Bridgeport - Advisers & Asset Managers Pty Ltd - [2005] NSWSC 757

No judgment structure available for this case.

CITATION:
Bridgeport - Advisers & Asset Managers Pty Ltd [2005] NSWSC 757

HEARING DATE(S): 22/07/05

JUDGMENT DATE :

2 August 2005

JURISDICTION:
Equity Division
Corporations List

JUDGMENT OF:
Barrett J

DECISION:
Examinees' application for orders discharging examination summonses and setting aside orders for production refused. Applications for review of various decisions of deed administrators refused.

CATCHWORDS:
CORPORATIONS - administration - examinations under Part 5.9 - whether examinations to be undertaken for impermissible purposes - whether abuse of process - whether three day time limit in rule 11.5(2) may be extended - CORPORATIONS - deed of company arrangement - deed administrators defer consideration of claimants claim - whether court should review administrators' decisions

LEGISLATION CITED:
Corporations Act 2001 (Cth), Part 5.9, s.183(1)
Supreme Court (Corporations) Rules 1999, rule 11.5

CASES CITED:
David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265
Flanders v Beatty (1995) 16 ACSR 324
Mine & Quarry Equipment International Ltd v McIntosh [2005] QCA 186
Re Markethaven Pty Ltd; Commonwealth v Sheahan [2004] FCA 1301
Re New Tel Ltd; Evans v Wainter Pty Ltd [2005] FCAFC 114
Sandhurst Trustees Ltd v Harvey (2004) 206 ALR 594
Yeomans v Walker (1986) 5 NSWLR 378

PARTIES:
Roderick Mackay Sutherland and Sule Arnautovic as Deed Administrators of Bridgeport - Advisers & Asset Managers Pty Limited - Plaintiffs
Wealthwise Financial Planning Pty Limited - First Applicant
Sentinel Wealth Management Pty Limited - Second Applicant
Justin Hooper - Third Applicant
Brian May - Fourth Applicant
Robert White - Fifth Applicant
Karin De Mamiel - Sixth Applicant

FILE NUMBER(S):
SC 2017/05

COUNSEL:
Mr R.K. Eassie - Plaintiffs
Mr L.G. Foster SC/Mr S.J. Philips - Applicants

SOLICITORS:
Nash O'Neill Tomko Lawyers - Plaintiffs
Deacons - Applicants

LOWER COURT JURISDICTION:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

BARRETT J

FRIDAY, 29 JULY 2005

2017/05 – BRIDGEPORT – ADVISERS & ASSET MANAGERS PTY LIMITED

JUDGMENT

1 On 22 July 2005, I heard three interlocutory processes which hedge around with a number of procedural points what are really two substantive questions, namely, whether the court should put a stop to proposed examinations of certain persons under Part 5.9 of the Corporations Act 2001 (Cth) and whether administrators of a deed of company arrangement should be ordered to rule upon certain claims submitted to them.

2 The first interlocutory process was ostensibly filed on 3 May 2005 but, on one view, the ostensible filing was out of time and there was no filing at all. Under that interlocutory process, two companies and four individuals (best described, for convenience, as the applicants) seek certain relief against the plaintiffs in the proceedings who are the deed administrators under a deed of company arrangement executed by Bridgeport – Advisers & Asset Managers Pty Limited (which I shall call “Bridgeport”). I shall refer to those plaintiffs as “the administrators”.

3 By that first interlocutory process, the applicants (or some of them) seek, first, declarations that they are persons aggrieved by certain decisions of the administrators, being a decision to obtain orders for production (first to sixth applicants), a decision not to rule on claims said to have been submitted under the deed of company arrangement (third to fifth applicants) and a decision to conduct examinations under Part 5.9 of the Corporations Act (third to sixth applicants); second, orders that the orders for production be set aside (first to sixth applicants); third, an order that the decision of the administrators not to rule on the claims of the third to fifth applicants be reversed; fourth, an order that the administrators admit the claims of the third to fifth applicants; fifth, an order that the decision of the administrators to conduct Part 5.9 examinations of the third to sixth applicants be reversed; and, sixth, an order that the examination summonses directed to the third to sixth applicants be set aside. At the conclusion of the hearing on 22 July 2005, the applicants applied for leave to add a seventh claim, namely, a claim for an order that the several examination summonses be discharged, that being the terminology in rule 11.5 of the Supreme Court (Corporations) Rules 1999. There being no opposition, leave was granted and the amendment was made by means of an amended interlocutory process in a form received in chambers on 25 July 2005.

4 The second interlocutory process was filed by the administrators. It seeks orders striking all the claims in the first interlocutory process except those in the second group (claims for orders setting aside orders for production).

5 The third interlocutory process was filed by the applicants on 22 June 2005. They sought thereby leave to file the first interlocutory process with the leave applying retrospectively to 3 May 2005, an order dismissing the second interlocutory application and an order for access to documents produced on subpoena by Zurich Australia Limited.

6 The only procedural questions of any importance arising from these claims and counter claims are whether the applicants are time barred (in a sense I shall mention presently) in their pursuit of the applications to have set aside or discharged the Part 5.9 examination summonses and whether the third to fifth applicants are persons aggrieved by the action of the administrators with respect to their claims. I shall deal with the first of these questions at once.

7 To the extent that the applicants seek orders that the decisions of the administrators to conduct the Part 5.9 examinations be reversed, they appear to be attempting to side-step an issue that they eventually confronted by their application for leave to amend, namely, that, under the Supreme Court (Corporations) Rules 1999, an application for an order discharging an examination summons is to be made within three days after the summons is served. This is the effect of rule 11.5(2):

8 The applicants’ applications were made more than three days after service. The relevant interlocutory process was filed (if it was filed at all) on 3 May 2005 whereas service of the examination summonses occurred on 6 and 10 April 2005. The fact that the applicants eventually accepted non-compliance with the timing requirement as an issue and amended accordingly should, in my view, mean that their collateral attack upon the examination summonses by way of application for review of the administrators’ decision to conduct the examinations may be left to one side. They could not be allowed to achieve by that indirect route anything not available under rule 11.5(2). The effect of the timing non-compliance as it affects the direct way of coming to the result the applicants seek in this respect should alone be considered.

9 The contention of the administrators is that the effect of rule 11.5(2) is such that the making of the application within time is essential to the jurisdiction to entertain that application – in other words, that an application not satisfying the time condition cannot be treated as an application at all. That argument is supported by reference to the High Court’s decision in David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265. The applicants, on the other hand, say that the time limit in rule 11.5(2) is amenable to modification by exercise of the court’s power under the rules of court to extend time.

10 I do not accept the administrators’ argument. The decision in David Grant turned essentially on three matters. First, there was the word “only” in the provision saying that an application “may only be made within 21 days after the demand is so served”. That word was seen by the High Court as attaching “a limitation or condition upon the authority of the court” to make an order of the kind concerned. Second, the High Court noted that the particular time specification before it had been introduced into the legislation after the general provision under which it was argued that the court had power to extend time. Third, the court was influenced by the role the particular provision concerning time played in a statutory scheme designed to ensure that challenges to statutory demands are disposed of quickly and efficiently in advance of the pursuit of winding up proceedings.

11 None of these considerations applies here. The word “only” does not appear in rule 11.5(2). The provision of the Supreme Court (Corporations) Rules with respect to extension and abridgement of time (rule 1.10, which imports the provisions of the general rules of court on that subject) was, in an earlier form, included in the rules at their inception, along with rule 11.5(2); and, unlike rule 11.5(2), rule 1.10 has been amended since. There can thus be no suggestion that the time specification in rule 11.5(2) is, because of later adoption, intended to displace the rule with respect to extension of time. Furthermore, while rule 11.5(2) obviously exhibits an expectation of prompt action, it cannot be said to form part of a scheme for expeditious resolution in the same way as the provisions with respect to challenges to statutory demands. I note, in this respect, the comment of Emmett J in Re Markethaven Pty Ltd; Commonwealth v Sheahan [2004] FCA 1301 that no one suggested that the time allowed by rule 11.5(2) could not be extended by the court and, in particular, the fact that his Honour made an order extending time to the dates on which the relevant interlocutory processes had been filed.

12 Because the first procedural point of consequence emerging from the interlocutory processes before me thus does not preclude consideration of the merits of the applicants’ claims to have the examination summonses discharged (in that the court is empowered to extend time), I proceed to a consideration of the question of substance whether, in the circumstances, resort by the administrators to the compulsory processes of Part 5.9 (coupled with the use of orders for the production of documents) amounts to an abuse of process.

13 I begin by considering the facts, noting that the administrators did not lead any evidence (except by tender of documents) and that the only evidence before me, in addition to tendered documents, was in affidavits sworn by four of the applicants and the former chairman of the board of directors of Bridgeport. I should mention that, at different times during the hearing, both sides suggested that it would be open to me to have regard to the content of the s.596C affidavit. In the end, however, both sides agreed that I should not take that unilateral course, it being accepted that the various applications should be determined on the evidence actually adduced before me, thereby avoiding the altogether unacceptable possibility that I might decide the matter on the basis of something that both parties had not had a chance to consider and address in submissions.

14 Bridgeport and, more particularly, its then subsidiary, Bridgeport Advisers Pty limited (“Advisers”) carried on business as financial planners and advisers. The wholly owned subsidiary Advisers was the operating company but Bridgeport, as well as owning all the shares in Advisers, owned certain assets deployed in the business and employed staff who worked in the business. Among those employees were the third to sixth applicants, Mr Hooper, Mr May, Mr White and Ms de Mamiel. Bridgeport and Advisers had a close commercial arrangement with Zurich Australia Limited (“Zurich”) whose products were marketed by Advisers, along with financial and insurance products of other organisations. Zurich provided financial support to Bridgeport upon the security of a mortgage debenture. By October 2004, the secured indebtedness exceeded $2 million. On 19 October 2004, Zurich appointed the administrators (Mr Sutherland and Mr Arnautovic) to be administrators of Bridgeport under Part 5.3A of the Corporations Act.

15 Very soon after their appointment, the administrators took steps towards selling “the business” – effectively, the shares in Advisers and the business assets owned directly by Bridgeport. Two days after their appointment, they had identified no less than seventeen parties who might be interested and had spoken with about half of them. It was recognised by the administrators, in a letter dated 21 October 2004 to Zurich, that “successful transfer of staff will maximise the probabilities of receiving the top price”. By that date, an offer had already been received from “Wealthwise” which was, at that point, technically non-existent but was brought into being shortly afterwards by Mr Hooper (Wealthwise Financial Planning Pty Ltd is the first applicant). The letter to Zurich identified Mr White (the fifth applicant), Mr O’Farrell and Mr Avis as staff members seen by most potential buyers as “critical” and said that Mr Hooper (the third applicant) and Mr May (the fourth applicant) did not appear to play a part in the potential buyers’ plans.

16 By early December 2004, LKM Capital Limited had emerged as the most serious contender for the purchase of the business. The prospects of selling to Mr Hooper and other staff members had receded. On 7 December 2004, an agreement for sale was made between Bridgeport (under the auspices of the administrators) and LKM. The agreement permitted LKM to offer employment to such as it wished of the persons employed in the business and required Bridgeport to facilitate transfer of chosen personnel to LKM. There was also a section headed “Key Employees” which referred to Mr Hooper, Mr May, Mr White and Mr O’Farrell and to which I shall return.

17 On 7 December 2004, Bridgeport, through the administrators, terminated the employment of Mr Hooper, Mr May and Mr White. Their services were not required by LKM. The circumstances in which the employment of Mr Hooper and Mr May was terminated were related by the administrators in a letter of 15 December 2004 to Zurich:

“You may recall that LKM Financial Services Pty Ltd (‘LKM’) did not continue the employment of Mr Justin Hooper and Mr Brian May after completion. You will also recall that concerns were expressed as to the manner in which Messrs May and/or Hooper may have dealt with or would deal with the confidential information of the Company, particularly its client lists and we could understand those concerns given statements that had been made by Messrs Hooper and May during the sale process concerning their intentions with respect to the Company’s clients if they were not the purchasers.

In those circumstances we had no alternative but to ensure Messrs May and Hooper were dismissed from employment immediately upon completion of the sale to LKM and to take all steps we could to ensure the confidential information of the Company was protected. You will recall the letters given to Messrs May and Hooper upon their termination.”

18 Mr Hooper, Mr May and Mr White went into business under the Wealthwise banner in the same field of endeavour as Bridgeport and Advisers had pursued. It is common ground that a number of clients previously serviced by Bridgeport came to be serviced by Wealthwise.

19 Each of Mr Hooper, Mr May and Mr White also put the administrators on notice of monetary claims consequent upon termination, including claims for redundancy pay and salary in lieu of notice. These were mentioned by the administrators in their report to creditors for the purpose of the second meeting of creditors in the Part 5.3A administration. Each of those former employees lodged a proof of debt for the purpose of voting at that meeting. The proofs were admitted in full for voting purposes.

20 The second meeting of creditors resolved (with the three ex-employees abstaining) that Bridgeport should execute a deed of company arrangement. The deed was executed on 2 February 2005. Its effect was to substitute for unsecured creditors’ debts (which it extinguished) rights to prove and participate under the deed. Mr Sutherland and Mr Arnautovic became the deed administrators. There are provisions for formal proof of debts and processing thereof about which more will be said later.

21 In correspondence after execution of the deed, the solicitors for Messrs Hooper, May and White seem to have suggested that the proofs previously lodged should be dealt with under the deed. The administrators’ solicitors replied to the effect that, while it was open to the administrators to take that course consistently with the deed, they did not consider it appropriate in the particular case. The solicitors said, in effect, that a claim should be submitted under and by reference to the deed.

22 By separate letters all dated 17 March 2005, the solicitors for Messrs Hooper, May and White set out in detail the claims of those persons and asked that the letter and its attachments be treated as a formal proof of debt. Six days later, on 23 March 2005, the administrators obtained orders for production of documents directed to Wealthwise and another company associated with Mr Hooper (which is the second applicant). On 4 April 2005, examination summonses addressed to Mr Hooper, Mr May, Mr White and Ms de Mamiel were issued on the administrators’ application, together with orders for the production of documents directed to those persons. The documents sought included any lists of clients or former clients of Bridgeport or Advisers held by the person concerned, copies of company manuals, documents detailing contact with clients or former clients since 7 December 2004 and documents of various kinds throwing light on any communications among the former employee group since 7 December 2004 relating to proposed purchase of the business or to clients or former clients.

23 The only clue, at that point, as to claims the administrators might have thought Bridgeport to have against any of these persons comes from the report to creditors dated 5 January 2005:

“We have not identified any potential actions for damages at this time. However, further investigations are still being undertaken by the Administrators to determine whether any claim for damages could be initiated against certain individuals responsible for the management of the Company for damaging the value of the assets/business of the Company by misusing their authority and position and by acting in conflict to the interests of the creditors and shareholders of the Company.”

24 Subsequently, however, matters were elucidated in the administrators’ report to creditors dated 14 April 2005. That report referred to the matter of examinations and said that examination summonses had been issued in respect of not only Mr Hooper, Mr May, Mr White and Ms de Mamiel but also “approximately five of the company’s former clients”. The administrators said that the clients had been examined on 11 April 2005 (in fact, four were examined and the fifth was not required for examination) and that it had not been possible to examine the four former employees at that time. The reasons behind the examinations are then stated:

“The purpose of the public examinations is to:-

- Establish whether any of the above-mentioned persons are officers of the company within the meaning given by Section 9 of the Act;

- Establish whether any of the above-mentioned persons are excluded employees of the company within the meaning given by Section 556 of the Act;

- Establish whether any of the above-mentioned persons have breached any of their contractual and statutory obligations owed to the company, the company’s clients or the Australian Securities & Investments Commissioner (‘ASIC’); and

- To investigate any other matters the Deed Administrators see fit.”

“The above-mentioned public examinations and any associated litigation is currently being funded by LKM.”

25 This last statement is, in the abstract, curious: why would the buyer of the business from Bridgeport have an interest in establishing any of the matters described as being the objectives of the examinations? An answer may be found in the purchase transaction.

26 The price provided for under the agreement consisted of two parts. A sum of $1.25 million was to be paid in cash on completion. In addition, there was a deferred element, being a sum equal to five-sixths of the revenue (limited to $1.5 million) derived by the buyer from the business in the twelve months after completion or, if smaller, the sum of $1.25 million. The agreement also contained detailed provisions about the maintenance and application of a “legal fund” of $150,000 which, it appears, was to be part of the first tranche of purchase moneys isolated by the administrators (sellers) in a trust account maintained by them. Clause 9.3 of the agreement then provides:

“If within 6 months of Completion the Buyer reasonably believes the Key Employees have breached any obligations owed by them as employees and/or de facto directors of the Bridgeport Subsidiary and/or the Seller with respect to confidential information and/or commercially sensitive information regarding any of the Assets in such way that is causing damage to the Buyer and/or the Bridgeport Subsidiary, then the Buyer may serve notice on the Administrators requiring them to either:

(a) commence; or

(b) join;

the Litigation Notice

“In the event the Buyer serves Litigation Notice, then the Administrators and/or the Sellers will take such legal action (in connection and consultation with the Buyer) as the Administrators may be advised by solicitors to take. The costs of such action (including an allowance for any adverse costs orders) will be paid from the Legal Fund.”

27 When the content of the report to creditors dated 14 April 2005 is considered in the light of these contractual provisions, it can be inferred that one of the main concerns of the administrators relates to possible breaches of duty or obligation by the key employees in relation to solicitation of clients of their former employer or competing with their former employer.

28 The administrators’ first apparent purpose in pursuing the examinations is to determine whether any of the persons to be examined was an “officer” of Bridgeport, the possibility said to be under examination being whether any was a “de facto director”, that is, a person who, although not appointed as a director, acted in the position of a director as contemplated by paragraph (b)(i) of the s.9 definition of “director”. The applicants point to a body of evidence that would not only dispel any idea that any of the individuals was a de facto director but also show that that position has already been accepted by the administrators.

29 The evidence shows that Mr Hooper (chief executive officer) and Mr May (chief operating officer) regularly attended board meetings of Bridgeport. There was, at all material times, a board of directors that functioned in the usual way. Its composition changed over the relevant period, but its existence and operations did not. Mr Hooper and Mr May attended board meetings as a matter of course. On occasions, they were asked to leave while the directors discussed certain matters, and did so. On that evidence, there is no suggestion that either of them acted in the position of director. Regular attendance at board meetings at the request of the board (and withdrawal as and when requested by it) does not in any way point to a conclusion of de facto directorship.

30 On 3 November 2004, Mr Arnautovic, one of the administrators, wrote to Mr Hooper and Mr May saying, among other things:

“I acknowledge that you are not directors of the company but rather employees of the company.”

31 On 7 December 2004, the administrators’ solicitors wrote to Mr Hooper:

“We note that since 3 February 2003, you have been employed by the Company as its CEO.”

32 In a report to ASIC dated 5 January 2005, the administrators gave a positive answer to the question, “In your opinion are there shadow directors?” But they gave negative answers to the question whether they intended to conduct public examinations and the question whether they intended undertaking Part 5.7B proceedings (including, of course, proceedings against directors).

33 As at January 2005, therefore, the administrators had stated an opinion that there were shadow directors but had not identified any of the applicants as objects of the opinion or suspicion. Rather, they had given assurances to Mr Hooper and Mr May that they were regarded as employees only. Nothing I have seen would suggest that any other view was warranted as to any of their individual applicants. Nor is there anything to suggest that the administrators obtained, after December 2004, new information capable of grounding a well-based suspicion of de facto director status regarding any of the individual applicants.

34 It is to be noted, however, that the administrators’ description of the purposes of the examinations does not itself refer to the question whether the individuals were de facto directors. It refers, rather, to the question whether they were “officers” – a concept that, in terms of the s.9 definition, extends not only to a director (including a de facto director) but also to a person who “makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation” or “has the capacity to affect significantly the corporation’s financial standing”. A statutory duty is owed under s.183(1) of the Corporations Act by a person who is or has been “a director or other officer or employee of a corporation” [emphasis added]. Section 183(1) is as follows:

35 The statutory duty imposed by s.182 extends to the same class of persons, but only as to present conduct. Other statutory duties arising under related provisions (ss.180, 181 and 184) are imposed on a “director or other officer”. The question whether a person is within either of the two aspects of the s.9 definition of “officer” to which I have referred is therefore relevant to the nature and extent of the statutory duties applicable to the person, as well as parallel general law duties. And the possibility that a chief executive officer or chief operating officer might be within either or both of the aspects of the definition of “officer” I have quoted is real.

36 That leads to a consideration of the next broadly stated possibility set out in the report of 14 April 2005, namely, that the individual applicants, or some of them, may have breached contractual or statutory obligations. In that connection, the mere fact that, after termination of employment, the individuals became involved in the same line of business on their own account (or, more precisely, through a new company) cannot, of itself, involve a breach of any obligation or duty. In the absence of contractual restraint, they are quite free to do so. But the duty to respect the confidentiality of the employer’s confidential information continues after termination of employment, both as part of the employee’s duty of fidelity and as an incident of the duty under s.183(1) of the Corporations Act. Whether an employer’s customer lists are confidential will be a question for determination in each case, but there is, at least, a real likelihood that they would be confidential in the context of a financial planning business of the kind now under discussion. In addition, of course, an “officer” who, while an officer, takes steps towards competing with his or her company or seeks to deflect business from it may be guilty of breach of the duty imposed by s.182 or s.185 or a parallel general law duty.

37 One may wonder what changed the administrators’ original intention of not conducting any examinations. The answer may be found in an email from Mr Koops of LKM to Mr Arnautovic of 10 May 2005 which reads in part as follows:

“I do not believe that the administrator and its legal advisers have acted in the manner originally contemplated – ie the felons have successfully attacked the client base with impunity and continue to do so. The goodwill that was to be protected for the benefit of the purchaser has been lost because no pre-emptive action was taken to stop them. It is all very well to say that they may ultimately pay the penalty in damages – but to whose account will those damages be payable? LKM has lost the benefit of recurring revenue and lost the opportunity to stall the felons attack by being able to contact and meet the clients in an orderly manner. They were gone before we knew who they were.”

38 Mr Arnautovic’s reply of the same date responds to that part of Mr Koops’ email in these terms:

“There was some delay (Easter and incorrect service etc etc) in getting the summons for examinations and orders for production issued by our solicitors. However, have you considered the following:

In summary, you were aware of the risk in regards to the sale that is why the deferred purchase price is only based on what you actually earn.”

39 This makes it perfectly clear that LKM was concerned about the defection of clients to the new enterprise established by former staff members of Bridgeport. That caused to be put into place a “strategy” that the administrators had devised some time before 24 November 2004 when proceeding with plans to sell the business. There was, at that point, a proposal that “Justin Hooper/staff” buy the business. In a letter of 24 November 2004 to Zurich, Mr Sutherland referred to steps that had been taken to persuade Mr Hooper to increase his offer. The letter continues:

“If he does not respond, we will conclude that he has no real intention of paying a fair value for the business and that he intends to frustrate the sale process for his own benefit. We will then terminate Justin Hooper and Brian May and use security guards to remove them from the premises. They will be provided with a legal letter threatening legal action if they approach staff, clients etc. This will have serious consequences with ASIC etc., which we should be able to deal with, although there can be no certainties in this regard.”

40 The letter then outlined the “strategy” regarding other key staff:

“In the interim we will sit down with Bob White and Shaun O’Farrell who we consider are the critical people on Thursday or Friday of this week. We will spell it out in no uncertain terms that they are faced with three options:

41 The letter to Zurich concluded:

“The bottom line is that if Justin Hooper/staff refuse to (a) enter into a contract to purchase the business for a reasonable price, or (b) sign an employment contract with one of the interested parties, then the only alternative open to Zurich if the staff resign or are terminated and attempt to start a new business is litigation, which will be difficult due to the lack of signed employment contracts.”

42 It is clear that the administrators realised from the outset the vulnerability of the goodwill and the client base to competition from staff members who, as part of the administrators’ strategy, were terminated summarily and escorted from the premises by security guards. It is also clear that they saw litigation (of a kind they acknowledged to be problematic) as a weapon to be used against the staff members if the feared erosion occurred. The business was sold to LKM on a basis that protected LKM, to an extent, against diminished revenues. This was the effect of the provision of the sale agreement about the second tranche of the purchase price. The agreement also set up a litigation fighting fund with the obvious aim of facilitating litigation to preserve the cement base for the benefit of LKM. However, it appears that that mechanism was not brought into play by LKM by means of notice given by it within six months after 7 December 2004, so that the fund has now vested in the vendor and cannot be the subject of any future requirement that it be devoted to litigation.

43 The contract with LKM left Bridgeport with a risk related to reduced revenues from the business after the LKM takeover. The provisions with respect to the second tranche of purchase price meant that, if revenues were small, the price would reduce to the benefit of LKM and to the detriment of Bridgeport and its creditors. The administrators were given a clear interest in seeking to preserve the revenue base for LKM since to do so would enhance returns for creditors from the sale to LKM.

44 The “strategy” developed by the administrators and described in the letter to Zurich dated 24 November 2004 might be described as blunt, involving, as it did, escorting of respectable people by security guards and a commitment to litigation as an instrument of persuasion or deterrence. But that, to my mind, is of little relevance here. No litigation has been commenced. The individual applicants are involved in a business of financial planning. Client lists and other client information concerning Bridgeport clients (such as their investment preferences, the investments held by them and their financial capacity) might, on examination, be found to be information caught by both the aspect of an employee’s duty of fidelity that survives termination of employment and the specific s.183(1) duty. It is significant that Mr Koops of LKM complained on 10 May 2005 that the clients “were gone before we knew who they were”, thus indicating at least a possibility (I emphasise that it can be no more) that actions directed towards the taking over of clients by the new Wealthwise business had occurred while relevant persons were still with Bridgeport – it will be recalled that execution of and completion under the contract with LKM took place on 7 December 2004, the day on which the employment of the staff members came to an end. It is, to my mind, legitimate for the administrators to investigate whether the relevant constraints have been overstepped. And that is so even though the immediate beneficiary of any successful action might be LKM, given the benefit that flows to the creditors of Bridgeport if the revenues of the business acquired by LKM are kept at high levels.

45 The legal principles relevant to the present application have received attention in a number of cases. It is sufficient to quote a distillation of them set out in the recent judgment of Lander J in Re New Tel Ltd; Evans v Wainter Pty Ltd [2005] FCAFC 114, Ryan and Crennan JJ concurring (although with reservations as to parts dealing with aspects of Flanders v Beatty (1995) 16 ACSR 324 and Sandhurst Trustees Ltd v Harvey (2004) 206 ALR 594). Lander J said:

46 In the present case, I am persuaded that, in seeking to embark upon the examinations, the administrators are actuated to some extent by a wish to assist LKM. But, because of the provisions with respect to the second tranche of purchase price (dependent on the extent of revenues of the business), I do not see that as an ulterior or impermissible purpose in the particular circumstances. It is a purpose relevant to the welfare of Bridgeport’s creditors. In addition, the obvious purpose of the administrators in seeking to discover how clients of the Bridgeport business came to be clients of the new Wealthwise business is relevant to their consideration of the possibility of breaches of general law duty and statutory duties as they relate to information confidential to Bridgeport about its clients. That is, without doubt, an aspect of the “examinable affairs” of Bridgeport.

47 Having regard to the principles enunciated by Lander J, I am not satisfied that the examinations are being pursued for a purpose unconnected with the purposes authorised by the legislation or to allow a party to obtain a forensic advantage or as a dress rehearsal for cross-examination in any future proceeding; indeed, it is by no means clear that any particular proceeding is in contemplation. While the administrators’ “strategy”, as outlined to Zurich, included litigation, it also acknowledged the problematic nature of any such litigation. Nothing in the evidence about subsequent events suggests that some definite plan to institute proceeding exists. It seems to me that the position is, rather, the usual and expected one in which the examinations are themselves part of the process by which the administrators are seeking to inform themselves whether causes of action exist and might usefully be pursued.

48 On this aspect of the case and in the absence of any evidence that the administrators are in any way prejudiced by the circumstance that the challenges to the examination summonses were not initiated within the time specified in rule 11.5(2), my decision is that the time for filing the relevant interlocutory process should be extended to the time of actual filing but that the application therein directed towards the discharge, setting aside or other neutralisation of the examination summonses should not be acceded to; also that there should be a corresponding result in relation to the orders for production of documents which are, in the usual way, adjuncts to the examination summonses.

49 It remains to consider the applicants’ claim for relief in respect of their assertions of entitlement to be recognised as creditors for the purposes of the deed of company arrangement.

50 The deed of company arrangement was executed on 2 February 2005. It contains, in clause 6, provisions for determining creditors’ claims. The administrators are required by clause 6.2 to make and maintain an Admitted List. Clause 6.2 is as follows:

“For the purpose of any Creditor (except Zurich) seeking to formally prove their Asserted Claim, sections 553A, 553AA and 553C of the Corporations Act and subdivisions C and E of Division 6 of Part 5.6 of the Corporations Act (other than section 554F of the Corporations Act) apply to the Asserted Claim, with such modifications as may be necessary, including:

(a) references to the ‘liquidator’ be read as references to the Deed Administrators;

(b) references to the ‘relevant date’ be read as references to the Appointment Date;

(c) where appropriate, references to the ‘company’ be read as references to the Fund;

(d) references to a ‘debt’ or ‘claim’ be read as references to a Claim.”

51 As I have already mentioned, each of the applicants who is a former employee lodged a proof of debt for the purpose of voting in the voluntary administration and those proofs were admitted in full for voting purposes. Each such proof bears a date in January 2005.

52 By separate letters dated 17 March 2005, the solicitors acting for all three of those former employees set out in some detail particulars of the individuals’ claims and asked (or required) that the letters be taken as formal proofs of debt in accordance with the regulations imputed into the deed. By three separate replies dated 18 April 2005, the administrators’ solicitors said that the administrators had not called for proofs of debt and were not in a position to do so:

“… for (amongst others) the following reasons:

(a) They have not fully accounted to Zurich Australia Limited, pursuant to its charge;

(b) They have not paid all of their remuneration and other costs, which is a priority over employee claims; and

(c) They are still finalising their revenue and liability spits with the new owners of both Bridgeport Advisers Pty Limited and AFS Accountants Financial Services Pty Limited.”

“The Deed Administrators will not be in a position to determine whether all or part of the claim of your client is a Claim under the Deed of Company Arrangement until after the examinations have taken place.”

53 By a single letter dated 2 May 2005, the solicitors for the three relevant applicants made it clear that the letters of 18 April were being taken as a refusal to rule on the former employees’ claims. The reasons stated in the 18 April letters were said to be irrelevant:

“Even if what you state in your letter were true, your clients are required to rule on our clients’ claims under sub-regulation 5.6.49(2) of the Corporations Regulations.”

54 The applicants take issue with the proposition that the administrators are unable at this point to quantify the employee entitlements of the three individuals. They point to correspondence between the administrators and the Department of Employment and Workplace Relations. In a letter to the department dated 12 April 2005, Mr Arnautovic disputed the amount (unstated) “remitted for Mr Brian May’s employee entitlements” and said that, on the basis of the company’s records, Mr May was a creditor for $59,259.14, being $14,259.14 annual leave and $45,000 pay in lieu of notice.

55 In a letter of 4 May 2005 to the department, Mr Arnautovic again gave the figure of $59,259.14 for Mr May. He added that Mr May had made a claim for $133,991.11 and said:

Corporations Act 2001

With regards to Mr May’s claim against the Department of Employment and Workplace Relations (‘DEWR’) under the GEERS, it would appear that you have approved Mr May’s annual leave entitlement for the amount of $15,855.51. I note that such an amount is not consistent with the company’s records and accordingly I require that you provide me with copies of any source documentation you have used to calculate Mr May’s claim.”

56 In all these cases, therefore, the letter to the department referred to the amount claimed by the individual to be outstanding, referred also to certain amounts acknowledged to be outstanding and gave reasons why there had been no final decision on their claims.

57 It is said on behalf of the three relevant applicants that, if the administrators can tell the department what their entitlements are, they can adjudicate the claims. That is too simple an approach. The administrators did not, in the correspondence with the department, purport to give an exhaustive statement of the entitlements of the relevant persons. They gave, for the purposes of the support scheme administered by the department, a figure which, as they put it, was revealed by the company’s records. In each case, the former employee claimed a total much greater than the figure given to the department. The administrators said that the claims for the much higher figures could not be assessed until the examination of the relevant person had been conducted.

58 This last point is, in my view, not unreasonable. There is at least a possibility, in the case of Mr Hooper and Mr May, that de facto director (and therefore “excluded employee”) status may be found. And the events concerning movement of clients raises at least a possibility of breach of duty claims which, in turn, raise at least a possibility of set-off under s.553C of the Corporations Act as imported by clause 6.2 of the deed of company arrangement.

59 This is not a case in which rejection of a proof of debt is challenged and it becomes appropriate for the court to make a decision of its own as to the existence and quantum of the debt. In terms of s.1321, the case is really one in which the administrators have omitted to make a decision or, conceivably, have made a decision to defer consideration of the applicants’ claims. That being so, the test to be applied in reviewing the administrators’ action (or inaction) is the test based on fraud, bad faith or unreasonableness. I quote from the judgment of Hodgson J in Yeomans v Walker (1986) 5 NSWLR 378 at p.383:

Leon v York-O-Matic

60 The explanations for the administrators’ deferral in this case are sufficiently within the bounds of reasonableness as not to attract the intervention of the court. While the possibilities to which I have referred remain, there would be little point in the somewhat empty formality of a decision on each claim, followed perhaps by amendment (see Mine & Quarry Equipment International Ltd v McIntosh [2005] QCA 186). This is particularly so where the administrators have not yet called for formal proofs.

61 This conclusion on the substantive question with respect to the former employees’ claims makes it unnecessary to determine the procedural question relevant to this aspect of the case, that is, whether the three relevant applicants are, in the context, “persons aggrieved” within s.1321. It is my opinion, however, that, where the complaint is as to deferral of consideration of a claim or inaction in response to a claim, the claimant is a “person aggrieved” by the decision to defer or the omission to act. The characterisation relied upon by the administrators on the basis of Ex parte Sidebotham (1880) 14 ChD 458 (a person who “has suffered a legal grievance, … against whom a decision has been pronounced which has wrongfully deprived him of something, or wrongly refused him something, or wrongfully affected his title to something”) may well be applicable where a decision has been made. But it cannot be conclusive in cases of deferral or inaction. The expression “person aggrieved” really aims to do no more than distinguish a mere busybody from a person with a recognisable interest. The relevant applicants here have clearly recognisable interests in both actions and inaction of the administrators in relation to their claims.

62 Each of the relevant applicants seeks a stand-alone order that he, she or it is a person aggrieved by a relevant action of the administrators. While I am satisfied that “person aggrieved” status exists, I am by no means satisfied that it is appropriate to grant declaratory relief confirming it. The proper way of asserting standing is as part and parcel of an assertion of entitlement to the particular substantive relief upon which a finding of standing depends. Where, as here, the claim for the substantive relief is unsuccessful even though the necessary standing has been shown, it serves no purpose to make, in isolation, a declaration confirming standing. And had the substantive application been successful, there would have been no sensible basis for making such a stand-alone declaration: the grant of the substantive relief is all that would have been necessary.

63 The outcome is as follows:

Supreme Court Rules

Supreme Court (Corporations) Rules

2. Order that the said amended interlocutory process be dismissed.

3. Order that, without prejudice to Order 1, the interlocutory process filed on 22 June 2005 be dismissed, except as to paragraph 3 and that that balance be stood over to the Registrar’s list on 8 August 2005.

4. Order that the costs of the plaintiffs in the proceedings (that is, the plaintiffs under the originating process filed on 18 March 2005) of and incidental to all interlocutory processes heard by me on 22 July 2005 be paid by the applicants under the amended interlocutory process referred to in Order 1.

5. Order that the proceedings be placed in the Registrar’s list on 8 August 2005 for directions regarding the examinations.

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Citations

Bridgeport - Advisers & Asset Managers Pty Ltd [2005] NSWSC 757

Most Recent Citation

Saraceni v Australian Securities and Investments Commission [2012] FCA 688

Cases Citing This Decision

8

In the matter of Stewart Free as Liquidator of Futurepower Developments Pty Ltd (in liq) [2025] NSWSC 619

In the matter of Kurmond Industries Pty Ltd (in liquidation) [2021] NSWSC 147

In the matter of Iris Diversified Property Pty Ltd (in liquidation) [2019] NSWSC 1593

Cases Cited

5

Statutory Material Cited

2

Mine & Quarry Equipment International Ltd v McIntosh [2005] QCA 186

Commonwealth v Sheahan [2004] FCA 1301

Evans v Wainter Pty Ltd [2005] FCAFC 114

CITATION:	Bridgeport - Advisers & Asset Managers Pty Ltd [2005] NSWSC 757
HEARING DATE(S):	22/07/05
JUDGMENT DATE :	2 August 2005
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	Barrett J
DECISION:	Examinees' application for orders discharging examination summonses and setting aside orders for production refused. Applications for review of various decisions of deed administrators refused.

CATCHWORDS:	CORPORATIONS - administration - examinations under Part 5.9 - whether examinations to be undertaken for impermissible purposes - whether abuse of process - whether three day time limit in rule 11.5(2) may be extended - CORPORATIONS - deed of company arrangement - deed administrators defer consideration of claimants claim - whether court should review administrators' decisions
LEGISLATION CITED:	Corporations Act 2001 (Cth), Part 5.9, s.183(1) Supreme Court (Corporations) Rules 1999, rule 11.5
CASES CITED:	David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265 Flanders v Beatty (1995) 16 ACSR 324 Mine & Quarry Equipment International Ltd v McIntosh [2005] QCA 186 Re Markethaven Pty Ltd; Commonwealth v Sheahan [2004] FCA 1301 Re New Tel Ltd; Evans v Wainter Pty Ltd [2005] FCAFC 114 Sandhurst Trustees Ltd v Harvey (2004) 206 ALR 594 Yeomans v Walker (1986) 5 NSWLR 378
PARTIES:	Roderick Mackay Sutherland and Sule Arnautovic as Deed Administrators of Bridgeport - Advisers & Asset Managers Pty Limited - Plaintiffs Wealthwise Financial Planning Pty Limited - First Applicant Sentinel Wealth Management Pty Limited - Second Applicant Justin Hooper - Third Applicant Brian May - Fourth Applicant Robert White - Fifth Applicant Karin De Mamiel - Sixth Applicant
FILE NUMBER(S):	SC 2017/05
COUNSEL:	Mr R.K. Eassie - Plaintiffs Mr L.G. Foster SC/Mr S.J. Philips - Applicants
SOLICITORS:	Nash O'Neill Tomko Lawyers - Plaintiffs Deacons - Applicants