BL & GY v Hypec Electronics

[2004] NSWSC 1119

CITATION:	BL & GY v Hypec Electronics [2004] NSWSC 1119
HEARING DATE(S):	25/10/04, 26/10/04, 27/10/04, 28/10/04
JUDGMENT DATE:	2 December 2004
JUDGMENT OF:	Gzell J
DECISION:	Liquidator removed and ordered to pay costs personally
CATCHWORDS:	CORPORATIONS - Winding up - Principles in removal of liquidators - Whether in interests of winding up to remove liquidator
LEGISLATION CITED:	Income Assessment Act 1936 (Cth) Corporations Act 2001 (Cth) Limitation Act 1969
CASES CITED:	BL & GY International Co Ltd v Hypec Electronics Pty Ltd [2001] NSWSC 705 Hypec Electronics Pty Ltd (in liq) v Mead (2003) 202 ALR 688 Hypec v Mead [2004] NSWCA 221 BL & GY International Co Ltd v Hypec Electronics Pty Ltd (in liq) [2001] NSWSC 841 BL & GY International Co Ltd v Hypec Electronics Pty Ltd [2002] NSWSC 38 BL & GY International Co Ltd v Hypec Electronics Pty Ltd [2002] NSWSC 575 Mead v Mead, unreported, 2 November 2001 Fam C of A Ex parte James; Re Condon (1874) LR 9 Ch App 609 Hypec Electronics Pty Ltd (in liq) v Mead (2004) 50 ACSR 448 Hypec Electronics Pty Ltd (in liq) v Mead, unreported, NSWSC, 25 November 2003) BL & GY International Co Ltd v Hypec Electronics Pty Ltd (in liq), unreported, NSWSC, 10 December 2003 House v The King (1936) 55 CLR 499 Re Adam Eyton Ltd; Ex parte Charlesworth (1887) 36 Ch D 299 City & Surburban Pty Ltd v Smith (1998) 28 ACSR 328 Domino Hire v Pioneer Park (2003) 21 ACLC 1330 Re Giant Resources Ltd (1991) 1 Qd R 107 Re Biposo Pty Ltd; Condon v Rodgers (1995) 17 ACSR 73 Re Allebart Pty Ltd (in liq) (1971) 1 NSWLR 24
PARTIES :	BL & GY International Co Ltd - Plaintiff Hypec Electronics Pty Ltd (in Liquidation) - Defendant
FILE NUMBER(S):	SC 1933/01
COUNSEL:	Mr D Fagan SC/ Mr V Bedrossian - Applicant Mr G T W Miller QC/ Mr N Gye/Mr T To - Respondent
SOLICITORS:	Etheringtons Solicitors A R Conolly & Company Lawyers

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

GZELL J

THURSDAY 2 DECEMBER 2004

1933/01 BL & GY INTERNATIONAL CO LTD v HYPEC ELECTRONICS PTY LTD (IN LIQ)

JUDGMENT

1 Colin Anthony Mead, the applicant, sought the removal of David Patrick Watson as liquidator of Hypec Electronics Pty Ltd (in liq). Mr Mead claimed that the liquidator actively opposed his claim that a default judgment against Hypec in favour of BL & GY International Co Ltd was fraudulently based and that the liquidator unfairly and oppressively exercised his powers against him. The parties have been involved in a number of court cases. It is convenient to analyse the facts by reference to those cases.

Background

2 On the application of BL & GY as creditor, Hypec was wound up and Mr Watson appointed liquidator on 7 May 2001. As the liquidator was aware by that date, the shareholders and directors of Hypec were Mr Mead and his former wife, Lucy Mead. The company imported and sold computers.

3 BL & GY was incorporated in Taiwan. Lucy Mead held a 44% interest, the balance being held by the Yang family of which Lucy Mead was a member. One of the computer suppliers to Hypec was BL & GY.

4 BL & GY commenced proceedings against Hypec, Mr Mead and Lucy Mead. A default judgment was entered against Hypec for $7.69 million. It also obtained judgment against Lucy Mead on liability with damages to be assessed. The proceedings against Mr Mead were defended.

5 Lucy Mead and Mr Mead were divorced. Family Court proceedings between them had been stayed pending the conclusion of the BL & GY proceedings and an injunction had issued from the Family Court restraining Mr Mead from dealing with properties jointly held with Lucy Mead.

6 The liquidator received $25,000 from Grace Yang, Lucy Mead’s sister. At the time of receipt he knew the funds had been provided on behalf of BL & GY.

Proceedings before Einstein J

7 On 12 June 2001, the solicitors for Mr Mead wrote to the liquidator advising that Mr Mead maintained that BL & GY’s default judgment had been obtained by fraud. They enclosed a draft notice of motion to set aside the judgment and an unsworn copy of a draft affidavit of Mr Mead and stated they had documents to be exhibited to the affidavit, folders of fraudulent invoices relied on by BL & GY, a draft expert report from a forensic accountant, a preliminary report from an examiner of suspect documents and a draft report from a customs and shipping expert which would be supplied on request. The solicitors asked that no further action be taken in the winding up until they had had the opportunity to meet and demonstrate that Hypec had never been insolvent.

8 The liquidator said he reserved his position until he received copies of a signed notice of motion and sworn affidavits.

9 Because of a potential conflict of interest, the liquidator withdrew his retainer of the solicitors for BL & GY in June 2001 and retained other solicitors. The new solicitors were subsequently informed that an application was to be made by Mr Mead in the Family Court to vary the injunction to enable him to sell some of the jointly owned properties to fund the proposed proceedings against BL & GY.

10 On 2 July 2001, Mr Mead’s solicitors informed the liquidator that Mr Mead wished Hypec to make an application to set aside the default judgment, for leave to defend the proceedings and for leave to issue a cross claim for overpayments to BL & GY with respect to goods sold and delivered and knowing participation by BL & GY in a breach by Lucy Mead of her fiduciary duties to Hypec in knowingly causing the overpayments. Enclosed were a draft notice of motion, a draft defence of Hypec, a draft cross claim against BL & GY, Lucy Mead and Grace Yang, an unsworn affidavit of Mr Mead, a report of Mr McKewen and an affidavit by the solicitor annexing unsworn affidavits from a shipping clerk and an Australian Customs Service officer. Also enclosed was a draft cross claim by Mr Mead in identical terms in his capacity as a shareholder of Hypec. The solicitor suggested that there should be no objection from the liquidator to Mr Mead being authorised to file the notice of motion, defend Hypec and prosecute the cross claim. Mr Mead undertook to indemnify the liquidator and Hypec against any liability for costs arising out of the proposed application to set aside the judgment and to prosecute the cross claim.

11 The draft affidavits collected primary information from Australian Customs Service. That information was analysed in Mr McKewen’s report. The affidavits were in the terms ultimately sworn and Mr McKewen’s final report did not differ from the draft.

12 A meeting of creditors of Hypec took place on 16 July 2001. The only creditors of the company were BL & GY in a claimed amount of $7,667,198 and the Australian Taxation Office in the claimed amount of $200. The meeting approved the remuneration of the liquidator in the sum of $25,000 and approved further remuneration to a limit of a further $25,000.

13 On 19 July 2001, the solicitors for Mr Mead provided the solicitors for the liquidator with the sworn affidavit of Mr Mead and the exhibits and the final report of Mr McKewen. They asked that the liquidator inform them by 25 July 2001 whether he consented to Mr Mead’s application. An annexure to Mr McKewen’s report was not provided. It was still being prepared by Mr Mead. It traced the shipping movements and customs clearances of goods that were analysed by Mr McKewen in his report.

14 On 24 July 2001, the solicitor for BL & GY and former solicitor of the liquidator wrote to the liquidator enclosing a draft affidavit for the liquidator to swear in support of BL & GY’s opposition to Mr Mead’s proposed application on behalf of Hypec to set aside its default judgment. An affidavit in substantially the form of the draft was sworn by the liquidator on 27 July 2001 and filed by the solicitor for BL & GY.

15 On 2 August 2001, the liquidator wrote to Ms Yang requesting a cheque for the further $25,000 to which reference had been made at the meeting of creditors. Coincidentally, on the same day, counsel for Mr Mead requested an indication of the liquidator’s stance to the notice of motion to avoid unnecessary preparation on a wrong premise. The letter confirmed that a request had been made for the identification of the source of the liquidator’s funds.

16 On 6 August 2001, the solicitor for BL & GY responded to the letter to Grace Yang stating that the amount of further costs authorised was $20,000 for accounting purposes and if for other purposes, the expenditure was to be approved in advance by BL & GY.

17 David Mark Hodgson was a chartered accountant assisting the liquidator. Mr Hodgson had seen an account receivable general ledger of BL & GY. It showed an amount owed by Hypec as at 31 December 1996 of $4,884,466 made up of a series of transactions during that calendar year augmenting an opening balance. He had also seen a general ledger of Hypec showing an identical balance said to be owed to BL & GY as at 30 June 1996 made up of a number of loans augmenting an opening balance.

18 Mr Hodgson concluded that Lucy Mead had contrived the liquidation of Hypec. He was also aware that Mr McKewen’s report had not picked up the inconsistency in the accounts of the two companies.

19 There was some inconsistency in Mr Hodgson’s evidence as to when he became aware of the discrepancy but the liquidator was in no doubt that the inconsistency in the records of the companies had been drawn to his attention by Mr Hodgson before he swore his affidavit on 27 July 2001 and that prior to the hearing before Einstein J he was aware that Mr McKewen’s report had not picked up that inconsistency.

20 I do not accept Mr Hodgson’s evidence that he was confused when he earlier answered that these matters had come to his attention some time before the hearing before Einstein J. I find that Mr Hodgson had become aware of the discrepancy and the failure of Mr McKewen to perceive it and had drawn both matters to the attention of the liquidator some time before the hearing before Einstein J.

21 The discrepancy would have assisted Mr Mead’s case of fraud. It could not be the case that a running total in the books of Hypec as at the end of the 1996 fiscal year was identical to a running total in the books of BL & GY as at the end of the 1996 calendar year. It was in the interests of Hypec that it be disclosed to the court. It was neither disclosed in the proceedings before Einstein J nor disclosed to Mr Mead. Instead, the liquidator adopted the draft affidavit prepared for him and filed on his behalf by the solicitor for BL & GY.

22 On 9 August 2001, the liquidator responded to the solicitor for BL & GY saying he would appreciate a cheque for $20,000 if Ms Yang was only prepared to make that amount available.

23 The liquidator did not respond to the request for identification of his source of funds. Nor did he inform Einstein J that the initial funding came from BL & GY and he was pressing it for a further instalment.

24 The liquidator swore a second affidavit for the proceedings before Einstein J on 13 August 2001, this time filed by his solicitors. He swore that he had not completed his consideration of whether he should take the proceedings to set aside the default judgment and defend any subsequent proceedings by BL & GY. He swore that the indemnity offered by Mr Mead was unsatisfactory and he would not be prepared to take responsibility for the proceedings without a satisfactory indemnity for costs and security for costs. He expressed the view that if he did not conduct the proceedings on behalf of Hypec it would not be in its interests and the interests of its members and creditors to allow Mr Mead to conduct the proceedings. No mention was made of the liquidator’s source of funds or of the discrepancy in the accounting records of BL & GY and Hypec or the absence of mention of the inconsistency in Mr McKewen’s report.

25 Both affidavits were read before Einstein J by counsel appearing for the liquidator. No mention of the discrepancy, the lack of knowledge of it by Mr McKewen or the funding position of the liquidator were brought to the attention of the Court.

26 Despite the liquidator’s opposition to the application, it was successful. On 21 August 2001, Einstein J granted leave to Mr Mead to intervene in the proceedings to take responsibility in the name of Hypec for the proceedings, to make an application in the name of the company to set aside the judgment entered by default and, in the event of it being set aside, to file a defence in the name of the company and thereafter conduct in the name of the company the proceedings, to make an application for leave to file a cross claim in the name of the company and to prosecute it if leave were granted (BL & GY International Co Ltd v Hypec Electronics Pty Ltd [2001] NSWSC 705).

27 The liquidator was justifiably indignant about Mr Mead’s constant requests for extensions of time to file the company’s report as to affairs and about the meagre nature of the information ultimately supplied. He was also indignant that Mr Mead refused, on legal advice, to meet with him. The liquidator took the view that Mr Mead was uncooperative. The liquidator was of the view that it was appropriate for Mr Mead to see him with original documentation so that he could look at the question of a cross claim impartially and quickly. The following exchange took place in the liquidator’s cross examination:

“Q: From that date in early July, it was apparent to you, wasn’t it, that this assertion by Mr Mead was seriously pressed upon the basis of information he was putting forward as supporting his view?
A: No, I believe that - may I explain?
Q: Yes.
A: Mr Mead did not involve himself in giving me a report as to the affairs. Mr Mead would not cooperate. I would have thought this was appropriate for Mr Mead to see me with original documentation so I could look at that cross claim impartially and quickly. And, therefore, with that assistance, I would be in a position to look at the cross claim because it would have been a possible recovery for the company.”

28 The major point of the exercise was not, however, the cross claim. BL & GY had a massive default judgment against Hypec that Mr Mead asserted was fraudulent. The nub of the exercise was to rid Hypec of that massive debt.

29 In his cross examination, the liquidator’s attention was drawn to the draft report of Mr McKewen sent under cover of a letter of 2 July 2001. Again there was the complaint that Mr Mead had not come to him:

“Q: On the basis of that, that appeared to show you, didn’t it, Mr Mead was doing a considerable amount of work to try to substantiate that BL & GY had falsely claimed the amount of $7.6 million?
A: That’s correct. May I explain? I would have expected him to come and see me and have worked this in a cooperative way and see the solicitors or otherwise assisted.
Q: Whether you expected him to cooperate or not, in the way he chose to do this through his solicitors and by forwarding you the documentation you have before you, the material which indicates a substantial effort to get to the bottom of the account of BL & GY and Hypec, didn’t you?
A: That’s what it says.
Q: That’s how you understood it and saw it didn’t?
A: Yes, but I might have understood it; whether I accepted it is another thing.”

30 The liquidator submitted that Mr Mead dissipated Hypec assets in a number of ways. It was said that his failure to provide the attachment to Mr McKewen’s affidavit until the morning of the hearing before Einstein J prevented the liquidator from preparing a report before the hearing before Einstein J in which event, it was submitted, his Honour would not have made the orders sought by Mr Mead.

31 The liquidator produced his report on 17 September 2001. It did not prevent Sully J setting aside the default judgment on 25 September 2001. Nor did the absence of the annexure prevent Mr Hodgson concluding that the BL & GY claim was fraudulent.

32 Both the liquidator and his solicitor took the view that in due course and towards the end of the administration, the liquidator would determine whether or not to admit the proof of debt of BL & GY and that Mr Mead was interfering with the orderly administration.

33 At the time the allegation of fraudulent claim was raised, BL & GY was the only substantial creditor, the other being the Commissioner of Taxation in a then minimal amount. It is the case that subsequently the claim of the Commissioner increased substantially on the basis that moneys utilised by Mr Mead and Lucy Mead for their personal use had been charged wrongly as expenses of Hypec. But at the time, if the allegation of fraud was established, it would likely have terminated the liquidation as Hypec had always been solvent.

34 It was in that context that Mr Mead’s solicitors suggested that the liquidator curtail his activities until that issue was resolved. In that context, the question whether the BL & GY debt could be set aside assumed a significance that should have caused the liquidator to advance the time at which he would consider whether or not to admit the proof of debt.

35 The liquidator’s submission that he would have rejected the proof in due time was not put to Einstein J as a reason for not granting Mr Mead’s application. On 3 November 2003, Campbell J found that there was no real likelihood that the liquidator would have followed this course (Hypec Electronics Pty Ltd (in liq) v Mead (2003) 202 ALR 688 at [190]). On appeal from his Honour, the court said there was some attempt to resurrect the argument but it was without substance (Hypec v Mead [2004] NSWCA 221 at [56]). For the reasons that appear hereafter, I endorse those findings.

36 There is no doubt that the liquidator provided his reports to Mr Mead or his solicitors. Furthermore, before his interview with Lucy Mead on 7 August 2001, the liquidator invited written questions to be put to Lucy Mead and they were put to her. On 8 August 2001, Mr Hodgson met with Mr Mead and his legal advisers while they inspected the BL & GY invoices and copies were provided to them.

37 These matters do not, however, outweigh the fact that Hypec was a solvent company if BL & GY’s debt was set aside. The liquidator was presented with material that demonstrated a strong case of fraud. Mr Hodgson concluded that the debt was fraudulent and he discovered a further basis for that contention unknown to Mr Mead and his expert Mr McKewen. Those matters were relayed to the liquidator. Yet he continued to seek funds from BL & GY, he made no mention of this fact to Einstein J, he made no mention of the additional ground for argument that the BL & GY claim was fraudulent but, instead, instructed counsel to appear before Einstein J and oppose Mr Mead’s application.

38 It was clearly in the interests of Hypec for the liquidator to take over or, at least, to support the application to set aside the default judgment. Particularly was this so when the liquidator was aware of an additional basis upon which fraud might have been established.

Proceedings before Sully J

39 On 11 September 2001, the liquidator wrote to the solicitors for BL & GY. He said that at the meetings of creditors on 17 July 2001 the solicitor personally undertook on behalf of BL & GY to provide funds, at that stage, of $20,000 from BL & GY. The liquidator pressed for the additional funds. He said it was no answer for the solicitor now to say that as a result of Mr Mead being given leave to attempt to set aside the judgment, BL & GY would need to apply its funds to the defence of the judgment.

40 The liquidator went on to comment that Einstein J had accepted the evidence of Mr Mead and he urged the solicitor for BL & GY to put on evidence in opposition. Josephine Yang was another sister of Lucy Mead. Mr Conolly was the liquidator’s solicitor. The letter stated:

“I have had an opportunity to read Einstein J’s reasons for his decisions. Fundamental to the judge’s reasoning is an acceptance of the evidence of Colin Mead. But the petitioning creditor filed no evidence for consideration of Einstein J on the critical issues.

The issues raised by Colin Mead are ones that need to be addressed by the provision of proper documentation and evidence in proofs of debt for me.
Mrs Lucy Mead has been cooperative in my investigations.
If, what Colin Mead says is wrong, as you claim, then it seems very likely to me that the best evidence on the issues raised by Colin Mead will be from Grace for the petitioning creditor, Mrs Lucy Mead and the company’s accountant, Mr Lloyd.
When I first instructed Mr Conolly, he informed me he spoke with you at your office – now several months ago – and asked you how you intended to prove your case in the proceedings instituted or planned to be instituted by Colin Mead.
You told him you did not believe Mr Colin Mead would pursue the proceedings and that if he did you would prove your case by the documents.
It is my understanding Mr Conolly suggested that you should obtain proofs of evidence from Lucy Mead, Grace, Josephine, and also Lucy’s mother.
My work as Official Liquidator will be greatly assisted if proofs of evidence are obtained and made available to me.
If you feel you should not interview Mrs Lucy Mead then I will arrange, hopefully with your encouragement, Mr Conolly to continue his interview of Mrs Lucy Mead.
My legal advice is, that your client should file Affidavit evidence on the issues raised by Mr Colin Mead in his application for leave to sue Hypec.
My concern is that the Court have before it, the evidence of the petitioning creditor, your client, if it is as you have stated, i.e. Mr McKewen’s evidence is based on wrong assumptions and that the substantive statements of fact made by Colin Mead are based on wrong assumptions or conjectural and hearsay or inconsistent with objective records eg bank statements.”

41 The liquidator’s duty was to Hypec. Mr Mead had been given leave to move to set aside the default judgment. The liquidator should have supported that application. Instead, he encouraged BL & GY to put on evidence in opposition to Hypec’s case. That not only showed the liquidator’s alignment with Lucy Mead interests to the detriment of Mr Mead: it constituted action against the interests of Hypec.

42 In cross examination the liquidator said the letter was drafted by his solicitor. He did not slavishly follow advice. Significantly, the liquidator failed to see that there was any conflict of interest in his forwarding the letter:

“Q: Well, in this case, didn’t you question with Mr Conolly the idea that in circumstances where Mr Mead had been given the conduct of this application before Justice Sully, you as the liquidator of the company should be proffering this assistance to the other party – didn’t you question Mr Conolly on it?
A: Yes.
Q: What did you say?
A: Well, in general there are two sides to the story. This whole issue… .
Q: Is this what you said to Mr Conolly?
A: This is my recollection.
Q: Of the conversation with Mr Conolly?
A: Yes.
Q: Go on please.
A: We have two trouble directors in the sense that they have been involved in books and records which had been fraudulently arranged. We were getting no cooperation from Mr Mead. He was running his particular applications. He was the originator of them. We are far from certain in the midst of our inquiry. We needed to know exactly what happened because I have to report to ASIC and creditors about situations of commercial matters and corporate malpractice.
Q: And in this context where Mr Conolly gave you this advice and you discussed this proposition with him of assisting BL & GY, did you see any conflict between that advise and the circumstance that Justice Einstein had conferred the authority on Mr Mead?
A: I think there are two questions in that. We did not assist with BL & GY. We were transparent and open about what we needed to know. The books and records showed – we needed an explanation from directors of the company to support and verify the integrity of the records.
Q: That is not answering my question.
A: I believe I did.”

43 The liquidator sent copies of letters he wrote to Mr Mead to the solicitors for BL & GY. He did not send a copy of his letter of 11 September 2001 to BL & GY to Mr Mead. The liquidator again complained that Mr Mead would not communicate with him:

“Q: Did you send a copy of this letter to Mr Mead?
A: I can’t recall.
Q: Why wouldn’t you?
A: What, that I can recall?
Q: No, why wouldn’t you send a copy of this to Mr Mead if you were being transparent and open?
A: Well, Mr Mead would not communicate with me…
Q: You could communicate with him?
A: We have tried to communicate with him on several occasions.
Q: I am just asking about this one. You were being transparent and open. Why didn’t you send this to Mr Mead and say: here’s my latest letter to Mr Mitchell?
A: Well, Mr Mead would not indicate to me …
Q: Answer my question, not why he would not communicate to you?
A: Because I decided not.
Q: And why did you decide?
A: Because I was of the view the books and records of the company could not be relied upon. The directors of the company could not be relied upon. The directors of the company could not be relied upon. We needed to get someone, a director, the accountant, to assist us, in determining the real position in terms of the proof of debt and the cross claim.”

44 On 17 September 2001, the liquidator’s solicitor wrote to the solicitors for BL & GY demanding a bank cheque in the sum of $20,000 by 11.00 am the next day. The liquidator also prepared his report. It complained that the annexure to Mr McKewen’s report had not been provided to the liquidator until 17 August 2001. The liquidator asserted it was pivotal in understanding the reconciliation process employed by Mr Mead in quantifying his cross claim. The report stated that the liquidator was in possession of additional documentation that Mr McKewen should review, being bank statements and cash books. He asserted that Mr McKewen had not analysed these documents. They would confirm the payments he relied upon or otherwise. The liquidator advised that he had found additional invoices that had not been included in the accounts receivable ledger that he attributed to purchases of computer equipment supplied to Hypec by BL & GY. He noted that the omissions had been included and corrected in the material relied upon by Mr Mead. The liquidator then analysed payments to BL & GY that could not be verified from the available bank statements or cash books and payments to BL & GY that had been presented in the bank account but the liquidator claimed required further verification. The liquidator pointed out that some cheques identified through his investigations of the directors’ loan accounts related to the directors’ personal use of the company’s funds to purchase properties. The liquidator noted that in the period up to October 1993, due to a lack of detail in the available Australian Customs Service documentation, cross referencing to bills of lading documents was not possible. He said this raised concern over the validity of the matched documentation. The report concluded that, rather than there being a case that payments made to BL & GY exceeded customs declared values by $1.3 million, his adjusted totals showed no basis for a cross claim because his verified payments to BL & GY of $0.3 million was vastly less than his adjusted customs declared values of $3.8 million.

45 The liquidator’s report was directed exclusively to the proposed cross claim. It did not deal with the merits of the assertions by Mr Mead and Mr McKewen that the default judgment should be set aside. The argument as to fraud was based upon an overstatement in the BL & GY invoices to Hypec both as to quantity and price when compared with the customs clearance documents. The explanation could not have been an attempt to reduce customs duty because at least from 1990 there was no customs duty on computer parts and the great majority of products imported by Hypec from BL & GY were duty free.

46 In cross examination, the liquidator could not explain why the discrepancy that Mr Hodgson had discovered between the balance dates in the accounts of BL & GY on the one hand and Hypec on the other was not included in his report. In preparation of his report, Mr Mead’s legal advisers had suggested that the liquidator interview Mr McKewen. That opportunity was not taken up.

47 A copy of the report was provided to Mr Mead’s legal advisers under cover of a letter that stated that if the liquidator were then asked to determine whether Hypec should apply to set aside the default judgment, he would answer in the negative:

“Given the very substantive legal expense incurred by Mr Mead in qualifying for instance Mr McKewen’s report I find it extraordinary that actual bank statements and cheques have not been examined. In this circumstances (sic) and given my attached report if I was now asked to determine whether Hypec should apply to set aside the judgment I would firmly say no. Unless examination of bank statements and cheques revealed actual payments to BY & GY then the evidence of Mrs (sic) Mead in that regard is wrong.”

48 In light of this statement, I endorse the finding of Campbell J, upheld on appeal, that there was no real likelihood that the liquidator would move to set aside the default judgment. This conclusion is enforced by the liquidator’s statement in his report, after having identified payments unable to be verified against the bank statements or cash books:

“I advise that my investigations are continuing to confirm the above matters and ultimately verify the claim made by BL against the company.”

49 It is also a matter of concern that the liquidator wrote that he would not support an application to set aside the BL & GY debt when a week earlier he was exhorting the solicitors for BL & GY to put on evidence to contradict Einstein J’s acceptance of the evidence of Mr Mead.

50 On 18 September 2001, the liquidator swore an affidavit for intended use in the proceedings before Sully J. The liquidator explained the investigations that he had carried out and attached his report of 17 September 2001. He said he wished to complete his investigations including taking whatever steps were necessary to ascertain use of company funds by Mr Mead and Lucy Mead and requested the Court to defer determination of the application pending that examination.

51 On 19 September 2001, counsel briefed by the liquidator appeared before Sully J to seek leave to be heard on the application and to be joined as a party. Sully J refused the application. The liquidator’s affidavit was then read by counsel for BL & GY.

52 Again, the liquidator did not draw to the attention the court that his funding was coming from BL & GY.

53 On 25 September 2001, Sully J set aside the default judgment and gave Hypec leave to file a defence and cross claim (BL & GY International Co Ltd v Hypec Electronics Pty Ltd (in liq) [2001] NSWSC 841).

Proceedings before Mathews AJ

54 In the course of the proceedings before Matthews AJ, counsel for BL & GY indicated that the liquidator would be called to give evidence in their case. No witness statement from the liquidator had been served on Mr Mead. By arrangement, junior counsel for Mr Mead met with the liquidator and asked what evidence he intended to give at the hearing. On advice from his solicitor, the liquidator refused to answer.

55 There is no property in a witness and any duty of confidentiality was owed to Hypec and not to its opponent, BL & GY. In cross examination the liquidator acknowledged that he knew the issues upon which he had been asked to give evidence and he did not regard himself under any obligation of confidence to BL & GY. Yet he agreed with the advice given by his solicitor that it was “out of order” for him to answer the question. In the end the liquidator was not called, but Mr Hodgson was.

56 The liquidator’s willingness to give evidence on behalf of Hypec’s opponent and his refusal to inform Mr Mead’s counsel of the burden of that evidence is, again, indicative of an association between the liquidator and the interests of Lucy Mead to the detriment of Mr Mead.

57 Meanwhile, the liquidator continued to press for the payment of the second instalment towards costs from BL & GY on 9 November 2001. That the liquidator continued to seek funds from the creditor accused of fraud, whose default judgment had been set aside, constituted a conflict of interest highly detrimental to the independence demanded of a liquidator.

58 The proceedings before Mathews AJ lasted for 15 days. In her evidence, Lucy Mead admitted falsifying entries in Hypec’s books. Her Honour entered judgment in favour of Hypec and Mr Mead on BL & GY’s claim. She set aside the default judgment against Lucy Mead and entered a verdict in her favour on BL & GY’s claim. Her Honour entered a verdict for BL & GY, Lucy Mead and Grace Yang on Hypec’s cross claim. Her Honour stood over the question of costs (BL & GY International Co Ltd v Hypec Electronics Pty Ltd [2002] NSWSC 38).

59 On 13 March 2002, the solicitors for the liquidator wrote to the Associate to Mathews AJ seeking leave to make submissions on costs. The solicitor for the liquidator subsequently appeared before Mathews AJ and handed up written submissions on costs to which the liquidator had agreed. The submissions contained the following:

“3 The Liquidator opposed the institution of proceedings by Colin Mead in the name of Hypec and the Liquidator’s position in that regard, with the benefit of hindsight, remains unchanged.
4 It is the Liquidator’s view that, in the ordinary course of the Liquidator’s investigations which the Liquidator says were obstructed by Colin Mead and those advising him, the probable outcome of the Liquidator’s investigations would have been the one that the Court has now reached.
5 Colin Mead through his solicitors and barristers obstructed the Liquidator in his independent investigations of the BL & GY claim and refused, for example, to make Colin Mead available for examination by the Liquidator.”

The submissions went on to say:

“21 In relation to the exercise of the Court’s discretion in making no costs order whatever in either the Cross-Claim or the Plaintiff’s proceedings, it is the Liquidator’s submission that, given that Colin Mead and Lucy Mead and her sister are tainted with issues of dishonesty, there should be no costs in favour of either Hypec or BL & GY or any of the parties, including Mr Colin Mead.”

60 The solicitor for the liquidator was given leave to appear on the argument as to costs before Mathews AJ but upon all parties agreeing that no order for costs would be sought either for or against Hypec, he withdrew.

61 Her Honour ordered BL & GY and Grace Yang to pay Mr Mead’s costs of the entire proceedings including the cross claims on an indemnity basis (BL & GY International Co Ltd v Hypec Electronics Pty Ltd [2002] NSWSC 575).

62 Mr Mead had succeeded in relieving Hypec of a debt in a very large amount. To suggest that he should be deprived of his costs indicated an antipathy to Mr Mead and a lack of that objectivity which is demanded of a liquidator.

63 Mr Mead and his legal advisers were not above fault. In the letter of 17 September 2001 enclosing his report, the liquidator complained that his solicitor had been told he would be kept advised of proceedings and nothing had happened. But fault on Mr Mead’s part did not justify the attitude taken by the liquidator.

64 It was submitted on behalf of the liquidator that Mr Mead knew of the discrepancy between the balance dates of the respective loan accounts in the books of BL & GY on the one hand and Hypec on the other because the Hypec general ledger for 1996 was tendered before Mathews AJ by counsel for Mr Mead. But that does not explain the earlier silence on the part of the liquidator and Mr Hodgson.

65 It was submitted that the liquidator was vindicated by Mathews AJ’s decision on the cross claim. Her Honour took the view that Mr Mead’s schedule of payments that he said were made to BL & GY was over zealous in its compilation but, more importantly, it assumed that the Hypec records as written up by Lucy Mead were accurate except when proved otherwise. It was submitted that the liquidator was justified in approving his solicitor’s submissions on costs because Mr Mead ought to have borne the consequences of his failure to take into account the liquidator’s investigations establishing the lack of integrity of Hypec’s books and accounts.

66 But the submissions went further and sought to deny Mr Mead his costs of the successful defence to the BL & GY claim. It was that submission that lacked objectivity and demonstrated a support for Lucy Mead’s interests against those of Mr Mead.

67 In early December 2001, the liquidator’s office calculated a likely income tax liability of Hypec with respect to payments wrongly claimed as expenses in an amount of $796,761.75. In addition, it was suggested that it might be concluded that Hypec would not insist on Mr Mead and Lucy Mead paying out their loan accounts such that Hypec might be deemed to have paid a dividend to them as a deemed forgiveness of debt under the Income Assessment Act 1936 (Cth), s 109F(6). The liquidator’s office estimated the tax liability of Mr Mead and Lucy Mead on this basis at $1,165,668 each.

68 The liquidator wrote to the Australian Taxation Office on 20 December 2001 suggesting an indebtedness by Hypec and its directors to the ATO of $3,566,492.

69 On 22 January 2002, the ATO lodged an amended proof of debt in the sum of $796,961.75.

70 It was submitted on behalf of the liquidator that it was entitled to criticise Mr Mead and make the submissions on costs because he had an obvious concern that Hypec’s assets were being dissipated and he sought to protect that position.

71 I fail to see how the liquidator’s conduct in relation to the ATO advanced that position. No doubt it was important to clarify Hypec’s liability to tax. But to take the additional step and suggest that the Commissioner might raise assessments against its directors was, to say the least, officious. I fail to see any relevance of this course of conduct to the liquidator’s submission that Mr Mead should have been deprived of an order for costs.

72 In the course of hearing the appeal from the decision of Campbell J, Ipp JA made the following comment:

“The inference I draw from all of this is the liquidator was more interested in acting to prejudice Mr Mead that (sic) promoting the interests of the company. That is a very serious thing, especially when it seems on the evidence he is being paid by someone who has the interest of Mrs Mead at heart. It is a very serious thing.”

73 It was submitted on behalf of the liquidator that the Court of Appeal did not have the liquidator’s full submissions on costs made to Mathews AJ. Mr Mead said they did. The liquidator submitted that the Court of Appeal was not aware that the liquidator had withdrawn so soon as his interests were protected. Nor was it aware of the events preceding the making of the submissions. It was submitted that, in consequence, the remarks of Ipp JA should be disregarded.

74 I have had the benefit of the surrounding circumstances and the submissions of counsel on the liquidator’s behalf. I endorse the remarks.

Proceedings before Campbell J

75 On 2 November 2001, Cohen J of the Family Court discharged injunctions to enable up to four identified properties to be sold to raise after payment of costs the sum of $375,000 to meet Mr Mead’s future costs of conducting the proceedings on behalf of Hypec and such of his earlier costs as did not exceed $375,000 with any balance being shared equally to meet Mr Mead’s debts and Lucy Mead’s debts (Mead v Mead, unreported, Fam C of A).

76 The proceedings before Mathews AJ concluded on 26 November 2001. On 4 December 2001 and 11 December 2001, the liquidator lodged caveats on various properties registered in the names of Mr Mead and Lucy Mead including the four properties the subject of the orders of Cohen J.

77 On 25 January 2002, the liquidator commenced the proceedings that were ultimately heard by Campbell J. He sought orders for transfer of the properties into the name of Hypec. With respect to the four properties, Mr Mead raised an estoppel based upon the allegation that the liquidator allowed him to incur legal expenses in the proceedings before Mathews AJ in the belief that he would be entitled to sell the four properties to pay the costs. He also raised the argument based on the principle in Ex parte James; Re Condon (1874) LR 9 Ch App 609 that it would be unfair for the liquidator to recover the proceeds of sale of the four properties because, by Mr Mead’s efforts and his incurring of legal expenses, Hypec obtained the very large benefit of being freed from the BL & GY debt.

78 Campbell J found in favour of Mr Mead on both grounds and excluded the four properties from orders, largely by consent, in favour of the liquidator.

79 The liquidator swore an affidavit in the proceedings explaining his lack of intervention in the proceedings before Cohen J. He said he had not been informed of the proceedings nor served with any of the documents pertaining to it.

80 In later proceedings as to costs (Hypec Electronics Pty Ltd (in liq) v Mead (2004) 50 ACSR 448 at [147], Campbell J said that the affidavit involved a misstatement by the liquidator of his own state of mind, on a topic of central importance to the estoppel case. The liquidator had been provided with the affidavit that Mr Mead swore in the Family Court proceedings and he was informed of the date of the application before the Family Court and was provided with the then current application.

81 In the proceedings as to costs, Campbell J went on to say that he was not prepared to find that the errors in the affidavit arose as a consequence of anything other than the taking of insufficient care. I was invited to form a different view.

82 The liquidator was cross examined and maintained that the affidavit stated his then belief. While it is difficult to imagine that the liquidator would have forgotten receipt of the documents, I am not prepared to find that the affidavit was falsely sworn.

83 The liquidator also opposed relief under the principle in Ex parte James. Campbell J found that it was not a proper exercise of the liquidator’s discretion to accept the benefit of the judgment that Mr Mead had obtained in Hypec’s name, while not accepting the burden of that part of the costs that Mr Mead claimed in the proceedings before him. His Honour said that the liquidator’s attempt to do so was a clear case of pressing a claim that had no merit (202 ALR 688 at [189]).

84 Of this opposition by the liquidator, Tobias JA with whom the other members of the Court of Appeal agreed said ([2004] NSWCA 221 at [79]):

“In the foregoing circumstances it lies ill in the mouth of the liquidator, having stood by whilst to his knowledge Mr Mead prosecuted the common law proceedings to a successful conclusion at what was obviously significant cost, to assert that Mr Mead was, by resisting the liquidator’s claim to the four properties, conducting himself in a manner which was either inconsistent with his stance before Einstein J or in breach of the undertaking which he had given in the leave proceedings. In my opinion the opposite of these contentions is the truth of the matter. The liquidator’s submissions are, with respect, devoid of merit and should be rejected.”

85 It was submitted on behalf of the liquidator that in the proceedings as to costs before Campbell J, his Honour noted (50 ACSR 448 at [119]) that the liquidator accepted that in principle Mr Mead was entitled to a costs order against the company in connection with the estoppel issue and the Ex parte James issue. But that does not explain why the liquidator opposed the exclusion of the four properties from his original claim before Campbell J.

86 It was submitted that the liquidator acted upon advice of, amongst others, the Honourable Tom Hughes QC, in resisting the estoppel claim and the Ex parte James claim. While Campbell J in the costs proceedings said the evidence as to this advice was not fully satisfactory, his Honour accepted that the liquidator received advice in conference from Mr Hughes and received other advice. The nub of the advice was that the liquidator should persist with the litigation (50 ACSR 448 at [132]). His Honour concluded that there should be no personal costs order against the liquidator nor an order on an indemnity basis.

87 Some aspects of the estoppel defence were not pressed by Mr Mead at the hearing. This drew the comment from Campbell J (50 ACSR 448 at [141]) that the pleaded defence contained elements that it was reasonable for the liquidator to oppose. His Honour concluded that the liquidator was acting reasonably in opposing the estoppel claim (at [142]). At [156] his Honour said:

“In circumstances where there is no attack on the bona fides of the liquidator in having run the litigation, the findings to which Mr Fagan points are not ones which show that there is any improper conduct, in the Beddoe sense, in the liquidator’s conduct of the litigation. The fact that he has lost the litigation concerning the four properties, on the grounds on which he lost it, does not mean that he has fallen short of the standards of conduct which the court expects of liquidators. The fact that, in exercise of its supervisory jurisdiction, the court has held that the liquidator’s claim to the four properties is one which a liquidator, acting fairly, ought not make, does not mean that there was the sort of impropriety which attracts a personal costs order in making the claim.”

88 It was pointed out that affidavits of the liquidator, Mr Hodgson and Mr Conolly were read in the proceedings before Campbell J on costs. It was submitted that the observations of Tobias JA should be read in the context that the Court of Appeal did not have that material nor the transcript of proceedings before Mathews AJ. That material was, however, before me and I take a similar view to that of Tobias JA.

89 The fact that the liquidator persisted in his opposition to the estoppel and the Ex parte James arguments on legal advice did not exonerate him from his past conduct. He had consistently opposed Mr Mead. That he could do so again on legal advice, augmented that conduct.

Proceedings before Cohen J

90 On 25 November 2003, Campbell J dealt with rival short minutes of orders arising from his judgment of 3 November 2003. The liquidator sought orders that the four properties or their proceeds of sale should pass through the liquidator’s hands. Campbell J rejected this approach, holding that the effect of the equities of estoppel and the principle in Ex parte James was, that in the eyes of equity, Mr Mead had a better title to the four properties than did the company (Hypec Electronics Pty Ltd (in liq) v Mead, unreported, NSWSC, 25 November 2003).

91 On 28 November 2003, Mr Mead and Lucy Mead appeared before Cohen J on a directions hearing with respect to Mr Mead’s application to vary his Honour’s orders of 2 November 2001. The liquidator, by counsel, sought leave to intervene and informed Cohen J that contrary to his understanding the properties belonged to Hypec and not to Mr Mead and Lucy Mead:

“Mr Greenwood: Yes, can I tell you why we’re here, and it’s almost as an amicus-type role. The matter was presented before your Honour in October 2001 as if all these properties belong to the husband and the wife.
His Honour: That’s what I was told.
Mr Greenwood: That’s right. In fact, they belong to the company.
His Honour: Well, nobody bothered to tell me.
Mr Greenwood: No, and it seemed to us that the two critical things, as your Honour wasn’t informed, and these I think can be said in a way that’s quite clearly they’re not contentious, is that both these – the husband the wife held all these properties that your Honour dealt with on trust for the company at the time. And that as a result of the way in which the husband and wife conducted themselves, the tax office was entitled to a very significant amount of money. Those things were matters that we submit should have been brought before your Honour at the relevant time. Unfortunately because they weren’t it’s quite clear, we would say, from your Honour’s judgment, that your Honour dealt with them on the basis that the only people interested in these properties that were seemingly unencumbered, were the husband and wife.”

92 In his judgment of 3 November 2003, Campbell J did not accept that there was any failure to make proper disclosure to the Family Court of the liquidator’s position concerning the four properties (202 ALR 688 at [113]).

93 On 10 December 2003, Mr Mead obtained from Campbell J an order that the liquidator make no further intervention in, or application in, the Family Court proceedings (BL & GY International Co Ltd v Hypec Electronics Pty Ltd (in liq), unreported, NSWSC, 10 December 2003). His Honour concluded that there was no legitimate purpose for the liquidator intervening in the Family Court:

“I can, on the evidence at present before me, see no legitimate purpose for the liquidator intervening in the Family Court. The material which the liquidator says should be placed before the Family Court is material which Mr and Mrs Mead are perfectly capable of placing before that court. I see no reason why the liquidator ought to spend the money of the creditors and contributories by intervening in that particular matrimonial dispute.”

94 The liquidator sought leave to appeal from this decision. That application was heard by the Court of Appeal at the same time as it heard the appeal from the decision of Campbell J of 3 November 2003. Leave to appeal was refused. The liquidator had not demonstrated that Campbell J’s discretion to control the liquidator’s exercise of power under the Corporations Act 2001 (Cth), s 477 had miscarried in accordance with the well known principles in House v The King (1936) 55 CLR 499 at 505 ([2004] NSWCA 221 at [111]).

95 In cross examination, the liquidator said he believed he checked the reasons for judgment of Campbell J of 3 November 2003 before the application to intervene in the proceedings before Cohen J. He was aware of the finding with respect to disclosure to the Family Court but believed that not all information had been brought to light before Campbell J.

“Q: Before this went down, did you check Campbell J’s judgment to see what he had said on the matter?
A: I don’t know whether Campbell J’s judgment -
Q: Issued on 3 November, I am talking before, a date, before Cohen J on 28th. When they told you that what was proposed to be put before Cohen J did you check to see what Campbell J had said on that?
A: I believe so.
Q: Did you not see material non-disclosure (sic) to the Family Court on the relevant date?
A: Presumably I did.
Q: Could you have approved properly Mr Conolly instructing counsel to go down there to put that before Cohen J on the 28th?
A: I think, I believe that not all information had been brought to light in the Campbell matter about ownership of assets, which were entitled to be returned to the company and this was the basis of it and Mr Conolly and Mr Greenwood were very strongly of the view that they should approach the Family Court. I had been instructed by a silk and very experienced legal practitioner.
Q: The substance was what Campbell J had said on the subject matter was itself unsoundly based, was your view. Isn’t that what you meant, not all material had been brought before Campbell J?
A: I am not certain all evidence was admitted or could be admitted.”

96 The object of the exercise must have been to influence the Family Court to set aside its earlier judgment. The four properties, to the knowledge of the liquidator, were the only sources of funds for Mr Mead’s conduct of the proceedings on behalf of Hypec. To seek to cut off that source of funds demonstrated, at the least, a lack of objectivity on the part of the liquidator.

Proceedings before the Court of Appeal

97 The persistence of the liquidator in appealing from the decision of Campbell J of 3 November 2003 and his seeking leave to appeal from his decision of 10 December 2003, is a relevant consideration. There could be no question raised against the liquidator if he acted in accordance with the decision of a single judge of the court. That he sought to set aside the decisions is consistent with his pattern of behaviour against the interests of Mr Mead and in favour of those of Lucy Mead from whom his funding came.

98 Advice with respect to the appeal was taken from a number of counsel. Ultimately the advice of Brian Rayment QC to proceed with the appeal was accepted. Similar considerations to those with respect to the legal advice to persist with the opposition to Mr Mead taking the four properties apply here. The fact that the liquidator had advice to proceed with the appeal did not exonerate the liquidator’s pattern of behaviour towards Mr Mead.

99 Campbell J found no case of non-disclosure to the Family Court by Mr Mead. He also found that Mr Mead had a better title to the four properties than did Hypec. The liquidator’s submission to Cohen J on 28 November 2003 was in opposition to those findings. If the purpose was to attempt to adduce evidence before the Family Court that had not been adduced or could not have been adduced before Campbell J, the purpose was to circumvent his judgment. And all this at the expense of the only creditor, the ATO and, if there was ultimately a surplus, at the expense of Mr Mead and Lucy Mead as the only contributories.

100 In my view, the application for leave to appeal from the decision of Campbell J restricting the liquidator from further intervention in the Family Court was totally unmeritorious and a further waste of the assets of Hypec.

Other matters

101 On 25 January 2002, the solicitors for the liquidator sought the advice of junior counsel for BL & GY on a draft summons and notice of motion. That retainer clearly lacked the appearance of a seeking of independent legal advice by the liquidator.

102 The liquidator had been provided with material that suggested that Hypec Information Technology Services Pty Ltd, with the assistance of Lucy Mead, might have taken over the business of Hypec without consideration. The question whether a claim for breach of fiduciary duty might be raised against Hypec Information was raised with the liquidator by the solicitors for Mr Mead. Mr Hodgson said in cross examination that he was unaware of any step taken by the liquidator to make a claim against Hypec Information. Any such claim may now be barred under the Limitation Act 1969.

103 It was submitted on behalf of the liquidator that at a meeting of 2 December 2002, Mr Mead undertook to provide a written statement as well as a written statement from a second witness who was an ex-employee of Hypec Information, but those statements were not provided. That failure, however, could not absolve the liquidator from his duty to investigate whether the business of Hypec had been taken over by Hypec Information without consideration.

104 It was submitted that the documents provided to the liquidator did not constitute compelling evidence of a breach of fiduciary duty. I beg to differ.

105 In her affidavit in the Family Court proceedings sworn on 13 August 1998, a copy of which had been provided to the liquidator, Lucy Mead stated that Hypec Information was incorporated on 9 January 1997 with her sister, Grace Yang, and her mother as the directors. It continued to operate from the business premises used by Hypec. Lucy Mead described herself as an employed operations manager.

106 The liquidator was also provided with a copy of a document of 25 September 1997 signed by Lucy Mead. The document had a logo in the name of Hypec, the name of Hypec Information and the address formerly used by Hypec at its head. It was in the following terms:

“To whom it may concern
Re: Payments to Hypec ITS
Please note that the company name has changed to Hypec Information Technology Services Pty Ltd (Hypec ITS) and all future payments will need to be made to this company name.
Thank you for your past business, and we look forward to doing more in the future.
Yours sincerely
Lucy Mead
Manager.”

107 There was, in my opinion, sufficient information in those two items alone to warrant an investigation as to whether the goodwill of Hypec had been taken over by Hypec Information.

108 In his affidavit sworn in the Family Court proceedings on 12 February 2001, Mr Mead referred to a contract for the supply of computer equipment to schools in New South Wales held by Hypec Technology Group Pty Ltd. Mr Mead alleged that Lucy Mead had directed that payments under the contract be made to Hypec Information.

109 It was submitted on behalf of the liquidator that any breach of fiduciary duty was committed against Hypec Technology rather than Hypec. But the one did not exclude the other and, indeed, that there was evidence that Hypec Information had taken over an asset of Hypec Technology made it even more desirable to investigate whether a similar course of conduct had been perpetrated upon Hypec.

110 The submission on behalf of Mr Mead that the liquidator demonstrated an intransigence was met by the submission on behalf of the liquidator that it was Mr Mead who was intransigent. There was a demonstrable degree of animosity on both sides in the material before me. But the issue is not one of attribution of blame but rather whether the conduct of the liquidator was such that he should be removed from office.

111 An issue as to the costs of the solicitor for the liquidator was raised by Mr Mead during the hearing. The submission was that the work in progress records of the solicitor did not justify representations as to the level of his costs in correspondence. I do not place any weight on this material. The schedule devised from the material was not investigated by Mr Conolly. In any event, he said that his firm had not yet rendered any fees. That would be done at a later stage.

Principles governing removal

112 The Corporations Act 2001 (Cth), s 473(1) provided that a liquidator appointed by the court might resign or, on cause shown, be removed by the court.

113 Bowen LJ pointed out in Re Adam Eyton Ltd; Ex parte Charlesworth (1887) 36 Ch D 299 at 306 that “cause shown” is to be measured by reference to the real, substantial, honest interests of the liquidation and fair play to the liquidator must not be left out of account:

“In many cases, no doubt, and very likely, for anything I know in most cases, unfitness of the liquidator will be the general form which the cause will take upon which Court in this class of case acts, but that is not the definition of due cause shewn. In order to define “due cause shewn” you must look wider afield, and see what is the purpose for which the liquidator is appointed. To my mind the Lord Justice has correctly intimated that the due cause is to be measured by the reference to the real, substantial, honest interests of the liquidation, and to the purpose for which the liquidator is appointed. Of course, fair play to the liquidator himself is not to be left out of sight, but the measure of due cause is the substantial and real interest of the liquidation.”

114 In City & Surburban Pty Ltd v Smith (1998) 28 ACSR 328 at 336, Merkel J pointed out that it has long been accepted that removal was not confined to situations where it was established that there was a personal unfitness, impropriety or breach of trust on the part of the liquidator:

“Cause is shown for removal whenever the court is satisfied that it is for the better conduct of the liquidation or, put another way, it is for the general advantage of those interested in the assets of the company that a liquidator be removed.”

115 In Domino Hire v Pioneer Park (2003) 21 ACLC 1330 at 1340, Austin J pointed out that “cause shown” was not a narrow concept:

“It is open to the applicant for removal to point to any conduct or inactivity on the liquidator’s part that provides a basis for the conclusion that he or she should be removed, ranging from moral turpitude to bias or partiality, lack of independence, incompetence or other unfitness for office. But the concept of “cause shown” is not limited to matters relating to the unfitness of the liquidator to hold office.”

His Honour went on to quote the above passage from Adam Eyton .

116 In Re Giant Resources Ltd (1991) 1 Qd R 107 at 115, Ryan J posed the issue as the substantial and real interest of the liquidation requiring or justifying the removal.

117 Where, as here, a course of conduct is relied upon, it is not necessary to go through each particular of misconduct on which reliance is placed and determine if each is made out. As Young J said in Re Biposo Pty Ltd; Condon v Rodgers (1995) 17 ACSR 730 at 734:

“The question is not whether in adversarial litigation there has been proof of a case according to the heads particularised, not as to the rights of the liquidator, but rather whether in the interests of the public the removal of the liquidator would be for the general advantage of persons interested in the winding up?”

118 One of the frequent reasons for seeking removal is the liquidator’s association with one lot of interests to the detriment of impartiality. Biposo was such a case. His Honour went on at 736 to say that the court had to look at the overall picture to determine whether there was a tendency to favour some interests at the expense of others:

“What the court has to do is to make up its mind by looking at the overall picture, whether there is a manifested tendency of the liquidators to favour certain interests at the expense of others. If there is that perception, and if in the eyes of a reasonable observer there is not the carrying on of the liquidation to the general advantage of the persons interested in the winding up, then the court might act. Indeed, the cases have stressed over and over again that not only must there be independence in the winding up, that there must be seen to be independence.”

Conclusion

119 In my view, when one looks at the overall picture in this case, there was a clear tendency on the part of the liquidator to favour the interests of BL & GY and Lucy Mead.

120 The liquidator was incensed by Mr Mead’s failure to lodge the report as to affairs or to discuss with him Mr Mead’s concerns over the probity of the default judgment. He failed to investigate properly Mr Mead’s contentions and thereafter set a course consistent with the partial view that Mr Mead was interfering in his administration and ought to be opposed.

121 The persistent opposition to Mr Mead’s proceedings before Einstein J, before Sully J and before Mathews AJ stand out as a favouring of the interests of Lucy Mead at the expense of Mr Mead. His appearance before Mathews AJ at the costs hearing and his submission that Mr Mead should not have an order for costs after he had freed Hypec of an enormous debt indicates how far the liquidator had gone in his determined opposition to the interests of Mr Mead.

122 That perception is enforced by the liquidator’s opposition before Campbell J to the exclusion of the four properties, the subject of earlier order by Cohen J in the Family Court, from the recovery of properties by Hypec.

123 The liquidator’s appearance by counsel before Cohen J must have been for the purpose of encouraging Cohen J to vary his earlier order thereby denying Mr Mead access to the only funds available to him to pay the costs of the proceedings successfully taken by him on behalf of Hypec.

124 The liquidator’s opposition to the further application before Campbell J to restrict his powers to prevent him from further intervening in the Family Court underlines the extent to which his opposition to the interests of Mr Mead had taken him. That favouring of the interests of Mrs Mead continued in the liquidator’s appeal and leave to appeal application from the orders of Campbell J.

125 This lack of impartiality was exacerbated by the liquidator’s reliance upon Lucy Mead’s interests to pay his costs.

126 It was submitted on behalf of the liquidator that the receipt of funds from a creditor for the purpose of conducting a liquidation was unexceptional. Reference was made to Re Allebart Pty Ltd (in liq) (1971) 1 NSWLR 24 at 28. But Street J there raised the caution that the liquidator’s independence must be preserved:

“Where he draws upon financial assistance from a creditor, it is incumbent upon him to ensure that he does not place in jeopardy his independence in the discharge of his duties. It is indispensable that in point of substance the liquidator’s independence should be preserved; and it is undesirable that a liquidator should permit a situation to develop in which it might appear that he has yielded up in any degree whatever his exclusive independent control in the decision-making processes and administration of a winding up.”

127 Furthermore, it must have been apparent to the liquidator when serious allegations of fraud were raised against BL & GY that his continued funding by it would jeopardise his independence. He chose to maintain his association with BL & GY and to refrain from informing Mr Mead or the court of his source of funds.

128 The liquidator’s failure to draw to the attention of the court or Mr Mead the further basis for asserting fraud on BL & GY’s part because of the different alleged balance dates of the debt said to be due by Hypec was further evidence of the liquidator’s lack of impartiality.

129 The same may be said of the liquidator’s assertion that in the fullness of time he would have moved to set aside the default judgment when that was highly unlikely to have been the course taken by him.

130 The liquidator’s favouring of the Lucy Mead interests was further exacerbated by his failure to investigate the charge that the goodwill of Hypec had been taken over by Hypec Information without consideration. In City & Surburban the failure of a liquidator to properly investigate a transaction was regarded as a serious and significant omission on his part.

131 The liquidator’s urging of the solicitors for BL & GY to put on evidence to rebut that of Mr Mead after he had been given leave by Einstein J to move to set aside the default judgment on behalf of Hypec was, in my view, an extraordinary abandonment of the impartiality demanded of a liquidator. The same may be said of the liquidator’s willingness to give evidence on behalf of BL & GY before Mathews AJ but not to disclose the nature of that evidence to counsel for Mr Mead.

132 The liquidator placed emphasis upon his forewarning of the fate of the cross claim, found to be untenable by Mathews AJ. the liquidator was correct in indicating to Mr Mead that his reliance upon the books of Hypec for that purpose, which Mr Mead alleged had been fraudulently prepared by Mrs Mead, was unlikely to lead to success. By concentrating on the cross claim, however, the liquidator excluded any consideration of Mr Mead’s allegations with respect to BL & GY’s default judgment. And it was the setting aside of the default judgment and the ultimate defence to the claim by BL & GY that was of primary concern to the fate of the liquidation and the prospect of the contributories sharing in a surplus.

133 The other aspect of the matter upon which the liquidator placed emphasis was the subsequent hearing as to costs by Campbell J. His Honour refused to order indemnity costs or to order costs against the liquidator personally. That was said to counteract the criticism that had been levelled against the liquidator by Campbell J in the earlier proceedings and by the Court of Appeal.

134 Campbell J was dealing with the costs of proceedings by the liquidator to obtain for the benefit of Hypec properties that were said to have been paid for with Hypec funds. What Mr Mead ultimately sought was the exclusion of the four properties the subject of Cohen J’s orders from that recovery. The liquidator was substantially successful. He failed with respect to the exclusion of the four properties. In that context it is understandable that Campbell J formed the view that he did. It was said that the criticisms of the Court of Appeal should be set to one side because there was additional information tendered in the costs proceedings before Campbell J. That additional material did not, in my view, remove the justified criticisms that had been levelled at the liquidator by Campbell J in his previous judgment and by the Court of Appeal on appeal from him.

Proposed orders

135 I propose to make an order for the removal of the liquidator and the appointment of his replacement. I propose to order that the liquidator personally pay Mr Mead’s costs of the proceedings.

136 Mr Mead also sought an order that there be an inquiry as to the amount of loss sustained by Hypec as a result of the misconduct of the liquidator in the performance of his duties. The liquidator submitted that Mr Mead did not have the standing to seek such an order. I will hear the parties on that issue. I will hear the parties on appropriate terms of orders including the appropriate form of the costs order. I direct the parties to bring in short minutes of orders reflecting my reasons.

**********

Last Modified: 12/10/2004