Australian Securities Commission v Solomon, Emad Kamel

[1997] FCA 1444

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 3469 of 1997

BETWEEN:

AUSTRALIAN SECURITIES COMMISSION
APPLICANT

AND:

EMAD KAMEL SOLOMON
FIRST RESPONDENT

TRANSPHERE (SOUTH PACIFIC) PTY LIMITED
SECOND RESPONDENT

THE EDDIE SOLOMON EMPORIUM PTY LIMITED
THIRD RESPONDENT

HOT CAKES PTY LIMITED
FOURTH RESPONDENT

JUDGE(S):	HILL J
DATE:	4 DECEMBER 1997
PLACE:	SYDNEY

EX TEMPORE REASONS FOR JUDGMENT

Mr Emad Kamel Solomon moves the Court that orders made by Tamberlin J on 8 February 1996 be discharged.

The background of the motion is to be found in the judgment which Tamberlin J gave on that day.  It seems that the Australian Securities Commission (“the ASC”), a respondent to Mr Solomon’s motion, had applied to the Court for orders that each of the three corporate respondents Transphere (South Pacific) Pty Limited, The Eddie Solomon Emporium Pty Limited and Hot Cakes Pty Limited (“Hot Cakes”) be wound up pursuant to s 461(h)(i) and (ii) of the Corporations Law (“the Law”).

The ASC sought interlocutory orders that a provisional liquidator be appointed to each of the corporate respondents and that that provisional liquidator take possession of all of their property. The basis of the application was that the ASC had stated in a report which had been prepared under Division 1 of Part 3 of the Law that, in its opinion, none of the companies could pay their debts and should be wound up and, further, that it was in the interests of the public that they should be wound up.

The various findings made by the ASC are set out in his Honour’s judgment and I need not repeat them.  It suffices to say that his Honour concluded that it was essential that a provisional liquidator be appointed to each of the three companies.  In so doing, his Honour took into account a number of matters which are recorded at pages 19 to 21 of his Honour’s judgment.  These included that there appeared to be a substantial deficiency of assets over liabilities, an intermingling of funds, a lack of proper records and a potentiality that funds might be diverted for other ventures of Mr Solomon or otherwise intermingled with his assets or perhaps the assets of other corporate entities.

Mr Solomon sought leave to appeal from that judgment to a Full Court of this Court.  The judgment of the Full Court was to the effect that no conclusion other than that reached by Tamberlin J was open on the evidence and that in any event no error of principle had been demonstrated by Mr Solomon such as to justify leave being granted.  Mr Solomon then sought leave to appeal from the High Court from the refusal of the Full Court of this Court to grant leave.  Not surprisingly, leave to appeal was refused by the High Court.

In the course of the debate in the special leave application, McHugh J, in response to an assertion by Mr Solomon that the order of Tamberlin J had been made in error, commented that in the event that further evidence became available at a later stage there was no reason why Mr Solomon could not go back to this Court and seek to have the orders appointing the provisional liquidator discharged.  Encouraged by this invitation, Mr Solomon commenced the present proceedings.

In support of the motion Mr Solomon swore three affidavits, the first, that of 24 November 1997, was formal and set out the previous history which I have already narrated; the second, that of 26 November 1997, dealt with a number of matters such as a transaction involving Hot Cakes and the purchase of two home units from Meriton Apartments, transactions which appear to have ultimately left Hot Cakes with a considerable loss after the vendor of the apartments took possession of them.  There is reference also to the sale of some books which Mr Solomon says should not have produced the loss that was in fact produced and some evidence about conversations with employees of the provisional liquidator.

The third affidavit, that of 2 December 1997, was in reply to some evidence that had been filed on behalf of the respondents.  It concerned various conversations and to the extent that it was admissible at all went to matters that have little to do with the present proceedings.  The respondents, apart from affidavit evidence, directed at meeting some of the criticisms which Mr Solomon had made added little to the state of knowledge about the affairs of the company.

However, oral evidence was adduced from Mr Potter, a chartered accountant in the employ of the provisional liquidator, who has, over the last six months, worked on the affairs of the corporate respondents.  Mr Potter said that he had examined the books and records of the company and he had drafted a report for the provisional liquidator.  There is no suggestion that that report has in any way been adopted by the provisional liquidator.  It is at this stage only in draft form.

Mr Solomon objected to the admissibility in evidence of the draft report on the basis that it was undated, unsigned, was not the report of the witness and, on the basis that in his opinion much of the detail was inaccurate.  He produced a lengthy document setting out his version of many of the matters that are contained in the report.

I admitted the report not as a report of the provisional liquidator but on the basis that it contained Mr Potter’s expert views based upon a study of the books of the company.  The significance of them is twofold.  First, Mr Potter is of the view that there has been a large intermingling of funds among the companies.  Second, and more importantly, he is of the view that the companies are hopelessly insolvent.

The one matter that Mr Solomon clearly has on his side, whatever else one may think about the matters set out in his analysis of Mr Potter’s report, is that virtually two years have gone by since the provisional liquidator was appointed but nothing has been done to wind up the company.  The appointment of a provisional liquidator is not an end in itself.  The law permits an application to be made for the appointment of a provisional liquidator but that application is in aid of proceedings to wind up the company.  So much is clear from the name of the office itself.  The appointment of a provisional liquidator is a provisional appointment, generally necessitated by an urgent need to protect the affairs of a company which is insolvent or where the circumstances are such that there may be a need to protect the assets of the company.  There was obviously adequate information before Tamberlin J at the time his Honour made orders appointing a provisional liquidator for such an appointment to proceed.  If I were looking at the matter today and the application were made for the first time, likewise there would be sufficient evidence before me to justify the appointment of a provisional liquidator.

It is, however, a matter of some concern to me that almost two years have gone by since the initial appointment of a provisional liquidator without any steps at all having been taken to wind up the company.  I think that Mr Solomon has a real grievance for that reason.

Objection was taken to Mr Solomon’s standing to bring the proceedings.  He is not, it would seem, a shareholder or director of The Eddie Solomon Emporium Pty Limited.  There is no other evidence of Mr Solomon’s standing to bring the motion and for that reason in respect of that company it should be dismissed.

Mr Solomon is, however, a director of the remaining two respondent companies. But it is said, notwithstanding this, he still has no title to bring proceedings, having regard to the provisions of s 471A(2) of the Law. That section, as its own language makes clear, without reference to the decision in Garden Mews - St Leonards Pty Limited v Butler Pollnew Pty Limited (1986) 9 ACLC 82 at 90, has the effect that once a provisional liquidator is appointed a person who is a director no longer is able to exercise the functions or powers which the office confers. That does not mean, and indeed the Law makes this clear, that the officer is not removed as an officer of the company, he remains so.

In my view, the fact that the officer is stripped of the function to act as director, does not mean that he ceases to have standing to bring a proceeding to take the corporation out of provisional liquidation.  In my view, Mr Solomon did, thus, have standing in respect of the other two companies.

As I have already indicated, the evidence makes it clear as it stands at the moment, that the company is insolvent.  Mr Solomon contests this.  The appropriate way for that matter to be determined, if it need be determined, is in proceedings to wind up the company.

I do not know why it has taken the ASC so long to form a view whether the companies should be wound up and, if so, to take the necessary steps for that to happen.  There is a suggestion, and I make no finding in respect of it, that part of the problem has been a lack of records and a lack of cooperation by or on the part of Mr Solomon.  I would propose to adjourn the present application until 18 December 1997.  If no steps have been taken by the ASC by that date to advance the proceedings to wind up the company, I would propose to allow Mr Solomon’s application.

If, on the other hand, steps are to be taken to wind up the company, then I will, on that day, make appropriate directions so that the state of affairs of the company can be properly litigated in proceedings.  The matter can then proceed to be allocated to a judge under the docket system for hearing.  I will also, on 18 December, consider the question of costs.

I certify that this and the preceding four (4) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Hill

Associate:

Dated:            16 December 1997

Counsel for the Applicant:	K Ngai
Solicitor for the Applicant:	Peter Stepek
Respondents’ representation:	Mr E Solomon appeared for the Respondents
Date of Hearing:	4 December 1997
Date of Judgment:	4 December 1997