ultimately, Mr Armistead was unable to offer any explanation for many significant matters, including the basis on which direct payments were made to himself, Mr Edge or their creditors. His evidence is discussed in detail below.
ASIC’S SUMMARY OF SECTIONS AND REGULATIONS
In its detailed final written submissions, ASIC set out the following summary of a number of sections of the Act and Regulations relevant to the proceeding:
(a)s.180 of the Act – a liquidator and administrator is an officer within the meaning of s.9 of the Act and thus has the duties of directors and other officers prescribed by sections 180 to 183 of the Act and at common law and equity, most notably the duty of care and diligence under s.180 of the Act.
(b)s.438A of the Act – requiring a voluntary administrator to investigate the business, property, affairs and financial circumstances of the company and to form the prescribed opinion concerning the future of the company.
(c)s.439A of the Act – requiring the convening of the second meeting of creditors within the time prescribed, by notice accompanied by a report by the voluntary administrator about the company’s business, property, affairs and financial circumstances and setting out the administrator’s opinion about the relevant matters.
(d)s.444B of the Act – concerning the requirements for execution of a deed of company arrangement, including the requirement (s.444B(2)) that the company execute the deed within 20 days after the end of the meeting of creditors and that (s.444B(5)) the administrator of the deed execute the instrument before, or as soon as practicable after, the company executes it.
(e)s.446A(1)(b) of the Act – providing that if a company under administration fails to execute a deed of company arrangement as required by s.444B(2), the company is taken to have passed a winding up resolution.
(f)s.477(2)(k) of the Act – providing that a liquidator may appoint an agent to do any business that the liquidator is unable to do, or that it is unreasonable to expect the liquidator to do in person.
…
(i)s.449E of the Act – providing that the administrator of a company under administration or of a deed of company arrangement is entitled to such remuneration as is fixed by a resolution of the company’s creditors passed at a meeting convened under s.439A or s.445F of the Act, or if no remuneration is so fixed, such remuneration as the Court fixes on the application of the administrator.
(j)s.450A of the Act - requiring a voluntary administrator to lodge a notice of appointment and advertise the appointment within the time prescribed (with the notice to be in form 505 as prescribed by Regulation 1.0.03(1) of the Regulations).
(k)s.450B of the Act – requiring the administrator of a deed of company arrangement to send to each creditor a written notice of the execution of the deed, cause the notice of execution to be published and lodge a copy of the deed with ASIC.
(l)s.450C of the Act – requiring the administrator of a deed of company arrangement to lodge with ASIC and publish, a notice that the company has failed to execute a deed of company arrangement within 21 days as required by s.444B(2).
…
(r)s.476 of the Act – requiring a liquidator in a court liquidation to lodge with ASIC a preliminary report based on the report as to the company’s affairs to be submitted to the liquidator pursuant to s.475 of the Act.
(s)s.499(3) of the Act – providing that the committee of inspection or, if there is no such committee, the creditors may fix the remuneration to be paid to the liquidator in a voluntary winding up.
(t)s.504 of the Act – providing that in a voluntary liquidation a member or creditor, or the liquidator, may at any time before the deregistration of the company apply to the Court to review the amount of the remuneration of the liquidator.
(u)s.508 of the Act – requiring a liquidator in a creditors’ voluntary liquidation to convene a meeting of creditors within 3 months after the end of the first year from the commencement of a winding up and at the end of each succeeding year, and lay before the meeting or each meeting an account of his or her acts and dealings and of the conduct of the winding up during the first year or that succeeding year, as the case may be, with notice of such meetings to be given in accordance with s.508(2) of the Act.
(v)s.509 of the Act – requiring a liquidator in a creditors’ voluntary liquidation, as soon as the affairs of a company are fully wound up, to make an account showing how the winding up has been conducted and the property of the company has been disposed of and to convene a meeting of creditors (and, in the case of a voluntary winding up, a meeting of members) for the purpose of laying before it the account and giving any explanation of the account. Under this section, the liquidator is also required to convene the meeting by an advertisement published in the Gazette at least 1 month before the meeting specifying the date, time, place and purpose of the meeting and within 7 days after the meeting, lodging a return of the holding of the meeting and of its date with a copy of the account attached to the return. (Until 23 December 2004, the return and attachment was required to be in Form 523: see Regulation 1.0.03(1) of the Regulations).
(w)s.531 of the Act – requiring a liquidator to keep proper books in which he or she must cause to be made entries or minutes of proceedings of meetings and of such other matters as are prescribed. The matters prescribed are, according to Regulation 5.6.01, those required to give a complete and correct record of the liquidator’s administration.
(x)s.533 of the Act – providing that if it appears to the liquidator of a company in the course of a winding up that an officer or employee may be guilty of an offence or that the company may be unable to pay its unsecured creditors more than 50 cents in the dollar, the liquidator must as soon as practicable lodge a report with respect to that matter with ASIC.
(y)s.537 of the Act – requiring a liquidator to lodge within 14 days after his or her appointment a notice of the appointment.
(z)s.539 of the Act – requiring a liquidator to lodge half yearly accounts within 1 month after the end of the period of 6 months from the date of appointment and every 6 months thereafter during the appointment and within 1 month after ceasing to act as liquidator. (Until 23 December 2004, the return and attachment was required to be in Form 523, see Regulation 1.0.03(1) of the Corporations Regulations).
(aa)s.542(2) of the Act – requiring a liquidator to retain the books of the company and of the liquidator that are relevant to the affairs of the company for a period of 5 years from the date of deregistration of the company. Subject to s.262A of the Income Tax Assessment Act 1936, only at the end of that period, the liquidator may destroy the books and records, unless consent to a shorter period is secured pursuant to s.542(3) of the Act. Under that section, the creditors of the company may by resolution direct a period shorter than 5 years, but in that case the liquidator is not entitled to destroy the books and records unless ASIC consents.”
RELEVANT LEGAL PRINCIPLES
The liquidator’s role, duties and powers
A liquidator is an officer of the Court, through whom the Court itself notionally conducts compulsory liquidations. In that context, although a liquidator is not an employee of the Court:
“the nature of the appointment makes him a representative of it … The winding up is by the Court which for the purposes the liquidator is. As such he is entrusted with the reputation of the Court for impartial and proper despatch of duties. No lesser standard in that regard is to be expected of the liquidator than of a court or a judge.”[1]
[1]Commissioner for Corporate Affairs v Harvey [1980] VR 669 at 696.
The liquidator’s essential functions are to identify, take possession of and realise the company’s assets, to investigate and determine the claims against the company and to apply the assets to the satisfaction of those claims in accordance with the statutory scheme of priority.
While there is frequently a shortfall of assets with which to satisfy creditors’ claims against a company wound up in insolvency, where there is any surplus the liquidator must distribute it to members and carry out the necessary steps to implement the company’s dissolution.
The liquidator’s functions, which are performed in the fiduciary capacity of agent of the company, necessitate the conferral of wide and extensive powers currently embodied in s.477 of the Act, including the power to carry on the company’s business for the purpose of beneficial disposal or winding up, pay creditors, bring and defend proceedings in the company’s name, enter agreements and (subject to some restrictions) compromise claims, sell and dispose of the company’s property, make purchases and execute documents on its behalf. The company’s books and records must be delivered to the liquidator, who has extensive powers to obtain information and is entitled to the assistance of the company’s officers.
In Commissioner for Corporate Affairs v Harvey[2] (“Harvey”), Marks J recognised that “the balance of authority favours the liquidator being treated not as a trustee stricto sensu but as an agent of the company”. It is clear, however, that a liquidator occupies a fiduciary position in relation to the company, its creditors and contributories. Although not a trustee in the sense, for example, that the property of the company is vested in him or her, the liquidator “is in a position of trust”.[3]
[2][1980] VR 669 at 695.
[3]At 695.
The extensive powers vested exclusively in the liquidator entail a corresponding vulnerability in the creditors, members and the public. The liquidator is a fiduciary on whom high standards of honesty, impartiality and probity are imposed both by the Act and the general law. As an officer of the company, the liquidator has a statutory duty of care, diligence and good faith.
In Harvey, Marks J stated that the liquidator’s fundamental duty is to:
“administer the estate strictly in accordance with the duties and obligations specifically imposed on him by the Companies Act and its Rules. It is obvious that everything to be done in a competent administration is not and cannot be specifically prescribed. Preserving the assets, giving proper attention to the administration, acting with due despatch and ensuring adequate knowledge and understanding of the affairs of the companies are matters of common sense.”[4]
[4]At 691.
It is recognised that a liquidator must meet high standards of skill and competence. As “a chartered accountant skilled and versed in the performance of the duties of such an office” and acting “for remuneration and for profit to himself”, the liquidator properly bears the burden and risks of decision-making in that capacity[5] and “common sense and judgment” may reasonably be expected of such an officer.[6]
[5]Re Windsor Steam Coal Co (1901) Ltd [1929] 1 Ch 151 at 162-3, per Lawrence LJ.
[6]Re Windsor Steam Coal Co (1901) Ltd [1929] 1 Ch 151 at 159, per Lord Hanworth MR.
In Pace v Antlers Pty Ltd (in liq)[7] Lindgren J stated that:
“The liquidator’s duty to exercise reasonable care and skill has been the subject of some debate. The following propositions, however, appear to have gained acceptance in Australia:
oThe court should not be quick to condemn a person in the difficult position of a liquidator, and, in particular, should not judge his or her conduct with wisdom born of hindsight: Re Windsor Stream Coal Co Ltd [1929] 1 Ch 151 (Windsor Steam Coal); Maelor Jones Investments (Noarlunga) Pty Ltd v Heywood‑Smith (1989) 54 SASR 285 (Olsson J) (Maelor Jones) at 287; it is not every error of judgment that will be accounted negligence: Re George Bond & Co Ltd (1932) 32 SR (NSW) 301 at 306.
oAt the same time, a high standard of care and diligence is to be expected of a liquidator as a professional person who is being paid for his or her services: Windsor Steam Coal at 165, per Lawrence LJ; Maelor Jones at 288-9; McPherson’s The Law of Company Liquidation, p 218;
oA liquidator is under a duty to complete the administration of the assets within a reasonable time and not to protract the liquidation unduly: Re House Property & Investment Co [1954] Ch 576 at 612; McPherson’s The Law of Company Liquidation, p 218; he or she must act with ‘due despatch’: Cmr for Corporate Affairs v Harvey [1980] VR 669 (CCA v Harvey) at 691; Maelor Jones at 288;
oIf there is a difficulty at any stage of the administration, it is the liquidator’s clear duty to inform the court and seek directions: CCA v Harvey at 691; Windsor Steam Coal at 159, 161; Maelor Jones at 288.”
[7](1998) 26 ACSR 490.
His Honour further observed:
“a liquidator must exhibit care (including diligence) and skill to an extent that is reasonable in all the circumstances. ‘All the circumstances’ will include the facts that a liquidator is a person practising a profession, that a liquidator holds himself or herself out as having special qualifications, training and experience pertinent to the liquidator’s role and function, and that a liquidator is paid for liquidation work. ‘All the circumstances’ will also include the fact that some decisions and courses of action which a liquidator is called upon to consider will be of a business or commercial character, as to which competent liquidators acting with due care, but always without the benefit of hindsight, may have differences of opinion.”[8]
[8]At 503.
In order to accept appointment and act as a liquidator under Chapter 5 of the Act, a person must be a registered liquidator and otherwise satisfy the conditions set out in s.532 of the Act. A registered liquidator is a person who has been granted registration by ASIC on satisfying the conditions set out in s.1282. A registered liquidator may be registered as an official liquidator by ASIC under s.1283. Only an official liquidator may be appointed a provisional liquidator or liquidator in a compulsory winding up. A registered liquidator who is not an official liquidator can act as a receiver, administrator or a liquidator in a voluntary liquidation.
Pursuant to s.1292(2) of the Act, the Companies Auditors and Liquidators Disciplinary Board may, on the application of ASIC, cancel or suspend the registration of a liquidator, where, inter alia, it is satisfied the liquidator has failed to carry out or perform the duties adequately and properly or is not a fit and proper person to remain a registered liquidator.
In addition to the general law and statutory duties of good faith, care and diligence, the liquidator has a large number of obligations under specific provisions of the Act, Regulations and other legislation. The statutory obligations particularly relevant to the present case include:
(i)Lodging a notice of appointment with ASIC pursuant to s.537 of the Act and with other relevant authorities under other legislation.
(ii)Receiving the director’s report as to affairs pursuant to s.475.
(iii)Lodging a preliminary report with ASIC under s.476.
(iv)Lodging a further report with ASIC where it appears that there has been misfeasance or the company may be unable to pay its unsecured creditors more than 50 cents in the dollar, pursuant to s.533.
(v)Keeping proper books pursuant to s.531 of the Act of the matters prescribed under Regulation 5.6.01.
(vi)Making and lodging a final account and convening a final meeting under s.509 of the Act in voluntary liquidations.
(vii)Lodging an account of receipts and the position of the winding up at six monthly intervals and a final account pursuant to s.539 of the Act.
(viii)Complying with Regulations 5.6.06 to 5.6.10 relating to money received by the liquidator, pursuant to s.538 of the Act.
(ix)Complying with s.542 of the Act.
(x)Complying with s.473(3) or s.499(3) for fixing remuneration, as applicable.
Delegation to an agent
Section 477(2)(k) of the Act empowers a liquidator to “appoint an agent to do any business that the liquidator is unable to do, or that it is unreasonable to expect the liquidator to do, in person”.
The permitted use of an agent is thus, in terms, quite circumscribed.
In Harvey, his Honour criticised the liquidator’s delegation of duties to unqualified, inexperienced or inadequately supervised members of staff, concluding that:
“Despite the apparent complexity of the problems with which the liquidator was first faced and the need for definitive decisions on the courses to be taken, the liquidator at an early stage delegated almost entirely the work to be done.”[9]
[9]At 745.
In Harvey, one staff member became a chartered accountant only after he had completed the work, although he had seven years’ previous experience in liquidations at another firm and experience in auditing, accounting and taxation. Marks J found that the staff member was never given any directions by the liquidator “as to what course the liquidation was to take, nor did he have any idea or belief as to that course”.[10] Another clerical employee was not qualified while working on the liquidations. A third staff member, although a legal practitioner qualified in economics and accounting, was without practical experience, and was “left on his own to do the best he could”[11] to find documents and conduct the liquidations. A fourth staff member had only limited experience of liquidations and no clear idea of the direction of the liquidations at issue.
[10]At 746.
[11]At 746.
Marks J found that the liquidator himself:
“took only marginal interest. He kept very little watch, if any, on such matters as internal control, keeping proper books, keeping books up-to-date, the banking of moneys, and compliance with statutory requirements”.[12]
[12]At 747.
His Honour also held that a liquidator’s appointment of his own firm “as agent for the purposes of the liquidation and all ancillary matters” was not authorised by the relevant statutory power (then s.236(2)(j)) and was “in the teeth of his duty as liquidator”.[13] The guiding principle in this context was that work should not be delegated unless it was work that the liquidator was “unable to do himself”. Marks J stated:
“If the liquidator was so disabled in some way that he could not perform the duties to which he was appointed then his duty is, not to appoint an agent, but to apply to the Court for permission to resign”.[14]
[13]At 754.
[14]At 754.
While acknowledging that liquidators not infrequently appointed their firms as agents, Marks J considered the practice alarming, as it set up a conflict of interest between the liquidator and his duty.[15]
[15]At 754.
Marks J endorsed the statement of Paine J in Re Killmier[16] (although made in relation to trustees) as applicable to delegation by liquidators. Paine J stated:
“It must have been patent to him as that time passed that if he was to delegate even the less responsible duties, it was essential that he must become fully acquainted with the duties required of him, that he must instal a properly organized system for the performance of those duties and, furthermore, see that where any duties were delegated to subordinates they, as well as he, should be well informed of the nature and extent of what they had to do. But above all, he must not overload those subordinates, and unless he can get a sufficiency of staff he must restrict his acceptance of trusteeships so that his staff can efficiently cope with the work.”[17]
[16][1966] ALR 906; (1965) 8 FLR 21.
[17]At 913-4.
In Ah Toy v Registrar of Companies for the Northern Territory,[18] it was held that a liquidator had improperly delegated his duties as a provisional liquidator and liquidator.
[18](1986) 10 ACLR 630.
On the day of his appointment as a provisional liquidator, the defendant had appointed a firm of accountants as his agents “for the purposes of such provisional liquidation and for all matters incidental thereto”[19] and, on subsequently being appointed liquidator, had made a similar appointment of agency.
[19]At 632.
On appeal, the Full Federal Court found that the defendant:
“played little part in the conduct of either the provisional liquidation or the winding up. He did attend some meetings of creditors or of the committee of inspection, but he delegated almost all of the duties of his office. Major decisions pertaining to the conduct of the liquidation, including most of the decisions concerning the matters of present complaint, were made without his involvement.”[20]
[20]At 635.
The Full Federal Court observed that there was no statutory provision permitting the delegation of the functions of a provisional liquidator. The purpose of s.236(2)(j) (now s.477(2)(k)), which permitted a limited delegation by liquidators:
“is to enable the delegation of specific tasks which the liquidator, for one reason or another, is not able to undertake. The scheme of the Act is that the liquidator remains generally responsible to the Court and to the creditors and contributories of the company for the conduct of the liquidation. We agree with the comment by Marks J, made in relation to a similar general delegation in Harvey at p.754, that if a liquidator is so disabled in some way that he cannot perform the duties to which he has been appointed, his duty is not to appoint an agent but to seek leave to resign his office.”[21]
Their Honours observed that:
“There was, in the present case, no question of any inability by [the defendant] to perform his duties…Provisional liquidators and liquidators are appointed to their office as individuals and upon the strength of their personal qualifications. The identity of a particular appointee may be important: cf. In re Stewden Nominees No. 4 Pty Ltd (1975-1976) CLC ¶40-224 at p.28,335; (1975) 1 ACLR 185 at 187, Re Photo Holdings Pty Ltd (in liq) (1977-1978) CLC ¶40-301 at p.29,203; (1976) 2 ACLR 117 at p.118, Re Intercontinental Properties Pty Ltd (in liq) (1977) 2 ACLR 488 at 491-492 and Re Nickel Mines Ltd (1978) 3 ACLR 686 at p.688-9. The selection is not to be circumvented by a general delegation whereby the liquidator places the affairs of the company in other hands. Appointees are personally accountable for the conduct of the provisional liquidation or liquidation. In their work they must rely to some extent upon others but it is important that they bring their personal skills and experience to all significant aspects of the liquidation.”[22]
[21]At 485.
[22]At 635.
In Re Reiter Brothers Exploratory Drilling Pty Ltd; Ex parte Andrew Charles Robert Lee,[23] Zeeman J found that a provisional liquidator’s arrangement to delegate insolvency work to another accounting firm amounted to a joint venture. The firm performed the work for 90% of the IPAA recommended rates. The provisional liquidator retained the additional 10%.
[23](1994) 3 TasR (NC) N10; (1994) 12 ACLC 430.
Zeeman J observed that although the provisional liquidator should not be deprived of all remuneration for the work done by the delegate, the 10% largely represented profit, justified by the fact that the delegate was provided with the work.[24] He concluded that the provisional liquidator should not receive any remuneration beyond that which the delegate expected to receive for the work.[25] Zeeman J stated:
“To allow to the applicant remuneration which countenances his arrangements for the sharing of professional fees with [the delegate] would be to countenance conduct inappropriate for an officer who owes a fiduciary duty to the Company. In reality [the delegate] agreed to do the work for 90% of the IPAA recommended fees.”[26]
[24]At [6].
[25]At [6].
[26]At [6].
Section 536 inquiry
The liquidator, in the performance of his or her functions, is subject to the supervision of ASIC and the Court.
Whether appointed to a court-ordered or voluntary winding up, the liquidator may be subject to an inquiry by the Court or ASIC pursuant to s.536 of the Act.
Section 536 of the Act provides:
“Supervision of liquidators
(1A)In this section:
“liquidator” includes a provisional liquidator.
(1) Where:
(a) it appears to the Court or to ASIC that a liquidator has not faithfully performed or is not faithfully performing his or her duties or has not observed or is not observing:
(i) a requirement of the Court; or
(ii) a requirement of this Act, of the regulations or of the rules; or
(b) a complaint is made to the Court or to ASIC by any person with respect to the conduct of a liquidator in connection with the performance of his or her duties;
the Court or ASIC, as the case may be, may inquire into the matter and, where the Court or ASIC so inquires, the Court may take such action as it thinks fit.
(2)ASIC may report to the Court any matter that in its opinion is a misfeasance, neglect or omission on the part of the liquidator and the Court may order the liquidator to make good any loss that the estate of the company has sustained thereby and may make such other order or orders as it thinks fit.
(3)The Court may at any time require a liquidator to answer any inquiry in relation to the winding up and may examine the liquidator or any other person on oath concerning the winding up and may direct an investigation to be made of the books of the liquidator.”
It is recognised that the threshold precondition for the instigation of an inquiry should not be a very high one.[27] At the primary stage, the Court should not make any finding on the reasonableness or otherwise of the liquidator’s conduct, but if there are sufficient matters prima facie calling for further investigation, then subject to “proper safeguards as to the scope of the inquiry, an inquiry should be permitted”.[28]
[27]Burns Philp Investment Pty Ltd v Dickens (No. 2) (1993) 10 ACSR 626 at 633 per Young J.
[28]At 633.
The most influential modern analysis of s.536 is that of Marks J in Harvey,[29] in which his Honour extensively analysed the history and ambit of s.278 of the Companies Act 1961, the then equivalent provision. In Harvey, the defendant, an experienced liquidator, was appointed to two companies with closely related operations. One company, Timberlands, purchased land on terms contracts, for resale to investors on terms contracts. Most investors also entered service contracts with the other company, EFS, which undertook to plant and maintain pine tree plantations on the land.
[29][1980] VR 669.
On liquidation, Timberlands owed the head vendors of the land approximately $116,000, but the investors to whom the land had been resold owed over $166,000 to Timberlands. The investors owed EFS over $200,000 under the service contracts.
Marks J held that the liquidator, in breach of duty, had made no payments to the head vendors (thus permitting the head contracts to determine) and had made no effort to obtain payment of the moneys due to Timberlands and EFS from the investors.
Marks J stated that the liquidator’s:
“first task was to keep the contracts on foot (preserve the assets) but if he felt that there was a problem to be resolved his duty was to take steps to have it resolved. If that meant seeking directions from the Court he was obliged to do so.”[30]
[30]At 716.
His Honour considered that, had the liquidator exercised common sense, the wishes of the investors about completion of the contracts could have been ascertained with little difficulty by correspondence, a general meeting, or both. The liquidator could not have reasonably been left in doubt about his appropriate conduct after a conference with the officers of the Commissioner for Corporate Affairs (“CCA”), but Marks J stated:
“As it turned out, the course of the liquidation was determined by the liquidator himself. He made no payments at all and thus defaulted under the head contracts. He ignored correspondence and overtures for negotiation on behalf of the head vendors. He took no steps to ascertain the wishes of the investors, did not apply for directions nor refer the matter back to Lush, J. Despite the cancellation of the contracts by the head vendors for default in payment of the moneys due the liquidator continued to pay insurance premiums in respect of the land including land on which no trees were planted. He took no steps to get in land which the head vendors had agreed to substitute for unsuitable parts of the land purchased.
The liquidator gave false and misleading information to investors, creditors and the C.C.A. He acted in breach of numerous statutory requirements, failed to comply with early requests of the Deputy Commissioner for Taxation to file taxation returns in respect of the companies, but did so after the C.C.A. had directed an audit of his accounts…
He delegated functions as liquidator to subordinates some of whom were insufficiently qualified and all of whom were insufficiently instructed and supervised. He appointed the firm of which he was a partner to act as his agent, allowed the liquidations to drift, provided little or no supervision or control over its administration, failed to keep books up to date and failed to keep himself fully informed of what was done. When he sought legal advice which he did largely at a late stage, he failed to act on it. He failed to co-operate with the C.C.A. and without cause displayed a hostile and uncooperative attitude to the audit which the C.C.A. had directed.
He received contributions from investors totalling nearly $50,000 without telling them he had no intention of maintaining the scheme.
Out of funds received he, without authority, paid out in excess of $10,000 in the early months of the liquidation to his firm on account of ‘agency fees’. He put on bank deposit a further $33,000, said he was without funds, and took no steps to repay it. He made no application to the Court for ratification of the fees paid until after an investigator from the C.A.O. sought an interview about the liquidation. He then obtained an order ex parte ratifying the payments but concealed material facts from the Court.
The liquidator’s administration was protracted and rudderless without any interim or final distribution. Nevertheless there was disbursement of large sums of money to persons with whom he had personal association.”[31]
[31]At 716-717.
Marks J observed that the provision then equivalent to s.536 posed problems of construction attributable to its drafting history, which included apparently accidental adaptations of, and grafts onto, prior provisions. He noted that “the provision in varying form has existed since the beginning of the century, but has been little (if at all) invoked”, and had not previously been the subject of judicial scrutiny.[32]
[32]At 685.
His Honour rejected the proposition that s.536, in imposing investigatory duties on the Court, thereby invoked a European style procedure, abrogated the traditional common law adversary system or imposed “a unique responsibility on the Court arguably analogous to that which prevails in the courts of Europe”.[33] Rather, the section provided for an inquiry, which was a process well known to the Courts. Although, unusually, the relevant inquiry was directed to be initiated and conducted by the Court, Marks J did not consider that “any fundamental departure from our entrenched fact finding process, via the ‘adversary system’”[34] was intended.
[33]At 686.
[34]At 686.
His Honour recognised that the Court, even within the context of the adversary system, properly understood, was entitled actively to participate, to a degree falling short of pre-judgment. While the Court was entitled to be satisfied that all available and admissible material was before it, and had a discretion as to how the proceeding should be conducted, it was not equipped to “arrange the presentation of evidence, to investigate its availability or to effect the calling of witnesses”.[35] Marks J acknowledged that it was therefore appropriate that in a s.536 inquiry, the corporate regulator should assist the Court as the representative of the public interest, by arranging for the attendance and cross-examination of witnesses.[36] He did not consider that an inquiry under s.536 would invariably require pleadings. In some cases, a report submitted under sub-section (2) would provide the requisite notice to the liquidator.
[35]At 687.
[36]At 687.
His Honour concluded that although the procedure was substantially within the Court’s discretion and could (subject to the ordinary rules ensuring fairness) vary according to the circumstances of the case, an inquiry under s.536 could be conducted substantially as though there were a contest inter partes.[37]
[37]At 688.
In Re Hadfield Steelworks Ltd,[38] Needham J appeared more ready than Marks J to contemplate that s.536 might require a departure from adversarial litigation, although he recognised that the procedure of the inquiry would be similar, whatever its nature. Marks J’s conclusion that a s.536 inquiry is adversarial in character was, however, endorsed in Re Day v Dent Constructions Pty Ltd (in liq)[39] and by the Full Federal Court in Ah Toy v Registrar of Companies for the Northern Territory.[40]
[38](1980) CLC 40-623.
[39](1984) 32 NTR 13; (1984) 75 FLR 355; (1984) 9 ACLR 319; (1984) 3 ACLC 111.
[40](1986) 10 FCR 356; (1986) 72 ALR 107; (1986) 10 ACLR 630; (1986) 4 ACLC 480.
Marks J considered that an inquiry under s.536 was not confined to matters raised in the regulator’s report, any affidavit in support of the application or any complaint. Other aspects of the liquidator’s conduct, which arose in the course of the hearing, could be dealt with, although appropriate adjournments or directions might be required.[41] The Court could determine the ambit of the inquiry, and could, if apprised of any relevant matter, inquire into other liquidations in which the liquidator had been concerned.[42]
[41]At 688.
[42]At 689.
Marks J considered that the Court should consider “any evidence bearing generally on the conduct of the liquidator and his fitness for the office of official liquidator”[43] and was entitled to consider not only acts or omissions in other liquidations but also in receiverships, which involved similar duties and thus were “capable of throwing light on [a defendant’s] fitness to act as liquidator”.[44]
[43]At 697.
[44]At 697.
In Harvey, his Honour considered evidence which had emerged in relation to a receivership and liquidations other than those the subject of the regulator’s report both “for what it reveals of the liquidator’s conduct there, his attitude to his duties, his competence and his fitness as a liquidator” and for the aid it gave to the proper assessment of his conduct of the liquidations which were specifically the subject of the inquiry.[45]
[45]At 697.
In Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd,[46] McLelland J stated that s.536:
“is concerned with aspects of the conduct of liquidators which are liable to attract sanctions or control for what might broadly be described as disciplinary reasons. Although the section applies to any liquidator it has particular significance in the case of a liquidator appointed by the court who is, in that sense, an officer of the court, and to a liquidator whose qualification for office is that he is a registered official liquidator or a registered liquidator with the public accreditation that such registration involves and who is in that sense a public officer.”[47]
[46](1989) 1 ACSR 79.
[47]At 83.
The precise inter-relationship of the three sub-sections of s.536 of the Act is unclear.[48]
[48]Cf. Ford’s Principles of Corporations Law, para 27.183.
The section arose out of early corporations legislation in Australia (Companies Act 1961). In O’Toole v Mitcham,[49] the provision in question was s.278, which was substantially in the same form as the present s.536. The Full Federal Court in that case observed, by way of obiter, that sub-ss.278(2) and (3) conferred independent powers.
[49](1977) 2 ACLR 471.
In Re Fermoyle Pty Ltd,[50] Crockett J acknowledged that the section was difficult to construe. In particular, the reconciliation of the sub-sections of s.278 presented considerable difficulty. His Honour observed that “it is by no means clear” that the inquiries provided for in sub‑ss.(1) and (3) were the same. He concluded that sub-ss.(1) and (3) must operate independently, in the light of their construction and the apparent legislative intent that “the Court should have the widest power of supervision and control over liquidators whenever the need for the exercise of that power should…come to its attention.”[51] That construction supported the view that an inquiry under sub-s.(1) was not (in contrast to sub-s.(3)) limited to a particular winding up.
[50](1982) 6 ACLR 640.
[51]At 650.
Crockett J questioned whether the Court had power to order a party to “make good any loss” that a company may have sustained by reason of any misfeasance, neglect or omission, unless a report under sub-s.(2) had been made. His Honour observed that, because sub‑s.(1) (which was in similar terms to its present day equivalent), empowered the Court to “make such order as it thinks fit” but sub-s.(2) empowered it to “make good any loss” in addition to “making any order it thinks fit”, then the legislature must have contemplated a difference in the relief the Court could grant pursuant to the two sub-sections. The relief available under sub-s.(1) might not encompass “making good any loss”, due to the explicit inclusion of that power in sub-s.(2). His Honour noted, however, that the expression “take such action as it thinks fit” were words which, on their face, bestowed powers of the greatest amplitude. He also recognised that inquiries under sub‑ss.(1) and (3) could be expected to reveal misfeasance, neglect or omission.
In my opinion, the power to “take such action as it thinks fit” should be construed to encompass making orders for compensation for loss. Sub-section (1) would otherwise have a serious limitation on its effective operation. In some cases, it would not be possible effectively to remedy the consequences of a contravention or breach of duty found in an inquiry under sub-s.(1) unless a report pursuant to sub-s.(2) had also been made. While the predominant view is that the sub-sections create independent powers,[52] there is considerable functional overlap. The Court’s power under sub-s. (1) to “take such action as it thinks fit” (derived from the provision’s historical antecedents, which assumed a role by the Board of Trade) is extremely broad. It clearly includes, but is not limited to, a power to make orders (the principal form of “action” taken by a court). The literal breadth of the power conferred by sub‑s.(1) should not be read down to exclude compensatory orders, which appear necessary to the effective operation of the sub-section.
[52]See, however, Burns Philp Investment Pty Ltd v Dickens (No. 2) (1993) 10 ACSR 626, in which Young J expressed uncertainty as to whether ss.536(1)(b) and 536(3) created independent powers.
In my opinion, on an inquiry under s.536(1), the Court is empowered to make a compensation order when its findings render that appropriate, whether or not a report under s.536(2) has been filed.
In the present case, Mr Woodward submitted that ASIC’s final written submissions could constitute a report under s.536(2) that would empower the Court to make a compensation order, if such an order were not available under s.536(1).
Rule 7.11 of the Supreme Court (Corporations) Rules 2003 (“the Rules”) states:
“A complaint to the Court under paragraph 536(1)(b) of the Corporations Act must be made –
(a)in the case of a winding up by the Court – by filing an interlocutory process seeking an inquiry; and
(b)in the case of a voluntary winding up – by filing an originating process seeking an inquiry.”
Rule 7.11(2) of the Rules states:
“A report to the Court by the Commission under sub-section 536(2) of the Corporations Act must be made –
(a) in the case of a winding up by the Court – by filing –
(i)an interlocutory process seeking orders under the subsection; and
(ii) a written report in a sealed envelope that is marked with the title and number of the proceeding; and
(b) in the case of a voluntary winding up – by filing –
(i)an originating process seeking orders under the subsection; and
(ii)a written report in a sealed envelope that is marked with the title of the proceeding and provision for its number.”
7.11(3) provides:
“The contents of a report filed under sub-rule (2) need not, at the time of filing, be verified by an affidavit.”
7.11(4) provides:
“Except with the leave of the Court, a report made under sub-section 536(2) of the Corporations Act is not available for inspection by any person except the liquidator or the Commission.”
While ASIC’s final written submissions do not comply with the requirements specified in Rule 7.11(2)(a)(ii) and (b)(ii) or Rule 7.11(4) (as they were not filed in a sealed envelope and no restrictions were placed on inspection) the Court has wide discretion over the conduct and procedure under s.536 and could dispense with compliance.
I am satisfied, however, that the Court is empowered to make a compensatory order under s.536(1) irrespective of whether a report under s.536(2) has been filed.
Power under s.447E of the Act
Mr Evans challenged the Court’s power to make inquiry into the defendant’s conduct as an administrator or deed administrator under s.447E, on the ground that no prejudicial or potentially prejudicial conduct had been demonstrated in relation to the relevant companies. Such conduct is a precondition of making an order under s.447E(1). It is not, however, a precondition of the Court determining the existence of such conduct, on an application under s.447E(3) of the Act. Section 447E(3) provides for an application by ASIC, a creditor or a member, and contemplates that allegations of prejudicial or potentially prejudicial conduct may be made. As Marks J observed in Harvey, an inquiry under s.536 largely retains the adversarial character of common law litigation and, in the present case at least, the procedure adopted for the inquiry is equally appropriate for a determination under s.447E.
I also accept, as Mr Woodward submitted, that the Court is empowered to inquire into the liquidator’s relevant conduct as an administrator as an incident of its inquiry under s.536 of the Act.
Requirements for approval of remuneration
In Re Stockford,[53] Finkelstein J extensively analysed the development of legislation and principles governing the remuneration of liquidators and administrators. His Honour held that the remuneration of the administrators of a large group of companies had not been validly fixed pursuant to s.449E of the Act and the administrators had therefore taken their fees without authority.
[53](2004) 52 ACSR 279; (2004) 140 FCR 424; [2004] FCA 1682; (2005) 23 ACLC 150.
The creditors, at a second meeting of all companies in the group (irregularly held concurrently), resolved to approve a particular sum as remuneration for specified past periods. They also resolved to approve the administrator’s further remuneration on the basis of the hourly rates set out in the creditors’ report for the remainder of the administration period, subject to the committee of creditors’ review and confirmation of the details of the remuneration claim.
The meeting was adjourned and a second report to creditors recommended that a DOCA be executed. The meeting of creditors resolved to execute the DOCA, which provided that the voluntary administrators and the deed administrators would be:
“(a)remunerated by the Stockford Group Companies in respect of any work done by the Administrators, and any partner or employee of the Administrators:
(i)since the Appointment Date to the Commencement Date in their capacity as Voluntary Administrators:
(A)all remuneration previously approved by the creditors of the Stockford Group Companies at the second meeting; and
(B)all further remuneration on the basis of the hourly rates set out in the report to creditors of the Stockford Group Companies tabled at the Second Meeting subject to the Committee reviewing and confirming the details of the remuneration.”[54]
[54]At 286.
The hourly rates were set out in the form of a table which gave a brief, but largely uninformative, description of the work and the fees that would be charged for it. The relevant staff members were not named, but were identified by a position held, or the activity to be engaged in.
Finkelstein J stated that:
“the report did not explain why persons who occupied the same position could charge different rates for performing the same activity… Importantly, the report provided no information which would enable the creditors to determine the reasonableness or otherwise of the proposed rates.”[55]
The Guide relevantly states:
“The Classifications above do not cover professional staff who are unqualified and not studying to become qualified as accountants. The Association recognises that in this latter category there are some people who are highly skilled. The National Committee believes it is not possible to give a description which will adequately cover all situations. Practitioners should therefore decide what is the appropriate charge-out rate and be prepared to justify that decision.”
The IPAA Guide thus has no category into which, on the evidence, Mr Armistead falls. It provides that an appropriate charge out rate for such a staff member must be determined by the practitioner and must ultimately be justified.
Therefore, even if it be assumed that the reference to a Guide “from time to time” did not, in itself, pose a difficulty, the incorporation of the IPAA Guide rates into the resolution would not remove the obstacle to validity found in Re Stockford. Mr Armistead’s rate of charge could not be ascertained from the IPAA Guide, but was required, under that Guide, to be determined by the practitioner himself. The incorporation of the IPAA guide did not result in a formula capable, without a further decision by the liquidator, of objective application.
As such, even if it were established that the resolutions for approval of remuneration for the relevant companies were duly passed, they would not, in my opinion, comply with the fundamental requirements of validity stated in Re Stockford and Re Aliance.
The minutes of the meeting of creditors of Greenchip Funds Management are, in any event, truncated and there is no evidence that the resolution was passed. In the case of CBS Global, the minutes indicate that the resolution was passed by the meeting of creditors, rather than first being put to the committee of inspection which had been formed, as required by s.499(3).
Gyles J’s recognition of the validity of a resolution for prospective approval is also predicated on the possibility of an effective review, which in turn presupposes the preparation of adequately detailed documentation.
In the present case, amounts now characterized by the defendant as remuneration have been drawn from the relevant companies’ funds without valid approval. The question is not one of review, but of the appropriation of funds to which, on the available evidence, the liquidator was not entitled. Much documentation has been unlawfully destroyed by Mr Edge. Mr Armistead’s evidence indicates that the timesheets, invoices and other relevant records which were prepared were inadequate according to the standards endorsed in Re Stockford and like authorities, and as required by s.531 and Regulation 5.6.01, in that the records, including accounting records, did not give a complete and accurate record of the liquidator’s administration of the companies’ affairs.
The cash cheques
ASIC contends, and I accept, that the drawing of the three cheques payable to cash in the voluntary liquidations of GCW Holdings for $39, Greenchip Funds Management for $117.07, and CBS Global for $1,196.27, all on 10 May 2006 (five days before Mr Edge swore his first affidavit in this proceeding), was “most troubling”.
Neither Mr Edge nor Mr Armistead referred to those cheques in their affidavits. The relevant bank statements and copy cheques were produced in response to a subpoena served on the ANZ.
In Harvey, Marks J stated that “the liquidator was guilty of a serious breach of duty in signing a ‘cash’ cheque, no matter what the amount”.[94]
[94]At 753.
The evidence of both Mr Edge and Mr Armistead in relation to the cash cheques was unsatisfactory. In each case, Mr Edge gave evidence that he did not recall signing the relevant cheque. He did not deny signing the cheques. He stated, “I’m not disputing that that’s the date on the cheque and that’s my signature so I assume it happened but I don’t recall.”
Mr Edge disclaimed any knowledge of the circumstances, and could not recall what became of the cash drawn on the cheques.
Mr Armistead testified to his extraordinary routine practice of throwing out letters from banks without opening them after activity on particular administrations ceased. He stated that, due to the proceeding, contrary to his usual practice, he opened a letter from the bank and had found there were still funds in the account.
Mr Armistead swore his affidavit in the proceeding on 17 May 2006, only one week later, but it made no reference to the cash cheques.
Mr Armistead’s evidence fluctuated considerably on this issue. Initially, he contended that he paid the cash into the Robert Edge & Associates account, but there was no evidence of any deposits in May 2006. Mr Armistead then testified that the money was paid into another account.
Mr Armistead asserted that money was owed to the practice because there was money in the account. He conceded that no invoices were outstanding and that he had hitherto treated the relevant administrations as at an end. His apparent assumption was that any funds remaining in a company’s account after activity had ceased must belong to the liquidator. His testimony was illogical and inherently incredible.
He believed that he had discussed the cash cheques with Mr Edge in May 2006. He asserted that Mr Edge had rebuked him in May 2006 because the bank accounts were still open, and had instructed him to close them. Mr Armistead could not recall whether the May 2006 cheques were pre-signed or whether he asked Mr Edge to sign them contemporaneously.
Mr Edge testified that he rebuked Mr Armistead over the practice of writing cheques to cash. He did not, however, suggest that Mr Armistead deliberately concealed the writing of the cash cheques from him.
The evidence of both Mr Edge and Mr Armistead was unsatisfactory and mutually contradictory.
I conclude that Mr Edge was aware that the cash cheques had been written in May 2006. Mr Armistead testified that there was some discussion at that time and Mr Edge did not suggest that Mr Armistead concealed his activity from him.
Mr Edge is, in any event, fully responsible for the writing of the cash cheques which he had signed, whether in blank or not, and had left within the control of an unqualified and unsupervised subordinate.
PRINCIPAL RELIEF SOUGHT
ASIC seeks that the Court make a number of specified findings, including findings that the defendant had breached particular sections of the Act or Regulations in relation to particular companies. It also seeks findings or declarations that by reason of specified contraventions of particular sections of the Act, the defendant breached his duty of diligence and care pursuant to s.180(1) of the Act in relation to each relevant company.
ASIC also seeks a finding or declaration that, in all the circumstances, the defendant has not duly fulfilled his duties as an official liquidator, has not faithfully performed his duties as a voluntary administrator and liquidator and has not observed the requirements prescribed by the Act and Regulations.
Like Marks J in Harvey, I consider it unnecessary to determine whether declarations can properly be made in an inquiry under s.536 of the Act. It is also, in my view, unnecessary to determine whether declarations or findings of breach of s.180 (1) of the Act can properly be made in such a context.
Section 180(1) of the Act imposes an obligation on officers of a corporation to exercise their powers and to discharge their duties with a degree of care and diligence that a reasonable person would exercise if they were a director or officer of a corporation in the corporation’s circumstances, occupied the office held by the relevant officer, and had the same responsibilities within the corporation. By s.180(2), an officer who makes a business judgment is taken to have met the requirements of s.180(1) if the officer satisfies the conditions of the “business judgment rule” set out in s.180(2).
Section 181(1) imposes an obligation on officers of a corporation to exercise their powers and discharge their duties in good faith in the best interests of the corporation and for a proper purpose.
While a liquidator is an “officer” subject to the obligations in ss.180 and 181, the focus of those sections is upon duties owed to a particular corporation. Section 180(1) directs attention to the particular circumstances of the corporation to which the duty is owed. The vast majority of cases decided under ss.180 and 181 concern directors.
The Court may make a declaration of contravention of s.180 or s.181 under s.1317E which, under s.1317F, is conclusive evidence of the matters declared under s.1317E(2). A pecuniary penalty order may consequently be imposed under s.1317G or a compensation order may be made under s.1317H(1) of the Act. ASIC may apply for a declaration of contravention, a pecuniary penalty order or a compensation order pursuant to s.1317S. In my opinion, for the reasons set out in detail above, the Court is also empowered to make compensatory orders pursuant to s.536(1) of the Act.
In contrast to ss.180 and 181, the focus of s.536 is on the conduct of a liquidator only.
No authority in which a finding or declaration under s.180(1) of the Act was made in the context of an inquiry under s.536, or which considered the relationship between a breach of s.180(1) and a failure or a liquidator faithfully to perform his duty under s.536, was identified.
While s.536(1) expressly distinguishes between a failure faithfully to perform the duties of a liquidator and a failure to observe a requirement of the Act, Regulations or Rules, there is a potential overlap, in that a particular failure to observe a requirement of the Act, Regulations or Rules could, in some cases, constitute a failure faithfully to perform the duties of a liquidator. In other cases, a series of failures to observe requirements of the Act, Regulations or Rules in relation to a number of companies cumulatively could, in my opinion, constitute a failure faithfully to perform the duties of a liquidator.
On the other hand, a deliberate contravention of a provision of the Act, such as the knowingly unauthorised destruction of a company’s books and records, would not, in my opinion, be aptly characterised as a failure to exercise care and diligence in breach of s.180(1).
Further, in my opinion, conduct by an administrator or deed administrator prejudicial or potentially prejudicial to members or creditors could comprehend and extend beyond conduct constituting a breach of either s.180 or s.181 of the Act. It is possible, although unlikely, that some kinds of conduct in breach of s.180 or s.181 would not be prejudicial or potentially prejudicial to members and creditors.
It is unnecessary for the purposes of the present inquiry to explore further the potentially complex relationship between ss.180 and 536 or s.447E of the Act, as, in my opinion, it is sufficient to make formal findings under s.536 or s.447E in the light of the evidence and the issues canvassed before the Court.
ASIC also seeks orders pursuant to ss.536 and 1324 of the Act that the defendant: lodge, within 7 days, a request pursuant to s.1290 of the Act that his registration as a liquidator be cancelled; that he be restrained until further order from consenting to, or accepting, appointment as a receiver, voluntary administrator, deed administrator, provisional liquidator or liquidator of a corporation; and that he be restrained from making application under s.1279 of the Act or otherwise, for registration as a liquidator, or as a liquidator of a specified body corporate.
Mr Evans submitted that it was inappropriate to compel the defendant to seek, pursuant to s.1290 of the Act, that his registration as a liquidator be cancelled or to restrain him from applying for registration as a liquidator under s.1279 of the Act. Mr Evans argued that the Companies Auditors and Liquidators Disciplinary Board, rather than the Court, should determine whether the defendant’s registration as a liquidator should be cancelled under s.1292(2). He submitted that the orders sought by ASIC encroached on the Board’s powers. I am satisfied, however, that the Court has power under s.536 to make such orders as will most effectively ensure that the defendant’s registration as a liquidator and an official liquidator are cancelled and that he does not reapply for such registration, or act as a liquidator, provisional liquidator, receiver, administrator or deed administrator for a specified period.
ASIC seeks an order that the defendant, within 14 days, pay into Court a total sum of $410,564.77, being amounts drawn as remuneration as follows.
| Company | Amount |
| The Pines Stud Bloodstock Pty Ltd (voluntary administration of deed of company arrangement): | $194,088.29 |
Cameo Arch Pty Ltd (liquidation) | $9,932.62 |
| Chelsea Springs Pty Ltd (liquidation) | $7,600.00 |
| Vicsworth Enterprises Pty Ltd (liquidation) | $959.00 |
| CBS Global Communications Pty Ltd (liquidation) | $102,204.48 |
GCW Holdings Pty Ltd (liquidation) | $9,199.76 |
| Greenchip Funds Management Pty Ltd (liquidation) | $9,665.36 |
| Tetherless Access Pty ltd (voluntary administration) | $27,500.00 |
| Tetherless Access Pty Ltd (liquidation) | $32,406.09 |
ASIC also seeks orders that an official liquidator be appointed Under Rule 39.01 of the Rules as receiver of the fund with specified powers, and that the defendant be permitted to apply only to the Court for approval of any remuneration to which he is entitled, following which any balance of moneys in the fund (after deduction of the receiver’s fees and expenses) would be distributed to creditors.
Mr Evans contended that the defendant should not be required to disgorge any funds found to be drawn as unauthorised remuneration without approval pending his application for approval. He relied, in that context, on Re Clynton Court Pty Ltd.[95]
[95](2005) 53 ACSR 432; [2005] FCA 543.
In Re Clynton Court Pty Ltd, deed administrators applied under s.449E(1)(b) for the fixing of their remuneration by the court, in circumstances where it had emerged that a resolution purporting to fix it was ineffective due to non-compliance with the principles expressed in Re Stockford.
The deed administrators were in dispute with a creditor that contended that the interim remuneration they had already drawn should be disgorged.
Finkelstein J referred the fixing of the administrator’s fees to a registrar, rather than an independent assessor.
His Honour did not consider that the deed administrators should disgorge any of the remuneration they had already drawn, because it was clear that they had performed work in their capacity as administrators and that they had “acted in good faith and in the belief that their remuneration had been fixed by… the deed. This has turned out to be wrong because of two events, neither of which is of the administrators’ doing”.[96]
[96]At 438.
Finkelstein J considered that in the circumstances, it would be “both wrong and unfair to withhold relief”.[97] He concluded that the administrators could retain what they had received to date without deduction, and take a percentage of their claims for future remuneration subject to an undertaking to pay interest on any amount required to be repaid after the court had fixed the remuneration.
[97]At 438.
In Pace v Antlers Pty Ltd(in liq),[98] the liquidator’s remuneration was approved by the vote of creditors who were not in fact entitled to vote. Lindgren J observed that:
“The result is that [the liquidator] appropriated to himself monies for his remuneration for which, it transpires, there were not due authority. No reason was suggested on the hearing as to why he should not be liable to make restitution of the amounts in question and pay interest on them from the dates when they were extracted from [the company’s] coffers down to the date of repayment.”[99]
[98](1998) 26 ACSR 490.
[99]At 516.
In the present case, I am not satisfied that the defendant drew the remuneration in good faith and in the belief that the remuneration had been validly fixed. Further, I am not satisfied as to what work has been performed. ASIC did not dispute, however, that Mr Edge had performed some work for which he is entitled to be remunerated. Further, it was not suggested that remuneration should not be paid for the work performed by Harrison’s Insolvency. In the circumstances, I consider that the amounts drawn for remuneration without valid approval should be paid into Court and any application by the defendant for approval of remuneration should be made to a Master.
Mr Evans argued that in the event that the Court found that funds had been drawn as remuneration without approval, the defendant was entitled to have his remuneration determined pursuant to s.473 (3) of the Act in the case of court-ordered liquidations or pursuant to s.499 (3) in the case of voluntary liquidations, rather than determined by the Court. He submitted that the paramount power of determining a liquidator’s remuneration rested primarily with the creditors and the Court’s power was ordinarily exercisable only in default of their decision.
In my opinion, the Court’s extensive powers pursuant to s.536 are not circumscribed by the provisions usually applicable to review where a resolution approving remuneration has been passed. Further, where funds have not been fixed or have been drawn without any valid approval, and their character as remuneration is not established, the Court’s power to take ‘such action as it thinks fit’ is not, in my view, restricted by the provisions which govern the fixing of remuneration in the usual case.
The Court’s power to disallow remuneration under s.536 is undoubted and was exercised by Marks J in Re Harvey. The Court may also establish an appropriate procedure to enable the liquidator to make out an entitlement to all or any part of a fund which he or she has been required to disgorge because it was drawn without valid approval.
In the unusual circumstances of the present case, as ASIC submitted, it would be unsatisfactory if the task of fixing the defendant’s remuneration were cast upon the creditors, given the serious practical difficulties arising from the lengthy periods of inactivity in many of the companies and the nature of the findings made against the defendant.
In my opinion, the defendant’s entitlement to any part of the total sum paid into Court for his fair and reasonable remuneration should be determined by a Master pursuant to an application made by the defendant within an appropriate time. The plaintiff should, in my view, be a contradictor in any such application.
I shall invite further submissions on the form of orders, addressing, inter alia, the precise amount to be paid into Court, the time that should be set for the payment into Court by the defendant and the time within which any application for approval of remuneration should be made. The directions for such an application should be determined by the Master.
ASIC also seeks orders pursuant to Rule 50.01 of the Rules, that a special referee determine specified questions in relation to Greenchip Funds Management and The Pines. For the reasons set out in detail above, I do not consider that the question in relation to the payment of $13,100 by Greenchip Funds Management warrants reference to a special reference. The question of the nature, purpose and propriety of the payment of approximately $30,000 from the funds of The Pines, which appears to be unaccounted for, and any consequential orders, should also be referred to the Master for determination.
FINDINGS
A number of specific findings sought by ASIC which (with certain modifications), may, in my opinion, properly be made on the basis of the evidence, are set out in Schedule A to these reasons.
CONCLUSION
In my opinion, the evidence establishes that for a period of some years, the defendant repeatedly contravened numerous significant provisions of the Act and Regulations in relation to numerous companies. His chronic and widespread failure to comply with the statutory requirements to maintain proper books and records (including books of account), prepare and lodge half-yearly and final accounts and statements, hold and advertise meetings, and prepare and lodge s.533(1)(c) reports, cannot be viewed as mere technical or administrative default. Rather, the defendant’s repeated contraventions struck at the heart of the statutory regime designed to ensure the liquidator’s accountability, to facilitate the audit and review of his conduct and to inform and protect members, creditors and the public. Similarly, the defendant’s failure to advertise meetings, lodge minutes, prepare adequate s.439A reports and ensure that DOCAs were duly executed was conduct prejudicial to the creditors and members of companies of which he was administrator or deed administrator.
The defendant’s wholesale destruction of the books and records of many companies, in breach of s.542 of the Act, has rendered impossible a detailed and comprehensive review of his conduct of the relevant liquidations and administrations. The unauthorised destruction of the books and records was a serious breach of duty.
The defendant’s long-term delegation to, and reliance upon, an unqualified, unsupervised and incompetent associate did not, as the defendant submitted, excuse the contraventions, but was itself a serious breach of duty, as was his delegation of numerous insolvency administrations to another firm.
The defendant repeatedly drew or caused to be drawn funds characterised as remuneration, which, in some cases, was paid by a cheque directly to a party subsequently identified as a creditor of the defendant or his associate. The remuneration was not validly approved and satisfactory supporting documentation was not prepared or was not in evidence. The defendant failed to open separate bank accounts for some administrations and caused the funds of various companies to be intermingled in the bank account of his practice, from which payments were subsequently made without making or maintaining any appropriate record. The defendant signed blank cheques, which he provided to his associate, and permitted cheques to be written to cash.
The defendant’s counsel argued that there was no express statutory prohibition on many practices he adopted, including writing cheques on the accounts of companies directly to the creditors of the defendant and his associate, and the long-term maintenance of bank accounts for companies from which remuneration was drawn after all activity in the liquidation had ceased.
It is self-evident that legislation cannot exhaustively prescribe all the duties incumbent on a liquidator or an administrator, which are frequently dictated by common sense or the professional norms of a chartered accountant holding special qualifications, training and experience, who is acting for remuneration and profit. The indefinite maintenance of company bank accounts for no proper purpose is implicitly prohibited by the requirement (stated in s.480 of the Act) that liquidations should not be needlessly protracted and that any distribution should be made with due despatch. While not expressly prohibited, the writing of cheques directly to the liquidator’s creditors is contrary to the appropriate professional norms of an officer entrusted with the exclusive knowledge and absolute control of funds to which he is not beneficially entitled. The creditors, members and the public are entitled to total assurance that such officers will handle corporate funds with probity and transparency and will not exploit their power to benefit or enrich themselves. The direct payment of corporate funds to the practitioner’s creditors obscures, and (particularly when coupled with the failure to create and preserve appropriate records), may permanently disguise the transfer of moneys to the liquidator or for his or her benefit.
In the present case, the intermingling of funds and the repeated drawing of amounts characterised as remuneration without approval or adequate supporting documentation were most serious breaches of duty, pursuant to which the defendant has appropriated the funds of numerous companies.
I am satisfied that, by reason of the matters discussed in detail above, the defendant failed faithfully to perform his duty as a liquidator, and has conducted administrations in a manner prejudicial or potentially prejudiced to the creditors and members of the relevant companies. The entrenched pattern of contraventions and dereliction of duty has demonstrated his unfitness to conduct liquidations as the representative of the Court or to exercise the extensive powers of a voluntary administrator or receiver. The defendant’s attitude to ASIC’s investigation was needlessly uncooperative. He was not a conscientious, candid or reliable witness. The evidence establishes that the defendant has failed to maintain the high standards of impartiality, probity and competence demanded by his important fiduciary office. In my opinion, the defendant should be removed from those offices he currently holds and should be prohibited from holding the office of liquidator, provisional liquidator, voluntary administrator, deed administrator or receiver for a period of ten years.
SCHEDULE A
In the case of each of ACN 007 335 165 Pty Ltd, Balanceauto Distribution Pty Ltd, Media Sales Network (Vic) Pty Ltd, Precision Interconnect Australia Pty Ltd, Seymour Lands Pty Ltd, Cameo Arch Pty Ltd, Chelsea Springs Pty Ltd, Vicsworth Enterprises Pty Ltd, CTP Capital Trading Pty Ltd, J.G.S. (Vic) Pty Ltd, Jewel Group Services Pty Ltd, Pabulum Enterprises Pty Ltd, Wallistan Pty Ltd, CBS Global Communications Pty Ltd, GCW Holdings Pty Ltd, Greenchip Funds Management Pty Ltd, Tetherless Access Ltd and Eurocapital Pty Ltd Mr Edge failed to lodge accounts including a final account as required by s539 of the Act and thereby failed faithfully to perform the duty as a liquidator.
In the case of Cameo Arch Pty Ltd, Chelsea Springs Pty Ltd and Vicsworth Enterprises Pty Ltd remuneration has been paid to or at the direction of Mr Edge in circumstances where there was no resolution fixing such remuneration as required by s473(3) of the Act and Mr Edge thereby failed faithfully to perform his duty as liquidator.
In the case of CTP Capital Trading Pty Ltd, J.G.S. (Vic) Pty Ltd, Jewel Group Services Pty Ltd, Pabulum Enterprises Pty Ltd, Wallistan Pty Ltd, ADF ACN 063 887 650 Pty Ltd, CBS Global Communications Pty Ltd, GCW Holdings Pty Ltd, Greenchip Funds Management Pty Ltd, Tetherless Access Ltd and Eurocapital Pty Ltd, Mr Edge failed to comply with s509 of the Act, and thereby failed faithfully to perform his duty as a liquidator.
in the case of ADF ACN 063 887 650 Pty Ltd, CBS Global Communications Pty Ltd, GCW Holdings Pty Ltd, Greenchip Funds Management Pty Ltd, Tetherless Access Ltd and Eurocapital Pty Ltd remuneration has been paid to or at the direction of Mr Edge in circumstances where there was no resolution fixing such remuneration as required by s499(3) of the Act, and Mr Edge thereby failed faithfully to perform his duty as liquidator.
Mr Edge’s destruction of the books and records of various companies in breach of s.542 of the Act constitutes a failure by Mr Edge faithfully to perform the duty as liquidator.
Mr Edge’s evidence that he recalled particular final meetings is unreliable. In the absence of any other evidence that such final meetings were held or final accounts prepared and lodged in respect of each company, I find that no such final meeting was in fact held.
In circumstances where Mr Edge had practiced for 27 years as an insolvency practitioner, knew about the existence and importance of a “show cause notice” and had read and signed at least four reports specifically referring to the requirement, I reject Mr Edge’s testimony that he was unaware of the need to lodge and file reports under s.533 when a company fails to pay more than 50 cents in the dollar.
A total of $7,600 was paid in the liquidation of Chelsea Springs to or at the direction of Mr Edge in respect of remuneration and that remuneration was never approved by creditors as required by s.473(3) of the Act or at all.
In the case of each of CTP Capital Trading Pty Ltd, J.G.S. (Vic) Pty Ltd, Jewel Group Services Pty Ltd, Pabulum Enterprises Pty Ltd and Wallistan Pty Ltd, in no case was there a final account prepared or a final meeting of creditors as required under s.509 of the Act or at all.
10. In the case of ADF ACN 063 887 650 Pty Ltd, while it appears that accounts purporting to be a final accounts were prepared, there was no final meeting of creditors as required by s.509, no other approval of remuneration as required by s.499(3) of the Act and the payment of remuneration of $1,449.10 apparently made on 14 January 1999 was not included in the final accounts and, accordingly, could not have been part of the accounts laid before the creditors and approved by them even if a meeting was held.
11. In the case of ADF ACN 063 887 650 Pty Ltd, Mr Edge’s failure to advertise and convene a final meeting of creditors as required by s.509 of the Act and seek a resolution of creditors fixing his remuneration and the payment of $1,499.10 in respect of remuneration after a final account had been prepared and lodged, constituted a failure by Mr Edge properly to perform his duties as a liquidator of ADF ACN 063 887 650 Pty Ltd.
12. Mr Edge was aware of and tolerated or condoned the practice of by‑passing the account of Robert Edge & Associates and making payments for fees directly from a liquidation account to a personal creditor or supplier. I reject Mr Edge’s testimony to the contrary.
13. Mr Edge’s failure to lodge half-yearly accounts as required by s.539 of the Act and seek a resolution of creditors fixing his remuneration, constituted a failure by Mr Edge properly to perform his duties as liquidator of Eurocapital Pty Ltd.
14. In respect of each of Balanceauto Distribution Pty Ltd, Cameo Arch Pty Ltd, CTP Capital Trading Pty Ltd, GCW Holdings Pty Limited, J.G.S. (Vic) Pty Ltd, Jewel Group Services Pty Ltd, Media Sales Network (Vic) Pty Ltd, Pabulum Enterprises Pty Ltd, Seymour Lands Pty Ltd, Tetherless Access Ltd and Wallistan Pty Ltd, Mr Edge failed to lodge with ASIC a report pursuant to s.533 of the Act, in circumstances where it was evident that such reports should have been lodged.
15. In respect of each of ACN 007 335 168 Pty Ltd, ADF ACN 063 887 650 Pty Ltd, Balanceauto Distribution Pty Ltd, Cameo Arch Pty Ltd, CBS Global Communications Pty Ltd, Chelsea Springs Pty Ltd, CTP Capital Trading Pty Ltd, Eurocapital Pty Ltd, GCW Holdings Pty Limited, Greenchip Funds Management Pty Ltd, J.G.S. (Vic) Pty Ltd, Jewel Group Services Pty Ltd, Media Sales Network (Vic) Pty Ltd, Pabulum Enterprises Pty Ltd, Precision Interconnect Australia Pty Ltd, Seymour Lands Pty Ltd, Tetherless Access Ltd, Vicsworth Enterprises Pty Ltd and Wallistan Pty Ltd, Mr Edge failed to ensure the safekeeping and retention for five years after deregistration, as required by s.542(2) of the Act of all books of the company and the liquidator that are relevant to the affairs of each company.
16. In respect of the voluntary administration of each of Eco Panels Australia Pty Ltd, Invaway Pty Ltd and The Pines Stud Bloodstock Pty Ltd, the deed administration or purported deed administration of each of Invaway Pty Ltd and The Pines Stud Bloodstock Pty Ltd and the winding up of Eco Panels Australia Pty Ltd, Mr Edge failed to maintain and/or keep any or any proper records of attendances or other tasks undertaken by him or persons acting in his employ or on his behalf and otherwise maintain files to an acceptable professional standard that adequately record steps taken by him.
17. In respect of each of the companies in liquidation referred to in paragraphs 14, 15, 16 above, the failures referred to therein constitute a failure by Mr Edge to properly to perform his duties as liquidator and in relation to the companies in administration or subject to a DOCA, constituted management of their business, property or affairs, or acts or omissions, prejudicial or potentially prejudicial to the interests of some or all of their creditors or members.
18. In the above circumstances, Mr Edge:
a. has not faithfully performed his duties as a liquidator;
b. has managed the business, property or affairs of companies in voluntary administration or subject to a DOCA, in a way that was prejudicial to the interests of some or all of their creditors or members, or has done acts or made omissions that were or would be prejudicial to such interests;
c. has failed to observe requirements prescribed by the Act and the Regulations thereunder; and
d. is unfit to be an official or registered liquidator.
19. There are grounds for the cancellation by ASIC pursuant to s.1291(1) of the Act of the registration of the defendant as an official liquidator for a period of not less than ten years.
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