Boral Resources (SA) Ltd v Rick Martin Nominees Pty Ltd (No 2)

[2012] SASC 192

SUPREME COURT OF SOUTH AUSTRALIA

(Civil)

BORAL RESOURCES (SA) LTD  v  RICK MARTIN NOMINEES PTY LTD (No 2)

[2012] SASC 192

Reasons of Judge Lunn a Master of the Supreme Court

18 October 2012

CORPORATIONS

Corporations – application to wind up company for insolvency – dispute on who is to be appointed as liquidator – after originating process issued company placed into administration and then wound up by a resolution of its creditors – motion at creditor meeting to appoint nominee of plaintiff as liquidator defeated and administrator left as liquidator – deducing wishes of creditors from analysis of voting at the meeting – other factors on exercise of Court’s discretion – held existing liquidator to be appointed as liquidator on order for winding up by the Court – back-dating of the commencement of the winding up.

BORAL RESOURCES (SA) LTD  v  RICK MARTIN NOMINEES PTY LTD (No 2)
[2012] SASC 192

JUDGE LUNN:

Reasons on appointment as liquidator

Definitions

1. In these reasons:

   “The company” is the defendant, Rick Martin Nominees Pty Ltd;
   “Boral” is the plaintiff, Boral Resources (SA) Pty Ltd, which is the second to largest unrelated creditor of the defendant and is owed about $604,227;[1]
   “RGM” is Ricky Gordon Martin, who until its winding up was the sole director and the secretary of the company;
   “HSM” is Hugh Sutcliffe Martin, a chartered accountant and an official liquidator, who has been the administrator and the liquidator of the company;
   “DRM” is Desmond Robert Munro, a chartered accountant and an official liquidator, who is Boral’s nominee to be the liquidator of the company;
   “Milagro” is Milagro Pty Ltd, which is a company associated with RGM and which is a creditor of the company for at least $1,056,345;
   “ATO” is the Australian Taxation Office, which is a creditor of the company for $632,328.

   [1]    In these reasons all monetary amounts are stated only in terms of dollars and ignoring any additional cents.

   Background history

2. On 15 June 2012 Boral instituted this action seeking the winding up of the company on the grounds of its presumed insolvency by reason of its failure to comply with a statutory demand for $368,082 served on it by Boral.  WorkCover SA, a creditor of the company for $228,118, filed a notice supporting the application for the winding up of the company.

3. At the first hearing in this action on 17 July 2012 a solicitor for the company, against the opposition of Boral, obtained an adjournment for the company to pursue further finance.  The hearing was adjourned to 31 July 2012.

4. On 30 July 2012 HSM was appointed to be the administrator of the company pursuant to s 439A of the Corporations Act 2001 (“the Act”).  Persons associated with RGM indicated to HSM that they would be prepared to put forward a guarantee which would be the basis of a DOCA[2] to enable the company to continue to trade.

   [2]    Deed of Company Arrangement.

5. At the hearing on 31 July 2012 HSM attended in person as the administrator and sought an adjournment so that he could continue to investigate the affairs of the company and to hold a first meeting of the creditors in the administration on 7 August 2012.  This was opposed by Boral.  I granted the adjournment until 7 August 2012 and immediately after the first meeting of creditors had been held.

6. On 7 August 2012 HSM reported to the first meeting of creditors on the arrangements which he was making for the sale of the company’s assets and that there were ongoing negotiations with RGM and his associates concerning a DOCA.  Mr Stewart, the proxy for Boral at that meeting, moved that HSM be replaced as administrator by DRM, but the motion was defeated with six creditors totalling $900,354 voting in favour and 57 creditors totalling $2,637,188 voting against it.[3] Boral did not take any legal action under ss 600A-600C of the Act to challenge the defeat of this motion.

   [3]    The motion was seconded by the proxy for the ATO, but the ATO then voted against the motion. Those voting against the motion included Milagro and others associated with RGM.

7. At the hearing before me later on 7 August 2012 HSM applied for a further adjournment until after the second meeting of creditors to enable a DOCA to be formulated and voted upon.  This was opposed by Boral.  I adjourned argument on the application until 15 August 2012.  After hearing extended argument I reserved my decision.  On 24 August 2012 I delivered my decision[4] and adjourned the hearing until 12 September 2012.

   [4]    My reasons are FDN 13.

8. On 24 August 2012 HSM had sent to the creditors his administrator’s report and the proposals for a DOCA[5].  In that report HSM recommended acceptance of the DOCA.

   [5]    The proposal evolved and changed over a period of time but their details are not relevant.

9. The second meeting of creditors was held on 3 September 2012 pursuant to s 439A of the Act. HSM acted as chair of the meeting. It was attended by 41 creditors in person or by proxy and a number of observers. For voting purposes HSM admits the debts of the creditors for varying amounts with the total value of the debts being $3,152,848. No issue has been taken with the amounts for which each of the creditors were admitted to vote. At the meeting the proxy for the ATO indicated that the company’s debt to the ATO had been substantially understated in the company’s records and in the administrator’s report. In the discussion about the DOCA, HSM informed the meeting that his view about it had changed, apparently at least in part because of the increased ATO debt, and that he no longer supported it. The motion for the acceptance of the DOCA resulted in a tied vote with no sufficient majority in number and of value in favour of, or against, it. HSM then exercised his casting vote against the motion and it was lost.[6]

   [6]    This defeat of that motion has not been challenged.

10. A motion was then moved by the proxy for the ATO and seconded by Mr Gormlie, the proxy for Boral, that the company be wound up. Again the voting of the meeting on this motion was tied on similar grounds to the previous motion. HSM exercised his casting vote in favour of the motion. By virtue of s 499(2A)(b)(i) of the Act this meant that HSM, as the former administrator of the company, thereby became its liquidator.

11. A motion was then moved by Mr Gormlie, the proxy for Boral, and seconded by Mr Stewart, the proxy for Holcim Australia Pty Ltd (but he was also an employee of Boral) that HSM be replaced as the liquidator of the company by DRM.  The voting on this resolution was tied.[7]  HSM exercised his casting vote against the motion.  Thus HSM remained as the liquidator of the company on its voluntary winding up.

    [7]    The details of the voting will be dealt with in more detail later.

12. On 11 September 2012 Boral filed an interlocutory process in this action seeking, inter alia, in the alternative to the Court liquidation of the company that HSM be removed as the liquidator of the company and be replaced by DRM. This application was made under s 503 of the Act.

13. The contributories of the company, and their associates including those who would have been parties to the DOCA, have not taken any part in this action.

14. At the final hearing of this action on 26 September 2012, Boral pressed for an order for a Court liquidation of the company with DRM to be its liquidator.  In the alternative, if the voluntary liquidation was to continue, it sought an order that DRM be appointed as the liquidator in place of HSM.  Apart from a subsidiary issue about the date of the relation back for the commencement of the winding up, the argument focused on whether HSM or DRM should be the liquidator of the company.  The insolvency of the company was not disputed and no one submitted that it should not be subject to some appropriate form of winding up.

    The law

15. There is no difference in principle on who the Court will appoint to be a liquidator of a company where the Court is either making the winding up order and appointing a liquidator as an adjunct to it, or exercising its jurisdiction under s 503 of the Act to remove a liquidator in an existing liquidation.[8]  Insofar as there may be some difference on which party bears the onus of proof, it is of no relevance in this matter.  There is no onus on Boral to show that HSM should be removed, or not be appointed, as liquidator.

    [8]    Citrix Systems Inc v Telesystems Learning Pty Ltd (1998) 28 ACSR 529.

16. Boral is correct in its submission that in relation to an insolvent company, its controllers should not be allowed to nominate, or engineer, who is to be appointed as its liquidator. However, I also accept the defendant’s submission that in relation to insolvent companies which go into administration and are subject to Part 5.3A of the Act, it is the operation of the Act, rather than any act of the controllers, which determines who is to be the liquidator. Under s 446A of the Act a meeting of creditors in the administration can place the company into voluntary liquidation. Under s 499(2A) the company’s creditors at that same meeting may appoint a person to be the liquidator of the company, but, if such an appointment is not made at that meeting, the administrator becomes the liquidator of the company. That is what occurred here at the second creditors meeting on 3 September 2012.[9]

    [9] The procedure adopted at that meeting did not quite accord with s 499(2A) in that it was incorrectly assumed that HSM would be the liquidator by virtue of him having been the administrator, but the defeat of the motion to replace HSM with DRM was to the same effect, and the difference is only technical. Boral did not challenge the defeat of that resolution under ss 600A-600C of the Act.

17. My previous decision in CSR Building Products Ltd v Jayvue Pty Ltd,[10] which was relied upon by Boral, is distinguishable.  In that case there was no bona fide reason established for the director to have appointed an administrator other than to influence who would be appointed by the Court to be the liquidator. Here, there were proposals for a DOCA which required the Part 5.3A provisions of the Act to be implemented.

    [10]   30 May 2008, Action No. SCCIV-08-354.

18. In deciding who should be the liquidator of a company, the Court looks at what is for the general advantage of those interested in the assets of the company.[11]  In an insolvent company this focuses on what would be in the best interests of the creditors as a whole.  For this purpose the Court will endeavour to ascertain the wishes of those creditors, although their wishes are not necessarily determinative of who should be appointed.[12]  I need to explore whether those wishes of the creditors can be deduced from what occurred at the second creditors’ meeting on the motion to replace HSM as the liquidator by DRM.  Of the 41 creditors represented at that meeting, who were voting in respect of debts totalling $3,152,848, seven, who were admitted to vote for $1,147,402 were related parties to RGM (“the related creditors”). The largest non-related creditor, the ATO, for a debt of $632,328, abstained from voting.  Five creditors, admitted to vote for $926,325, voted for the motion.  HSM held seven proxies from unrelated creditors which were admitted to vote for $322,104 and which were exercised by him against the motion.  RGM, who held 12 proxies from unrelated creditors and who were admitted to vote for $8,852, also voted against the motion.  There were eight creditors present in person or represented by proxies other than HSM or RGM, who were admitted to vote for $86,799, who voted against the motion.

    [11]   Citrix Systems Inc v Telesystems Learning Pty Ltd, above, at 536; Advance Housing Pty Ltd v Newcastle Classic Developments Pty Ltd (1990) 14 ACSR 230.

    [12]   Re George A Bond & Co Ltd (1932) 32 SR (NSW) 301; Re Greight Pty Ltd (in liq); Handberg v Cant (2006) 56 ACSR 334

19. Even if all of the votes of the related creditors and the proxies held by HSM and RGM are excluded, the motion would still have been tied because not only would there have been five creditors for $926,325 voting in favour of the motion, there would have been eight creditors for $86,799 voting against it.  Thus there was not a majority in number of the creditors sufficient to carry the motion.  If votes against the motion exercised by HSM and RGM on their proxies for unrelated creditors are added in, the number of voters against the motion increases from eight to 27.

20. Although he was entitled to do so,[13] it is irrelevant that HSM exercised his casting vote to defeat the motion.  By Regulation 5.6.2(4)(c), if HSM had not exercised his casting vote, the motion was also lost.

    [13]   Commonwealth Bank of Australia v Fernandez (2010) 81 ACSR 262.

    Voting by HSM on general proxies

21. HSM held proxies for seven unrelated creditors.[14]  Their proxy forms are not in evidence.  If they followed the proforma proxy which was sent out with the papers for the meeting, they impliedly gave the proxy holder a general discretion to vote as he saw fit on any resolution to change the liquidator.  HSM voted on these proxies against his removal as liquidator.  I assume on the presumption of regularity that the form of the proxies empowered him to do so.  Boral has not challenged it.

    [14]   He also held a proxy for RGM for his personal debt even though RGM was at the meeting, but this proxy is ignored in these figures.

22. HSM was entitled to vote on such general proxies as he saw fit.[15] In relation to motions under s 436E(4) of the Act for the removal of an administrator at a first meeting of creditors, an administrator is entitled to exercise any general proxies granted to him against his removal.[16] The same Regulations under the Act apply to second meetings of creditors in an administration as applied to first meetings of creditors. In this case it means that an administrator can exercise his general proxies against a motion for his removal as liquidator. Boral did not seek to challenge the defeat of the resolution to replace HSM under ss 600A-600C of the Act on any ground that HSM had improperly voted against the motion on these proxies. As these creditors had given their proxies to HSM it can reasonably be inferred that they had confidence in him to act properly on their behalf and that they had no objection to him being the administrator, any DOCA manager or the liquidator of the company.

    [15]   Maylor Equity Management Pty Ltd v Reeltime (2008) 26 ACLC 1176.

    [16]   Re Builders Associated Pty Ltd, ex-parte Lord (2001) 39 ACSR 1.

    Inference on the wishes of the creditors

23. As there is unlikely to be enough money in the liquidation of the company to pay all of the priority creditors, it would not be economic to incur the expense of either circularising, or holding a meeting of, the unrelated creditors of the company to determine their wishes about whether HSM or DRM should be its liquidator. I draw such inference as I can from the evidence before the Court on what has occurred. As stated above, there is a clear majority in value of the unrelated creditors in favour of DRM, but a majority in number in favour of HSM. The seven creditors who gave proxies to HSM should also be included in the number of creditors supporting the appointment of HSM, although not as strongly in favour as the creditors who were present and voted in his favour. The largest non-related creditor abstained from voting, which suggests that it saw the merits of HSM or DRM being appointed liquidator as being about equal, but also did not consider there was any good reason why HSM should not be appointed. There was no clear indication from these unrelated creditors that DRM should be appointed in place of HSM. On the operation of the Act, as dealt with above, this would leave HSM as the liquidator by virtue of Regulation 5.6.21(4)(c). I reject the submission of Boral that there was an overwhelming preponderance of the unrelated creditors in favour of DRM. There is no presumption that a majority in value overrides a majority in number, but the disproportion in value is a factor to be taken into account.[17]   The matter is to be decided on the exercise of a judicial discretion, but bearing in mind as significant factors that, the majority in value supported DRM, and that the majority in number supported HSM.

    [17]   Brisconnection Management Co Ltd v Burness (2009) 72 ACSR 233.

24. I now proceed to deal with the other relevant factors on the exercise of the Court’s discretion.

    Prior involvement of HSM with the company

25. On about 28 March 2012 the company engaged HSM’s firm to advise it about its financial position.  HSM met with RGM and others associated with the company in excess of 15 times thereafter.  On 25 June 2012 HSM produced a detailed written report about the financial position of the company which concluded that it was insolvent.  RGM told HSM that he was seeking additional finance for the company.  HSM only acted as an advisor for the company and did not become involved in its management.  He was owed less than $5,000 for his work for the company and so was not disqualified by that debt from becoming its administrator.

26. In the papers convening the first meeting of creditors, HSM disclosed his previous involvement with the company.[18]  It was open to any creditor to question HSM about this previous involvement with the company at both meetings of creditors.

    [18]   This report was not included in his first affidavit filed in this action.  That was apparently an oversight.  The necessary disclosure had been made to the creditors.

27. Counsel for Boral was critical of the fact that it took RGM until 30 July 2012, being the day before the second hearing of this action, to appoint an administrator.  The reason for this delay was not explained.  It may be that it was not until that date that the persons associated with the company who intended to support the DOCA decided to do so.  There is no evidence about whether HSM was involved in the decision to appoint him as administrator.  The company also had a solicitor acting for it at the time.  This delay in appointing the administrator is of no significance on the question of who is now to be the liquidator.

28. HSM did not have such a close involvement with the company prior to his appointment as its administrator that it can be inferred that he does not have the requisite degree of independence to be its liquidator or that he might be unduly influenced in his roles as administrator or liquidator to favour the interests of RGM and the connected creditors.[19]

    [19]   Commonwealth of Australia v Irving (1996) 19 ACSR 459.

    HSM as the advocate for the company

29. In the hearings between 31 July 2012 and 15 August 2012, HSM appeared in person as the administrator for the company.  In that period he filed three affidavits sworn by himself. At the hearing on 12 September 2012 the defendant was represented by solicitors and counsel instructed by HSM as the liquidator.   In the hearings between 31 July 2012 and 15 August 2012, HSM successfully sought adjournments, against the opposition of Boral, to enable the meetings of creditors in the administration to take place.  In his later affidavits he has sought to maintain his position as the liquidator.

30. The related creditors and the contributories of the company have not taken any part in this action since before 31 July 2012.  The only opposition to the appointment of DRM as liquidator has come through HSM.

31. Counsel for Boral submitted that as administrator, and as liquidator, HSM should merely have submitted to the orders of the Court and should not have taken any active role in the action.  For this proposition he cited the decision of Logan J in the Federal Court in Pink Lillies Pty Ltd v Huxtable.[20]  That case is distinguishable.  There, another creditor was before the Court which acted as a contradictor to the orders sought by the plaintiff.  Logan J accepted that there needed to be a proper contradictor to put the opposing case to the Court, but held that it was not necessary for the administrator to adopt the role of a second contradictor.  Here, in the absence of any other contradictor, it was appropriate for HSM as the administrator and as the liquidator to adopt that role, albeit that if he was unsuccessful, it might have had adverse consequences in costs against him.  The role that HSM has played in these proceedings on behalf of the defendant is irrelevant to the exercise of the Court’s discretion on who should now be the liquidator.

    [20] 19 December 2011, [2011] FCA 1543.

    Need to investigate the affairs of the company

1. The company was part of an intricate set of trusts.  It is necessary for the liquidator to unravel a complicated series of transactions involving the company and others to determine whether the company can recover monies from other persons.  Boral submits that it is in the interests of the creditors as a whole that this investigation should be done by DRM rather than by HSM.  It contends that in the circumstances the independence of HSM to properly carry out these investigations has been compromised.

2. A liquidator is not to be removed for a possible conflict of interest if it is only a theoretical or remote possibility.[21]  There must be some proper basis on the evidence to conclude that there is a reasonable basis for finding that there is a sufficient potential conflict which would justify the removal of the liquidator.[22]

   [21]   Advance Housing Pty Ltd v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230.

   [22]   Domino Hire v Pioneer Park (2003) 21 ACLC 1330 at [58]; Citrix Systems Inc v Telesystems Learning Pty Ltd, above, at 537; Multi-Core Aerators v Dye (1999) 17 ACLC 1172

3. HSM has already embarked on a substantial amount of work in these investigations, but there is still considerable more work to be done.  He says he has been assisted in performing this work by his prior involvement with the company.

4. As the administrator HSM sold the assets of the company in August 2012.  It was his duty as administrator to enter into any appropriate sale of its assets.  He reported on the sale to the meetings of creditors and no issue was taken about it at those meetings.  Boral submits that the appointment of DRM is necessary as liquidator so that this sale can be investigated.  However, no evidence has been put forward to suggest there was anything untoward about it.

5. I do not consider there is sufficient evidence of any want of independence of HSM to justify replacing him as liquidator by DRM.

   HSM’s conduct at the second meeting of creditors

6. Counsel for Boral was critical of the conduct of HSM at this meeting.  In his report to creditors of 24 August 2012, he had recommended accepting the second DOCA.  However, at the meeting he changed his mind and withdrew his support for it.  He was entitled to do so.  His action was contrary to the assertion that he was biased in favour of those standing behind the company.  No-one now suggests that the DOCA should have been implemented.

7. Counsel for Boral submitted that HSM should have adjourned the second meeting and issued a supplementary report to the creditors.  While that was a course open to HSM, it was not mandatory that he should take it.  There was no point in incurring the delay and expense of a supplementary report and an adjourned meeting unless it was likely to give it a sufficient potential benefit to creditors to justify it.[23]  The representative of Boral at the meeting, who was being advised by a solicitor and by DRM, did not seek any adjournment and neither did any other creditor.  HSM is not to be criticised for not adjourning the meeting.

   [23]   Wells v Wily, Palmer J, Supreme Court NSW, [2004] NSWSC 145.

   Work already done by HSM

8. As at 20 September 2012 HSM had already done work in the winding up which he costed at $52,355.  He estimated that his costs to complete the winding up would be a further $56,640.  He is continuing his work while these reasons are being prepared.  The more work which has been done, the less likely it generally is that the Court will replace the existing liquidator unless there is good reason for it.[24]

   [24]   Re Biposo Pty Ltd; Condon v Rodgers (1995) 17 ACSR 730.

   Additional costs if DRM is appointed liquidator

9. There was a conflict of opinion between HSM and DRM about what would be the additional costs if DRM was now appointed to be the liquidator.  DRM suggested it would only be the costs of him and his staff reading the working papers of HSM.  That is the most optimistic view on the topic, but experience suggests that there may well be unexpected complications which will increase those costs.  There is no way of accurately assessing what those additional costs will be, but they could well be significant.

   Conclusion

10. On the evidence there is no basis to infer that HSM will not properly conduct the winding up of the company to its conclusion. Boral has rights under the Act to challenge the acts of HSM as the liquidator if it believes that he has not properly pursued claims against those previously standing behind the company. While Boral, which voted in favour of replacing HSM by DRM, stands to benefit to a greater extent because of the amount of its debt if the liquidator of the company can effect significant recoveries from those previously standing behind the company, the interests of the smaller creditors who favoured appointing HSM are not to be ignored. The overall costs of the winding up are likely to be significantly less if HSM continues the liquidation to its conclusion. In any event, there is a real prospect there will be no dividend payable to the non‑priority creditors of the company. I consider that on balance the interests of the creditors of the company as a whole will be best served by HSM continuing to be the liquidator of the company and not being replaced by DRM.

    Date of commencement of winding up

11. The date of the commencement of the winding up is significant for the ascertainment of the “relation-back day” as defined in s 9 of the Act. The earlier the commencement date, the greater is the potential for the recovery of undue preferences by the liquidator which occurred within six months of the commencement of the winding up.

12. If the company was not already in a voluntary winding up, by virtue of s 513A(3) of the Act and the definition of relation-back day in s 9, the relation‑back day would be calculated on a commencement of the winding up on the date of the issue of the originating process, which was 15 June 2012. However, the issue is complicated because s 513A(a) of the Act provides:

    If the Court orders under section … 459A … that a company be wound up, the winding up is taken to have begun or commenced:

    (a)  if, when the order was made, a winding up of the company was already in progress - when the last-mentioned winding up is taken because of this Division to have begun or commenced; …

13. There are further complications under ss 513B and 513C of the Act as to calculating what is the commencement date of a winding up where at the date of the winding up order by the Court, a company is already in a voluntary winding up by virtue of a resolution of its creditors passed in an administration. It is not necessary to go into these complications. The commencement of such a winding up here by an order of the Court would be significantly later than 15 June 2012.

14. Boral invited the Court to adopt a course which would arguably exclude the operation of s 513A(a), and so make the commencement of the winding up of the company 15 June 2012. This would require a two-step process of the Court first terminating the voluntary winding up under s 503 of the Act and subsequently making a separate and later order under s 459A of the Act for the winding up of the company. A similar approach was endorsed in St Leonards Property Pty Ltd v Ambridge Investments Pty Ltd[25]  and Macquarie Health Corporation Ltd v Federal Commissioner of Taxation[26] and by Judge Withers in Pernod Ricard Pacific Pty Ltd v Bordex Wineracks Australia Pty Ltd.[27]

    [25] (2004) 210 ALR 265.

    [26] (1999) 169 ALR 16 at [91] et seq.

    [27]   Action No. SCCIV-10-96 in this Court.

15. Such a course may be of advantage to the creditors of the company. There appears to be no good reason why the relation-back day for recovery of undue preferences should be curtailed merely because an administration and a voluntary winding up occurred after Boral had instituted its proceedings for the winding up of the company. Any creditor who is the subject of an undue preference claim arising in the relevant period can still argue as a defence to the preference claim that the commencement date for the winding up is governed by s 513A(a).

16. On the next hearing on Wednesday 24 October 2012 at 9.30am I will make an order terminating the voluntary winding up of the company.  I will then set a further hearing date to consider making an order for the winding up of the company and hearing any arguments on costs and ancillary matters.