Billingsley v Napoli, in the matter of Biometric Identity Systems Pty Ltd (administrators appointed) (No 2)
[2021] FCA 526
•19 May 2021
FEDERAL COURT OF AUSTRALIA
Billingsley v Napoli, in the matter of Biometric Identity Systems Pty Ltd (administrators appointed) (No 2) [2021] FCA 526
File number(s): NSD 1365 of 2019 Judgment of: FARRELL J Date of judgment: 19 May 2021 Catchwords: COSTS – application for order that defendant pay first plaintiffs’ costs incurred after 28 August 2019 on an indemnity basis – where first plaintiffs, as administrators of company, sought orders validating their appointment – whether defendant’s continued opposition to validating order after 28 August 2019 until it was withdrawn on 25 September 2019 was not reasonable or consistent with the overarching purpose set out in s 37M of the Federal Court of Australia Act 1976 (Cth) – whether defendant’s persistence resulted in the need for an application to further extend the convening period– whether defendant should pay the costs of the application to extend the convening period– application granted
COSTS – application by defendant for third-party costs order against directors of second plaintiff – where claimed defect in administrators’ appointment arose from potentially invalid appointment of director – whether directors “prompted”, “supported”, “steered” or “influenced” the administrators to continue the proceedings – application dismissed
Legislation: Corporations Act 2001 (Cth) Part 5.3A, ss 290, 438B, 439A, 443D, 443E, 443F, 447A, 447C
Corporations Act 2001 (Cth) Sch 2, Insolvency Practice Schedule (Corporations) s 70-10
Federal Court of Australia Act 1976 (Cth) ss 37M, 37N, 43
Federal Court Rules 2011 (Cth) r 40.02
Insolvency Practice Rules (Corporations) 2016 (Cth) r 75-225
Cases cited: Bayley & Associates Pty Ltd v DBR Australia Pty Ltd [2014] FCA 346
Beach Petroleum NL v Johnson (No 2) (1995) 57 FCR 119
Billingsley v Napoli, in the matter of Biometric Identity Systems Pty Ltd (administrators appointed) [2019] FCA 1640
Bullock v The London General Omnibus Company [1907] 1 KB 264
Colgate Palmolive Company v Cussons Pty Limited [1993] FCA 801; (1993) 46 FCR 225
Coshott v Burke (No 2) [2018] FCAFC 81
Ginos Engineers Pty Ltd v Autodesk Australia Pty Ltd [2008] FCA 1051; (2008) 249 ALR 371
Habrok (Dalgaranga) Pty Ltd v Gascoyne Resources Pty Ltd (No 2) [2021] FCA 72
Hamod v State of New South Wales [2002] FCAFC 97; [2002] FCA 424; (2002) 188 ALR 659
Hancock v Rinehart (Lump sum costs) [2015] NSWSC 1640
Hayes v Doran [No 2] [2012] WASC 486
Hudson v Sigalla (No 2) [2017] FCA 339
Innes v AAL Aviation Limited (No 2) [2018] FCAFC 130
In the matter of Condor Blanco Mines Ltd (No 3) [2017] NSWSC 65
Knight v F.P. Special Assets Limited [1992] HCA 28; (1992) 174 CLR 178
Melbourne City Investments Pty Ltd v Treasury Wine Estates Limited (No 2) [2017] FCAFC 116
Paciocco v Australia and New Zealand Banking Group Ltd (No 2) [2017] FCAFC 146; (2017) 253 FCR 403
Re: Nardell Coal Corporation (In Liq) v Hunter Valley Coal Processing [2003] NSWSC 642; (2003) 178 FLR 400
Re the Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; ex parte Lai Qin [1997] HCA 6; (1997) 186 CLR 622
Sandalwood Properties Ltd (Subject to a Deed of Company Arrangement) v Huntley Management Ltd (No 2) [2019] FCA 647
Sanderson v Blyth Theatre Company [1903] 2 KB 533
Sony Entertainment (Australia) Limited v Smith [2005] FCA 228; (2005) 215 ALR 788
Summers v Repatriation Commission (No 2) [2015] FCAFC 64
Wentworth v Wentworth; Estate of Wentworth [1999] NSWSC 317; (1999) 46 NSWLR 300
Yu v Cao [2015] NSWCA 276; (2015) 91 NSWLR 190
Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 177 Date of last submissions: 12 March 2020 Dates of hearing: Determined on the papers Solicitor for the First Plaintiffs: MillerPrince Solicitor for the Defendant: Madison Marcus Solicitor for Messrs Gough and Crabtree: Frank Law ORDERS
NSD 1365 of 2019 BETWEEN: MICHAEL JAMES BILLINGSLEY AND DAVID IAN MANSFIELD IN THEIR CAPACITY AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF BIOMETRIC IDENTITY SYSTEMS PTY LTD (ACN 608 962 796)
First Plaintiff
BIOMETRIC IDENTITY SYSTEMS PTY LTD (ACN 608 962 796) (ADMINISTRATORS APPOINTED)
Second Plaintiff
AND: SIMON MARK NAPOLI
Defendant
IN THE INTERLOCUTORY APPLICATION DATED 28 OCTOBER 2019 BETWEEN: SIMON MARK NAPOLI
Applicant
AND: MICHAEL JAMES BILLINGSLEY AND DAVID IAN MANSFIELD IN THEIR CAPACITY AS JOINT AND SEVERAL VOLUNTARY ADMINISTRATORS OF BIOMETRIC IDENTITY SYSTEMS PTY LTD (ACN 608 962 796)
First Respondents
DANIEL GERARD GOUGH
Second RespondentDAMIEN SIMON CRABTREE
Third Respondent
ORDER MADE BY:
FARRELL J
DATE OF ORDER:
19 MAY 2021
THE COURT ORDERS THAT:
1.The first plaintiffs’ costs of the originating process dated 26 August 2019 up to and including 28 August 2019 be costs in the administration of Biometric Identity Systems Pty Ltd (the Company).
2.Simon Mark Napoli (Mr Napoli) must pay the first plaintiffs’ costs of the originating process and of the interlocutory application dated 17 September 2019, including their application for costs, incurred on and from 29 August 2019 on an indemnity basis and in a lump sum of $71,000.
3.Mr Napoli’s interlocutory application dated 28 October 2019 be dismissed with costs.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
FARRELL J:
INTRODUCTION
This judgment concerns competing applications for costs.
In Billingsley v Napoli, in the matter of Biometric Identity Systems Pty Ltd (administrators appointed) [2019] FCA 1640 (Billingsley v Napoli), I gave reasons for the following orders made on 30 September 2019:
(1)Pursuant to s 447A of the Corporations Act 2001 (Cth), Part 5.3A of that Act is to apply to Biometric Identity Systems Pty Ltd (administrators appointed) (the Company) as though the appointment of Michael James Billingsley and David Ian Mansfield (first plaintiffs or administrators) as administrators of the Company on 8 August 2019 was valid (validating order);
(2)Costs of the originating process filed on 26 August 2019 be reserved;
(3)Pursuant to s 447A of the Corporations Act, Part 5.3A of the Corporations Act is to operate in relation to the Company such that, notwithstanding s 439A(2) of that Act, the second meeting of creditors of the Company be convened at any time during, or within five business days after the end of, 31 October 2019;
(4)The administrators’ costs of and incidental to the interlocutory process filed on 17 September 2019 (the extension application) be reserved. That application sought the order referred to in (3) above;
(5)The administrators file and serve any evidence and written submissions on the question of costs of the originating process and extension application by 14 October 2019; and
(6)Mr Napoli file and serve any interlocutory process, evidence and written submissions on the question of costs by 28 October 2019.
I explained the background to those orders in Billingsley v Napoli at [5]-[20] and [31]-[32]. It is useful to note that:
(1)The originating process sought a number of orders as well as the validating order, including orders for short service on Mr Napoli, an extension of the convening period to 30 September 2019 and orders with respect to the manner in which notices be given to creditors. The administrators sought an order that their costs be costs in the administration of the Company save that Mr Napoli should pay the costs of the validating order.
(2)Following the first case management hearing in relation to the originating process, Lee J (as Commercial and Corporations Duty Judge) made an order dated 28 August 2019 extending the convening period to 30 September 2019 without opposition from Mr Napoli. However, as Mr Napoli’s counsel advised Lee J that Mr Napoli opposed the validating order, his Honour made orders that the administrators file points of claim, Mr Napoli file points of defence and that the parties give standard discovery in respect of the basis for the validating order.
In Billingsley v Napoli at [5]-[20] and [31]-[32], I said:
5The Company’s business was to develop software which unifies biometric technology to enhance business processes through unique and secure identification of individuals. All of the Company’s employees had either resigned or were made redundant before 8 August 2019.
6On 8 August 2019, Daniel Gerard Gough and Damien Simon Crabtree purported to pass a resolution pursuant to s 436A of the Corporations Act appointing the first plaintiffs as voluntary administrators of the Company. The appointment documents in evidence include minutes of a meeting of the directors signed by Mr Gough as chairman and an instrument of appointment signed by Messrs Gough and Crabtree. Searches of the register maintained by the Australian Securities and Investments Commission on 12 June 2019, 9 August 2019 and 13 September 2019 indicate that Mr Gough was appointed as a director on 27 October 2015, Mr Crabtree was appointed as a director on 17 May 2019 and neither resigned prior to 8 August 2019.
7From the time of their appointment and until 14 August 2019, the first plaintiffs and their staff took a number of steps to advance the voluntary administration of the Company as detailed in Mr Billingsley’s affidavit sworn on 26 August 2019 at [14].
8At around 5.45 pm on 14 August 2019, the first plaintiffs received a letter of the same date from Madison Marcus, lawyers for Mr Napoli and Human IQ Pty Ltd. The letter advised that in around November 2018, the Company, Mr Gough, Mr Crabtree and Human IQ entered into a shareholders agreement in relation to the Company. A copy of a document said to be that shareholders agreement was attached to the letter. The letter stated that:
(1)Under the shareholders agreement, Messrs Gough and Crabtree have the right to appoint one director (and as at the date of signing the shareholders agreement, that director was Mr Gough) and Human IQ had the right to appoint one director.
(2)The appointment of Mr Crabtree as a director on 17 May 2019 was in breach of the shareholders agreement.
(3)On 5 August 2019, Human IQ sent a notice of appointment of Mr Napoli as a director by pre-paid post in accordance with clause 3.5 of the shareholders agreement with the result that his appointment took effect on 7 August 2019.
(4)Under clause 4.1 of the shareholders agreement, a quorum of directors was a minimum of two directors and if there is no quorum a meeting cannot proceed.
(5)Mr Napoli was not notified of, nor did he attend, the meeting of directors to consider the appointment of administrators, nor was he consulted in relation to that appointment.
(6)Mr Crabtree was not entitled to vote at the directors’ meeting.
(7)The first plaintiffs had therefore not been validly appointed pursuant to s 436A of the Corporations Act.
9By a circular to creditors dated 16 August 2019, the first plaintiffs advised creditors that their appointment as voluntary administrators may be contested and of their intention to make an application to the Court concerning it. They said:
We would encourage all creditors to ventilate any concerns that they may have with respect to our appointment as Administrators of the Company and to indicate – whether at the first creditors meeting or in writing before or after that meeting – their consent or opposition with the course proposed by the Administrators in respect of the proposed Court action.
10The first meeting of creditors of the Company was held on 19 August 2019. At the meeting, the first plaintiffs discussed the need to bring an application in relation to their appointment and no objection was raised to their appointment or the application. Mr Napoli was allowed to attend the meeting as an observer.
11The first plaintiffs say that an order validating their appointment is justified and consistent with the overriding objects of Part 5.3A because:
(1)The persons acting on the basis that they were directors on 8 August 2019 believed that the Company was insolvent or likely to become insolvent at the time the resolution was passed.
(2)Mr Billingsley believes that the Company is insolvent based on:
(a)The balance sheet of the Company as at 8 August 2019 created on that day discloses a deficit of assets over liabilities of $129,516.50. Since the first plaintiffs have had access to the Company’s books and records, it appears that there is further “decay” in the Company’s financial position to a deficit of $153,704.49;
(b)The Company’s liability to the Australian Taxation Office (ATO) may increase because it has several outstanding lodgements. It also has a history of unfulfilled payment arrangements with the ATO;
(c)The Company’s profit and loss statement for the period from 1 July 2019 to 8 August 2019 revealed a net loss of $326,015.81; and
(d)The Company is no longer trading and it has no employees so that (save for revenue derived under the Licence Agreement referred to below and $1,0154.54 in cash at bank held as at 8 August 2019) it has no sources of revenue to meet existing liabilities.
(3)On 7 August 2019, the ATO issued director penalty notices to Messrs Gough and Crabtree.
(4)Having reviewed the Company’s bank statements for the period between June and August 2019, it appears that there have been movements of money between the Company’s bank account and Mr Gough’s. While it appears that all amounts taken out were returned, it bears investigation.
12The Company had an unwritten service and maintenance agreement with a major client for about three years. The Company’s final services were to be completed in September 2019. The expected revenue for those final services is approximately $77,724. The first plaintiffs approved entry into a Licence Agreement with Mr Gough for use of the Company’s property to enable provision of those services to the client because:
(1)The licence was necessary to enable Mr Gough to provide the service to a longstanding client.
(2)Completion of the work was in the best interest of the creditors of the Company because it would preserve value in the Company’s business while the first plaintiffs attempt to initiate a sale of the Company’s business and assets, which remains a course they wish to exhaust.
(3)Subject to the terms of the Licence Agreement it will generate income.
(4)The Company did not have the funds to pay the upfront costs (wages, travel expenses and accommodation) necessary to perform the works required and Mr Gough agreed to fund those costs on the basis that he would be reimbursed.
(5)The first plaintiffs in their absolute discretion may elect to terminate the Licence Agreement.
13The fact of the Licence Agreement has been disclosed to creditors. The revenue derived under the Licence Agreement would not be sufficient to change the first plaintiffs’ view of the solvency of the Company.
14The first plaintiffs believe that the intellectual property and client lists of the Company are assets which hold material value which could be sold to an interested purchaser. For reasons set out in the next paragraph, the first plaintiffs have not advertised the business for sale, but if their appointment is validated, Mr Billingsley would expect a sale process to take about four weeks, or perhaps longer depending on the number of interested parties.
15Since learning of the issue concerning their appointment, the first plaintiffs have been unwilling to advance the voluntary administration as they are concerned that, if the relief sought in the originating process were not granted, they may face personal liability for any step they take in that respect. The unwillingness of the first plaintiffs to advance the administration was strengthened when the defendant opposed the relief sought at the first case management hearing held on 28 August 2019 before Lee J. The defendant’s opposition was only withdrawn on 25 September 2019.
16Mr Billingsley says that the first plaintiffs would have pressed for orders under s 447A in relation to their appointment as administrators at the case management hearing on 28 August 2019 had the defendant not opposed the orders at that time. In his view, it will take the first plaintiffs four weeks to conduct their functions so that it is likely that an extension of the convening period to 30 September 2019 would have been sufficient if the relief they sought had been granted then.
17 The functions still to be undertaken are:
(1)Exploring opportunities to turn the business of the Company around, sell the business or sell the assets of the Company (specifically its intellectual property) with a view to improving any return to the Company’s creditors;
(2)Reviewing the books and records of the Company and taking advice in respect of any recovery actions that might be available were the Company to enter liquidation; and
(3)Weighing the costs/benefits of any possibilities referred to in (1) against any possibilities referred to in (2) for the purposes of making a recommendation to creditors of the Company as to what ought to occur following the end of the convening period and producing a meaningful report pursuant to s 75-225 of Insolvency Practice Rules (Corporations) 2016 (Cth).
Accordingly, the extension now sought is until 31 October 2019.
18The Company is not trading and there are no employees whose interests the Court would otherwise be concerned about when asked to extend the convening period. In relation to any prejudice to other creditors of the Company arising from the continuation of the statutory moratorium, the first plaintiffs have communicated their intention to apply to the Court for a further extension of the convening period and invited creditors to state whether they consent or oppose the application.
19By a circular dated 19 September 2019, the first plaintiffs advised that the hearing of the application in relation to their appointment as voluntary administrators was set down for hearing on 30 September 2019 and the application for extension of the convening period until 31 October 2019 was listed for hearing on 27 September 2019. Copies of the interlocutory process and Mr Billingsley’s affidavits sworn on 26 August 2019 and 13 and 17 September 2019 were attached to the circular. Those affidavits, along with the affidavit of Christopher Athanassios sworn on 26 September 2019, were read on both applications. The hearing on 27 September 2019 was stood over to 30 September 2019.
20Other than Mr Napoli, who withdrew his opposition to orders relating to the first plaintiff’s appointment as voluntary administrators on 25 September 2019, the first plaintiffs received no notice of any opposition to the request for extension of the convening period or orders in relation to their appointment as voluntary [administrators] and no creditor appeared at the hearings on 27 or 30 September 2019 to oppose those orders being made. Counsel for Mr Napoli appeared at both hearings seeking to establish a timetable for dealing with the issue of costs. A form of orders in relation to the issue of costs was agreed between Mr Napoli and the first plaintiffs.
…
COSTS
31Both the first plaintiffs and Mr Napoli have advised the Court that they require an opportunity to make submissions concerning the appropriate orders to be made as to costs. Mr Napoli has foreshadowed an application that Messrs Gough and Crabtree be ordered to pay costs. The first plaintiffs also submitted that they would like an opportunity to make submissions concerning the nature of the orders that should be made as to costs.
32The Court determined to make orders reserving costs on both the originating and interlocutory processes and the timetabling orders agreed by the first plaintiffs and Mr Napoli.
COSTS ORDERS SOUGHT
In submissions in chief on costs dated 14 October 2019, the administrators summarised the costs orders they sought as being:
(1)Their costs of and incidental to the originating process up to and including the case management hearing held on 28 August 2019 be costs in the administration of the Company. They submitted that this would be the usual costs order made on the originating process and the administrators accept that Mr Napoli ought not to have to pay for aspects of the proceedings which the administrators would have had to attend to regardless of his intervention;
(2)Mr Napoli pay the administrators’ costs of and incidental to:
(a)the originating process incurred after 28 August 2019; and
(b)in relation to the extension application;
on an indemnity basis or failing that on the ordinary basis; and
(3)In respect of the period after 28 August 2019, a lump sum costs order against Mr Napoli in the amount of $55,930.04 (inclusive of GST and disbursements). They estimate their costs of the costs application (which would not be covered by the lump sum costs order) to be between $12,000 and $13,000. The administrators indicated that, purely on a commercial basis, if Mr Napoli agreed to the making of a costs order and its amount, they would be prepared to accept $44,000 (inclusive of GST) and they would not seek costs of their costs application.
On 28 October 2019, Mr Napoli filed an interlocutory application (Mr Napoli’s interlocutory application) and a supporting affidavit sworn by Mr Napoli on that date. In Mr Napoli’s interlocutory application, he sought orders only against Messrs Gough and Crabtree in relation to his cost and the administrators’ costs.
He also filed written submissions dated 28 October 2019. Those submissions were in response to the administrators’ submissions in chief and in support of Mr Napoli’s interlocutory application. Mr Napoli sought orders that:
(1)The administrators’ costs of the proceeding be costs in the administration;
(2)The administrators pay Mr Napoli’s costs from 20 September 2019 and of and incidental to its costs application against him;
(3)Messrs Gough and Crabtree pay Mr Napoli’s costs of the proceedings and the costs of and incidental to Mr Napoli’s interlocutory application; and
(4)If the Court orders Mr Napoli to pay part of the administrators’ costs, an order analogous to orders made in Sanderson v Blyth Theatre Company [1903] 2 KB 533 (Sanderson order) or Bullock v The London General Omnibus Company [1907] 1 KB 264 (Bullock order) should be made against Messrs Gough and Crabtree.
Mr Napoli also submitted that if the Court were minded to make a lump sum costs order, further orders should be made following the Court’s determination of entitlement. Mr Napoli says this would be in conformity with the procedure set out in Practice Note GPN-Costs (the Costs Practice Note) at [4.4].
The administrators filed submissions in reply dated 13 November 2019. It is sufficient to note at this point that:
(1)They did not wish to be heard or participate in any dispute between Mr Napoli and Messrs Crabtree and Gough save to say that it would be inappropriate that primary liability for the administrators’ costs rest with anyone other than Mr Napoli on the basis that it was steps taken by Mr Napoli which caused the administrators to incur costs that were ultimately incurred and they have no insight into the ability of Messrs Gough and Crabtree to meet such an order;
(2)Having received no response to their offer, they withdrew the offer to accept a lump sum costs order for $44,000 (inclusive of GST) and instead pressed for a lump sum costs order of $82,885.54 comprised of:
(a)$55,930.04 (inclusive of GST) in respect of the originating process and the extension application as previously asserted; and
(b)$26,955.50 (inclusive of GST) in respect of costs incurred in respect of the question of costs;
(3)They opposed the form of orders sought by Mr Napoli in the submissions dated 28 October 2019 at [78]-[79].
The parties, not without difficulty, ultimately agreed that the issues as to costs could be determined on the papers. The administrators sought, and the Court made (on 11 December 2019) orders to the effect that the administrators be excused from further participating in Mr Napoli’s interlocutory application save for the Court reading:
(1)Paragraphs [42]-[48] of the administrators’ costs submissions in chief filed on 14 October 2019; and
(2)Paragraphs [1]-[4] of the administrators’ costs submissions in reply filed on 13 November 2019;
in respect of prayer 2 of Mr Napoli’s interlocutory application and their costs in respect of that application were reserved.
In support of their position as to costs the administrators rely on:
(1)Affidavits sworn by Christopher Athanassios of Miller & Prince Lawyers, the administrators’ solicitors, on 14 October 2019 and 13 November 2019 together with exhibits CA-1 and CA-2;
(2)Their counsel’s written submissions in chief dated 14 October 2019 and in reply dated 13 November 2019 and their counsel’s written reply submissions to Mr Napoli’s further submissions on costs dated 2 December 2019.
Mr Napoli relies on the following material in respect of costs:
(1)Mr Napoli’s affidavit in support of his interlocutory application sworn on 28 October 2019 and exhibit SMN-1;
(2)An affidavit sworn by David Winston Low of Madison Marcus Law Firm Pty Ltd, Mr Napoli’s lawyers, on 10 December 2019; and
(3)Mr Napoli’s counsel’s written submissions dated 28 October 2019; 28 November 2019; 10 December 2019; 18 December 2019; and 12 March 2020.
Messrs Gough and Crabtree rely on their counsel’s written submissions dated 26 November 2019 and 24 February 2020 opposing the orders sought by Mr Napoli. They filed no evidence.
BACKGROUND
Period to 8 August 2019
Mr Gough, as the sole director of the Company, purported to appoint Mr Crabtree as a director of the Company on 17 May 2019 and they both acted in the capacity of director until 8 August 2019.
Mr Napoli explained the background to the acquisition by entities controlled by him of all of the shares in Human IQ as follows. Between August 2018 and January 2019, Argus Global Pty Ltd (Human IQ’s then holding company) conducted a fundraising campaign in which entities Mr Napoli controlled invested about $2,582,872.50. Argus’ principal business was the provision of biometric solutions to correctional service facilities in Australia, including approximately 18 correctional facilities across New South Wales. In mid-April 2019, Argus’ sole director (Kenton Geoffrey Farrow) resolved to appoint administrators of Argus who were subsequently replaced (none of whom were the administrators of the Company). Following negotiations with Argus’ administrators, Mr Napoli caused an entity he controls to acquire the shareholding in Human IQ for $50,000. Human IQ then held 33% of the shares in the Company. After the acquisition, which occurred in about mid-June 2019, Mr Napoli was appointed a director of Human IQ on 14 June 2019.
Mr Gough and Mr Crabtree met with Mr Napoli in early July 2019 and Mr Gough sent an email to Mr Napoli and Graeme Webb dated 4 July 2019 concerning the future direction of the Company, including shareholding structure. Mr Gough corresponded with Mr Napoli and Mr Webb on 15 July 2019 which indicated that he and Mr Crabtree had heard nothing from Mr Napoli since meeting “two Tuesdays ago”, that they were no long prepared to pursue the path discussed, and that they “need to move on”. Mr Gough suggested buying back Human IQ’s 50 shares for $10,000, noting that neither he or Mr Crabtree had received even $1.00 out of Mr Napoli’s investment in Argus or in the purchase of the 50 shares in the Company held by Human IQ.
By a letter dated 5 August 2019, Madison Marcus served on the Company a notice from Human IQ purporting to appoint Mr Napoli as a director pursuant to cll 3.3 and 3.5 of a shareholders agreement with effect on and from 8 August 2019 and a consent to act as a director signed by Mr Napoli. That shareholders agreement is said to be between Messrs Crabtree and Gough, Human IQ and the Company, it is undated (save for a printed “2017”) but apparently executed in counterpart by the parties to it. In their written submissions, Messrs Crabtree and Gough concede that they received that letter on 6 August 2019.
On 8 August 2019, Madison Marcus sent emails to Messrs Gough and Crabtree to which were attached letters of the same date addressed to the Company at its registered office.
The first letter dated 8 August 2019 required the Company to rectify ASIC’s register to indicate that Human IQ’s shares in the Company were beneficially owned. It went on to say:
Request for copy of financial documents
7.Human IQ has a reasonable suspicion that the Company has a cause of action against its directors, for breaches of the directors’ duties to act in the best interests of the Company, and not to trade whilst insolvent.
8.Human IQ hereby requests that the Company provide it with copies of the following documents, to assist Human IQ with its investigations into the cause of action referred to in paragraph 7 above:
(a)Copies of the financial reports for the Company for the financial years ending 30 June 2018 and 30 June 2019 respectively (including income statement, profit and loss statement and balance sheet);
(b)Copies of the Company’s management accounts for the financial years ending 30 June 2018 and 30 June 2019;
(c)Copies of any and all bank account statements in the name of the Company from 30 June 2018 to date; and
(d)Copies of any tenders submitted by the Company to third parties for any proposed works between the period 30 June 2018 to date.
By a further letter dated 8 August 2019, Madison Marcus sought, pursuant to s 290 of the Corporations Act, all invoices, receipts, orders for payment of money, bills of exchange, cheques, promissory notes, vouchers, documents of prime entry and working papers and other documents needed to explain the methods by which the Company’s financial statements are made up and adjustments to be made in preparing financial statements.
On 8 August 2019, Mr Gough and Mr Crabtree purported to resolve to appoint Messrs Billingsley and Mansfield as voluntary administrators of the Company. In their written submissions dated 26 February 2020, Messrs Gough and Crabtree say that, rather than taking the course of appointing Mr Napoli as a director by 5 pm on that day (as required in the 5 August 2019 letter sent to them by Madison Marcus) they appointed the administrators in circumstances where the Company was, or was likely to be, insolvent, the ATO had issued director penalty notices for the Company’s failure to meet tax obligations and voluntary administration was consistent with the objects of Part 5.3A of the Corporations Act.
Period from 14 August 2019 to 30 August 2019
On 14 August 2019, Mr Napoli’s lawyers sent to the administrators by email a letter of that date casting doubt on the validity of their appointment: Billingsley v Napoli at [8].
On 15 August 2019, Mr Gough sent an email to the administrators’ staff to which was attached an unsworn statement prepared by him and dated that date. It said (as written):
Biometric Identity Systems Pty Ltd (BIS) began in late 2015.
Late 2016 we were approached by Argus Global Pty Ltd (AG) who were interested in acquiring BIS.
By late 2017 we had negotiated an agreement to become part of the Argus Group.
Argus represented an attractive opportunity for BIS to continue it’s pursuits with new resourcing and processes to fill operational gaps.
To commence this, a further 50 Ordinary Shares in BIS were issued and provided to Argus, in exchange for many back-end administration services, assistance with any financial obligations and full access to the services of their Marketing and Public Relations Teams to promote and improve BIS.
The relationship with Argus was centred around developing technical strengths, building a Team environment for “belonging”, significant business administration improvements and providing necessary funds for meeting the costs of the business.
While the relationship aged, the “attractions” weren’t exactly forthcoming. Late 2018 we were advised by Argus that it was time to complete the “acquisition” in order to maximise the benefits available from BIS to Argus and to further reduce costs. It was also at this time that BIS were given to understand that Argus would make arrangements for the outstanding liabilities to the ATO and SGC to be paid out.
By March 2019 there were several things that simply hadn’t happened to complete the acquisition:
•No Employment Agreements were provided and/or signed.
•No outstanding liabilities had been paid or brought up to date.
•No arrangements were made for ongoing financial management of BIS, ie; how we were going to pay rent, wages and other bills etc.
•Nothing was provided to explain our position within the new entity and what benefit we would receive in the Argus Employee Share Opportunity Program (ESOP).
•The agreed amount of $20k was not paid to Damien and I for settlement of the purchase of our remaining Shares in BIS.
In mid-March, Argus underwent a significant internal restructuring of roles and approximately half of the staff were made redundant. Many middle managers were included in that change. This was the first sign to BIS that Argus were having major financial problems.
In Early April, Ken Farrow, the Managing Director of Argus Global Pty Ltd put the company into Voluntary Administration. This was really the end of the beginning for us as our “agreement” was with Ken and his Team.
The 50 BIS Shares were owned by a wholly owned subsidiary of Argus called Human IQ Pty Ltd (HIQ). That company was sold by the Argus Liquidators to Simon Napoli and Graeme Webb.
Our outstanding ATO liabilities had not been dealt with by Argus Global, as previously promised.
On Tuesday the 6th August both Damien Crabtree and Daniel Gough received Director Penalty Notices from the Australian Taxation Office for the full amount owing to the ATO.
On Wednesday the 7th August, most staff had advised of their intended resignation from BIS.
Being left in the position of having no senior technical staff and significant debt, the only choice left to the Directors was to place the company into Voluntary Administration.
On 16 August 2019, Messrs Billingsley, Mansfield and Athanassios held a teleconference with Mr Napoli and his lawyers, Bechara Shamieh and Lisa Boler (of Madison Marcus). Mr Napoli’s evidence is that at that meeting Mr Shamieh said words to the following effect:
My client, Mr Napoli is a director of Biometric. The only other director of Biometric is Mr Gough. Mr Crabtree was invalidly appointed a director of Biometric.
In order for the directors to pass a resolution, there needs to be a quorum of two directors. Therefore, both Mr Gough and Mr Napoli need to be present.
Mr Napoli had no knowledge of, and did not attend, the meeting of directors on 8 August 2019, which means there was no quorum and the meeting on this date could not proceed. Therefore, your appointment as administrators is invalid. Mr Napoli has requested Biometric provide him with a copy of books and records. To date, these requests have gone unanswered. As a director of Biometric, he is entitled to the books and records. Until our client has received a copy of the books and records he is unable to comment on the solvency or insolvency of Biometric. Please provide us with a copy of the documents.
Mr Napoli also says that he was very concerned about the Licence Agreement (defined below) because there may have been a collateral purpose for Mr Gough’s entry into that agreement, noting that it gives him rights over the Company’s intellectual property.
Following that meeting, at 11.10 am on 16 August 2019, Ms Boler sent an email to Mr Athanassios requesting copies of minutes of the directors meeting on 8 August 2019 at which the administrators were appointed, a copy of the Licence Agreement dated 12 August 2019 (referred to in Billingsley v Napoli at [12] (see at [4] above)), a copy of all sales agreements relating to intellectual property entered into by the Company either before or after the administrators’ appointment, and the Company’s balance sheet referred to during the conference.
By an email sent at 3.31 pm on 16 August 2019, the administrators’ solicitors sent a copy of the appointment documents executed on 8 August 2019, a copy of the executed Licence Agreement and “a copy of a document summarising BIS’s liabilities” and stating that the administrators are not aware of or in possession of any sales agreements entered into by the Company before or after their appointment with respect to intellectual property.
I note that:
(1)The stated sole purpose of the Licence Agreement (at cl 3) is to permit and assist the Company to perform its obligations under a “Material Contract”, being the agreements, arrangements or understandings with an identified client (Honeywell Limited) and to ensure that the Company receives any and all revenues or income in respect of, or in connection with it. Under cl 2.3(a), (e), the Licence Agreement terminates when the Material Contract terminates or at any time in the administrators’ absolute discretion; and
(2)The “document summarising BIS’s liabilities” indicated that the Company had liabilities of $309,415.60 as at August 2019 of which $249,524.60 was said to be owed to the ATO.
On 16 August 2019, the administrators sent a circular relating to a meeting of creditors to be convened on 19 August 2019. Among other things it said:
On 12 August 2019, we executed a Licence Agreement with Mr Daniel Gerard Gough (the Licensee) in order to preserve the value of the Company’s business as well as its operations and assets, effective from 8 August 2019. The purpose of the Licence Agreement, in broad compass, is to enable the Licensee to complete a project and, upon completion, to realise and apply the funds to the administration.
It has since come to our attention that a third party may contest our appointment as Administrators of the Company. The substance of the contentions raised are being duly considered by us and professionals advising us, however, as a result of these matters raised by this contention, amongst other potential issues, we intend to make an application to the Court to ratify our appointment.
The views of creditors of the Company are relevant in any applications which can be brought by voluntary administrators, including in respect of ratifying our appointment, and we intend to ask for those views at the first creditors meeting convened on Monday, 19 August 2019.
We would encourage all creditors to ventilate any concerns that they may have with respect to our appointment as Administrators of the Company and to indicate – whether at the first creditors meeting or in writing before or after that meeting – their consent or opposition with the course proposed by the Administrators in respect of the proposed Court action.
If any creditor wishes to oppose the proposed application, we will join that creditor as a defendant to any such proceeding and they will be given every opportunity to be heard. In fairness to all creditors of the Company, we reserve all rights on the question of costs.
On 20 August 2019 at 10.48 am, the administrators’ solicitors sent an email to the solicitors for Mr Napoli and Human IQ with an attached letter saying:
First Meeting of Creditors
We note that Mr Lachlan McIntosh, on behalf of your clients, attended as an observer at the First Meeting of Creditors whereby (amongst other things) it was noted that the Administrators circulated the enclosed circular to creditors on 16 August 2019.
We understand that your clients did not receive this circular however, at the First Meeting of Creditors we note that Mr Athanassios:
(a) explained the contents of the circular at the First Meeting of Creditors; and
(b) subsequently, requested:
i.if any creditor had any objection to the Administrators being appointed to the Company; or
ii.if any creditor wanted to be joined to the Administrators proposed application seeking to validate their appointment to the Company.
We note that your clients’ observer did not raise any objections at the First Meeting of Creditors (despite ventilating other concerns at the First Meeting of Creditors).
Remedying technical defect
The Administrators are conscious of incurring unnecessary legal cost to validate their appointment as Administrators of the Company. As such, there appears to be a pragmatic way forward, namely, Mr Napoli ratifies the appointment of the Administrators as resolved at the board meeting held on 8 August 2019.
If, for whatever reason, Mr Simon Napoli does not ratify the appointment of the Administrators, the Administrators will commence proceedings in the Federal Court of Australia seeking to ratify their appointment as Administrators of the Company.
Could we please have Mr Napoli’s ratification in respect of the appointment of the Administrators or Mr Napoli’s position in respect of this request by no later than 5:00 pm Tuesday, 20 August 2019. As you no doubt appreciate, the matter is of some urgency given the strict statutory convening period and inability of the Administrators to attend to the administration until this issue has been resolved.
We look forward to your urgent reply.
Our clients otherwise reserve their rights.
A copy of the circular to creditors was enclosed with the letter.
Mr Napoli’s solicitors responded at 12.16 pm on Tuesday, 20 August 2019 requesting an extension of time to notify the administrators of whether Mr Napoli would ratify their appointment to 5.00 pm on Wednesday, 21 August 2019. The administrators consented and advised Mr Napoli’s solicitors by email sent at 6.40 pm on the same day.
By letter dated 21 August 2019 sent by email at 11.58 am, the solicitors for Mr Napoli stated to the solicitors for the administrators that “[o]ur client requires full financial and operational information concerning the operations of the Company, so he may properly consider whether to ratify your client’s appointment as administrators of the Company”. The letter went on to make an extensive request for the documents referred to at [31] below to be provided by noon on 21 August 2019. The letter stated that if the administrators were unable to provide the requested documents in the time stipulated, Mr Napoli would respond to the request for ratification of the administrators’ appointment within 48 hours of receipt of that information. The letter warned that if the administrators failed or refused to provide the information and make an application to the Court, Mr Napoli would contend that the application was premature and produce the letter to the Court on the question of costs.
The requested documents included:
(1)Financial statements for the year to 30 June in 2017-2019;
(2)The client list;
(3)Tenders made from 1 July 2018 to date and their responses;
(4)Contracts to which the Company was a party from 1 July 2018 to date, including but not limited to the complete sales “pipeline” for customers and suppliers, all customer and supplier contracts including those in negotiation, all customer and supplier partnership, memoranda of understanding and non-disclosure agreements, and all third-party agreements for software maintenance and/or customer support;
(5)Details of who possesses the Company’s source code (whether a service provider or a director);
(6)Lists of software source code versions installed with each customer (relevant to future costs);
(7)Details of all software source code in research and development;
(8)The current software roadmap;
(9)Bank statements from 1 July 2018 to date;
(10)Third party agreements with any current or former director or executive of the Company;
(11)Government research and development grants and applications; and
(12)Any other historical or current information that is relevant to running the Company’s business.
By a letter dated 22 August 2019 sent by email to Mr Napoli’s solicitors by the administrators’ solicitors at 9.42 am on that day, the administrators advised:
Upon further review of the matters raised in Your Letter [of 21 August 2019], amongst other matters, we are of the view that ratification, even if forthcoming, is not capable of addressing the difficulties set out in Your Letter without order of the Court. For that reason, we are instructed to withdraw our clients’ request for ratification and will proceed with the proposed application.
We do not understand your assertion that any such application is premature in circumstances where regardless of the position adopted by your clients, our clients will require relief from the Court in respect of their appointment. In those circumstances, could you please clarify your clients’ position. …
In circumstances where your natural person client appears to wish to participate in any application ultimately brought by our clients, we hold instructions to join your client to the proposed proceedings to allow him the forum to be heard should he wish to (although he has no obligation to appear and is welcome to put on a submitting appearance if he wishes to). If your client does choose to take an active part in the proposed proceedings, our clients reserve all rights including as to the question of costs.
In respect of the request for information set out at paragraph 7 of Your Letter, we fail to see how any category other than the first could possibly be required by your natural person client to ascertain his views on the question of solvency – which is the only matter relevant to the resolution appointing our clients as voluntary administrators. To the extent that your natural person client presses for certain material, we invite you to refine your request having regard to what is set out above and we will take instructions on the matter.
By letter dated 22 August 2019 sent by Mr Napoli’s solicitors to the administrators’ solicitors by email at 4.59 pm, Mr Napoli’s solicitors confirmed they were instructed to accept service and asked for clarification as to what form of service they were being asked to accept; that is, whether the documents would be served on him and Human IQ as defendants, non-party interested persons or on some other basis.
In relation to the request for documents, the letter pointed out that the solvency test is in effect a cash flow test, not a balance sheet test, and stated that it was therefore relevant for Mr Napoli to be able to determine what the Company’s cash flow position was “as at the date of the purported appointment”. In relation to the statement of liabilities provided by the administrators, which had been collated from proof of debt forms submitted in the administration, it was noted that Mr Napoli was not aware of the age of the debts, when they fell due or income that was receivable or projected in or about the same period and that was the purpose of the request for books and records made in the letter dated 21 August 2019. The letter pressed for provision of those documents and said that, given Mr Napoli’s lack of substantive information about the Company’s financial position, it was premature to give any indication in relation to his attitude to the administrators’ proposed application. The letter noted s 70-10(2) of the Insolvency Practice Schedule (Corporations) and asserted that as Human IQ is a “contributory” of the Company it was entitled to inspect the Company’s records at all reasonable times. The letter requested advice as to the time at which Human IQ may inspect the Company’s books noting that it may be more convenient to provide true copies of those documents.
In reply, on Friday, 23 August 2019, Mr Athanassios sent an email to Mr Napoli’s solicitors at 10.56 am stating that Mr Napoli would be joined as a defendant to the originating process but if he elects to do nothing other than to lodge a submitting appearance then the administrators would not seek an adverse costs order against him. The email also said that Mr Athanassios’ firm would revert to Mr Napoli’s solicitors “separately about the information/documents sought” by their clients.
The originating process was filed on Monday, 26 August 2019. Affidavits were sworn on that date by Mr Athanassios (to which were annexed the emails and letters referred to at [28] to [33] above) and Mr Billingsley in support of the relief sought in the originating process. A copy of these documents and exhibit MJB and orders for short service made by Lee J on that day were served on the solicitors for Mr Napoli by email sent at 3.32 pm on 26 August 2019.
It is relevant to note that the administrators did not seek to be heard on the validity of the resolution which Messrs Gough and Crabtree purported to pass on 8 August 2019 but rather rested their application on the Company’s likely insolvency.
By Mr Billingsley’s affidavit sworn on 26 August 2019 and exhibit MJB the following evidence was provided:
(1)An ASIC search relating to the Company dated 9 August 2019;
(2)Copies of minutes of the directors’ meeting held on 8 August 2019 and the instrument of that date appointing the administrators;
(3)Copies of the Report on Company Activities and Property executed by Mr Gough on 21 August 2019 to which were attached details of:
(a)“Amounts the Company owes to its employees (priority creditors)”, showing an aggregate amount of $47,954.40;
(b)“Amounts the Company owes to its creditors”, showing an aggregate amount of $68,265.30. This appears to be a list of trade creditors. It does not list the ATO as a creditor;
(c) “Money owed to the Company”, being amounts owed by customers showing an aggregate amount of $43,400.83 and an asset register. The asset register appears to relate only to tangible assets;
(d)A payroll register summary for the period 1 to 21 August 2019 setting out the wages and salaries payable to employees including net pay and expenses.
(4)A copy of the Licence Agreement;
(5)Mr Billingsley deposed to the steps taken in the administration to that date;
(6)A copy of the circular sent to creditors on 16 August 2019 and a copy of the minutes of the creditors’ meeting on 19 August 2019;
(7)A copy of the Madison Marcus letter to the administrators dated 14 August 2019 in relation to the validity of the administrators’ appointment with its attachments;
(8)Copies of letters dated 5 and 8 August 2019 from Madison Marcus to the Company summarised at [16]-[18] and the Company’s constitution. Mr Billingsley deposed that these were provided to him by Mr Gough at approximately 12.44 pm on 15 August 2019.
(9)Copies of proofs of debt received to that time, including a proof of debt from the ATO for an amount of $138,815.80; and
(10)Mr Billingsley deposed as follows in relation to the Company’s solvency:
Solvency of the Company
38.Based on my investigations to date, I believe that the Company is insolvent, and has been since at least 8 August 2019.
39. The basis for this belief is that:
(a)the balance sheet of the Company as at 8 August 2019 (being the date the Administrators were appointed) discloses that the net assets of the Company is - $129,516.50 (negative);
(b)the total liabilities are significantly higher than the total assets;
(c)the ATO’s outstanding liability may increase to an amount which is presently unknown because the Company has several outstanding lodgements which, when lodged, may have the effect of increasing the ATO’s debt;
(d)the Company's profit and loss statement for the current financial year, being 1 July 2019 to 8 August 2019, revealed a net loss of $326,015.81; and
(e)given that the Company is no longer trading and there are no employees, there are no further revenue sources with which to meet the Company's existing liabilities.
40.Exhibited to this affidavit behind Tab 10 is a copy of a file note prepared at my instruction dated 20 August 2019 which provides further solvency analysis in respect of the Company.
The file note behind Tab 10 of exhibit MJB at pages 149-155 contained:
(1)On the first page:
(a)A description of the Company’s assets to a total value of $201,192.99, including current assets (being cash at bank, trade debtors and inventory) to an aggregate value of $51,130.11 and non-current assets (being a rental bond, furniture and office equipment, a motor vehicle and intellectual property) to an aggregate value of $150,062.88 of which intellectual property was the major component at $120,000;
(b)A description of the Company’s liabilities comprising current liabilities of $330,709.49, including a debt to the ATO of $270,818.49 with no non-current liabilities. The notes contained further detail as to the nature of tax liabilities (the ATO had notified the administrators of several outstanding lodgements which, when lodged, may have the effect of increasing the ATO’s claim); a disputed debt for work done for Argus; negative petty cash, a secured charge and salary sacrifice totalling $21,833.60; and priority creditors of $37,148 with respect to wages and superannuation;
(c)An identified deficiency of $129,516.50 and statements in the notes on the first page which stated:
Based upon both the Company’s records and the Administrators’ initial assessment of same, the Company is unable to meet its existing liabilities from the assets available to it.
(2)On the second page:
(a)Under the heading “Business Ceased Trading”:
Prior to the Administrators’ appointment on 8 August 2019, all employees resigned and/or were terminated and the business ceased trading operations. Given that the business is no longer trading and there are no employees, there are no further revenue sources with which to meet the Company’s existing liabilities.
(b)Under the heading “Other Indicators of Insolvency”:
The Company’s profit and loss statement for the current financial year, being 1 July 2019 to 8 August 2019, revealed a net loss of $326,015.81.
(c)A summary of creditors’ claims received by the administrators to that date to a figure of $248,054.81 and a concluding statement that:
Given the recent timing of the appointment, and the ATO’s comments regarding outstanding tax lodgements, this amount may increase.
(d)Mr Billingsley’s signature under a statement headed “Summary”:
Our initial analysis of the Company’s financial documents confirms that the Company is currently insolvent.
(3)On the third and fourth pages, there is a document headed “Balance Sheet” as of 8 August 2019 which indicates that it was created on that date at 3.51 pm. It showed negative net assets and negative total equity of $129,516.50;
(4)On the fifth and sixth pages there is a document headed “Profit & Loss Statement July 2019 to June 2020”. It indicated a net loss of $326,015.81;
(5)On the seventh page there is a document which appears to have been prepared by Deloitte Financial Advisory Pty Ltd on 20 August 2019 in relation to the Company’s projected creditor claims based on formal proofs of debt for an aggregated amount of $248,054.81, being:
(a)claims by Westpac Banking Corporation and the Commonwealth Bank of Australia for an amount of nil;
(b)claims by employees for a total amount of $14,179.36. I note that two women with the surname Gough and (according to Mr Gough) Mr Crabtree’s nephew made claims for an aggregate amount of $9,970.19;
(c)claims by Messrs Gough and Crabtree as directors for an aggregate amount of $22,970.35;
(d)the ATO for $138,815.80; and
(e)other unsecured creditors for an aggregate amount of $72,089.30.
On Tuesday, 27 August 2019, Mr Napoli’s solicitors sent a letter to the administrators’ solicitors by an email sent at 10.01 am. The letter noted that the administrators’ solicitors had not provided the requested information to Mr Napoli notwithstanding what was said in Mr Athanassios’ email of 23 August 2019. The letter went on to say:
We note that from a review of Mr Billingsley’s affidavit sworn in the Proceedings on 26 August 2019 (‘Affidavit’) he refers to having, inter alia:
•“prepared a detailed file note assessing the solvency of the Company”: subparagraph 14(s) of his Affidavit;
•reviewed the “Report on Company Activities and Property Part A”: subparagraph 14(w) of his Affidavit;
•caused the Company to enter into a Licence Agreement with Daniel Gerard Gough dated 12 August 2019: subparagraph 14(y) of his Affidavit; and
•“reviewed the books and records delivered by Mr Daniel Gerard Gough” to his office: subparagraph 14(v) of his Affidavit.
Therefore, it would appear that Mr Billingsley has access to the documents, which are sought by our client.
If our client had been provided with copies of the requested information/documents, before the Federal Court Proceedings were commenced, it may have been possible for our client to have consented to the order now sought under section 447A Corporations Act, in respect of the appointment.
We note that in paragraph 9 of our letter to you dated 21 August 2019, we had offered to notify you within 48-hours from the time of receipt of these documents, whether our client was willing to ratify the appointment of your clients as administrators.
Provision of access to information/documents, or copies of same
Provided that the documents previously sought by our client are satisfactorily provided to our client, or he is given suitable access to such material, and provided there are no material matters arising from our client’s review and inspection of those documents which would alter the position of our client with respect to your client’s appointment as administrators of the company, our client is likely to consent to the substantive order sought by your clients concerning their appointment (save as to costs).
The other orders concerning the extension of the convening period would be matters for the creditors of the company.
Noting that the Proceedings have been adjourned by Justice Lee until 9.00am on Wednesday, 28 August 2019, please inform us urgently whether your clients are willing to provide our client with access to, or copies of, the information/documents sought and, if so, whether they are able to do so today.
The administrators’ solicitors responded to Madison Marcus by letter attached to an email sent at 3.08 pm on Tuesday, 27 August 2019. The letter noted points made in previous correspondence concerning the documents Mr Napoli had requested including an invitation to refine his request. The letter went on to say (as written):
As you are aware, on 8 August 2019, the board of the Company resolved that, in the opinion of the directors:
(a)the Company was insolvent or likely to become insolvent at some future time; and
(b)the Administrators should be appointed by the Company.
Paragraphs 39 and 40 of the affidavit of Michael James Billingsley (Billingsley Affidavit) are consistent with the view that the Company was insolvent at the time the Administrators were appointed to the Company on 8 August 2019. In such circumstances, it is in the interests of the Company’s creditors that the Administrators remain and continue the voluntary administration. Without limitation as to the reasons why the voluntary administration ought to continue, we refer you specifically to the following matters in addition to the views of one of the voluntary administrators:
(a)tab 10 of Exhibit and MJB, exhibits (amongst other things) the balance sheet of the Company as at 8 August 2019 and the profit and loss statement from July 2019 to June 2019 – being the relevant point in time for the purposes of the relevant resolution appointing the Administrators to the Company; and
(b)tab 7 of Exhibit MJB, at page 94 of the exhibit, contains correspondence from your offices where Human IQ Pty Ltd (Human IQ) suspected that the Company was insolvent in any event (and prior to the appointment of the Administrators).
As you would have also seen from paragraph 36 of the Billingsley Affidavit, the convening period of the voluntary administration ends on 5 September 2019.
Whether intentionally or not, Mr Napoli’s insistence on access to the Requested Documents for which neither he nor Human IQ have any entitlement (for reasons set out below) will very likely prevent the Administrators’ section 447A application being heard and determined prior to the expiration of the convening period.
In circumstances where an extension to the convening period would not otherwise be sought by the Administrators, the Administrators will seek their costs of the Proceedings – including the extension of the convening period – from Mr Napoli should he take any position other than consent/not oppose the relief sought by the Administrators in the Proceedings.
To be clear, if Mr Napoli were to consent/not oppose the relief sought by our clients under section 447A of the Corporations Act 2001 (Cth) (Corporations Act) at the case management hearing listed tomorrow – our clients will not seek any costs from him.
The letter went on to assert that on a proper reading of s 70-10 of the Insolvency Practice Schedule (Corporations) the reference to “books” is confined to the “administration books” as detailed in s 70-10(1) and referred Mr Napoli’s lawyers to the Explanatory Memorandum to the Insolvency Law Reform Bill 2015 (Cth) at [6.66]. The letter concluded that, as none of the documents which Mr Napoli had requested were “administration books”, the administrators were under no obligation to provide those documents to him.
The letter went on to say:
Sale process post validation of the Administrators’ appointment
Subject to the Court validating the Administrators’ appointment to the Company (which is the very purpose of the Proceedings), the Administrators propose to engage in a sale process of certain assets of the Company. We note that it was recorded in the minutes of meeting of the first meeting of creditors of the Company that your client, Human IQ, is an interested party in respect of the sale of the Company’s business/assets. The Administrators are conscious of their obligations under the Corporations Act and confirm that they will engage in any such sale process in the usual way – having regard to their professional and ethical obligations. Further, we are instructed that, at this stage, the Administrators do not have certain documents/information sought in the Requested Documents. The Administrators will make enquiries about those documents if the Administrators’ section 447A application is ultimately successful.
Appearance on Wednesday 28 August 2019
As above, in the event that Mr Napoli seeks to take any position in the Proceedings other than to consent/not oppose the relief sought by our clients under section 447A of the Corporations Act – our clients will press for their costs of the Proceedings, including in respect of being forced to extend the convening period of the second meeting of creditors to facilitate whatever steps Mr Napoli wishes to take in the Proceedings.
If Mr Napoli is minded to consent/not oppose the relief sought under section 447A of the Corporations Act, could you please confirm that position in writing as soon as possible? We confirm that we hold instructions to mention your appearance should this occur.
As indicated above, the parties appeared before Lee J on 28 August 2019 at a case management hearing. Three issues were identified:
(1)The need for an order extending the convening period to 30 September 2019, to which Mr Napoli was not opposed provided it did not prejudice his position concerning the proposed final relief (that is, the validating order);
(2)The proposed validating order in relation to the administrators’ appointment. The administrators conceded that there was a defect in their appointment. Their counsel submitted that the validating order was justified on the basis that the Company was insolvent or (in the view of the directors on 8 August 2019) likely to be insolvent and a question of governance. The question of governance was that it would not be possible to govern the Company if two directors have fundamentally different views on that point. Counsel for the administrators submitted that all necessary evidence as to solvency had already been filed; and
(3)Mr Napoli’s access to documents relevant to the contest as to the proposed validating order pursuant to a notice to produce. Counsel for Mr Napoli said that he wished to confirm for himself the question of whether or not the Company was insolvent. The administrators were concerned about providing access to the Company’s intellectual property and other commercially sensitive information on the basis that Mr Napoli had interests in a competitor of the Company (Argus) and he had indicated an interest in acquiring the Company’s business so that to give him access in this process would subvert a sale process conducted by the administrators.
From my consideration of the transcript of the proceedings on 28 August 2019, I accept that Lee J raised the issue of the parties filing points of claim and defence and that discovery referable to those pleadings would be more expedient than Mr Napoli’s proposed notice to produce.
On Wednesday, 28 August 2019 at 7.03 pm, Mr Napoli’s solicitors sent a letter by email to the administrators’ solicitors. In relation to communications before the commencement of proceedings, the letter noted that the administrators took the view that regardless of the position adopted by Mr Napoli concerning their appointment, they would require relief from the Court in respect of their appointment and the administrators withdrew their request that Mr Napoli ratify their appointment and asked him whether or not he wished to take an active part in the foreshadowed proceedings. The letter also noted the administrators’ request to refine the categories of documents sought but that they had not indicated what documents they had in their possession. The letter went on to say:
8.In open Court during the directions hearing before the Justice Lee earlier today, your clients, through their Counsel, informed the Court that they concede their appointment as administrators of the Company was defective. Given that an order is sought by your clients pursuant to section 447A Corporations Act and the exercise of such power is, of course, a discretionary matter for the Court, for which our client’s consent alone would not be sufficient, our client Mr Napoli (being the person who brought the defects in the appointment of your clients to their attention) was not a catalyst for the application, but the innocent party. Messrs Gough and Crabtree, by their acts or omissions, are the persons who are responsible for your clients’ need to make the current application for orders validating their appointment and extending the convening period. Given the above facts and circumstances, if your clients are ultimately successful in obtaining the substantive orders they seek from the Court, in our view, our client would nonetheless be entitled to an order for the payment of his costs, given that he brought to the attention of your clients, the defects in the appointment purportedly effected by Messrs Gough and Crabtree on 8 August 2019.
Proposed resolution
9.Our client has no desire to put your clients to additional cost and expenses. We understand from the submissions made by your clients’ Counsel to the Court earlier today, that the reason why your clients are reluctant to provide us with the documents and information sought is because they have concerns that these documents will be used by our client Mr Napoli for a collateral purpose, given that he is a competitor of the company. These concerns are unfounded. Our clients seek the documents and information because Mr Napoli, as a director of the Company, and Human IQ Pty Ltd, as a shareholder of the Company have an interest in the Company.
10.We are instructed that the reason our client requires the documents and information is for the purpose of understanding the operations of the Company, including whether it was solvent at the time your clients were purportedly appointed administrators on 8 August 2019. In this respect, he is willing to provide your clients with an undertaking that all documents and/or information disclosed to him will be solely used for the purpose of the proceedings.
The form of orders proposed by Mr Napoli’s solicitor included orders requiring Mr Napoli to indicate whether he intended to oppose the originating process by 2 pm on Monday, 2 September 2019. By letter dated 29 August 2019, the administrators’ solicitors said:
Mr Napoli, through his Counsel, indicated that there would be opposition to the section 447A relief sought by our clients and that is the basis upon which standard discovery was foreshadowed in respect of documents relevant to the issues your client joins issue with once you have seen our clients’ Points of Claim and provided Mr Napoli’s Points of Response. Until that point in time, our clients maintain that Mr Napoli is not entitled to the information he seeks.
On the above basis, your proposed form of order is rejected.
If your client wishes to change his position, please indicate as such forthwith as it will have a material effect on the form of order sought and will likely mean that the matter will need to be relisted. Our clients reserve their rights on the question of costs.
Otherwise, could you please provide the confidentiality undertaking that Mr Napoli’s counsel indicated that he would take instructions on so that we may take further instructions.
The parties ultimately agreed a form of orders which were provided to Lee J and entered on Friday, 30 August 2019 (with a date of 28 August 2019).
In accordance with those orders, points of claim were filed by the administrators on 30 August 2019 and accepted for filing on 2 September 2019.
Among other things, the points of claim asserted that:
(1)the Company was insolvent, or alternatively Messrs Gough and Crabtree believed the Company was insolvent or likely to become insolvent, on 8 August 2019;
(2)it was not in the interests of creditors to return the Company to its directors on the bases that:
(a)the administrators had taken steps in the administration and incurred “not insubstantial” costs;
(b)Messrs Gough and Crabtree had been served with director penalty notices dated 5 August 2019; and
(c)even if the Company was not insolvent on 8 August 2019, there was no utility in returning the Company to its directors as it did not trade and the creditors did not oppose the appointment of the administrators at the first creditors’ meeting.
Period of September 2019
On Tuesday, 3 September 2019, Mr Gough sent an email to the administrators’ staff to which were attached: a three page document headed “Information regarding BAS > HIQ Shareholders Agreement Prepared by Danny Gough 3/09/2019”; a letter on the letterhead of the Company dated 7 June 2019 addressed to named joint and several administrators of Argus and signed by Mr Gough; a copy of a document addressed to “Graeme and Simon” which appears to be in the same form as that attached to an email sent by Mr Gough to Mr Napoli on 4 July 2019; and a document dated 15 July 2019 containing correspondence sent to Mr Napoli by Mr Gough. Mr Gough said the following in his covering email (emphasis added):
Hi Tonni & Tenille, I am sending this stuff because, after reading all the docs you sent me a copy of yesterday, I realised it could be difficult for a Judge to make a determination in our favour due to a lack of detail about previous significant events.
I am in Sydney now, at least until middle of Wednesday, if you would like me to make some sort of “signed statement”, if it would help. …
Mr Napoli filed points of defence on Wednesday, 4 September 2019, a day later than required by Lee J’s orders. This was the subject of correspondence between the parties set out in exhibit CA-1 at tabs 35-37. A notice of appearance was filed by his lawyers at the same time.
The points of defence included:
(1)A claim that, as the first plaintiffs had not been validly appointed, they commenced the proceedings in their personal capacity rather than as voluntary administrators and had no standing to seek relief under s 447A;
(2)A claim that the Company had not authorised the commencement and maintenance of the proceedings on its behalf and “the Company’s purported solicitors” do not have a valid retainer such that the points of claim should be struck out to that extent;
(3)Detailed factual allegations about the circumstances and timing of Mr Napoli’s appointment (including a denial that it occurred on 8 August 2019 but rather 7 August 2019) and the invalidity of Mr Crabtree’s appointment having regard to identified clauses of the shareholders agreement and the Company’s constitution;
(4)Dispute as to the first plaintiffs’ pleading concerning the validity of their appointment;
(5)Dispute that the work carried out by the first plaintiffs was carried out as voluntary administrators and the timing at which the administrators conceded the invalidity of their appointment (that is, on 20 August 2019);
(6)Dispute as to the first plaintiffs’ ability to rely on a search of ASIC’s register in relation to the Company on 9 August 2019. Mr Napoli put them to proof as to when they became aware that Mr Napoli disputed the validity of their appointment;
(7)Dispute about whether the Company was insolvent on 8 August 2019; and
(8)Dispute about the Court’s power to make an order under s 447A validating the first plaintiffs’ appointment as administrators.
By letter dated 4 September 2019 sent by email from Mr Napoli’s solicitors to the administrators’ solicitors at 3.37 pm, Mr Napoli’s solicitors noted that the points of claim at [15] state that, on or about 20 August 2019, the administrators accepted Mr Napoli’s contentions in respect of their appointment as voluntary administrators, as a consequence of which they raised the following issues:
(1)Whether the administrators had lawful authority to act on behalf of the Company, including commencing and maintaining proceedings on behalf of the Company and instructing solicitors. The letter asserted that Miller & Prince had not been validly retained on the Company’s behalf. The letter noted that, in those circumstances, the proceedings might validly be struck out. They sought an explanation by 10.00 am on 5 September 2019. This was on the basis that the Court had asked for proposed orders by 2.00 pm on that day. I note that a case management hearing had been set down for 6 September 2019;
(2)The fact that the administrators had not advised ASIC of the invalidity of their appointment. The administrators were asked to explain the basis on which they continue to hold themselves out as voluntary administrators and to have commenced the proceedings;
(3)The impact on the administrators’ authority to use or expend assets of the Company in pursuit of the originating process or the administration of the Company. The letter noted that, on the first page of the minutes of the creditors’ meeting held on 19 August 2019, it was recorded that:
The Chairperson advised that there has (sic) been no changes to the DIRRI forwarded to creditors on 9 August 2019. He further noted that of the indemnity of $40,000 (provided by the Company Director, Daniel Gough), $10,000 had been received by the Administrators, on 19 August 2019. The Chairperson advised the meeting that the indemnity was solely for the costs of the Administration and was not contingent on any outcome.
and went on to request confirmation that:
(a)the indemnity of $40,000, including the $10,000 which had been received by the administrators on 19 August 2019, had been and would be paid by Mr Gough from his own funds and not from the assets of the Company; and
(b)the administrators will agree to not use funds of the Company pending resolution of the proceedings.
(4)Mr Napoli’s position as to costs was reserved.
On Thursday, 5 September 2019 at 12.55 pm, the administrators’ solicitors responded by email to Mr Napoli’s solicitors attaching a letter of that date to the following effect:
(1)On the issue of commencing and maintaining the proceedings: It is beyond serious contention that s 447A could not be invoked to cure defective administrator appointments. The administrators relied on Calabretta v Redpen Developments Pty Ltd (in liq) [2010] FCA 81; (2010) 183 FCR 47 at [26] (Yates J) for the proposition that invalidly appointed administrators who have acted on the basis of the appointment are interested persons within the meaning of s 447A(4)(f). Any opposition to the originating process on that basis was doomed to fail;
(2)In relation to why the Company was joined as a plaintiff in the proceedings: It is uncontroversial that the Company was affected by the relief sought and it has been joined on that basis rather than to allow it to articulate any position in the proceedings and it is not taking any position in the proceedings. If, for no other reason, the application to extend the convening period required the Company to be joined and it would have been whether or not Mr Napoli had taken the position that he had;
(3)In relation to the administrators holding themselves out as voluntary administrators: In circumstances where the Company is not trading, the administrators were not minded to take any further steps in this regard until the proceedings had been resolved;
(4)In relation to the further conduct of the administration: Mr Billingsley’s affidavit sworn on 26 August 2019 makes the point that until the proceedings are resolved, the administrators were not minded to advance the voluntary administration;
(5)In relation to Mr Gough’s indemnification of the administrators: Any such indemnification is a matter between the administrators and Mr Gough but in circumstances where the administrators are in control of the property of the Company, it is obvious that any indemnity from Mr Gough is not out of the Company’s assets;
(6)In relation to the convening period: Given Mr Napoli’s unexplained delay in providing points of defence, the administrators required further time to comply with the standard discovery obligations ordered by the Court. Further, where the convening period expires on 30 September 2019, the proceedings will need to be heard and determined before then; and
(7)The administrators’ proposed timetabling orders.
The parties were unable to agree consent orders for the progress of the proceedings. At the case management hearing held on 6 September 2019 before me:
(1)Counsel for the administrators confirmed that the Company would be taking no active part in proceedings. Counsel for Mr Napoli indicated that his concern was the practical one of who was funding the administrators’ application. Noting that there had been correspondence between the parties on this issue, it was left to be sorted out between the solicitors;
(2)It was agreed that the parties would give standard discovery by exchanging lists of documents and copies of documents by 10 September 2019;
(3)Counsel for Mr Napoli did not oppose the administrators being required to provide any further evidence in chief by Friday, 13 September 2019;
(4)Noting that the points of claim at [16] asserted that the Company was insolvent, counsel for Mr Napoli stated that “we want to see all of [the administrators’] evidence on solvency and decide whether or not we’re really wanting to get into all of this. We are – we don’t have to accept my friend’s word for it”. He emphasised that Mr Napoli did not wish to be forced to accept the administrators’ conclusions because “from what we can infer, [Mr Billingsley] is just saying what he is told by Mr Gough”;
(5)Counsel for Mr Napoli indicated that the existence of the Licence Agreement suggested that the Company’s business continued;
(6)Counsel for Mr Napoli suggested that a longer timetable was required so that Mr Napoli may obtain expert evidence concerning the Company’s solvency and no commitments could be made until the discovered materials had been considered; and
(7)Counsel for the administrators foreshadowed that it may be necessary to file an interlocutory application further extending the convening period past 30 September 2019 and, if so, the administrators will seek an order that their costs of such an application be paid by Mr Napoli.
On 6 September 2019, I made orders extending the period in which the parties were to give standard discovery to Tuesday, 10 September 2019, permitting the administrators to file further evidence in chief by 13 September 2019, permitting Mr Napoli to file and serve any evidence upon which he intended to rely by Friday, 20 September 2019, permitting the administrators to file any evidence in reply by Tuesday, 24 September 2019, and the parties to put on submissions by Friday, 27 September 2019. The matter was listed for hearing on Monday, 30 September 2019.
On 6 September 2019 at 5.59 pm, an associate at Miller & Prince sent a letter by email to the solicitors for Mr Napoli in which the administrators called on Mr Napoli to withdraw the second paragraph of the points of defence and agree not to take issue with the Company being a party to the proceedings. The administrators noted the paragraphs of the points of defence which relate to the claim that Mr Napoli had been appointed as a director of the Company and drew his attention to cl 3.3 of the shareholders agreement which they said had the effect of Human IQ appointing Mr Farrow as a director of the Company as its nominee. The letter noted that cl 3.5 provides that every appointment and removal of a director must be in writing and takes effect when received at the Company’s registered office. The letter requested Mr Napoli to provide evidence of Mr Farrow’s removal, including evidence of a written notice of his removal signed by Human IQ and of its receipt at the Company’s registered office.
Mr Napoli submitted that it would be consistent with principle to order Messrs Gough and Crabtree to pay his costs because:
(1)It is clear that they have a connection with the proceedings in that it is their conduct that led to the passing of an invalid resolution purporting to appoint the administrators without the administrators’ prior knowledge of critical facts;
(2)For the same reason it is clear that there is a causal connection between their conduct and the costs incurred by the parties to the proceedings. Had they either complied with the shareholders agreement or advised the administrators of critical facts, it is likely that the application for the validating order would have been unnecessary;
(3)Their conduct was demonstrably improper in the sense that it breached the shareholders agreement and it was unreasonable in the circumstances; and
(4)Given that their conduct was the root of the parties’ legal costs and the compensatory principle underlying the exercise of the costs discretion, it is appropriate that they compensate the parties inconvenienced by their conduct in the sense of incurring a cost liability.
Messrs Gough and Crabtree’s submissions summarised
Messrs Gough and Crabtree say that Mr Napoli’s argument that they should bear his costs of these proceedings is misconceived as a matter of law, even if it can be shown that they acted inappropriately in relation to the appointment of the administrators and that act caused these proceedings to occur.
They rely on the decision in Condor Blanco Mines (No 3) in which Barrett AJA refused to make a non-party costs order against a director (Mr Darby) in circumstances where Condor Blanco Mines Ltd sued a person purportedly appointed as administrator and was successful in having the appointment declared invalid, void and of no effect. The “administrator” was required to pay one half of Condor’s costs of the application. In a later interlocutory application Condor sought a third-party costs order against Mr Darby on the basis that the substantive proceedings were an inevitable consequence of his actions as a director of Condor in passing the resolution to appoint the administrators for an improper purpose.
They submitted that, in so finding, Barrett AJA held that:
(1)Generally speaking, the class of persons against whom non-party costs orders may properly be made is confined to persons who have played an “active and intimate role in the initiation or conduct of the proceedings themselves (or their defence) and have thus influenced the incurring and quantum of the costs”: Condor Blanco Mines (No 3) at [13];
(2)Mr Darby did not occupy any such position in the litigation: he was not a party, he played no role in deciding whether to bring it, how it should be structured, or how any party should respond to it: Condor Blanco Mines (No 3) at [14]; and
(3)Even if Mr Darby’s wrongful conduct was causally connected to the subject matter of the litigation in that there would have been no occasion for the litigation but for that conduct, that was insufficient to justify a non-party costs order, being too remote from the conduct of the litigation itself to attract such an order: Condor Blanco Mines (No 3) at [18].
They say that, while that is sufficient to dispose of the application, the facts of this case do not rise to the same level as in Condor Blanco Mines (No 3) because:
(1)Condor had been successful in its substantive application but even that did not justify the third-party costs order. Mr Napoli was wholly unsuccessful in his challenge to the validating order;
(2)Despite the administrators having explained to Mr Napoli from an early stage that the Company was insolvent and had ceased to trade, Mr Napoli chose to take a highly active and adversarial approach to opposing their appointment; he only withdrew his opposition at the last moment after causing the costs which are now in issue;
(3)As in Condor Blanco Mines (No 3), costs cannot fairly be said to flow from the circumstances of the administrators’ appointment but rather decisions made by Mr Napoli regarding how he would conduct the proceedings; and
(4)Unlike Condor Blanco Mines (No 3), where Condor had the benefit of findings of breach of duty against Mr Darby and an ultimate finding that the administration should not be upheld, in this case, on 30 September 2019, the Court found that the Company was insolvent or likely to be insolvent, the ATO had issued director penalty notices in respect of the Company’s failure to meet its tax obligations, and voluntary administration was consistent with the objects of Part 5.3A of the Corporations Act. That is, Messrs Gough and Crabtree caused the administrators’ appointment in precisely the kind of circumstances where it is objectively appropriate for such an appointment to occur.
Mr Napoli’s submissions in reply summarised
Mr Napoli noted that Messrs Gough and Crabtree had elected not to adduce any evidence. Noting the correspondence set out at [78]-[79] above, he submitted that this was a deliberate, forensic decision in circumstances where the administrators put in evidence the covering email that Mr Gough sent to them on 3 September 2019 (to which was attached a statement prepared by Mr Gough regarding the evidence he was prepared to give (see [51] above)).
In this regard, Mr Napoli says:
(1)The covering email is notable because it proves that there was significant interaction between the administrators and Mr Gough concerning the proceedings, Mr Gough wanted to assist in the application and he regarded the application as an application to his benefit. Mr Napoli notes that Mr Gough said that “I realised it could be difficult for a Judge to make a determination in our favour due to lack of detail about previous significant events”, offering to make a signed statement “if it would help” (emphasis added);
(2)The statement attached to the covering email is notable because it records Mr Gough’s desire and attempts to acquire Human IQ’s shares in the Company before the resolution purporting to appoint the administrators was passed, which gives colour to the propositions that:
(a)They intended to acquire the business of the Company months before they purported to appoint the administrators;
(b)The purported appointment of the administrators was in the context of failed attempts to acquire Human IQ’s shares in the Company; and
(c)One of the benefits of the voluntary administration to Messrs Gough and Crabtree is that it gave them the opportunity to acquire the Company’s business free from Mr Napoli’s ownership interest through Human IQ;
(3)The statement is also significant because in it Mr Gough admits that he and Mr Crabtree received and were aware of the notice of Mr Napoli’s appointment as a director of the Company before they purported to appoint the administrators. The chronology in it demonstrates that notice of Mr Napoli’s appointment was received on 6 August 2019, the director penalty notices were received the next day and after that they made “no attempt to discuss” Mr Napoli’s appointment with him because they wanted to act quickly; that is, they decided to ignore the notice of Mr Napoli’s appointment;
(4)The timing is particularly poignant when one considers that, based on the s 439A report to creditors ahead of the second creditors’ meeting (see [74] above):
(a)The Company only likely became insolvent after 1 July 2019 in circumstances where it had sufficient assets to meet its current liabilities as at 30 June 2019 and significant liabilities became due and payable when the employees left the Company just prior to the administrators’ appointment;
(b)Immediately before 8 August 2019 there were $64,298.55 of potential director related transactions in favour of related parties which “obviously” impacted on the state of solvency as at that date; and
(c)The administrators are concerned as to whether there has been phoenixing achieved via the DOCA, having regard to the similar nature of Biode’s business (established on 15 July 2019, after Mr Napoli rejected Mr Gough’s buyout offers but before the issue of the director penalty notices) and Biode’s employment of a number of former employees of the Company before any DOCA was approved and those employees (five of nine of whom are Messrs Gough and Crabtree and their relatives) will be treated as continuing employees. The administrators stated that “[i]n the event the Company transitions into liquidation, we will conduct further investigations regarding potential phoenixing activity”;
(5)Drawing on the above it might be observed that Messrs Gough and Crabtree would benefit from the proposed DOCA by virtue of their (and their relatives’) continued employment by Biode, and they would benefit from a voluntary administration that ended by way of DOCA, rather than a liquidation of the Company, in that:
(a)The right to sue them in respect of intellectual property rights of the Company would not be assigned to any third party, whereas they could potentially be assigned to an interested purchaser upon liquidation;
(b)The potential unreasonable director-related transactions would not be investigated, whereas they would be investigated upon a liquidation;
(c)The potential illegal phoenixing of the Company’s business would not be investigated, whereas they would be investigated in a liquidation; and
(d)Those benefits crystallise upon the execution of the DOCA on 22 November 2019, which was only possible because the validating order was made; and
(6)It is notable that Biode was incorporated on 15 July 2019 and its registered office is that of the current solicitors representing Messrs Gough and Crabtree in these proceedings. It would be a fair inference that Biode was incorporated as a special purpose vehicle for the purpose of acquiring the assets and undertaking of the Company and that, accordingly, the acquisition of the assets and undertaking by Biode was a concept that dated back to at least that date.
In relation to Messrs Gough and Crabtree’s submission that, having regard to the decision in Condor Blanco Mines (No 3), Mr Napoli’s interlocutory application cannot succeed, it is well-established that the costs discretion conferred by s 43 of the Federal Court of Australia Act is a wide one. Differently constituted Full Courts have variously referred to it as a “largely unfettered discretion” (see Summers v Repatriation Commission (No 2) [2015] FCAFC 64 at [13] (Kenny, Murphy and Beach JJ) and a “broad discretion” (see Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union v ALS Industrial Australia Pty Ltd (No 2) [2015] FCAFC 166; (2015) 235 FCR 366 at [4] (Dowsett, Tracey and Katzmann JJ)). Further, in Minister for Immigration and Border Protection v Singh [2014] FCAFC 1; (2014) 231 FCR 437 at [42] (Allsop CJ, Robertson and Mortimer JJ), the Full Court said that, in the context of assessing the proper exercise of a discretionary power, it would be wrong to use the facts of the previous case in creating some kind of factual checklist to be followed and applied in terms of determining the proper exercise of a discretionary power in a subsequent case. The outcome will depend on the application of the relevant principles to the facts, rather than on a factual similarity or difference with other cases. Accordingly, the submission advanced by Messrs Gough and Crabtree is erroneous and should be rejected.
In any event, a careful reading of Condor Blanco Mines (No 3) indicates that Messrs Gough and Crabtree have overstated its significance and there are material differences:
(1)In Condor Blanco Mines (No 3), Mr Darby did not have a connection with the commencement of the proceedings which were commenced to reverse the consequences of a resolution passed by him with what was found to be improper motives. The proceedings were against his interests. I understand the submission to be that Mr Darby certainly did not take any steps to “prompt”, “support”, “steer” or “influence” the proceedings.
(2)In contrast, there is a much greater nexus between the actions of Messrs Gough and Crabtree and the commencement of the proceedings:
(a)They wanted the appointment of voluntary administrators and the proceedings were brought for the purposes of validating the administrators’ appointment. They “supported” the initiation and continuation of the proceedings;
(b)Their actions in failing to give notice of the meeting on 8 August 2019 to Mr Napoli rendered the proceedings a necessity. They “prompted” the initiation and continuation of the proceedings. There was no necessity for Condor to bring proceedings;
(c)Their action “steered” or “influenced” the proceedings, as is evident from the covering email sent on 3 September 2019 (at [51] above) which demonstrates that Mr Gough was in communication with the administrators and offering to assist them, referring to a Judge making a determination in “our favour” (emphasis added), which is a far cry from the situation in Condor Blanco Mines (No 3); and
(d)In short, the originating process was necessary for the purpose of curing a deficiency in the administrators’ appointment so that the resolution passed by Messrs Gough and Crabtree could stand. It was an outcome that they desired, supported and thought of as theirs.
(3)The policy concern expressed by Barrett AJA in Condor Blanco Mines (No 3) at [18] (that “there would be a group of potential respondents to a non-party costs application in every action against a company in which an outsider plaintiff succeeds in establishing that some corporate action or decision is voidable because of motives or purposes on the part of the company’s directors determined to be legally impermissible”) does not arise in this case. This action was brought by the administrators, not some outsider plaintiff, seeking to avoid a decision of the Company based on the intentions of its directors. There is therefore no “floodgates” risk.
(4)Nothing in the decision in Condor Blanco Mines (No 3) undercuts other factors that the Court may take into account in deciding whether to make a third-party costs order. A classic category identified in the seminal decision of Knight v F.P. Special Assets Ltd at 192-193 (Mason CJ and Deane J with whom Gaudron J agreed) was where “some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation”. This case falls within that recognised category because Messrs Gough and Crabtree are people who appointed the party to the litigation and who have an interest in the subject of the litigation having regard to the benefits discussed previously. Their interests have been well served by the proceedings.
The contention that Mr Napoli is liable for his own conduct because “substantially all of the costs in issue relate to Mr Napoli’s challenge to the Administrator’s application in respect of which he was wholly unsuccessful” is erroneous because:
(1)He was not “wholly unsuccessful”. He did not commence the application nor did he ultimately contest the application. It is wrong to characterise a party who has functionally submitted to an application for the exercise by the Court of a discretionary statutory power as a wholly unsuccessful party;
(2)Mr Napoli’s costs are his costs of the proceedings up until the point where he had an opportunity to assess the discovery, which enabled him to properly assess the financial position of the Company and make a decision as to whether he would oppose the application. That is his evidence, on which he has not been cross-examined, set out in his affidavit sworn on 28 October 2019 at [70]-[71]; and
(3)He would not have been in the position of being sued and having to consider his position in respect of the litigation at all had Messrs Gough and Crabtree given proper notice of the meeting to pass a resolution to appoint a voluntary administrator. His position, particularly in incurring costs to get to a point where he could make an informed decision, was reasonable and a consequence of the conduct of Messrs Gough and Crabtree. It is “a bit rich” for them to suggest that the only reasonable cause of action was for Mr Napoli to accept the administrators’ assertion that the Company was insolvent and had ceased to trade given their role in running down the financial position of the Company immediately before the administrators’ appointment and without disclosure to Mr Napoli. Mr Napoli again refers to the matters set out at [155(4)] derived from the s 439A report to creditors in relation to the second creditors’ meeting.
The assertion made by Messrs Gough and Crabtree that there are no findings or allegations against them is curious as, by Mr Napoli’s interlocutory application, he is inviting the Court to make adverse findings concerning their conduct. Their assertion that the appointment of administrators in the Company’s circumstances was objectively appropriate skirts around the actual issues identified above. The fact that the Court concluded that a voluntary administration was consistent with the objects of Part 5.3A does not address how the Company got to that point in the first place, including the need for a validating order, and Messrs Gough and Crabtree’s role in that respect. It also does not gainsay the proposition that it is an appropriate exercise of the Court’s cost discretion that they should pay Mr Napoli’s costs in view of their conduct and the benefit they derived from the litigation. It cannot be disputed that, had they conducted themselves appropriately and the resolution appointing the administrators been passed properly, there would be no occasion for the litigation or for Mr Napoli to incur costs in assessing his position.
Further submissions by Messrs Gough and Crabtree summarised
Having regard to the nature of the submissions made by Mr Napoli, I determined that it is appropriate to grant Messrs Gough and Crabtree leave to rely on their further submissions.
In relation to Mr Napoli’s “insinuations” concerning the possibility that Messrs Gough and Crabtree engaged in illegal phoenixing activities and entered into the DOCA in furtherance of that conduct, they say:
(1)There are no allegations clearly made and in that circumstance, the insinuations made by Mr Napoli based on the administrators’ report to creditors in relation to the second creditors’ meeting are irrelevant and should not have been made. Allegations of serious wrongdoing should be clearly and unequivocally stated so that they can be addressed squarely and Messrs Gough and Crabtree should not be expected to prove their innocence of matters not squarely put and made without a clear evidentiary basis;
(2)They had nothing to produce in response to a notice to produce issued to them by Mr Napoli in relation to the beneficial ownership of the shares in Biode. For the avoidance of doubt, they deny any beneficial ownership of Biode and say that the issue is irrelevant to the present dispute;
(3)Whatever allegations Mr Napoli intended to make in relation to the DOCA are legally irrelevant to the costs dispute which arises from Mr Napoli’s opposition to the administrators’ application for the validating order. If Mr Napoli wishes to press allegations concerning the DOCA, the proper process is to make an application to have it set aside. Not even on Mr Napoli’s construction of the authorities could it be a proper exercise of the Court’s power to order costs against Messrs Gough and Crabtree on the basis of complaints about a DOCA that post-dates all of the costs actually in issue; and
(4)Mr Napoli’s submission in relation to the DOCA are illustrative of the error in his approach to this litigation and to the costs dispute. That is, the proceedings were commenced by the administrators for a specific and defined purpose. However, Mr Napoli appears to have used it as a vehicle for a roving inquiry going beyond that purpose, including to impugn the DOCA. If he elects to act that way, Mr Napoli acts at his own risk as to costs.
In relation to Mr Napoli’s submissions concerning receipt of Human IQ’s notice of Mr Napoli’s appointment as a director of the Company, they submitted that:
(1)Messrs Gough and Crabtree do not dispute that the notice of appointment was received by the Company on 6 August 2019. It required that Mr Napoli’s appointment be effected and registered by ASIC by 5 pm on 8 August 2019;
(2)Rather than giving effect to Mr Napoli’s appointment, they appointed the administrators. The reasons why that was appropriate are set out in their submissions in chief at [17] (summarised at [153(4)] above); and
(3)Whether or not Mr Napoli accepts that Messrs Gough and Crabtree could validly have appointed the administrators on 7 August 2019 and whether or not it was wise of Messrs Gough and Crabtree to do what they did on 8 August 2019, is not to the point. Aside from the fact that it is all moot because the Court made the validating order, whatever allegations Mr Napoli may make about the procedural appropriateness of the administrators’ appointment, they are not a basis for a costs order against Messrs Gough and Crabtree.
In relation to Mr Napoli’s submissions concerning the Court’s power to make third-party costs orders and the decision in Condor Blanco Mines (No 3), Messrs Gough and Crabtree submitted that:
(1)Mr Napoli does not suggest that Condor Blanco Mines (No 3) was wrongly decided or that any of the statements of principle in it are incorrect. Rather, he alleges that the present case is distinguishable; and
(2)The grounds on which Mr Napoli seeks to distinguish Condor Blanco Mines (No 3) cannot be accepted for reasons set out in their further submissions at [25]-[30].
Insofar as Mr Napoli sought to put reliance on alleged potentially voidable pre-administration transactions, Messrs Gough and Crabtree say he is attempting to indirectly litigate separate causes of action that are not before the Court and are demonstrative of Mr Napoli’s error in treating these proceedings as a vehicle to pursue such matters which were relevant to the administrators’ originating process.
Consideration
Having considered these submissions, Mr Napoli’s interlocutory application should be dismissed with costs.
There is some superficial attraction to a proposition that Messrs Gough and Crabtree should bear some liability for costs incurred on an application for a validating order where their actions led to there being serious questions as to the validity of their appointment of the administrators. In the context of this case, even that superficial attraction would be limited to Mr Napoli’s costs incurred up to 28 August 2019 since I have already found that his opposition to the validating order was unreasonable once there was credible evidence given by Mr Billingsley in his first affidavit that the Company was insolvent or was likely to be insolvent as at 8 August 2019 and thereafter.
However, I accept that it would be an inappropriate exercise of the discretion conferred by s 43 of the Federal Court of Australia Act to make an order that Messrs Gough and Crabtree pay any part of Mr Napoli’s costs incurred in the proceedings for the following reasons.
There is no dispute between the parties that s 43 of the Federal Court of Australia Act confers power on the Court to make orders against Messrs Gough and Crabtree or anyone else. However, while s 43 of the Federal Court of Australia Act confers a broad discretion on the Court which is unfettered in its terms, that discretion “must be exercised judicially, not arbitrarily or capriciously, and must relate to the litigation in question”: see Summers v Repatriation Commission (No 2) at [14]. The discretion, being a judicial one, is to be exercised with proper regard to established principles and precedent. The fact that the discretion must relate to the litigation in question is the very essence of what was addressed at length in Condor Blanco Mines (No 3) at [13]-[20] and the reason why Mr Napoli’s interlocutory application should be dismissed with costs.
I accept the submission made by Messrs Gough and Crabtree that, relevantly to the context of this case, in Knight v F.P. Special Assets Ltd at 192, set out at [88] above, Mason CJ and Deane J were referring to a category of case where a non-party had an interest in litigation and then, through a person they control, a “man of straw”, brings proceedings in which the non-party then plays an active role, such as where a receiver causes an insolvent company to conduct litigation where the receiver is the effective litigant. The High Court did not endorse the view that it is appropriate to make non-party costs orders merely because the non-party played a role in appointing a person who goes on to conduct successful litigation merely because the non-party has some indirect financial interest in the litigation. The example of a shareholder who benefits from litigation conducted by directors in which the shareholder plays no active role is apt in demonstrating the cases to which the principle enunciated in Knight v F.P. Special Assets Ltd at 192 does not apply.
In my view, Mr Napoli’s relies on a misreading of the shortened quotation of that passage from Knight v F.P. Special Assets Ltd in Yu v Cao at [137] and on what is said in Yu v Cao [139] to suggest a broader application of the principle which requires only that the person created the circumstances from which the litigation arose and may benefit from the outcome of the litigation. In my view what is said by Barrett AJA in Condor Blanco Mines (No 3) at [13] is consistent with Yu v Cao at [137]-[140] and represents a correct understanding of the relevant principle enunciated in Knight v F.P. Special Assets Ltd at 192. That is for the reasons given by Barrett AJA in Condor Blanco Mines (No 3) at [14]-[18] (see [90] above).
Accordingly, I accept that, even if it were established that Messrs Gough and Crabtree acted improperly and for improper motives in relation to the administrators’ appointment and that was the immediate occasion for the proceedings commenced by the administrators, it would not be appropriate to make a third-party costs order in this case.
I accept that the power to order non-party costs is inevitably to some extent a fact-specific jurisdiction and there will often be a number of different considerations in play, some militating in favour of an order, some against: Yu v Cao at [139]. However, I do not accept that there is any relevant distinction between the circumstances of Condor Blanco Mines (No 3) at [14] and this case. I do not accept that either of Messrs Gough or Crabtree can, in the required sense, be said to have “prompted”, “supported”, “steered” or “influenced” the administrators to make their application or prosecute for the reasons given by Mr Napoli. That is because:
(1)Mr Napoli’s contentions based on the fact that the administrators were the applicants in relation to the validating order while the administrator was the defendant in Condor Blanco Mines (No 3) should be rejected because it is a distinction without a difference. It would put form over substance to suggest that the proper exercise of the Court's cost discretion would turn upon which party is the formal “applicant” in the proceeding;
(2)To the extent that the indemnity given by Mr Gough might have been drawn on to fund the proceedings, there is no evidence that it was given for that purpose. The administrators’ position, which I accept, is that it is a standard form of indemnity which was given as a condition of the administrators accepting appointment, it was capped in an amount of $40,000 and it applied only to the extent that the Company’s assets were not sufficient to fund their expenses and remuneration;
(3)I do not accept Mr Napoli’s contentions based on the language of the covering email dated 3 September 2019 and Mr Gough’s offer to give evidence or assistance if requested by the administrators in connection with the originating process because:
(a)Pursuant to s 438B of the Corporations Act, Mr Gough (as a director) and Mr Crabtree (as at least a de facto director of the Company) were under a statutory duty to assist the administrators and give them such information as they reasonably required. Compliance with that statutory obligation should not be regarded as “support” or “prompting” of the originating process which sounds in a third-party costs order;
(b)Offering to provide evidence or information to a party does not amount to controlling that party’s litigation;
(c)The financial position of the Company as at 8 August 2019 justified the appointment of an external administrator, irrespective of the circumstances leading to this positions; and
(d)Most importantly, I accept there is no evidence that the administrators did anything other than make their own independent decisions as to the initiation and conduct of the proceedings whether or not either of Messrs Gough or Crabtree was in favour of the validating order being made;
(4)I accept that Messrs Gough and Crabtree did have an interest in the validating order being made, since there is evidence that the Company was, or was likely to be insolvent on 8 August 2019 and as directors of the Company they were subject to obligations to ensure that the Company did not trade while it was insolvent. However, that interest is not sufficient to found a third-party costs order. Insofar as Mr Napoli sought to rely on the fact that the DOCA was approved and executed, that was not an inevitable outcome of the administrators’ appointment even though it undoubtedly had the effect of removing Human IQ’s indirect interest in the Company’s intellectual property and Messrs Gough and Crabtree and members of their family benefited from employment by Biode. There is nothing in evidence to suggest that the administrators acted on the instruction or direction of either of Messrs Gough or Crabtree or that they did not undertake a sale process open to any suitable offer for the Company’s intellectual property.
Further, the originating process was not an application under s 447C in which the administrators sought to assert the validity of their appointment. In the context of an application of that kind, it may have been necessary to determine the matters on which Mr Napoli relied. In contrast, the originating process was an application for a validating order under s 447A. Once the administrators accepted that there was substantial doubt about the validity of their appointment arising out of Mr Napoli’s claims and the documents he provided in support of them and Mr Billingsley had provided credible evidence that cast substantial doubt on the Company’s solvency in his first affidavit and exhibit MJB, these proceedings were an inappropriate vehicle for determination of what, if any, rights were conferred on Human IQ under the shareholders agreement and the validity of the appointments of either Mr Crabtree or Mr Napoli or whether or not they were involved in “phoenixing”.
If Mr Napoli wished to establish and vindicate any rights Human IQ may have had against Messrs Crabtree and Gough arising out of any breach of the shareholders’ agreement and any loss Human IQ might have suffered as a result, it should have been litigated in proceedings Human IQ brought against Messrs Gough and Crabtree for that relief. The same can be said for the issues raised by Mr Napoli on the basis of what the administrators said in their s 439A report (see [155(4)] above), including taking any available action to have the DOCA set aside.
As I do not accept that a costs order should be made against Messrs Gough and Crabtree, no occasion arises for me to determine whether a Sanderson or Bullock order should be made. Accordingly, I have not set out Mr Napoli’s submissions in that regard in these reasons, although I have considered them. Suffice it to say, I consider that the application for such an order was misconceived in the circumstances of this case, including the fact that neither of Messrs Gough or Crabtree was joined as a defendant in relation to the originating process and therefore the principles relevant to such orders were not engaged.
MR NAPOLI’S COSTS AS AGAINST THE ADMINISTRATORS
In his submissions, Mr Napoli claimed that the administrators should pay his costs of the originating process after 20 September 2019. Since I consider that it was unreasonable for Mr Napoli to pursue his opposition to the validating order after 28 August 2019, most of the work required in support of the validating order and extension application had been undertaken by 25 September 2019 (when Mr Napoli actually withdrew his opposition) and Mr Napoli’s interlocutory application unreasonably prolonged the administrators’ involvement in the proceedings, I reject that submission.
CONCLUSION
For the reasons previously given, I will make orders to the following effect:
(1)The administrators’ costs of the originating process be costs in the administration of the Company up to and including 28 August 2019;
(2)Mr Napoli must pay the administrators’ costs of the originating process incurred after 28 August 2019 and their costs of the extension application on an indemnity basis in an aggregate amount of $71,000 in accordance with my reasons; and
(3)Mr Napoli’s interlocutory application be dismissed with costs
.
I certify that the preceding one hundred and seventy-seven (177) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Farrell. Associate:
Dated: 19 May 2021
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