Bratovic v SBM Argentinian Bar and Grill Pty Ltd - [2005] SASC 431

SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
BRATOVIC v SBM ARGENTINIAN BAR AND GRILL PTY LTD & ORS
Reasons of Judge Lunn a Master of the Supreme Court
18 November 2005
PROCEDURE
Action in ordinary jurisdiction of the court - interlocutory process filed by defendant under R 2.2(1) of Corporations Rules 2003 seeking winding up of a party - held application contrary to Corporations Rules and incompetent.

EQUITY - TRUSTS AND TRUSTEES
Application for removal of trustee and appointment of a new trustee - corporate trustee unable to function properly due to disputes between its two directors - held in the interests of the beneficiaries to remove the trustee and appoint new trustees.

BRATOVIC v SBM ARGENTINIAN BAR AND GRILL PTY LTD & ORS
[2005] SASC 431

JUDGE LUNN As an urgent determination of the applications before the Court is needed these Reasons are confined to the facts which are essential for the orders to be made. There are numerous and substantial factual disputes between the parties which cannot be resolved on the affidavit evidence. However, the present applications can be determined on facts which are not in dispute and by rulings of law. The plaintiff and the second defendant were acting as trustees, but this can be ignored for the purpose of the present rulings.
The plaintiff and Norberto Spagnolo (“Norberto”) are the only two directors of the first defendant. Of its two hundred issued shares 98 are held by the plaintiff and 102 by the second defendant. The second defendant is controlled by Norberto and the third defendant. The third defendant is the wife of Norberto and the secretary of the first defendant.
The first defendant is the trustee of the Restaurant Unit Trust (“RUT”). There is a dispute about who is entitled to the issued units in RUT but they are held generally by the second defendant, the plaintiff and allegedly his father. The first defendant is the lessee of premises at 46 Port Road, Hindmarsh on which the first defendant as the trustee of RUT conducts the business of “Norbert’s Argentinian Bar and Grill”. The business opened in February 2005 and continues to trade. Norberto and the third defendant work in the restaurant business. The first defendant spent in the region of $700,000 to convert the premises into a restaurant and to set it up. The source of part of this sum of about $700,000 is in dispute between the parties. It is alleged that some of the money has been borrowed at a very high rate of interest.
On 10 October 2005 the plaintiff instituted this action seeking an order under s 36 of the Trustee Act that the first defendant be removed as the trustee of RUT and that two independent accountants, Messrs Hall and Heard, be appointed as trustees in its place. The plaintiff filed a large affidavit alleging many disputes between himself, Norberto and the third defendant about the affairs of the first defendant and the running of the restaurant business. On 1 November, Norberto and the third defendant filed large affidavits disputing much of what had been alleged by the plaintiff in his affidavit. The tenor of these defendants’ affidavits was that the first defendant through the agencies of Norberto and the third defendant were properly managing the business of the restaurant.
An interlocutory application by the plaintiff for the removal of the first defendant as trustee was listed for urgent argument before me on 8 November 2005.
At the hearing on 8 November counsel for the second and third defendants raised for the first time that on his instructions the first defendant was insolvent and that the proper course was for the Court to appoint a provisional liquidator to it. I adjourned the argument to 14 November for the second defendant to bring such proceedings as it was advised for this purpose.
On 10 November the second defendant issued a notice for specific directions seeking, inter alia, the appointment of a provisional liquidator for the first defendant. An affidavit of the third defendant was filed on that day as to the current creditors of the first defendant on which submissions were later based by counsel for the second and third defendants that the first defendant was insolvent. The plaintiff filed affidavits disputing the factual basis for a conclusion of insolvency. I now deal with the plaintiff’s submission that the second defendant’s application for the appointment of a provisional liquidator was incompetent.
Competence of Application for Appointment of a Provisional Liquidator
The action was commenced under the Supreme Court Rules 1987 (“The Civil Rules”– references to these rules are prefaced by “R”.) The action sought no relief under the Corporations Act 2001 (“The Act”). By R 1.05:
1.05 Unless the Court shall otherwise direct:
(a)these Rules shall not apply to any action which is governed by Special Rules;
(b)in so far as Special Rules refer to the general Supreme Court Rules that shall as and from 1^st May 1987 mean these Rules.
The Corporations Rules 2003 (“the Corporations Rules”: - references to individual rules are prefixed by “CR”) They are “special rules” for the purposes of R 1.05.
On 10 November the second defendant as a creditor, contributory and unit holder of the first defendant issued its Notice for Specific Directions under R 55.06 of the Civil Rules and in Form 18 under those rules. In part it read:
The Second Defendant ….. intends to apply to the court for specific directions in this action as follows:
1.That the First Defendant be wound up pursuant to sections 461(k), 462(b) and 462(c) of the Corporations Act, 2001 on the grounds that it is just and equitable to do so;
2.That Mark Christopher Hall and Andrew James Heard Chartered Accountants of PPB Level 10, 26 Flinders Street Adelaide in the State of South Australia, both be appointed jointly and severally as the liquidators of the First Defendant;
3.That Mark Christopher Hall and Andrew James Heard ….. be appointed jointly and severally as the provisional liquidators of the First Defendant;
4.Dispensation from such of the Sections of the Corporations Act, 2001 and of the Corporations Rules 2003 (South Australia) so that this application may be heard expeditiously on an urgency basis;
…..
The second defendant relies on CR 2.02(1) which provides:
2.2(1) Unless these Rules otherwise provide, a person must make an application required or permitted by the Corporations Act to be made to the Court:
(a)if the application is not made in a proceeding already commenced in the Court – by filing an originating process; and
(b)in any other case – by filing an interlocutory process.
The plaintiff challenged that this application could be made by filing such an “interlocutory process” in an action commenced under the Civil Rules.
No authority or precedent for such an application was cited to me. This matter needs to be determined urgently and in the time available to me I have not been able to find any authority on whether a notice for directions under R 55.06 of the Civil Rules can properly be used to bring an application by “interlocutory process” under CR 2.2 of the Corporations Rules.
“Interlocutory Process” is defined in CR 1.5 as “interlocutory process means an interlocutory process in accordance with Form 3”. The notice for specific directions does not comply with Form 3 or with CR 2.1 which provides:
The title of a document filed in a proceeding must be in accordance with Form 1.
However, CR 1.7 provides:
1.7(1) It is sufficient compliance with these Rules in relation to a document that is required to be in accordance with a form in Schedule 1 if the document is substantially in accordance with the form required or has only such variations as the nature of the case required.
This probably overcomes any difficulty in the non-compliance with the forms.
The crux of the matter appears to be what is meant by “proceeding” in CR 2.2(1). Does it mean only a proceeding brought under the Act or can it mean any proceeding already commenced in the Court under the Civil Rules (or indeed in its criminal jurisdiction).
The term “proceeding” is not defined in either the Act or the Corporations Rules. It broadly means the vehicle by which the jurisdiction of the Court is invoked: Mitsubishi Motors Ltd v Kowalski Full Court 24 September 2004 [2004] SASC 302. However, it has a wide variety of meanings and ultimately it must take its precise meaning from its context: Blake v Norris (1990) 20 NSW LR 300 at 306. In many contexts it can include a step in the proceedings: Braeside Bearings Pty Ltd v H G Brignell & Associates [1996] 1 VR 17.
“Proceeding” also appears in CR 1.3(1) which provides:
Unless the Court otherwise orders, these Rules apply to a proceeding in the Court under the Corporations Act, or the ASIC Act, that is commenced on or after the commencement of these Rules.
Here it is limited by phrase “under the Corporations Act”. It is also limited in a similar way in CR 1.3(2) which provides:
The other rules of the Court apply, so far as they are relevant and not inconsistent with these Rules, to a proceeding in the Court under the Corporations Act, or the ASIC Act, that is commenced on or after the commencement of these Rules.
Where CR2.2(1) refers to “in a proceeding already commenced in the Court” it means a proceeding to which the Corporations Rules apply by virtue of CR 1.3(1), ie its meaning is to be read down in CR 2.2(1) to make it the same as its meaning in CR1.3(1). It does not refer in CR 2.2(1) to a proceeding to which Corporations Rules do not apply because they are governed solely under R1.05 by the Civil Rules. If “proceeding” meant any proceeding in CR2.2(1), it would enable applications under the Act to be mixed in with any other type of proceeding in the Court. It is significant that while CR1.3(1) and CR2.2(2) are prefaced by “unless the Court otherwise orders” this qualification is not imposed on CR2.2(1). Its omission, when compared with CR1.3(1) and CR2.2(2), would suggest that it was not intended that CR2.2(1) should have a wide field of operation. It makes good sense to limit CR2.2(1) to proceedings under the Act as then there is little potential mischief for sub paragraph (b) being used to tack other applications under the Act onto existing proceedings in the Court. While the Court may still have other powers to be able to exercise some control over the use of CR2.2(1), this restricted meaning suggests its operation is limited to where proceedings have as their subject matter the affairs of a particular company.
This conclusion is reinforced by the need for some similar restriction on “proceeding” in CR2.2(2) which states :
Unless the Court otherwise directs, a person may make an application to the Court in relation to a proceeding in respect of which final relief has been granted by filing an interlocutory process in that proceeding.
If it was not so restricted CR2.2(2) could be used to tack an application under the Act onto proceedings between the parties which had long since been completed and which had nothing to do with the company in question. Obviously the rationale of CR2.2(2) is that where proceedings under the Act have been dealt with in an action, e.g. a winding-up order, the same action can be used for other aspects of the affairs of that corporation.
Therefore I find that the notice dated 10 November is not within CR2.2(1), and is contrary to CR1.3(1). It cannot be saved by s 467A of the Act because it is not an application on which that section can operate and it cannot be validated under s 1332(2) of the Act because it is not a proceeding under the Act to which that section can apply.
The operation of CR 1.3 on this application is subject to the Court not ordering to the contrary. I am not prepared to make such a contrary order. As stated above under the lease the bringing of such an application could be an act of fault which leads to forfeiture. The plaintiff does not want any such forfeiture. The defendants’ counsel contended that a similar result would follow from the plaintiff’s application in that it would necessitate a transfer of the lease to the new trustees. However, the legal consequences of both matters are not entirely the same and there is a reasonable possibility that the plaintiff could suffer greater prejudice from an application to wind up the Company. At the hearing on 8 November the second defendant was put on notice that there may be procedural difficulties in bringing an interlocutory application for winding-up rather than instituting a new action seeking that relief, but it elected to pursue the course of the interlocutory application rather than a new action. The defendants’ counsel cited the decision of Yellow Rock Pty Ltd v Eastgate Properties Pty Ltd Muir J, Supreme Court of Queensland, 2004 [2004] QSC 124, unreported, in support of having a provisional liquidator appointed in preference to appointing a new trustee. However, there the appointment of a new trustee was pursued in one action and the appointment of a liquidator was pursued in separate action, apparently under the Corporations Rules, and they were dealt with concurrently.
The plaintiff’s counsel contended that notice of 10 November 2005 was inconsistent with s 445Q of the Act. Even if it was, any irregularity stemming from it could probably be cured under s 1322(4) of the Act: Aizen v Essendon Travel (Vic) Pty Ltd 1994) 12 ACLC 299.
The notice of 10 November 2005 is incompetent and must be struck out.
Removal of Trustee
The law on the principles to be applied by this Court on an application for the removal of a trustee, either under the inherent jurisdiction of the Court or under s 36 of the Trustee Act, is set out in the following passage from Dixon J in Miller v Cameron (1936) 54 CLR 572 at 580-581:
The jurisdiction to remove a trustee is exercised with a view to the interests of the beneficiaries, to the security of the trust property and to an efficient and satisfactory execution of the trusts and a faithful and sound exercise of the powers conferred upon the trustee. In deciding to remove a trustee the Court forms a judgment based upon considerations, possibly large in number and varied in character, which combine to show that the welfare of the beneficiaries is opposed to his continued occupation of the office. Such a judgment must be largely discretionary. A trustee is not to be removed unless circumstances exist which afford ground upon which the jurisdiction may be exercised.
See also Pope v DRP Nominees Pty Ltd & Ors (1999) 74 SASR 78 particularly at 86 and Titterton v Oates (1998) 143 FLR 467.
Without entering into the disputes about whether any directors’ meetings of the first defendant have been properly convened it is clear from the affidavit evidence that no proper directors’ meetings of the first defendant have been held for some months. This is an unsatisfactory state of affairs. The extent of the disputes between the plaintiff on the one hand and Norberto and the third defendant on the other hand, as disclosed by the affidavits, and the degree of animosity obviously existing between them, makes it highly unlikely that they can work together in the near future to conduct the affairs of the first defendant in a business-like manner. There is no apparent way in which other directors can be appointed to the first defendant, and neither party has suggested this course should be pursued. The inability of the present directorate of the first defendant to function in a business-like and constructive manner makes it highly unlikely that the first defendant has in the recent past, and can hereafter, satisfactorily and faithfully perform its obligations as the trustee of RUT for the benefit of all of its beneficiaries. This conclusion does not require any resolution of the disputes between the plaintiff on the one hand and Norberto and the third defendant on the other hand, and indeed is based upon the existence of those disputes. The time which it would take for a trial to resolve those disputes would prejudice the viability of the restaurant business and would not place the Court in any better position than it is now to deal with the plaintiff’s application.
The second and third defendants submitted that any appointment of new trustees may prejudice the trust asset of the lease in that the landlord might not consent to the transfer of the lease to the new trustees. I am not in a position to resolve whether the landlord would be entitled in law to refuse consent to a transfer of the legal estate of the first defendant in the lease to the new trustees where the equitable estate remained in the trust, but I accept that there may be some risk on the appointment of new trustees that RUT could be deprived of its valuable asset of the lease. The plaintiff is prepared to take that risk, but the second and third defendants asserted that it would be prejudicial to them and a factor against removing the first defendant as the trustee. However, that risk is less than the risk which the second defendant was prepared to take by seeking to bring proceedings for the winding up of the first defendant, as related above, which would have been more likely to have resulted in a forfeiture of the lease.
For the reasons stated I consider that it is now in the interests of the beneficiaries of RUT as a whole, and for the security of the trust property, to order the removal of the first defendant as trustee of RUT and the appointment of Messrs Hall and Heard as joint trustees in its place. The second and third defendants did not dispute that if the first defendant was to be removed Messrs Hall and Heard were proper persons to be appointed as the new trustees.
In view of the allegations of the second and third defendants about the solvency of RUT the new trustees may well be concerned about whether the restaurant should continue to trade. I will grant liberty for them to apply in these proceedings for directions.
I will hear counsel on precisely what orders should now be made.